Financial Reporting Obligations for Small Companies (SME’s)

20 October 2011

On 25 August 2011, the Department for Business Innovation and Skills (BIS) and the Financial Reporting Council (FRC) published a discussion paper, "Simpler Reporting for the Smallest Businesses". The paper aims to stimulate discussion in response to SME concerns that the current legal and regulatory financial reporting regime is onerous and costly, and adds little value for users of that information.

One of the core concepts of company law is that information about a company should be made available to the public. The purpose of this ‘openness’ is to enable anyone interested in the affairs of a company to have access to the information they need to make an informed judgement. The information that has to be available for inspection at the companies’ registry includes:

  • The company’s memorandum and articles of association;
  • Particulars of directors and secretary;
  • Particulars of the issue of shares;
  • Particulars of most charges;
  • Particulars of all special resolutions;
  • Notice of the accounting reference date;
  • Notice of any increase of capital;
  • Particulars of resolutions granting directors authority to allot shares;
  • Particulars of the address of the registered office;
  • The annual return; and
  • Accounts

In respect of the last two items, the annual return and accounts, these have further statutory obligations regarding when, how and what must be contained in them when they are filed.

Small and medium companies

The European Commission defines that a company will be a micro-entity if it does not exceed the limits of two of the following three criteria: a balance sheet total of EUR250,000, a net turnover of EUR500,000 and an average number of 10 employees.

In the discussion paper, the BIS notes that this definition captures approximately 60% of companies currently registered at Companies House, as well as around 3.5 million unincorporated businesses.

The discussion paper seeks feedback on a range of issues under the following broad headings:

  • The benefits of reducing financial reporting obligations. What would those benefits be, how could they be quantified and would the benefits outweigh the cost of moving to a new regime?
  • The information that micro-entities should have to prepare and file. Who uses the information that is filed, what is the minimum information those users generally require and is that information readily available?

One approach which has been suggested would limit financial reporting for SMEs to:

  • a simplified Trading Statement, in place of a profit and loss statement.
  • a simplified Statement of Position, in place of a balance sheet.
  • a simplified annual return.

What could be the benefits to an SME of less rigorous reporting obligations?

  • Integrated financial and tax data might help management better to understand trends and build more accurate financial projections and models.
  • A more simple filing system might reduce the incidence of late filings, which can adversely impact on credit ratings.
  • The ability for micro-entities to provide accurate and up-to-date information might improve the opportunities to raise third party debt or equity finance to further develop their businesses.

The discussion paper published by BIS and the FRC does recognise that pursuing any approach that would simplify reporting obligations would need further investigation, in particular around the issues of tax avoidance and legislative complexity. However, the paper does ask for feedback on whether, in principle, the proposal could be beneficial. For more information and to view the discussion paper, visit /.

Simon Halberstam

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