Are you ready for the EU Accounting Directive?

EU flags in Brussels

More importantly, is your company ready?

Back in 2013, EU Directive 2013/34EU, better known as the Accounting Directive, became law. The directive consolidates existing legislation on financial reporting and aims to lessen the load of financial reporting and audit and to cut governments’ regulatory control over smaller companies.

Member states had until July 2015 to incorporate the directive into national law, and the UK government consulted on its approach to implementing the directive between August and October 2014.

Fast-forward to 2015 and the government turned the directive into law. The Companies, Partnerships and Groups (Accounts and Reports) Regulations 2015, which came into force on 6 April 2015, apply to financial years that start on or after 1 January 2016.

Earlier adoption of some of the provisions is allowed for a financial year that starts on or after 1 January 2015. Either way, with only two months to go until the New Year, the final countdown has begun. And for finance directors of SMEs, this means big changes are on the way.

With the new regulations set to govern the content and publication of annual accounts, or statutory accounts, and of the combined strategic report and directors’ report, businesses need to ensure they are prepared. The regulations also redefined what counts as a small company – that is, a rise in the threshold that dictates a company’s size category will shift roughly 11,000 companies into the small company accounting regime.

Is your company affected?

’Small’ is defined as a company or group with turnover of not more than £10.2 million, up from the current £6.5 million; balance sheet total of not more than £5.1 million, up from the current £3.26 million; and no more than 50 employees, which is unchanged.

Two out of three of this criteria must be met, as was the case before the new legislation, and normally for two years. That said, small companies can choose to follow the accounting and reporting requirements of large companies, if they wish.

Size limits for medium-sized companies have also risen. Medium-sized is defined as a company or group whose turnover is no more than £36 million, up from £25.9 million; balance sheet total are no more than £18 million, up from £12.9 million; and no more than 250 employees, again unchanged.

Smaller companies that meet the micro-entity size limit – turnover of not more than £632,000, balance sheet assets of note more that £316,000 and not more than 10 employees – remain under the micro-entity accounting regime of 2013 and no longer need to prepare a directors’ report.

Companies who have expansion plans for increasing employee headcount and driving growth should take these criteria into consideration when considering budgets for the coming year.

The main changes from the accounting directive

The regulations affect companies of all sizes, except public companies (whether listed or not). Companies in the same group as a public company that is not listed gain access to the small or medium-sized companies regime.

The regulations simplify small company accounts and cut the number of mandatory notes to 13. This means it will not be possible to disclose information about subsidiaries and other related companies in the annual return, and this information will have to appear in the accounts.

Companies can choose to use alternative layouts when preparing their profit and loss account and balance sheet, as long as the information disclosed is at least equivalent to the information the standard formats demand. This is to cut the burden for those in a group using international accounting standards.

And small companies can prepare an abbreviated profit and loss and abbreviated balance sheet, if approved by all the company’s shareholders.

Although the small company accounting thresholds have been raised, the audit exemption limited remains unchanged. And some companies that now qualify as small will still need an audit.

Expanded auditor reporting requirements mean that the combined strategic report and director’s report and the corporate governance statement will now come under more scrutiny. This will see a rise in businesses partnering with recruitment agencies to hire auditors (both on an interim and permanent basis) to assist identifying whether the reports have been prepared in line with legal requirements and whether they include any material misstatements.

While the aim of the new accounting directive is to simplify financial reporting, there is a significant amount of change that businesses need to take on board. The reliance on having experienced finance professionals to help identify what changes need to be made and implementing them sooner rather than later is going to see an increased demand for accounting and finance professionals across the UK. As the world’s leading specialised recruitment consultancy, Robert Half can help you find the top accounting and finance professionals on an interim and permanent basis.

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