Joint BIS and FRC discussion paper to prompt debate on how the smallest companies should report their finances
UPDATE 24 March 2012: Following the EU’s adoption of the Directive on micro-entity reporting in February 2012, the Government has now announced that it intends to take advantage of the new EU regime and will consult on implementation in due course. See this post for details.
The Department of Business, Innovation and Skills (BIS) and the Financial Reporting Council (FRC) jointly published on 26 August 2011 a discussion paper titled “Simpler Reporting for the Smallest Businesses” (the Paper). The aim of the Paper is to seek views on developing a new reporting regime for the smallest companies, so that the regulatory burden on the very smallest businesses can be “significantly reduced and the associated cost savings realised”. The Paper can be read here and the associated press release can be read here.
To define what it means by the “smallest companies”, the Paper uses the European Commission’s proposed category of “micro-entity”, being companies that trade for profit and do not exceed two of the following criteria:
- A net turnover of Euro 500,000;
- A balance sheet of Euro 250,000;
- An average of 10 employees during the financial year.
The principal proposal in the Paper is that these smallest companies would, in place of the existing financial reporting requirements under the Companies Act 2006 and the Fourth Company Law Directive, be required to prepare shortened financial information consisting of:
- A simplified Trading Statement (in place of the current Profit and Loss account);
- A Statement of Position (shareholders’ funds, fixed assets, cash, debtors, loans, short and long term creditors); and
- A simplified Annual Return.
This financial information could provide the basis for an annual tax return, so removing the requirement to prepare reconciliations to tax returns, and allowing alignment with the VAT cash accounting scheme.
The Paper complements the Office of Tax Simplification’s discussion document on options for simplifying taxation for the smallest business, which was published in July 2011 and which can be read here. The Paper should also be seen in the context of the European Commission’s ongoing work on simplifying the requirements of the Fourth Company Law Directive as they apply to the smallest companies, and to the Government’s other efforts in the same area, which we discuss in this post of 23 March 2011 and in particular in this post of 4 March 2011.
Comments on the Paper are requested by 30 October 2011.
UPDATE 19 December 2011: The changes needed to European law to allow the creation of this new accounting regime for these very small companies, “micro entities”, have now been agreed – see this post for details.
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