Company accounts

TheLawStudent

Introduction to company accounts

My previous posts on business accounts have discussed the format of the Profit and Loss Account and Balance Sheet for sole traders and partnerships, together with the necessity of making year-end adjustments such as accruals, prepayments, depreciation and bad and doubtful debts to the trial balance before producing the financial statements. These same principles also apply to companies, however there are some differences to the Profit and Loss Account and Balance Sheet of a company, which I will cover over the next few posts.

Regulation of company accounts

There are three main sources of regulation of UK company accounts:

  1. The Companies Acts 1985, 1989 and 2006 (‘CA’);
  2. Accounting standards; and
  3. The FCA Listing Rules, Prospectus Rules and Disclosure and Transparency Rules (for companies whose securities are offered to the public in the UK or admitted to trading by the London Stock Exchange).

Companies prepare accounts because they are obliged to do so by statute. The accounts also have to take on a particular appearance and format and must also present a true and fair view of the profits, assets and liabilities of the company (s.396(2) CA 2006). This is because the accounts need to provide the reader, whether they are a shareholder, potential investor or an individual investigating an allegation of fraud, with certain key information. Unless that information is presented in a particular way, and consistently each year, then the story that the accounts actually tell may not be true or fair.

A company is free to choose its own accounting reference period, subject to provisions of the Companies Act 2006. Under s.391(4) CA 2006, a company’s accounting reference date (ARD) (the date on which the accounts are ‘ruled off’) is the last day of the month in which the anniversary of its incorporation falls. A company is, however, able to change its ARD to a date of its choice provided the provisions of s.392 CA 2006 are complied with. Under s.442(2)(a) CA 2006, a private company must file its accounts at Companies House within nine months after the end of the relevant accounting reference period and under s.442(2)(b) CA 2006, a public company must file its accounts at Companies House within six months after the end of the same period.

The main accounting requirements of the Companies Act 2006 are contained in Part XV and deal with matters such as:

  1. the duty to keep accounting records (s.386 CA 2006);
  2. accounting reference periods and accounting reference date (s.391-392 CA 2006);
  3. the duty to prepare annual company accounts (s.396 CA 2006);
  4. for parent companies, the duty to prepare group accounts (ss.399, 403 and 404 CA 2006). In principle, every subsidiary in a group remains subject to the duty to prepare its own individual accounts – but in practice many subsidiaries will qualify for an exemption from this;
  5. the duty to prepare a directors’ report (ss.415- 419A CA 2006);
  6. the duty to prepare an auditors’ report (ss.475, 495- 497A CA 2006);
  7. the duty to provide every member with a copy of the accounts (s.423 CA 2006);
  8. the duty for public companies to lay the accounts before a general meeting (ss.437-38 CA 2006); and
  9. the duty to deliver copies of the accounts to the registrar (ss.441, 444- 447 CA 2006).

Accounting standards are issued as Financial Reporting Standards (‘FRSs’) by the Financial Reporting Council (www.frc.org.uk). They were formerly issued as Statements of Standard Accounting Practice (‘SSAPs’), some of which are still in force. Accounting standards apply to all companies.

As a consequence of the Companies Acts, FRSs and SSAPs, company accounts tend to conform to a given format, with a large number of supplementary notes (i.e. footnotes giving extra detail).

Some of the legal and regulatory requirements are relaxed in relation to ‘small’ or ‘medium-sized’ companies, as defined by statute (ss.382, 465 CA 2006). In addition, ‘micro-entities’ (very small companies) are exempt from certain financial reporting requirements, including in relation to s.396(2A) CA 2006.