20 April 2015
The new provisions in Ireland’s Companies Act 2014 are set to reduce costs and red tape for SMEs
This June sees the Republic of Ireland’s Companies Act 2014 come into effect – the first major overhaul of company law in Ireland in over half a century. Although we have yet to see it in practice, the new Act is good news for better corporate governance.
One of the key consolidations in this new Act is Part 6 – Financial Statements, Annual Return and Audit, which brings together all the sections covering these topics. These sections have a number of changes, among them that the definitions of statutory financial statements and accounting records will replace the current definitions of accounts, books and records. In toughening up the governance regime, it will be a Category Two offence to fail to keep adequate accounting records.
There will be an extension of the ‘true and fair’ view to include the financial position of the company under review. There will also be an obligation to prepare financial statements in accordance with the Companies Act or International Financial Reporting Standards. Company directors will also have to provide a statement that there is no relevant audit information of which the company’s auditors are unaware.
The Act clarifies the length of a financial year and the new rules regarding changing the financial year end. A company’s first financial year is the period beginning with the date of its incorporation and ending no later than 18 months after this date. Each subsequent financial year of the company begins with the day immediately after its previous financial year end and continues for 12 months, plus or minus seven days.
Within a group, the directors of a holding company will have to ensure the financial year end of the companies coincide with the holding company’s year end, unless there are substantial reasons why not. This must be disclosed in the financial statements of the company. A company may alter its financial year end by giving notice to the Registrar of Companies on the prescribed form, but it may only be altered once every five years. Consideration should therefore be given to the financial year end when forming a company, changing the annual return date, creating groups or bringing a company into a group.
In an attempt to encourage smaller enterprises and to make continuing to do business in Ireland easier (the ‘ease of doing business’ indices are closely watched by industrial development agencies), the new Act extends the audit exemption provisions to several types of company. This is a welcome provision as it removes this cost for these entity types.
The types of companies that can avail of this exemption include: a Company Limited by Shares (LTD) – that is also a small company; a Designated Activity Company; a Company Limited by Guarantee; Small Groups; and finally dormant companies that have no significant accounting transactions or permitted assets and liabilities.
Small companies that qualify under this provision are defined in the Act as being those that fulfil two or more of the following requirements: turnover of the company does not exceed €8.8 million, the balance sheet total does not exceed €4.4 million and the average number of employees of the company does not exceed 50. With around 160,000 SMEs in the Republic of Ireland, this provision is important to a large number of companies.
The types of companies that cannot benefit from this valuable exemption include PLCs and certain Unlimited Companies. Also non-exempt are companies, holdings or subsidiary companies that fall within Schedule 5 of the Act: being a credit institution or one that is an insurance undertaking or with relevant securitisation, or one that is a body with securities admitted to trading.
The exemption lapses for a company, no matter its size, if it is late in filing the current or preceding annual return with financial statements annexed or is late filing its first annual return. Additionally, there is a governance provision that allows for an objection to an exemption if a notice is received one month before the end of the financial year by one or more members holding 10% or greater of the voting rights. For Companies Limited by Guarantee only one member needs to object.
There is also provision in the Act for the termination of the appointment of an auditor if a company avails itself of audit exemption, decides that the appointment of the statutory auditor should not be continued or decides to terminate the appointment of the auditor. When the statutory auditor has been notified of such a decision by the company he or she has 21 days to serve notice on the company, stating whether or not there are circumstances to be brought to the attention of the members or creditors. If this notice is not served on the company the termination shall not have effect, so it will be in the company’s own interest to chase such a notice. Once served, a copy of the notice has to be filed with the Company Registration Office (CRO) within 14 days.
For the first time new provisions for revision of defective financial statements have been introduced, something that was missing from the Companies Acts 1963 to 2013. According to these provisions, directors may prepare revised financial statements or a revised directors’ report if it appears that these did not comply with the Act, even if these financial statements have been laid before the members and have been filed at the CRO.
Where the amounts and presentation of the profit and loss account, balance sheet or other statements are not affected by the revision, the revision may be affected by a supplementary note. In all other cases revised financial statements or a directors’ report must be prepared. Where financial statements are revised, the next statements prepared after the date of revision have to refer to this revision and the particulars of it, its effect and the reasons behind it. All of this has to be included in a note to the financial statements.
An auditor’s report must be prepared on the revised financial statements unless the company is entitled to avail of an audit exemption. Where original financial statements or a directors’ report have been laid before the members at a general meeting, the revised versions must be laid before the company’s next meeting after the date of revision at which any financial statements for a financial year are laid. Where revised financial statements or a directors’ report are prepared and the originals have been filed with the CRO, the directors must, within 28 days of the date of revision, file a copy of the revised financial statements, a directors’ report or supplementary note and a copy of the auditor’s report on the new statements.
The changes mentioned above should reduce the cost and red tape for SME companies, particularly allowing group companies to avail of audit exemption. Directors and accountants will have to get up to speed with these new provisions so that financial statements prepared after the commencement date will reflect these new sections and provisions.
Conor Sweeney will be running a workshop session at the ICSA Ireland Conference on 26 May - book your place at icsa.org.uk/events. For more information on the Irish Companies Act visit icsacharteredsecretaries.ie
Conor Sweeney is a member of the Irish Regional Council of ICSA and is Managing Director of CLS Chartered Secretaries.