4.4.1 Company law and regulatory requirements governing financial reporting framework

As required by Article 4 of the IAS Regulation, a UK parent company with transferable securities admitted to trading on a regulated market at its financial year end must prepare its consolidated financial statements as IAS group accounts. [s403(1)]. The individual financial statements of such a parent company may be either Companies Act individual accounts or IAS individual accounts. [s395(1)].

AIM is not a regulated market. An ‘AIM company’ (i.e. a company with a class of security admitted to AIM) incorporated in an EEA country (including, for this purpose, a company incorporated in the Channel Islands or the Isle of Man) must prepare and present its annual accounts in accordance with EU-adopted IFRS. However, an AIM company incorporated in an EEA country that is not a parent company at the end of the relevant financial period may prepare and present its annual accounts either in accordance with EU-adopted IFRS or in accordance with the accounting and company legislation and regulations that are applicable to that company due to its country of incorporation (which, under the new UK and Irish financial reporting framework, could include EU-adopted IFRS, FRS 101 – if a qualifying entity – and FRS 102). While the AIM Rules do not specifically differentiate between consolidated and individual financial statements, many AIM companies incorporated in the UK use EU-adopted IFRS in their consolidated financial statements but national GAAP in their individual financial statements. However, a parent company that only prepares individual financial statements, e.g. it is exempt from preparing consolidated financial statements, must prepare these in accordance with EU-adopted IFRS.⁴

For a UK company, the choice of framework, discussed at 4.4 above, is subject to the requirements in the CA 2006 on change in financial reporting framework (from IAS accounts to Companies Act accounts) (see 6.1.2 below) and consistency of financial reporting framework in individual accounts of group undertakings (see 6.1.3 below).

For the purposes of the CA 2006, only statutory accounts prepared in accordance with full EU-adopted IFRS are IAS accounts, whereas statutory accounts prepared in accordance with FRS 102, FRS 101, or FRS 105 are Companies Act accounts. [s395(1), s403(2)].

UK charitable companies are not permitted to prepare IAS accounts under the CA 2006, [s395(2), s403(3)], and charities are not permitted to apply FRS 101 (as excluded from its definition of a qualifying entity). [FRS 100 Appendix I, FRS 101 Appendix I]. UK charitable companies preparing financial statements under the CA 2006 must, therefore, apply FRS 102. Other charities in England and Wales and Scotland preparing financial statements under charities legislation must also apply FRS 102.

There is further detail on the requirements of the CA 2006 in relation to annual reports and accounts at 6 below.

FRS 101, FRS 102 and FRS 105 may also be used by entities preparing financial statements intended to give a true and fair view but that are not subject to the CA 2006 (or Irish law). Entities preparing such financial statements intended to give a true and fair view within other legal frameworks will need to satisfy themselves that the standard being applied does not conflict with any relevant legal obligations. [FRS 100 Appendix II.20, FRS 102 Appendix III.41]. Appendix III to FRS 100 and Appendix IV to FRS 102 include observations on the requirements of specific UK and Northern Ireland legislation, although some of this legislation may subsequently have been amended or superseded. Where an entity is subject to a SORP, the relevant SORP will provide more details on the relevant legislation. [FRS 100 Appendix II.2, 21, FRS 102 Appendix III.2, 42].

4.4.2 EU-adopted IFRS

EU-adopted IFRS means IFRSs as adopted by the EU pursuant to the IAS Regulation. [s474].

4.4.3 FRS 102 – The Financial Reporting Standard applicable in the UK and Republic of Ireland

FRS 102 is a single, largely stand-alone, financial reporting standard based on a significantly modified version of the IFRS for SMEs issued by the IASB in 2009.

FRS 102 was originally issued in March 2013 but has had several subsequent amendments (see Chapter 3 at 1.2 and 1.3). A consolidated version of the standard issued in September 2015, incorporating the July 2015 amendments, was mandatory for periods beginning on or after 1 January 2016. Early application was permitted for accounting periods beginning on or after 1 January 2015 provided that the requirements of SI 2015/980 were applied from the same date.

A revised version of FRS 102 was issued in March 2018 (see Chapter 3 at 1.3 for details of the effective date) incorporating the following amendments made after the September 2015 version (which included the July 2015 and earlier amendments):

• Amendments to FRS 102 The Financial Reporting Standard applicable in the UK and Ireland – Fair value hierarchy disclosures issued in March 2016;
• Amendments to FRS 101 Reduced Disclosure Framework and FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland – Notification of shareholders issued in December 2016;
• Triennial review 2017 issued in December 2017; and
• some minor typographical or presentational corrections.

Amendments to FRS 102 The Financial Reporting Standard applicable in the UK and Ireland – Directors' loans – optional interim relief for small entities issued in May 2017 provided an optional interim relief, with immediate effect, when accounting for loans made to a small entity by a director who is a natural person and a shareholder in the small entity (or a close member of the family of that person). These amendments were removed by the Triennial review 2017 (once applied) which include a more extensive relief. See Chapter 5 at 6.3.

FRS 102 is arranged into sections: Section 1 addresses scope, Sections 2 to 33 each address a separate accounting topic, Section 34 addresses specialised activities, and Section 35 – Transition to this FRS – addresses transition. There is a reduced disclosure framework available for qualifying entities (see 4.5 below) in their individual financial statements and also a separate disclosure framework for small entities introduced in July 2015 (see Chapter 5).

4.4.4 FRS 101 – Reduced Disclosure Framework

FRS 101 was issued originally on 22 November 2012. A consolidated version of the standard incorporating subsequent amendments was issued in September 2015 and was mandatory for accounting periods beginning on or after 1 January 2016, with certain early application provisions.

In March 2018, a revised edition of FRS 101 was issued which updates the September 2015 version for the following amendments (see Chapter 2 at 1.2):

• Amendments to FRS 101 – Reduced Disclosure Framework 2015/16 cycle issued in July 2016;
• Amendments to FRS 101 Reduced Disclosure Framework and FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland – Notification of shareholders issued in December 2016;
• Amendments to FRS 101 – Reduced Disclosure Framework 2016/17 cycle issued in July 2017;
• Triennial review 2017 amendments issued in December 2017; and
• some minor typographical or presentational corrections.

Amendments to Basis for Conclusions FRS 101 – Reduced Disclosure Framework –2017/18 Cycle, issued in May 2018, made an amendment to the Basis for Conclusions in respect of IFRS 17 – Insurance Contracts – and updated Table 2 which sets out IFRS publications considered in the development of FRS 101. However, no changes were made to the standard itself.

See Chapter 2 at 1.2 for further details, including the circumstances in which the standard can be adopted early.

FRS 101 sets out a framework which addresses the financial reporting requirements and disclosure exemptions for the individual financial statements of qualifying entities (see 4.5 below) that otherwise apply the recognition, measurement and disclosure requirements of standards and interpretations issued by the International Accounting Standards Board (IASB) that have been adopted in the European Union (EU-adopted IFRS).

An entity reporting under FRS 101 complies with EU-adopted IFRS except as modified by the standard. FRS 101 contains various recognition and measurement modifications to EU-adopted IFRS, primarily to ensure compliance with UK company law.

The FRC will review FRS 101 annually to ensure that the reduced disclosure framework continues to be effective in providing disclosure reductions for qualifying entities when compared with EU-adopted IFRS. [FRS 101.BC10].

4.4.5 Section 1A of FRS 102

Small entities can apply Section 1A of FRS 102. Section 1A was introduced in the July 2015 amendments to FRS 102 and is effective for accounting periods beginning on or after 1 January 2016 (see Chapter 5 at 5 for further details of effective date and early application). Section 1A requires small entities to apply the recognition and measurement requirements of FRS 102 in full. However, the presentation and disclosure requirements required by Section 1A are based on those required by the CA 2006 and the Small Companies Regulations for companies subject to the small companies regime.

The application of the small entities regime in Section 1A is not mandatory and an entity can instead apply FRS 102 in full, FRS 101 (if the entity is a ‘qualifying entity’ preparing individual financial statements – see Chapter 2), EU-adopted IFRS, or FRS 105 if subject to the micro-entities regime (see 4.4.6 below).

The small entities regime of FRS 102 is discussed in Chapter 5.

4.4.6 FRS 105 – The Financial Reporting Standard applicable to the Micro-entities Regime

An entity that chooses to prepare its financial statements in accordance with the micro-entities regime (see 6.4 below) as set out in The Small Companies (Micro-entities' Accounts) Regulations 2013 (SI 2013/3008) is required to apply FRS 105 for periods beginning on or after 1 January 2016. Early application was permitted. FRS 105 was initially only available to UK companies, but was later extended to LLPs and Irish Companies. Amendments to FRS 105 were published in December 2017 as part of the Triennial Review 2017. The amendments mainly introduce new disclosure requirements and are effective for accounting periods beginning on or after 1 January 2019.

The recognition and measurement requirements of FRS 105 are based on those in FRS 102 (but with significant simplifications) and its presentation and disclosure requirements are consistent with the micro-entity provisions (in UK company and LLP law).

FRS 105 is outside the scope of this publication.

4.4.7 Considerations on choice of financial reporting framework

Entities will need to carefully consider their choice of financial reporting framework, based on their individual circumstances. In doing so, entities may need to consider the implications of a new financial reporting framework for other aspects of their business, such as covenants in loan agreements, employee remuneration (e.g. performance-related bonuses), the effect on key performance indicators, accounting systems, taxation and distributable profits.

Factors influencing the choice of financial reporting framework might include:

• whether the entity is a member of a group, and if so, what GAAP is used for group reporting. In particular, subsidiaries of groups reporting under IFRS or in multinational groups may prefer to apply IFRS or FRS 101 rather than FRS 102;
• the level of disclosures required in the financial statements.

  FRS 101 and FRS 102 financial statements prepared by a UK company are Companies Act accounts and therefore must comply with the requirements of the CA 2006 and all applicable schedules of the Regulations (as well as accounting standards). Financial statements prepared under EU-adopted IFRS do not need to comply with Schedules 1, 2 or 3 to the Regulations but must comply with the extensive disclosure requirements in IFRS (see 6.7 below).

  The level of disclosure also depends on whether the entity is a qualifying entity and can make use of a reduced disclosure framework (under FRS 101 or FRS 102) in its individual financial statements (see 4.5 below). While FRS 102 has fewer disclosures than IFRS, the level of disclosure required may sometimes not be significantly different from FRS 101, but this will depend on the entity's individual circumstances;

• stability of the financial reporting framework (in general, there are more frequent changes to IFRS than to FRS 102);
• the implications of new IFRSs (such as IFRS 9 – Financial Instruments – or IFRS 15 – Revenue from Contracts with Customers – or IFRS 16 – Leases ) or expected changes to IFRS that will be implemented or expected to be finalised in future periods;
• IFRS provides detailed and sometimes complex guidance, whereas the requirements in FRS 102 are much shorter (but lack the same level of application guidance as in IFRS, and are likely to involve increased application of management judgement in applying the standard); and
• the implications of different GAAPs for distributable profits (see 5.5 below) and taxation, in particular cash tax. This will also depend on the interaction with tax legislation, and whether tax elections are made.

4.6.1 Related Companies Act 2006 requirements

Where the directors of a large or medium-sized company (i.e. a company not subject to the micro-entity provisions or the small companies regime – see 6.4 and 6.5 below) prepare Companies Act individual or group accounts (such as those prepared under FRS 101 and FRS 102), the notes to the accounts must include a statement as to whether the accounts have been prepared in accordance with applicable accounting standards. Particulars of any material departure from those standards and the reasons for the departure must be given. This statement is not required in the individual accounts of medium-sized companies (see 6.6.2.A below). [Regulations 4(2A), 1 Sch 45].

‘Applicable accounting standards’ means statements of standard accounting practice issued by the FRC (and SSAPs, FRSs issued by the Accounting Standard Board and UITF Abstracts, until withdrawn).⁵ Therefore, FRS 100 to FRS 103 (and FRS 105 for companies applying the micro-entity provisions only) are ‘applicable accounting standards’.⁶

Where the directors of a company prepare IAS individual or IAS group accounts (see 6.1 below), the notes to the accounts must include a statement that the accounts have been prepared in accordance with international accounting standards (i.e. EU-adopted IFRS). [s397, s406, s474].

4.7.1 Status of SORPs

Certain SORPs were withdrawn on implementation of the new UK and Irish GAAP framework. Other SORPs have been updated to conform with FRS 102 (although two Charities SORPs have been issued, one for use with the FRSSE and one for use with FRS 102).

The following SORPs have been updated to conform with FRS 102:

• Accounting for Further and Higher Education (October 2018);
• Financial Statements of UK Authorised Funds (May 2014, as amended in June 2017);
• Charities (FRS 102) (July 2014, as updated Update Bulletin 1 in February 2016 and Update Bulletin 2 in October 2018);
• Limited Liability Partnerships (January 2017);
• Registered Social Housing Providers (September 2014);
• Investment Trust Companies and Venture Capital Trusts (November 2014, as updated in February 2018); and
• Pension Schemes (July 2018).

Refer to Chapter 3 at 2.3 for further details on the application of SORPs.

As a consequence of the December 2017 amendments to FRS 102 following the triennial review, all seven SORP-making bodies have either updated, or are in the process of updating, their respective SORPs to reflect the amendments. At the time of writing only the Pensions Scheme SORP has been updated. A draft version of the updated Limited Liability Partnerships SORP was published in August 2018 for consultation.

6.1.1 Choice of IAS accounts and Companies Act accounts under the CA 2006

The CA 2006 distinguishes between IAS accounts and Companies Act accounts. Financial statements prepared in accordance with the CA 2006 using EU-adopted IFRS are IAS accounts. Financial statements prepared in accordance with the CA 2006 using FRS 101, FRS 102 or FRS 105 are Companies Act accounts.

See 6.2 below for the requirements for IAS accounts and Companies Act accounts.

A company's individual accounts may be prepared:

• in accordance with section 396 (Companies Act individual accounts); or
• in accordance with EU-adopted IFRS (IAS individual accounts). [s395(1)].

This is subject to the restrictions on changes of financial reporting framework and the requirements for consistency of financial reporting framework within the individual accounts of group undertakings (see 6.1.2 and 6.1.3 below).

The group accounts of certain parent companies are required by Article 4 of the IAS Regulation to be prepared in accordance with EU-adopted IFRS. [s403(1)]. Article 4 of the IAS Regulation requires an EEA-incorporated company with securities admitted to trading on a regulated market (as at its financial year end) to prepare its consolidated financial statements in accordance with EU-adopted IFRS.

The group accounts of other companies may be prepared:

• in accordance with section 404 (Companies Act group accounts); or
• in accordance with EU-adopted IFRS (IAS group accounts). [s403(2)].

This is subject to the restrictions on changes of financial reporting framework (see 6.1.2 below).

The individual and any group accounts of a company that is a charity must be Companies Act accounts. [s395(2), s403(3)].

6.1.2 CA 2006 restrictions on changes of financial reporting framework

Under the CA 2006, a company which wishes to change from preparing IAS individual accounts to preparing Companies Act individual accounts (such as financial statements prepared under FRS 101, FRS 102 or FRS 105) may do so only:

• if there is a relevant change of circumstance (see below); or
• for financial years ending on or after 1 October 2012, for a reason other than a relevant change of circumstance, provided the company has not changed to Companies Act individual accounts in the period of five years preceding the first day of that financial year. In calculating the five year period, no account is taken of a change made due to a relevant change of circumstance. [s395(3)-(5)].

The same requirements apply where a company wishes to change from preparing IAS group accounts to preparing Companies Act group accounts, except that the references to individual accounts above are to group accounts. [s403(4)-(6)].

These requirements enable a group where the parent and subsidiary undertakings prepare IAS individual accounts to instead prepare FRS 101 financial statements or even FRS 102 financial statements (as these are both Companies Act individual accounts) where the above criteria are met.

A relevant change of circumstance in respect of individual accounts occurs if, at any time during or after the first financial year in which the directors of a company prepare IAS individual accounts:

• the company becomes a subsidiary undertaking of another undertaking that does not prepare IAS individual accounts;
• the company ceases to be a subsidiary undertaking;
• the company ceases to be a company with securities admitted to trading on a regulated market in an EEA State; or
• a parent undertaking of the company ceases to be an undertaking with securities admitted to trading on a regulated market in an EEA State. [s395(4)].

A relevant change of circumstance for the purposes of group accounts occurs if, at any time during or after the first financial year in which the directors of a parent company prepare IAS group accounts:

• the company becomes a subsidiary undertaking of another undertaking that does not prepare IAS group accounts;
• the company ceases to be a company with securities admitted to trading on a regulated market in an EEA State; or
• a parent undertaking of the company ceases to be an undertaking with securities admitted to trading on a regulated market in an EEA State. [s403(5)].

Section 395's requirements in respect of individual accounts and section 403's requirements in respect of group accounts operate independently of each other. Therefore, an IFRS reporter would be permitted to move from IAS accounts to Companies Act accounts in its individual accounts, while continuing to prepare IAS group accounts.

Paragraph 9.18 of the June 2008 BERR document Guidance for UK Companies on Accounting and Reporting: Requirements under the Companies Act 2006 and the application of the IAS regulation notes that the first example of a relevant change in circumstance in the lists above is ‘intended to deal with situations where a subsidiary undertaking is sold by a group generally using IAS, to another group or entity not generally using IAS. It is not intended that companies switch between accounting regimes on the basis of an internal group restructuring.’

The restriction is ‘one-way’ only from IAS accounts to Companies Act accounts. There is no restriction on the number of times a company can move from Companies Act accounts to IAS accounts or vice versa so theoretically a company could ‘flip’ from IAS accounts to Companies Act accounts and back again several times without a relevant change of circumstance provided it reverted back to Companies Act accounts no more than once every five years.

The CA 2006 does not restrict changes made between FRS 101, FRS 102 or FRS 105 since these are all Companies Act accounts.

6.1.3 Consistency of financial reporting framework in individual accounts of group undertakings

The CA 2006 requires that the directors of a UK parent company must secure that the individual accounts of the parent company and of each of its subsidiary undertakings are prepared under the same financial reporting framework, be it IAS accounts or Companies Act accounts, except to the extent that in the directors' opinion there are ‘good reasons’ for not doing so. [s407(1)]. However, this requirement does not apply:

• where the UK parent company does not prepare group accounts under the CA 2006; [s407(2)]
• to accounts of subsidiary undertakings not required to be prepared under Part 15 of the CA 2006 (e.g. accounts of a foreign subsidiary undertaking); [s407(3)] or
• to accounts of any subsidiary undertakings that are charities, [s407(4)], (so charities and non-charities within a group are not required to use the same financial reporting framework in their accounts). Charities are not permitted to prepare either IAS group or IAS individual accounts. [s395(2), s403(3)].

Additionally, a parent company that prepares both consolidated and separate financial statements under EU-adopted IFRS (i.e. IAS group accounts and IAS individual accounts) is not required to ensure that its subsidiary undertakings all prepare IAS individual accounts. However, it must ensure that its subsidiary undertakings use the same financial reporting framework (i.e. all prepare IAS accounts or all prepare Companies Act accounts) in their individual accounts unless there are ‘good reasons’ for not doing so. [s407(5)].

Although not explicitly stated by FRS 100, there appears to be no requirement that all subsidiary undertakings in a group must use the same GAAP for their Companies Act individual accounts. Some could use, for example, FRS 101, and others could use FRS 102 since all are Companies Act individual accounts and therefore part of the same financial reporting framework. This approach would comply with the statutory requirements of Section 407. However, groups that use a ‘mix’ of GAAP in the individual financial statements may be challenged by HMRC, particularly if this results in tax arbitrage. Examples of ‘good reasons’ for not preparing all individual accounts within a group using the same financial reporting framework are contained in the June 2008 BERR document Guidance for UK Companies On Accounting and Reporting: Requirements under the Companies Act 2006 and the application of the IAS regulation. Paragraph 9.17 of the Guidance notes that this provision is intended to provide a degree of flexibility where there are genuine (including cost/benefit) grounds for using different accounting frameworks within a group of companies and identifies the following examples:

• ‘A group using IAS acquired a subsidiary undertaking that had not been using IAS; in the first year of acquisition, it might not be practical for the newly acquired company to switch to IAS straight away.
• The group contains subsidiary undertakings that are themselves publicly traded, in which case market pressures or regulatory requirements to use IAS might come into play, without necessarily justifying a switch to IAS by the non-publicly traded subsidiaries.
• A subsidiary undertaking or the parent were planning to apply for a listing and so might wish to convert to IAS in advance, but the rest of the group was not planning to apply for a listing.
• The group contains minor or dormant subsidiaries where the costs of switching accounting framework would outweigh the benefits.

The key point is that the directors of the parent company must be able to justify any inconsistency to shareholders, regulators or other interested parties’.

6.2.1 Companies Act requirements for annual accounts

6.2.2 Companies Act requirements for annual reports

The content of the annual report depends principally on whether the company is an unquoted company or a quoted company.

A quoted company means a company whose equity share capital:

• has been included in the Official List (as defined in section 103(1) of the Financial Services and Markets Act 2000) in accordance with the provisions of Part 6 of the Financial Services and Markets Act 2000; or
• is officially listed in an EEA State; or
• is admitted to dealing on either the New York Stock Exchange or the exchange known as Nasdaq.

A company is a quoted company in relation to a financial year if it is a quoted company immediately before the end of the accounting reference period (defined in section 391 of the CA 2006) by reference to which that financial year was determined. An unquoted company means a company that is not a quoted company. [s385(1)-(3)].

The content of the annual reports and accounts of an unquoted and a quoted company are as follows:

• an unquoted company's annual accounts and reports comprise its annual accounts, strategic report (if required – see 6.2.2.B below), directors' report (unless a micro-entity – see 6.2.2.B below), any separate corporate governance statement and the auditor's report (unless the company is exempt from audit); and
• a quoted company's annual accounts and reports comprise its annual accounts, directors' remuneration report, strategic report, directors' report, any separate corporate governance statement, and the auditor's report.

Where the company is a parent company preparing group accounts, the directors' and strategic reports must be consolidated reports (i.e. a ‘group directors’ report' and ‘group strategic report’) relating to the undertakings included in the consolidation. These group reports may, when appropriate, give greater emphasis to the matters that are significant to the undertakings included in the consolidation. [s414A-s414D, s415-s419].

In addition, companies with more than 500 employees that are traded companies, banking companies, authorised insurance companies and companies carrying on insurance market activity are required to comply with the Non-financial Reporting Regulations and must prepare a non-financial information statement within the strategic report. However, there are some scope exceptions (see 6.2.2.D below). The information should be provided on a consolidated basis for groups. [s414CA-CB].

Entities are encouraged to meet the requirements of the non-financial information statement through a title and a series of cross-references, so as to maintain the coherence of the strategic report. Entities are discouraged from replicating information located elsewhere in the strategic report in the non-financial information statement.⁸

Small and medium-sized companies are entitled to certain exemptions (see 6.2.2.B below). Companies with securities admitted to a regulated market must make statutory corporate governance disclosures in the annual report and quoted companies have extended disclosures (see 6.2.2.C below). These include the Takeovers Directive disclosures required in the directors' report for companies with securities carrying voting rights admitted to trading on a regulated market at the financial year end. [7 Sch 13]. For large private companies, The Companies (Miscellaneous Reporting) Regulations 2018 (see 6.2.2.A) introduce a requirement to include disclosures of their corporate governance arrangements in the Directors' Report. AIM Rule 26 also requires that from 28 September 2018, AIM companies must provide details (on a website) explaining how they comply with, and where they depart from, a chosen ‘recognised’ corporate governance code.

A company's strategic report (if any), directors' report, directors' remuneration report (if any), and separate corporate governance statement (if any) must be approved by the board of directors and signed on behalf of the board by a director or the secretary of the company. [s414D(1), s419(1), s419A, s422(1)].

It is beyond the scope of this publication to set out the content of the directors' report, strategic report, directors' remuneration report or corporate governance statement. In July 2018, the FRC published updated Guidance on the Strategic Report. The Guidance is intended to be persuasive rather than have mandatory force. In September 2016, the GC 100 and Investor Group published Directors' Remuneration Report Guidance which provides best practice guidance on the directors' remuneration report prepared by quoted companies.

In July 2018, Parliament approved the statutory instrument, The Companies (Miscellaneous Reporting) Regulations 2018 (SI 2018/860). The legislation introduces a wide range of disclosures, with varying applicability, discussed at 6.2.2.A below.

6.3.1 Requirements of accounting standards to prepare consolidated financial statements

FRS 100 does not address the requirements to prepare consolidated financial statements (nor do FRS 101 or FRS 105, since these standards only address individual financial statements).

EU-adopted IFRS and FRS 102 both include requirements on which entities should prepare consolidated financial statements, and how these should be prepared. Their requirements need to be read in conjunction with the requirements of the relevant statutory framework for preparation of the entity's financial statements.

FRS 102 requires an entity, that is a parent at its year end, to present consolidated financial statements in which it consolidates all its investments in subsidiaries in accordance with the standard (except those permitted or required to be excluded from consolidation) unless it is exempt from the requirement to prepare consolidated financial statements provided in the standard. [FRS 102.9.2-9.3]. As noted above, FRS 102's requirements to prepare group accounts (and exemptions) are consistent with the requirements of the CA 2006. A small entity that is a parent entity is not required to prepare consolidated financial statements under Section 1A of FRS 102 (see Chapter 5 at 6.2). [FRS 102.1A.21]. However, the CA 2006 is more restrictive than this, requiring a small entity that is a parent entity to prepare group accounts if the company is a member of a group which contains certain types of entities (see 6.3 above and Chapter 5 at 6.2).

6.3.2 Exemption from publishing the individual profit and loss account where group accounts are prepared

Where a company prepares group accounts in accordance with the CA 2006,

• the company's individual profit and loss account need not contain the information specified in paragraphs 65 to 69 of Schedule 1 to the Regulations (specified information supplementing the profit and loss account); and
• the company's individual profit and loss account must be approved by the directors in accordance with section 414(1) but may be omitted from the company's annual accounts.

This exemption is conditional on the company's individual balance sheet showing the company's profit or loss for the financial year (determined in accordance with the CA 2006) and use of the exemption conferred by section 408 being disclosed in the annual accounts. [s408, Regulations 3(2)].

The exemption is available for both Companies Act and IAS group accounts. Paragraph 9.24 of the June 2008 BERR document Guidance for UK Companies on Accounting and Reporting: Requirements under the Companies Act 2006 and the application of the IAS regulation clarifies that:

‘The omission of the profit and loss account (referred to within IAS as the income statement) might be considered to be inconsistent with certain aspects of IAS, for example, the requirement in IAS 1 Presentation of Financial Statements in relation to a fair presentation. However, IAS does not in itself require the preparation of separate financial statements but permits the omission of certain elements. In other words, the separate financial statements required to be published under the 2006 Act are an extract of the full IAS separate financial statements. This exemption should not affect the ability of a parent company to be treated as a “first-time adopter” and hence to take advantage of exemptions for first time use under the provisions of IFRS 1. The company will need to provide the disclosure required by section 408(4) i.e. that advantage has been taken of the publication exemption in section 408(1). The auditor will also need to describe the accounting framework that has been used within its audit reports. In respect of individual accounts, the reference to the framework will need to make clear that its basis is IAS as adopted by the EU as applied in accordance with the provisions of the 2006 Act.’

Paragraph 9.25 of the BERR guidance further notes that:

‘The exemption in the 2006 Act relates only to the profit and loss account. By virtue of section 472(2), the exemption also extends to the notes to the profit and loss account. The individual IAS accounts would, however, still need to include the other primary statements and note disclosures required by IAS, including a cash flow statement and a statement of changes in shareholders’ equity.'

6.4.1 Scope of the micro-entities regime

A company or an LLP or qualifying partnership can only use the micro-entity provisions if it meets the size criteria and is not excluded from being treated as a micro-entity. The size criteria operate in the same way as for the small companies regime (see 6.5 below and Chapter 5 at 4.3).

The micro-entity provisions are not available to overseas companies and other entities. The Explanatory Note to the Micro-entities Regulations confirms that the regime is only available to companies formed and registered (or treated as formed and registered) under the CA 2006.

The qualifying conditions for UK entities are met in a year in which the entity satisfies two or more of the following requirements: [s384A(4)-(7)]

• turnover must not exceed £632,000;
• balance sheet total (gross assets) must not exceed £316,000; and
• the number of employees must not exceed 10.

In the case of an entity which is a parent entity, the entity qualifies as a micro-entity in relation to a financial year only if the entity qualifies as a micro-entity in relation to that year and the group headed by the entity qualifies as a small group. [s384A(8)].

The micro-entity provisions do not apply to an entity's accounts for a particular financial year if the entity was at any time within that year: [s384B(1)]

• a company excluded from the small companies regime, or small LLPs regime, by section 384;
• an investment undertaking as defined in Article 2(14) of the EU Accounting Directive (Directive 2013/34/EU);
• a financial holding undertaking as defined in Article 2(15) of the EU Accounting Directive;
• a credit institution as defined in Article 4 of Directive 2006/48/EC (other than one referred to in Article 2 of that directive);
• an insurance undertaking as defined in Article 2(1) of Directive 91/674/EEC; or
• a charity.

The micro-entity provisions also do not apply in relation to an entity's accounts for a financial year if the entity is a parent company which prepares group accounts for that year as permitted by section 399(4), or is not a parent entity but its accounts are included in consolidated group accounts for that year. [s384B(2)].

6.4.2 Companies Act requirements for micro-entities

The Micro-entities Regulations provide extensive presentation and disclosure exemptions for micro-entities (known as the micro-entity provisions). In summary, a micro-entity applies one of two abridged formats for the balance sheet and one abridged format for the profit and loss account, as set out in the Section C formats included in the Small Companies Regulations and presents limited prescribed notes which must be included at the foot of the balance sheet. [s472(1A)]. The formats and related notes disclosures are known as the ‘micro-entity minimum accounting items’. [s474(1)].

The prescribed notes comprise: information on directors' advances, credits and guarantees (required by s413); and on financial guarantees and commitments (required by 1 Sch 57 to the Small Companies Regulations). The micro-entity is not required to give any of the other information required by way of notes to the accounts set out in Schedules 1 to 3 to the Small Companies Regulations. This means there is no requirement to give the information on related undertakings set out in Schedule 2 or the disclosures on directors' remuneration set out in Schedule 3. [Regulations (SC) 4, 5, 5A].

Micro-entities are not required to prepare a directors' report. [s415(1A)].

The alternative accounting rules and fair value accounting rules (explained further in Chapter 6 at 10) do not apply where the micro-entity provisions are applied; therefore a micro-entity applying the micro-entity provisions is not permitted to revalue tangible fixed assets, investment properties or financial instruments.

In considering whether the individual accounts give a true and fair view, the directors apply the following provisions:

• where the accounts comprise only micro-entity minimum accounting items, the directors must disregard any provision of an accounting standard which would require the accounts to contain information additional to those items;
• in relation to a micro-entity minimum accounting item contained in the accounts, the directors must disregard any provision of an accounting standard which would require the accounts to contain further information in relation to that item; and
• where the accounts contain an item of information additional to the micro-entity minimum accounting items, the directors must have regard to any provision of an accounting standard which relates to that item. [s393(1A)].

Even though the presentation and disclosure requirements are minimal, ‘the micro-entity minimum accounting items’ included in the company's accounts for the year are presumed to give the true and fair view required (the usual requirements to give additional information where the matters required to be included in the accounts are not sufficient to give a true and fair view and the provisions on ‘true and fair override’ do not apply in relation to the micro-entity minimum accounting items included in the company's accounts for the year).

The auditor of a company which qualifies as a micro-entity in relation to a financial year applies the same provisions above in considering whether the individual accounts of the company for that year give a true and fair view. [s495(3A)].

If the accounts are prepared in accordance with the micro-entity provisions, the balance sheet must contain a statement to this effect in a prominent place above the signature(s) of the director(s). [s414(3)(a)].

Companies using the micro-entity provisions must file a copy of their accounts at Companies House. [s444(3)]. Micro-entities can use the filing exemptions for companies subject to the small companies regime (subject to making the statement that the accounts (and reports) have been delivered in accordance with the provisions applicable to companies subject to the small companies regime). [s444(1)-(2), (5)].

6.4.3 Micro-entities in the Republic of Ireland

Equivalent legislation to the Micro-entities Regulations (see 6.4 above) was signed into Irish law in May 2017 (with a commencement date of 9 June 2017) as part of the Companies (Accounting) Act 2017. The Companies (Accounting) Act 2017 is mandatory for accounting periods beginning on or after 1 January 2017, but the micro-entities provisions can be adopted by Irish companies for periods beginning on or after 1 January 2015.

The qualifying conditions for Irish entities are different to those for UK entities (see 6.4.1 above) and are met in a year in which the entity satisfied two or more of the following requirements: [FRS 105 Appendix IV.4]

• turnover must not exceed €700,000;
• balance sheet total (gross assets) must not exceed €350,000; and
• the number of employees must not exceed 10.

Certain companies are excluded from being treated as micro companies, including those excluded from the small companies regime, investment undertakings, financial holding undertakings, holding companies voluntarily preparing consolidated financial statements and subsidiaries included in consolidated financial statements. The Companies Act 2014 should be referred to for a full list of excluded companies. [FRS 105 Appendix IV.4].

6.6.1 Qualification as medium-sized company

The medium-sized companies regime works in the same way as the small companies regime (described in Chapter 3 at 4.1.2). The size criteria and excluded companies are detailed below.

6.6.2 Disclosure exemptions available for medium-sized companies

6.7.1 Disclosures required by the Regulations

The Regulations contain the following schedules:

• Schedule 1 (Companies Act individual accounts – companies other than banking and insurance companies);
• Schedule 2 (Companies Act individual accounts: banking companies);
• Schedule 3 (Companies Act individual accounts: insurance companies);
• Schedule 4 (Information about related undertakings – Companies Act or IAS accounts);
• Schedule 5 (Information about directors' benefits: remuneration – Companies Act or IAS accounts);
• Schedule 6 (Companies Act group accounts);
• Schedule 7 (Matters to be dealt with in directors' report);
• Schedule 8 (Directors' remuneration report – quoted companies);
• Schedule 9 (Definition of ‘provisions’); and
• Schedule 10 (General interpretation).

A company preparing IAS individual accounts in accordance with section 397 (or IAS group accounts in accordance with section 406) does not apply Schedules 1 to 3, or Schedule 6 to the Regulations.

A company preparing Companies Act accounts must comply with all the requirements of the Regulations, including Schedules 1 to 3 (as applicable) and, where group accounts are prepared, Schedule 6. Schedules 1 to 3 include the formats for the profit and loss account and balance sheet, recognition and measurement principles, and disclosure requirements. Schedule 1 applies to all companies (other than banking companies and insurance companies), Schedule 2 to banking companies and groups, and Schedule 3 to insurance companies and groups. See Chapter 6 at 4.2.2 and 4.2.3 for definitions of banking and insurance companies and groups respectively.

The Regulations require various disclosures to be given in the financial statements. In particular, Parts 3 of Schedules 1 to 3 for Companies Act accounts require certain disclosures to be made in the notes to the financial statements if not given in the primary statements. The relevant paragraphs are as follows:

• Schedule 1 paragraphs 42 to 72B;
• Schedule 2 paragraphs 52 to 92B;
• Schedule 3 paragraphs 60 to 90B; and
• Schedule 6 various paragraphs.

Although some of these disclosure requirements are replicated in EU-adopted IFRS, others are not. Entities that move to FRS 101 or FRS 102 from previous UK GAAP will have been required to provide the statutory disclosures required for Companies Act accounts previously and therefore these requirements will not increase their reporting burden. Entities that move to FRS 101 or FRS 102 from EU-adopted IFRS are required to provide the additional statutory disclosures for Companies Act accounts and should consider carefully the impact of these new requirements against the benefits of the reduced disclosures under those standards.

6.7.2 Existing Companies Act disclosures in the accounts and reports applicable to IAS accounts and Companies Act accounts

Companies preparing IAS accounts or Companies Act accounts are subject to the following disclosures:

• section 396(A1) and 397(1) – information about the status of the company where individual accounts are prepared. See 6.2.1.C above;
• section 404(A1) and 406(1) – information about the status of the company where group accounts are prepared See 6.2.1.C above; and
• section 409 (and Schedule 4 to the Regulations) – information about related undertakings;
• section 410A – off-balance sheet arrangements (unless subject to the small companies regime). See Chapter 6 at 8.7;
• section 411 – employee numbers and costs (unless subject to the small companies regime). See Chapter 6 at 8.6;
• section 412 (and Schedule 5 and paragraph 22A of Schedule 6 to the Regulations) – directors' benefits: remuneration;
• section 413 – directors' benefits: advances, credits and guarantees. See Chapter 6 at 8.8;
• section 414A-D – strategic report (including the non-financial information statement report disclosures required by section 414CA-CB for certain large public interest entities). The FRC's Guidance on the Strategic Report (June 2018) provides best practice guidance. This is intended to be persuasive rather than have mandatory force;
• section 236, sections 415 to 419 (and Schedule 7 to the Regulations) – directors' report;
• sections 420 to 421 (and Schedule 8 to the Regulations) – directors' remuneration report (quoted companies only). The GC 100 and Investor Group's Directors' Remuneration Report Guidance 2016 (see 6.2.2 above), provides best practice guidance on the directors' remuneration report prepared by quoted companies; and
• section 494 (and Companies (Disclosure of Auditor Remuneration and Liability Limitation Agreements) Regulations 2008) – services provided by auditor and associates and related remuneration.

  Medium-sized companies are only required to disclose remuneration for the audit of the annual accounts receivable by the company's auditor (but not the associates of the auditor) and are not required to disclose remuneration for non-audit services. [s494].¹¹

TECH 14/13 FRF provides guidance on disclosure of auditor remuneration but does not reflect the amendments made by SI 2016/649¹²:

• to remove the requirement for companies subject to the small companies regime to disclose, in a note to the annual accounts, the amount of any remuneration receivable by the auditor for the auditing of those accounts.

  This disclosure remains for medium-sized companies; or

• to restrict the conditions for exemption for a subsidiary company, from disclosing information required by regulation (5)(1)(b) of SI 2008/489 (remuneration for services other than the auditing of the company's accounts) in the subsidiary's individual accounts, to situations where the statutory auditor of the subsidiary company is the same as the statutory auditor of the parent that is required to prepare and does prepare group accounts in accordance with the CA 2006 (which consolidate the subsidiary).

  The other conditions for use of this exemption by a subsidiary company are unchanged. There is also no change to the conditions for the same exemption for the individual accounts of a parent company.

LLPs may also have specific disclosure requirements, which are outside the scope of this publication.

In addition, other CA 2006 or related disclosures may apply depending on individual circumstances such as the disclosures required for a parent taking advantage of the exemption from preparing consolidated accounts under either sections 400 or 401 of the CA 2006.

6.8.1 Realised profits

Profit is realised, as a matter of generally accepted accounting practice, where it arises from: [TECH 02/17BL.3.9]

1. a transaction where the consideration received by the company is ‘qualifying consideration’ (see 6.8.2 below); or
2. an event which results in ‘qualifying consideration’ being received by the company in circumstances where no consideration is given by the company; or
3. the recognition in the financial statements of a change in fair value, in those cases where fair value has been determined in accordance with measurement guidance in the relevant accounting standards or company law, and to the extent that the change recognised is readily convertible to cash; or
4. the translation of:
   1. a monetary asset which comprises qualifying consideration; or
   2. a liability,

      denominated in a foreign currency; or

5. the reversal of a loss previously regarded as realised; or
6. a profit previously regarded as unrealised (such as amounts taken to a revaluation reserve, merger reserve, or other similar reserve) becoming realised as a result of:
   1. consideration previously received by the company becoming ‘qualifying consideration’; or
   2. the related asset being disposed of in a transaction where the consideration received by the company is ‘qualifying consideration’; or
   3. a realised loss being recognised on the scrapping or disposal of the related asset; or
   4. a realised loss being recognised on the write-down for depreciation, amortisation, diminution in value or impairment of the related asset;
   5. the distribution in kind of the asset to which the unrealised profit relates; or
   6. the receipt of a dividend in the form of qualifying consideration when no profit is recognised because the dividend is deducted from the book value of the investment to which the unrealised profit relates,

      in which case the appropriate proportion of the related unrealised profit becomes a realised profit; or

7. the remeasurement of a liability, to the extent that the change recognised is readily convertible to cash.

If the write down in (f)(iv) above is subsequently reversed, an equal amount of profit should be regarded as becoming unrealised. In other words, the amount of profit regarded as becoming realised is equal to the cumulative amount of any write down treated as a realised loss.

In addition to those instances of realised profit included in the definition of realised profit set out above, the following would also constitute a realised profit per the guidance in TECH 02/17BL: [TECH 02/17BL.3.14]

1. the receipt or accrual of investment or other income receivable in the form of qualifying consideration; or
2. a gain arising on a return of capital on an investment where the return is in the form of qualifying consideration; or
3. a gift (such as a ‘capital contribution’) received in the form of qualifying consideration. However, this does not apply when the legal form of the transaction is a loan even though it is accounted for as a capital contribution (see paragraph 6.20 of the TECH 02/17BL guidance regarding the proceeds of issue of convertible debt and paragraph 9.53 of the TECH 02/17BL guidance regarding intra-group off-market loans); or
4. the release of a provision for a liability or loss which was treated as a realised loss; or
5. the reversal of a write-down or provision for diminution in value or impairment of an asset which was treated as a realised loss.

6.8.2 Qualifying consideration

Qualifying consideration comprises: [TECH 02/17BL.3.11]

1. cash; or
2. an asset that is readily convertible to cash; or
3. the release, or the settlement or assumption by another party, of all or part of a liability of the company; or
4. an amount receivable in any of the above forms of consideration where:
   1. the debtor is capable of settling the receivable within a reasonable period of time; and
   2. there is a reasonable certainty that the debtor will be capable of settling when called upon to do so; and
   3. there is an expectation that the receivable will be settled; or
5. an amount receivable from a shareholder where and to the extent that:
   1. the company intends to make a distribution to the shareholder of an amount equal to or less than its receivable from that shareholder; and
   2. the company intends to settle such distribution by off-setting against the amount receivable (in whole or in part); and
   3. within the meaning of paragraph 3.5 and 3.5A of the TECH 02/17BL guidance, (i) and (ii) are linked.

6.8.3 Realised losses

Losses should be regarded as realised losses except to the extent that the law, accounting standards or the guidance in TECH 02/17BL provide otherwise. [TECH 02/17BL.3.10].

Realised losses will include: [TECH 02/17BL.3.15]

1. a cost or an expense (other than one charged to the share premium account) which results in a reduction in recorded net assets;
2. a loss arising on the sale or other disposal or scrapping of an asset;
3. the writing down, or providing for the depreciation, amortisation, diminution in value or impairment, of an asset (except in the circumstances set out in paragraphs 2.33 and 2.36 of the TECH 02/17BL guidance);
4. the creation of, or increase in a provision for a liability or loss (other than deferred tax arising in the circumstances discussed in paragraph 3.17 of the TECH 02/17BL guidance) which results in an overall reduction in recorded net assets;
5. a gift made by the company (or the release of all or part of a debt due to that company or the assumption of a liability by the company) to the extent that it results in an overall reduction in recorded net assets; and
6. a loss arising from fair value accounting where profits on remeasurement of the same asset or liability would be treated as realised profits.

6.8.4 Disclosure of distributable profits

Except for companies authorised to carry on long-term insurance business (e.g. life insurers), there is no requirement under UK law or accounting standards for financial statements to distinguish between realised and unrealised profits or between distributable profits and non-distributable profits. However, companies should maintain sufficient records to enable them to distinguish between those profits that are available for distribution and those which are not. [TECH 02/17BL.2.25].

For companies authorised to carry on long-term insurance business, Schedule 3 to the Regulations requires that every balance sheet of such a company must show separately as an additional item the aggregate of any capital and reserves which are not required to be treated as realised profits under section 843 of the CA 2006. [3 Sch 11(1)].

For companies authorised to carry on long-term insurance business in accordance with Article 14 of the Solvency 2 Directive, the realised profit or loss of the company in respect of which its relevant accounts are prepared is the amount calculated by a given formula. [s833A]. In summary, this formula is the company's net assets as calculated by the Solvency 2 Directive less share capital, share premium, any capital redemption reserve and any other reserve that the company is prohibited from distributing.

For companies that are not required to comply with the Solvency 2 Directive, realised profits or losses are determined using the normal UK common law and statutory requirements (see 6.8 above).

6.8.5 Impact of transition on distributable profits

The potential impact on distributable profits on transition to FRS 101, FRS 102 or FRS 105 is discussed at 5.5 above.

7.2.1 Accounting standards and true and fair

Section 393 of the CA 2006 requires that the directors of a company must not approve accounts unless they are satisfied that they give a true and fair view of the assets, liabilities, financial position and profit or loss. [s393].

Predecessor bodies to the FRC obtained legal opinions that have confirmed the centrality of the true and fair concept to the preparation and audit of financial statements, whether prepared in accordance with UK accounting standards or international accounting standards. The latest Opinion written by Martin Moore QC (2008) followed the enactment of the CA 2006 and the introduction of international accounting standards and endorsed the analysis in the earlier Opinions of Leonard Hoffman QC (1983) and Mary Arden (1984) and Mary Arden QC (1993) as to the approach that Courts would take to accounting standards when considering whether accounts show a true and fair view.

In October 2013, the then Department of Business, Skills and Innovation (BIS) published a ministerial statement:

‘The Department of Business has given serious consideration to concerns raised by some stakeholders that accounts prepared over the past 30 years, in accordance with UK or international financial reporting standards, have not been properly prepared under UK and EU law.

‘However, it is entirely satisfied that the concerns expressed are misconceived and that the existing legal framework, including international financial reporting standards, is binding under European Law.

‘In preparing financial statements, achieving a true and fair view is and remains the overriding objective (and legal requirement). In the vast majority of cases, compliance with accounting standards will result in a true and fair view. However, where compliance with an accounting standard may not achieve that objective, accounting standards expressly provide that that standard may be overridden. […]’

The FRC published its independent legal advice, available on the FRC website. The Opinion written by Martin Moore QC (3 October 2013) – International Accounting Standards and the true and fair view – considered issues addressed in an Opinion written by George Bompas QC (8 April 2013), in particular the interaction of International Accounting Standards and the legal requirement that directors must not approve accounts that do not show a true and fair view, and the place of prudence.

However, both the FRC (in its Press Notice of 3 October 2013) and the BIS ministerial statement noted scope for improvements in aspects of international financial reporting standards and the IASB's Conceptual Framework, for example:

• stewardship reporting (i.e. holding directors to account for their management of the company’s property) should be regarded as a primary objective of financial reporting;
• prudence (i.e. the exercise of caution), should be explicitly acknowledged in the Conceptual Framework; and
• there should be clear principles to describe when specific measurement bases, such as fair value (which needs to be appropriately defined) should be used. Performance reporting should present movements in fair value clearly and appropriately.

The FRC noted that investors raised other concerns and that it looked forward to working with investors and other stakeholders to address the full range of issues.

In June 2014, the FRC issued updated guidance – True and Fair. This confirms the fundamental importance of the true and fair requirement in both IFRS and UK GAAP, whether applying FRS 100 to FRS 103 or previous UK GAAP. This guidance emphasises the application of objective professional judgement, which applies at all stages of preparation of the financial statements, to ensure the financial statements give a true and fair view. The guidance specifically addresses the concept of prudence and reflecting the substance of transactions under both IFRS and UK GAAP.

The FRC expects preparers, those charged with governance and auditors to stand back and ensure that the financial statements as a whole give a true and fair view, provide additional disclosures where compliance with an accounting standard is insufficient to present a true and fair view, to use the true and fair override where compliance with the standards does not result in the presentation of a true and fair view and to ensure that the consideration they give to these matters is evident in their deliberations and documentation. See Chapter 6 at 9.2.