‘Clearing the mud’ about filing options for small companies
Since the abolition of abbreviated financial statements, the filing regime for small companies has caused some element of confusion among practitioners. This brief article aims to ‘clear the mud’ where filing options for small companies are concerned.
The ‘file what you prepare’ mantra which is cited by many commentators is not strictly correct for small entities because they are afforded a couple of extra options, in addition to filing the accounts prepared for the members (shareholders) and HM Revenue and Customs (HMRC). It is rare that a small entity would want the full financial statements filing with Companies House.
Relevant sections of the Companies Act 2006
The Companies Act 2006 deals with the filing obligations of a small company in section 444 Filing obligations of companies subject to small companies regime. Section 444(1) requires the directors of a company subject to the small companies regime to:
• deliver to the registrar for each financial year a copy of the balance sheet drawn up as at the last day of that year; and
• may also deliver to the registrar:
- a copy of the company’s profit and loss account for that year; and
- a copy of the directors’ report for that year.
The key point to note where the second bullet is concerned is that a small company may file a copy of its profit and loss account and directors’ report. It is not mandatorily required to file these documents and few small entities choose to file the profit and loss account and directors’ report.
Filleted financial statements
The term ‘filleted financial statements’ is not a term you will find in the Companies Act. It is a term coined by the accountancy profession which refers to a version of the financial statements lodged at Companies House. In IRIS Accounts Production, filleted financial statements are produced by going to ‘Reports’ | ‘Annual’ | and selecting ‘ABR’.
The term ‘filleted’ means that the directors’ report, profit and loss account, statement of changes in equity (if prepared) and any notes relating to the profit and loss account are removed from the ‘full’ financial statements as prepared for the shareholders and HMRC and the remainder is filed at Companies House. Hence, Companies House receives the balance sheet (as prepared for the shareholders and HMRC) and the notes relating to the balance sheet.
It must be emphasised that the average number of employees disclosure (which does include directors under contracts of service) must be disclosed in the filleted financial statements. This is because the average number of employees disclosure is not a payroll disclosure; it provides information as to the average number of employees the business has employed during the accounting period. It is also a requirement of company law (s411 Information about employee numbers and costs). Therefore, be sure not to fillet out the employee numbers disclosure when preparing the financial statements for Companies House.
Abridged financial statements
At the outset, it is worth noting that abridged accounts are not a replacement for abbreviated accounts. Abridged accounts are an option available to companies and are provided to the shareholders and to HMRC instead of ‘full’ financial statements. The small company can then file filleted abridged financial statements if it wishes (which most choose to do).
Abridged accounts do not include any of the items in the statutory formats of the profit and loss account and balance sheet which are preceded by an Arabic numeral. Hence, items such as current assets and current liabilities are not broken down in the notes to the financial statements.
The advantage of filing filleted abridged financial statements is that there is less disclosure on the public record in comparison to filleted accounts. It may be worthwhile comparing the two by running a set of filleted accounts and a set of filleted abridged accounts for a small company so you can see the differences between the two.
There is protocol outlined in company law which must be followed where the preparation of abridged accounts is concerned. Firstly, all the shareholders must unanimously agree to the entity preparing abridged accounts. It is not a majority vote; it must be unanimous. Secondly, this approval must be obtained before the abridged financial statements are approved. Thirdly, s444(2A) requires a statement to be made on the balance sheet confirming that all the shareholders have consented to the abridgement. This statement is not the approval – it is confirmation that the shareholders have consented to the abridgement. The approval should be in the form of a written statement from the shareholders (or a resolution).
To prepare abridged financial statements in IRIS, go to:
Data Screens | Small Companies | Abridgement – and select the relevant boxes.
It should be noted that a small entity can abridge the profit and loss account or the balance sheet or both. An abridged profit and loss account will start with ‘gross profit or loss’ (presuming a Format 1 profit and loss account is being prepared). The face of the abridged balance sheet will not look any different than an unabridged balance sheet, but the disclosure notes will be less detailed as items preceded by Arabic numerals in the statutory formats do not appear.
Many small entities are choosing not to abridge the profit and loss account, which allows the directors and shareholders to see turnover, other income and cost of sales; but they are abridging the balance sheet. The primary reason for this is that the profit and loss account, and any notes relating to the profit and loss account, are filleted out when the version of the abridged financial statements for Companies House are prepared.
Micro-entities choosing to use FRS 105 The Financial Reporting Standard applicable to the Micro-entities Regime are required to file the balance sheet and notes at the foot of the balance sheet as a minimum with Companies House. There is no requirement to file the profit and loss account.
Steve Collings, FMAAT FCCA
Steve Collings, FMAAT FCCA, is the audit and technical partner at Leavitt Walmsley Associates Ltd and the author of several books on the areas of financial reporting and audit. Steve specialises in financial reporting (UK GAAP and IFRS), auditing and solicitors’ accounts rules. Steve is also a regular contributor of articles to AccountingWEB.co.uk and works closely with various professional bodies assisting them with issues relating to financial reporting and audit. He was the winner of the Accounting Technician of the Year award at the British Accountancy Awards in 2011 and was awarded ‘Outstanding Contribution to the Accountancy Profession’ in 2013.