How to get it right when disclosing average numbers of staff
All companies are required to disclose the average number of employees within their financial statements. But how do you make sure you’re getting it right?
This article considers some of the key questions that accountants often ask about this requirement.
Where does the requirement come from?
It comes from section 411 of the Companies Act 2006, section 1, which states:
‘The notes to a company’s annual accounts must disclose the average number of persons employed by the company in the financial year.’
Companies which are outside the small companies’ regime must also disclose the average number of persons within each category of persons so employed (s 411(1A), Companies Act 2006).
FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland reflects this requirement in paragraph 1AC.33 (of the March 2018 edition) for small entities. For micro-entities choosing to report under FRS 105 The Financial Reporting Standard applicable to the Micro-entities Regime, the requirement to disclose the average number of employees is in paragraph 6.2(b).
Calculating the average number of employees
The calculation of the average number of employees is in Section 382(6) of the Companies Act 2006. The average number of employees is determined as follows:
(a) find for each month in the financial year the number of persons employed under contracts of service by the company in that month (whether throughout the month or not);
(b) add together the monthly totals; and
(c) divide by the number of months in the financial year.
For the purpose of this calculation, if an employee leaves during the month you assume that they have worked for the whole of that month.
Who should be included in the calculation?
The requirement is to disclose the average number of persons employed by the company in the financial year. Therefore, it would be appropriate to include all employees but exclude any casual workers as such workers would not be considered to be employees.
Section 382(6)(a) refers to ‘… persons employed under contracts of service by the company in that month’. A ‘contract of service’ is not defined in the Act and hence is not necessarily confined to just written contracts as a contract can, of course, be verbal.
Directors would be included in the calculation but non-executive directors would not because they are not generally employed under a contract of service.
Where a company is a member of a group and employees from another group member perform services for the company (e.g. ‘seconded’ employees), these would not be included in the calculation because their contract of employment is with another company. This would also apply to sub-contractors.
Many accountants ask whether the calculation includes both full-time and/or part-time employees. The answer is the Act requires disclosure of the average number of employees – it makes no reference to full-time or part-time staff so in this respect it would include both.
Filleted accounts for Companies House
The average number of employees disclosure cannot be filleted out of the accounts for filing purposes. The disclosure itself is not a payroll disclosure (payroll, of course, being a profit and loss item).
The disclosure itself informs the user of the accounts as to how many employees, on average, the business has employed during the reporting period.
The disclosure must be included in the accounts for filing at Companies House for a small company. Both ICAEW and ACCA have issued guidance to member firms confirming this also.