Is it compulsory that accounts comply with accounting standards?
No it is not compulsory, though nearly all accounts do comply. Accounts must comply with all applicable accounting standards unless, exceptionally, the directors decide not to do so. If the directors do make this decision, they must disclose which accounting standards have not been followed and their reasons for not doing so. If the accounts are audited, the auditor will express an opinion about the effect and significance of the departure from the accounting standards. The directors' reasons may be good, bad or a matter of opinion. Everything, including compliance with accounting standards, is subsidiary to the requirement that the accounts should give a true and fair view.
Decisions not to comply with accounting standards are relatively rare. This is partly because accounting standards are well-respected, but also because it leads to qualified audit reports and possibly to searching questions from HMRC, the bank, members and others.
What are the definitions of small and medium-sized companies?
Small and medium-sized companies must satisfy any two out of the following three conditions (counted on a group basis) for both the current financial year and the previous financial year.
This applies for accounts periods commencing on or after 6th April 2008.
Public companies do not qualify for exemptions and neither do banking companies, insurance companies and an 'authorised person' under the Financial Services Act 1986.
What are the benefits of being a small or medium-sized company?
Small and medium-sized companies may file abbreviated accounts at Companies House, though there is no compulsion for them to do so. They must still provide full accounts to their members, so there is no saving in work preparing the accounts and in fact the opposite is the case. The benefit is privacy because, if it is so wished, less information is put into the public domain.
What exemptions are available for abbreviated accounts?
The exemptions for a small company are:
No profit and loss account need be filed.
No directors' report need be filed.
The balance sheet and notes to the accounts may be summarised.
For medium-sized companies certain information relating to the profit and loss account need not be disclosed. In particular, it is not necessary to show other operating income and cost of sales. The balance sheet and notes must be shown in full.
What is the accounting reference date and what is its significance?
Every company has an accounting reference date. The initial accounting reference date is allocated by Companies House and it is the last day of the month in which the company is registered. So for example, companies registered on 4th April and 18th April will both be given the accounting reference date of 30th April. The period between two accounting reference dates is the accounting reference period. The significance of the accounting reference date is that accounts must be made up to a date within seven days either side of it. So for example, if the accounting reference date is 30th April, the balance sheet may be dated any day between 23rd April and 7th May.
Can the accounting reference date be changed?
Yes it can. It is a decision of the directors and they must notify Companies House by means of form AA01. The consequence of doing so is that the accounts do not cover a period of a year.
The directors may freely bring the accounting reference date forward so that the accounts period is less than a year. They can do this as often as they wish. They can put back the accounting reference date so that the accounts period is longer than a year, but there are two conditions that must always be met:
The accounts period can never be longer than 18 months.
The accounts must not be overdue when the form is submitted, unless the company is subject to an administration order.
Furthermore, the accounting reference date cannot be put back more than once in a five year period unless one of the following exceptions applies:
The company is subject to an administration order.
The approval of the Secretary of State has been obtained.
The change is to align the date with that of a parent or subsidiary established in the European Economic Area.
The company is an overseas company.
Is there a way round the restrictions on changing the accounting reference date?
Yes there is and it is a glaring anomaly. However, it cannot be done if the resulting accounts period is longer than 18 months or if the accounts are overdue. Subject to this it can be done in four steps as follows:
Buy an off-the-shelf, dormant subsidiary company.
Change the accounting reference date of the sub sidiary comp any to the required date.
Change your accounting reference date to match that of the dormant subsidiary.
Have the dormant subsidiary company struck-off. This achieves the desired result at a cost of less than £100.
What are the time limits for laying and delivering the accounts?
The time limits are the same for delivering the accounts to the members, laying the accounts before the members (if required) and delivering them to the Registrar of Companies. Counting from the accounting reference date, it is six months for a PLC and nine months for a private company.
Is it possible for the time limits to be extended?
It is no longer possible to claim an automatic three months extension if the company has overseas interests. However, an application may be made to the Secretary of State for a discretionary extension. This is intended to help in a situation where there has been a serious and unforeseeable event. A fire destroying accounting records could be an example. An application will only be considered if it is made before the expiry of the time allowed for delivery to Companies House.
What are the penalties for late delivery of the accounts to Companies House?
It is an offence for the directors and one or more of them may be prosecuted and fined. However, prosecutions are relatively rare and usually only happen when the offence is particularly bad. A director may put forward the defence that he took all reasonable steps to secure compliance and it will be up to the court whether or not this is accepted.
Separately, Companies House will almost invariably impose civil penalties if accounts are delivered late. These are a civil matter, not a criminal conviction, and are levied on the company, not the directors. The scale of the penalties is:
If the accounts were late in two successive years, these penalties are doubled.
For how long must accounting records be kept?
Accounting records must be kept for a minimum of three years from the balance sheet date in the case of a private company, and six years from the balance sheet date in the case of a public company. These are Companies Act requirements. Other considerations, such as HM Revenue and Customs or the Money Laundering Regulations, may dictate a longer period and most companies will probably decide to keep the records for a longer period.