Few small companies relish the prospect of preparing their annual accounts, so you may take comfort from new EU legislation designed to make things a little easier for SMEs and microbusinesses. The legislation in question is the 2013 European Accounting Directive, which will be adopted into British law after a consultation exercise led by the Department for Business Innovation & Skills (BIS) and the Financial Reporting Council. If all goes according to schedule, the directive will come into force in 2015 in respect of accounting years starting on or after January 1.
What’s the new directive for?
The purpose of EU accounting legislation is to create a level playing field across all member states. So, a set of limited liability company annual accounts produced in Spain, say, should be prepared according to the same principles as statements published in the UK, France and the Czech Republic. This should mean that consumers of accounts statements – shareholders, potential buyers, and so on – will be able to compare ‘apples with apples’.
"Under the new directive, all member states must legislate to distinguish small companies from larger ones, using assets, employee numbers and turnover as criteria."This approach has had its critics. A small business operating in Aberdeen might legitimately ask why it has to conform to European standards when its trade is focused on Scotland or the UK. Brussels’ justification for this is that an increasing number of fast-growth businesses will export to Europe as they grow. The new directive acknowledges that the existing EU accounting regime has been onerous for small companies who have been obliged to conform to the same standards as their larger counterparts, despite having less resources. The new legislation seeks to put that right. So what exactly does this mean for SMEs? Under the new directive, all member states must legislate to distinguish small companies from larger ones, using assets, employee numbers and turnover as criteria. Each national government has a certain amount of flexibility in setting the parameters and the BIS has indicated that a company will be considered small if it meets at least two out of three criteria: assets of £5.1 million or less, turnover of £10.2 million or less, and employee numbers of 50 or less. These represent an increase on the previous definitions of a small business in the UK. And this is important. BIS says the impact of the directive on the UK will be limited since Britain already has a regime of small business accounting. However, the change thresholds will bring around 11,000 more companies under the umbrella of simplified accounting rules. Meanwhile, BIS defines microbusinesses as those with up to £316,000 on the balance sheet, £632,000 in turnover, and 10 staff. Businesses categorised as “small” are set to benefit from a reduced obligation to provide information. Essentially small companies will be required to provide only profit and loss (P&L) account and balance-sheet figures while the mandatory notes accompanying those figures will be pared back to eight areas, with the possibility of five more at the discretion of member states. In addition, BIS is currently consulting on proposals that small businesses should be able to provide shareholders with abridged P&L and balance-sheet data while an unabridged version goes to Companies House. What about microbusinesses? The EU directive says microbusinesses should be protected from complexity to at least the same degree as small companies, with governments given the flexibility to implement a regime of “very simple” balance sheets and P&L accounts, accompanied by only minimal notes. BIS is proposing to do away with directors’ reports for this class of company.
"A small business operating in Aberdeen might legitimately ask why it has to conform to European standards when its trade is focused on Scotland or the UK. Brussels’ justification for this is that an increasing number of fast-growth businesses will export to Europe as they grow."Under the directive, there should be no mandatory audit for “small companies”. However, while the UK will implement this, it is proposing that this exemption should be limited by the old “small business” definitions (turnover £6.5 million, assets £3.6, employees 50). Okay, so overall is this good or bad news? This should be good news for Britain’s small businesses. Not only will the implementation of the directive mean simpler reporting, it should also result in lower costs as the work of advisers – and therefore the amount they charge – will be reduced. It has to be said that none of this is set in stone. The UK government has a certain amount of discretion in implementing the rules and there will be no final dotting of i’s or crossing of t’s until the consultation is completed and the final details worked out. However, what we should see is a simpler accounting regime embracing a larger number of companies. Businesses should seek expert advice right now about the implications for their accounting processes. ______________________________________________