FRSSE and Companies Limited by Guarantee
A query came in from a client recently about the application of the FRSSE to charities for 2015. It’s worth repeating here, as general knowledge about the application of the FRSSE. Here is the query ‘I read somewhere that charities in Ireland cannot apply FRSSE and must go to FRS 102 for periods beginning on or after 1st January 2015, because they are classed as public companies, is this correct?’
The Financial Reporting Standard for Small Entities 2015 was published in July 2013. It applies for one year only to financial statements of ‘small’ entities (as defined in company law) for accounting periods commencing on/after 1 January 2015.
In order to understand how to apply any standard, it is always a good idea to read the Scope section. The Scope Section is in Part 1.1 and footnote number 9 explains that companies entitled to the small company criteria can use the FRSSE.
I don’t know the date article of the you are referring to, but since 1 June 2015 (under the CA 2014), companies limited by guarantee (including many charities) may now avail of the ‘small’/’medium’ thresholds and file abridged accounts, among other things. See more below. The way in which the CA 2014 was brought into law was unprecedented, as it was based on the date the accounts are approved by the Directors.
Let’s take two companies ‘A’ and ‘B’, both limited by guarantee, with a 31 December 2014 period end. Company ‘A’’s financial statements are approved on 21 May 2015 (i.e. under the Companies Acts 1963 to 2013), while Company ‘B’’s financial statements are approved on 21 June 2015 (under the Companies Act, 2014).
The effect of these approval dates are that Company ‘A’ cannot avail of:
• Audit exemption
• Exemption from the presentation of the Cash flow statement under FRS 1
• Abridged financial statements
• The FRSSE as it is not deemed to be a ‘small’ entity, but the equivalent of a ‘public’ company as the financial statements were approved before the enactment of the Companies Act, 2014.
Company ‘B’ however can avail of:
• Audit exemption, unless it is a charity with income in excess of €100,000 when the Charities Act, 2009 requires it to have an audit
• Exemption from the presentation of the Cash flow statement as it is a ‘small’ entity
• Abridged financial statements
• The FRSSE as it is now deemed to be a ‘small’ entity, unless it is a financially regulated entity i.e. an insurance broker (as well as certain other companies included in Sections 8 and 9 of the FRSSE 2015) as the financial statements were approved on/after the date of enactment of the Companies Act, 2014.
There are some unintended consequences arising from the ‘big bang’ method of implementation of the Companies Act 2014 which auditors, accountants and other professionals need to be aware.
On 1 May 2015 the Irish Minister for Jobs, Enterprise and Innovation, Mr Richard Bruton signed the commencement order providing that the Companies Act 2014 (the “Act”) (subject to certain exceptions) will commence with effect from 1 June 2015.
The Ministerial Order (SI 169 of 2015) commencing the Companies Act 2014 is now available in the online version of the Irish Statute Book http://goo.gl/4Y7OsC
Virtually all of the Act comes into force on 1 June 2015, with some exceptions, shown below.
Financial statements approved on after 1 June 2015
The implementation of the Act means that if financial statements are approved on/after 1 June 2015 and the legislative citation quoted in those financial statements is the ‘Companies Act, 2014’, then the provisions of the new act will apply, including those relating to the newly enhanced criteria for audit exemption for certain ‘small’ companies (including those limited by guarantee and dormant companies with no ‘significant ‘ transactions, as defined), as well as ‘small’ groups, as defined in the 2014 Act.
The implications of this form of ‘big bang’ implementation will take some time to digest fully but here are some initial comments:
1. There may be an incentive for some companies to delay signing off their financial statements until 1 June or later, but if by doing so, they miss their Annual Return Date (ARD) they will lose the audit exemption and, as well as triggering a financial penalty for late filing, will also incur a statutory company audit for one financial year under Section 363 – the very thing they were trying so hard to avoid!
2. If the financial statements are signed off on/after 1 June 2015 the correct legislative citation to use is the ‘Companies Act 2014’.
3. It is possible that some ‘small’ companies limited by guarantee (as defined in the new Act) may have commenced their audits of accounting periods ending, for example, on 31 December 2014, before implementation of the new Act on 1 June 2015 i.e. there was no opportunity to file a notice on the company ‘blocking’ audit exemption (as such a block was unnecessary because guarantee companies had compulsory audits).
Under the new Section 1218 Companies Act, 2014, where notice is served on the company, in writing, by at least one member of a guarantee company under that section, a request may be made for an audit under company law, in spite of the company, being entitled to claim audit exemption.
Because of the ‘big bang’ implementation of this new Act, some members of guarantee companies could retrospectively decide to scrap the audit for 2014 (out of sheer convenience or for some other reason), perhaps against the wishes of certain members. Those disaffected members who did want to have an audit could argue that the new Act is unconstitutional as it did not allow them the opportunity to lodge a notice in time to block the audit exemption.
4. In the circumstances, in paragraph 3 above, where the auditor initially contracted for an audit to be carried out and, before the conclusion of the audit, is informed that the members wish to change the assignment to a lesser level of assurance such as a review or a related service, the auditor should carefully read ISA 210 ‘Agreeing the Terms of Audit Engagements’, paragraphs 14 to 17, before complying with such a request. The supporting Application Guidance in paragraphs A29 to A33 of ISA 210 is also essential reading. Here is an extract from part of that guidance (my italics):
‘A32. Before agreeing to change an audit engagement to a review or a related service, an auditor who was engaged to perform an audit in accordance with ISAs (UK and Ireland) may need to assess, in addition to the matters referred to in paragraphs A29-A31 above, any legal or contractual implications of the change.
A33. If the auditor concludes that there is reasonable justification to change the audit engagement to a review or a related service, the audit work performed to the date of change may be relevant to the changed engagement; however, the work required to be performed and the report to be issued would be those appropriate to the revised engagement. In order to avoid confusing the reader, the report on the related service would not include reference to:
(a) The original audit engagement; or
(b) Any procedures that may have been performed in the original audit engagement, except where the audit engagement is changed to an engagement to undertake agreed-upon procedures and thus reference to the procedures performed is a normal part of the report.’
Provisions coming into effect for accounting periods commencing on/after 1 June 2015
The Statutory Instrument (SI 169 of 2015 http://goo.gl/4Y7OsC) also clarifies that certain accounting-related provisions come into operation on the first day of the next financial year of a company that falls on or after 1 June 2015). Those provisions are:
- Section 167 – the requirement to establish an audit committee;
- Section 225 – the requirement to prepare a Directors’ compliance statement;
- Section 305(1)(b) – the disclosure in a company’s financial statements of gains made by directors on the exercise of share options;
- Section 306(1) – the disclosure in financial statements of the amounts paid to persons connected with a director;
- Section 326(1)(a) – the disclosure in a Directors’ Report of the names of persons who at any time during the year were directors of the company; and
- Section 330 – the statement in a Directors’ Report on relevant audit information.
Exceptions to the implementation of the Companies Act, 2014
Certain sections of the Companies Acts 1963 to 2013 are being deferred or preserved. These are:
- the repeal of Part V of the Companies Act 1990 – the prohibition of insider dealing on non-regulated markets – is being deferred and therefore this law continues until further notice;
- certain technical provisions relating to mergers of public limited companies are preserved; and
- the repeal of the Bank of Ireland Acts is deferred pending the re-registration of Bank of Ireland as a company under the Act.