What are Abridged Accounts?
Abridged accounts are a reduced version of a company’s annual accounts; they cover comparatively less information than full-fledged accounts and exclude the profit and loss account. It is a fundamental principle that companies with limited liability protection should be required to make certain information publicly available. The ability of the company to carry on its trade without serious prejudice must also be protected.
Currently, the purpose behind abridged accounts is to limit the public accessibility of certain financial data of the company as the publication of a company’s profit and loss account will allow sensitive commercial information to be readily available to a company’s competitors.
The government has introduced Economic Crime (Transparency and Enforcement) Act 2022 to reduce money laundering and other economic crimes. With Companies House in need of modernization, the Government has been consulting with various bodies on the extent of these reforms and issued its final White Paper on Corporate Transparency and Register Reform. Key recommendations include:
- Filing deadlines will not be shortened, but legislation will be introduced to facilitate future changes.
- Small companies will no longer have the option to prepare and file abridged accounts and will be required to file both their profit and loss account and directors’ report, ie, the option to file ‘filleted’ accounts will be removed.
- Micro-entities will also be required to file their profit and loss accounts but will continue to have the option to not prepare or file a directors’ report.
- Dormant companies will be required to file an eligibility statement
- All companies will be required to file accounts digitally, with full tagging.
ICAEW though welcoming the measures set out in the White Paper has stated that they will benefit trade, and the UK economy, combat economic crime, improve the quality and value of financial information introduce mandatory digital filing and checks on the information being filed.
Through this act, the Companies House will be able to check the assets a company holds and know who the company’s owners are.
How Do These Changes Impact Micro and Small Entities?
Insufficient Insight Elapsed
Currently, micro and small entities can file abridged accounts. Such accounts showcase little details of the company’s financial performance, making abridged accounts an attractive option to economic criminals. By eliminating this opportunity, the directors will be required to submit a digitally tagged complete set of accounts using iXBRL, which can be easily searched and cross-referenced with HMRC’s data, eliminating any discrepancies.
ICAEW has however not supported small and micro companies being required to file a profit and loss account on the public register.
More Accurate Accounts Filling
From a historical perspective, it has been observed that the accounts filled with the HMRC and the Companies House are somewhat inconsistent and incomparable in various respects. But the implementation of proposed changes in the accounts filling process will wipe out these issues, and the information provided by a company will be more consistent and accurate.
ICAEW has also expressed its concerns as to the shortening of filing deadlines which could have a detrimental effect on the quality of reporting. They are in agreement as to the merits of financial information being as current as possible however this must be balanced with ensuring information is of high quality.”
Identity Verification & More freedom of movement for the Registrar
Directors will be required to validate their identity to the Companies House when registering a company or submitting their annual accounts, restricting corporate directors and officers from directly connecting with the company owners. The registrar will not only be capable of eradicating inaccurate information with the company but can also charge a fine if they are unable to meet these requirements.
Transparency for Small Businesses in the UK
The most significant change for small companies and micro-entities will be the increased transparency when submitting their annual accounts. Removing the privilege to file abridged versions would mean that small companies will also be required to submit the Statement of Profit and Loss along with the Statement of Financial Position. Small-sized limited companies will be required to file a directors’ report; however, micro-entities are still exempted. Everything is not gloomy about the proposed changes will streamline the filling process, leaving only two filing options.
Pros and Cons
- The foremost advantage is the reduction in economic crimes; this will also benefit the economy as there will be better control of money laundering and other frauds.
- Seeking credit from financial institutions will be smoother as credit rating agencies can gather more information from the Companies House to assess the creditworthiness of smaller firms.
- Increased checks at the time of company formation
- Filing company accounts will become much more straightforward.
- More information will go public, including The Statement of Profit and Loss, while submitting the accounts
- Increased documentation required while setting up a company
When will these Changes be taken into Effect?
These changes could be implemented at any point, but the authorities have declared no official date. However, the importance of overcoming economic crimes is so high that it is inevitable that the Government could take swift action.
While the Government is considering accelerating its plans to make significant changes and Companies House Reforms which will involve some significant changes to filing requirements, including profit and loss, accounts for small and micro-entities.
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