A summary of members' responses to our consultation on the EU Accounting Directive.
The responses submitted by members to the ACCA’s survey on the proposed implementation of the EU Accounting Directive show some interesting results.
In October ACCA conducted a survey of its members in respect of some key issues relating to the proposed implementation of the EU Accounting Directive in the UK, which is outlined in two parallel consultations run by the Department for Business, Innovation and Skills (BIS) and the Financial Reporting Council (FRC). Some of the questions in the survey were also administered to delegates attending certain ACCA CPD events.
ACCA is grateful to the members who took part in the survey, as your input has helped us shape our responses to the respective consultations.
The responses submitted yielded some interesting results and arguments in support or opposition to the proposals and can be analysed as follows:
Small companies thresholds The government’s proposal to adopt the maximum small company thresholds allowed by the Directive (ie £10.2m turnover and £5.1m balance sheet total), to include as many companies as possible in the small company regime, did not receive the outright support of the majority of respondents.
In fact, while half of the respondents supported the proposal, almost 40% opposed it. Supporters of the proposal often cited reduction of the burden of regulation and cost savings relating to the production of statutory financial information as reasons for their position.
The sizeable share of respondents opposing the proposal frequently mentioned that the additional entities that would qualify as small under the increased thresholds could not be considered as small, both in terms of public perception and in terms of the relatively large number of stakeholders interested in such entities (for instance non-manager-owners, employees, suppliers, finance providers etc). Many respondents opposing the proposal also expressed concern that the financial reporting requirements placed on the additional entities qualifying as small would be insufficient to meet the information requirements of stakeholders willing to transact with the entity.
The concerns voiced by the opponents of the maximum increase of the thresholds cannot be summarily dismissed as they reflect the reality of many entities classified as medium under the current rules, especially in light of the reduced disclosure framework that will be applicable to the financial statements of small companies. The FRC also acknowledges in its consultation document that entities with more complex affairs, but qualifying as small, are likely to need additional disclosures to those required as a minimum for their financial statements to provide a true and fair view.
Notes to small company’s accounts In respect of the government’s proposal that the notes to the accounts of a small company should include both the eight mandatory and the five optional disclosures allowed under the Directive, the large majority of respondents (78%) agreed that the inclusion of the five optional disclosures is important to a proper understanding of a small company’s financial statements.
The respondents opposing the inclusion of one or more of the five optional notes (16% of the total) indicated that the related party transactions note would be the most relevant of the optional ones.
The majority of respondents also indicated that the requirement for the five optional notes should be included in accounting standards rather than regulations, with many respondents believing that inclusion in accounting standards would allow a more comprehensive and explanatory drafting of the rules.
Preparation of abbreviated accounts for members The government’s proposal to allow small companies the option of preparing abbreviated accounts to be circulated to members in place of full accounts was one of the questions where the opinion of the respondents was most divided.
In particular, 49% of respondents supported the proposal while 45% opposed it.
With opinions almost equally split, those in support of the proposal tended to agree with the government’s rationale that, for small companies where there is no separation between ownership and management, producing full accounts would not be necessary.
Opponents of the proposal point out that the interests of minority shareholders might be endangered, by providing them with limited financial information, if the option given is not subject to the agreement of all the directors and shareholders of the company and not just of a majority of them. Many respondents also point out that is unclear whether the abbreviated accounts produced would be sufficient to determine the tax position of the company and whether additional information or full accounts should be produced for such purposes, effectively nullifying the benefits of producing abbreviated accounts.
Micro-entities directors’ report The proposal to relieve companies qualifying as micro-entities from the obligation to prepare a directors’ report met with the agreement of 75% of respondents, while 20% of them were not in favour.
Comments received from the respondents highlighted that, while the value of information included in the directors’ report of a micro-entity is limited, removing the requirement to produce such a report is unlikely to result in any tangible benefit or cost for the reporting entity, as the cost of producing a director’s report for a micro-entity is effectively marginal.
Audit exemption The government’s intention of leaving the audit exemption thresholds at the current level, ie not increasing them in line with the proposed thresholds for the small company regime, also almost split the opinion of the respondents equally, with 49% in favour and 45% against the proposal.
Many respondents supporting the proposal to leave the limits unchanged expressed concern that increasing the scope of audit exemption to sizeable companies would increase risk for the stakeholders of such entities, and for the economy in general, without generating a corresponding comparable benefit if the latter is limited to avoiding the cost of an audit.
On the other hand, respondents considered it necessary that the audit exemption thresholds should be aligned to those relating to the small company regime in order to avoid possible confusion and unnecessary complication of the reporting requirements. Some respondents also pointed out that if entities were deemed suitable to benefit from a reduced disclosure and presentation framework there would be a discrepancy in subjecting them to the external scrutiny of an audit.
Financial reporting standard for micro-entities The introduction of a new financial reporting standard for micro-entities based on the recognition and measurement requirements of FRS 102 received the support of the vast majority of respondents, 73% of the total, while 25% of them would not agree with introducing a new standard.
Those who disagreed with the proposal mainly believed that the change of standards would increase complexity in reporting for micro-entities rather than aiming at its simplification.
Small entities The proposal to withdraw the FRSSE and to bring small companies within the scope of FRS 102, with limited disclosures and reduced presentation requirements, was approved by 76% of respondents and opposed by 20% of them.
The results probably reflect the fact that respondents are averse to having two sets of standards, one for small entities and one for larger entities, which are inconsistent in many aspects and may create discrepancies in financial information for broadly similar entities.
Those opposed to withdrawing the FRSSE pointed out that smaller entities may be forced to adopt standards that may be too complex or too costly for them or their professional advisers to manage.
Conclusions Overall the results of the survey show general support for the government’s decisions regarding the implementation of the EU Accounting Directive, although there is a substantial level of disapproval in respect of the adoption of the maximum increase for the small company regime thresholds and about the misalignment between such thresholds and those for audit exemption. Equally the intention of allowing small companies to prepare abbreviated accounts for members is likely to create some degree of controversy.
Guidance on the financial reporting requirements and options applicable from 1 January 2015 and on those likely to apply from 1 January 2016, arising from the proposed changes included in the BIS and FRC consultations, is available on ACCA's website.