The Companies (Accounting) Bill was signed by the President on 17 May 2017, and is accordingly the Companies (Accounting) Act 2017 (the Accounting Act). Almost all of its provisions came into force pursuant to a commencement order signed by the Minister for Jobs, Enterprise and Innovation (DJEI) on 2 June 2017 and published on 6 June 2017 (the First Commencement Order).
As mentioned in our previous bulletins, the purpose of the Accounting Act is to transpose the EU Accounting Directive (Directive 2013/34/EU) into Irish law. For this purpose, the Accounting Act makes a large number of technical changes to the accounting provisions of the Companies Act 2014 (2014 Act).
However, in an unusual move, we understand that a second commencement order was signed on Thursday 8 June 2017, with the effect that Section 80 of the Accounting Act will not come into operation today (9 June 2017). This is discussed further below.
In a welcome development, the Accounting Act also makes a number of important non-accounting changes to the 2014 Act, in order to fix a number of anomalies which had been drawn to the attention of the DJEI.
Article 3 of the First Commencement Order confirms that the Accounting Act shall come into operation on Friday 9 June 2017. Article 4, however, provides that, subject to Section 14 of the Accounting Act, the Accounting Act shall apply to any financial year which commenced on or after 1 January 2017 in respect of the following:
(i) financial statements of a company;
(ii) a directors' report including any group directors' report;
(iii) a statutory auditors' report on the financial statements referred to in
(i) above and on the directors' report referred to in
(iv) an entity payment report;
(v) a consolidated payment report;
(vi) a payment report or consolidated payment report prepared in accordance with equivalent reporting requirements;
(vii) an auditors' report referred to in Regulation 93 (amended by section 100(b) of the Accounting Act) of the European Communities (Undertakings for Collective Investment in Transferable Securities Regulations 2011 (S.I. No. 352 of 2011); and
(viii) an auditors' report referred to in Regulation 23(4A) (amended by section 101 of the Accounting Act) of the European Union (Alternative Investment Fund Managers) Regulations 2013 (S.I. No. 257 of 2013).
Section 14 of the Accounting Act helpfully provides that companies may opt to prepare and approve their financial statements in accordance with the new "micro", "small", and "medium" accounting regime (discussed further below), and also certain other specified provisions of the Accounting Act, in respect of financial years which commenced on or after 1 January 2015, subject to meeting the relevant qualifying criteria.
Some key accounting amendments to the 2014 Act
Filing obligations of Irish unlimited companies
As anticipated in our previous bulletins, the amendments made by Section 78 of the Accounting Act to Section 1274 of the 2014 Act, designed to significantly restrict the ability of certain ULCs to be able to avoid having to file their financial statements with the Companies Registration Office along with their annual return, will, by virtue of Article 4 of the First Commencement Order referred to earlier, only apply with respect to financial years commencing on or after 1 January 2017.
In summary, the amendments mean that any ULC which is a "designated ULC" will henceforth have to file its financial statements in respect of such financial periods. "Designated ULCs" will now include:
(i) ULCs which are subsidiaries (including indirect subsidiaries), as well as holding companies, of limited liability undertakings, and
(ii) any ULC the direct or indirect members of which comprise any combination of ULCs and other companies "such that the ultimate beneficial owners enjoy the protection of limited liability."
An exception is, however, made for ULCs which have been holding companies of limited liability undertakings; such ULCs will not be subject to the new filing regime until financial years commencing on or after 1 January 2022. However, to avoid the filing obligation, it would appear that such an ULC will also have to ensure that it does not otherwise fall within the definition of "designated ULC", having regard to the remaining provisions of Section 1274 as amended.
New accounting regimes for micro, small and medium companies
The Accounting Act amends Part 6 (financial statements, annual return and audit) of the 2014 Act, and establishes a new and less prescriptive reporting regime for certain company types, discussed below.
The Accounting Act gives effect to the Accounting Directive by introducing a new category known as the "micro company". These are companies with turnovers of €700,000 or less, balance sheet totals of €350,000 or less, and ten or fewer employees on average. A number of companies cannot however qualify as a micro company, including investment undertakings, a holding company that prepares group financial statements, a PLC, a PUC or a PULC.
The micro company will benefit from a significantly reduced financial reporting regime, including the ability to claim an exemption from the obligation to prepare group financial statements, and the ability to prepare abridged financial statements. It will also be entitled to an exemption from having its statutory financial statements audited, provided it also qualifies as a "small" company.
The Accounting Act also increases the "small" company and "medium" company thresholds. The revised position is set out in the following table:
Must satisfy at least 2 of these conditions in a financial year
Turnover not exceeding:
€12m (previously €8.8m)
€40m (previously €20m)
Balance sheet total not exceeding:
Average number of employees not exceeding:
Like the micro company, a small company will be able to file abridged financial statements and qualify for the audit exemption, and may also avail of certain other accounting advantages to which micro companies are entitled.
However, the effect of the changes is that a company which qualifies in the future as a "medium" company will have to file its full financial statements, and will not benefit from the audit exemption.
It should also be noted that there are additional criteria that must be satisfied in order for a company to qualify as a "small" or "micro" company: for example, a "micro" company cannot be a holding company that produced group financial statements, and also cannot be a PLC, a PUC, or a PULC; and to be a "small" company, the company cannot be (for example) a credit institution, or an insurance undertaking.
Changing the company's financial reporting framework
The Accounting Act amends the 2014 Act to permit most companies to change its financial reporting framework from Irish Companies Act requirements to IFRS, and vice versa, once every 5 years, irrespective of whether there is a change in the company's circumstances, e.g. where the company becomes a subsidiary of another undertaking that does not prepare its financial statements using IFRS.
However, the company will be obliged to explain in the notes to the financial statements the reason for, and any impact of, a change in accounting policy, if it makes such a change.
Disclosure of consideration paid to third parties for the services of a director
Sections 27 and 28 of the Accounting Act insert new provisions in the 2014 Act, requiring the disclosure, in the notes to the financial statements, of consideration (including non-cash benefits) paid to a third party for the services of a director, shadow director or de facto director of a company and any subsidiary. The new category of "micro companies" will, however, be exempt. Importantly, if the required information is not included, the statutory auditors of the company will be required, "so far as they are reasonably able to do so", to include it in their own report on the financial statements.
Section 11 of the Accounting Act amends Section 274 of the 2014 Act to permit charities and other not-for profit companies to produce an "income and expenditure account", rather than a profit and loss account, in accordance with the Charities SORP (Statement of Recommended Practice), as had previously been the case under the now-repealed Companies Act 1963.
Some key non-accounting amendments to the 2014 Act
Amended branch registration provisions for external companies
Currently, Part 21 of the 2014 Act requires only non-Irish incorporated bodies corporate with limited liability to register with the Companies Registration Office (CRO) any branch of the body corporate established in the State. The aim of Section 80 of the Accounting Act is to amend Section 1300 of Part 21 of the 2014 Act. The amended provision will apply the branch registration requirements to non-Irish incorporated undertakings with unlimited liability, and which are subsidiary undertakings of bodies corporate, the members of which have limited liability.
However, as indicated in our Introduction, the effect of a second commencement order which we understand was signed by the Minister on Thursday 8 June 2017 is that Section 80 of the Accounting Act will not come into operation today. Consequently, and until it does, branches of such foreign ULCs will not be subject to the same registration and filing requirements in Ireland as branches of foreign limited liability companies.
Amended definition of "credit institution"
As a result of the prohibition in the 2014 Act on a CLS/LTD company type carrying on the activity of a credit institution or an insurance undertaking, a large number of CLS/LTD companies converted to designated activity companies, or DACs, which are not subject to this prohibition. Some of these conversions were driven by the fact that the definition of "credit institution" in the 2014 Act was ambiguous, and open to differing interpretations, including a view that the activity of a "credit institution" could include certain group treasury functions, as well as other forms of activity which were previously never regarded as falling within the generally accepted meaning of a "credit institution".
The definition has now been amended, and helpfully clarifies that the activity of a credit institution must include the carrying on of the business of accepting deposits or other repayable funds from the public and granting of credit for its own account, thereby removing a major concern caused by the ambiguities in the original definition.
Companies with debt securities listed or admitted to trading prior to June 1, 2015
Section 68 (2) of the 2014 Act contains a prohibition on private limited companies having, or applying to have, securities admitted to trading or listing on any stock market. Other Sections of the 2014 Act apply similar restrictions, but with limited exceptions, to other company types. Section 6 of the Accounting Act introduces a new subsection (8A) in Section 68, which disapplies this provision to securities which were traded or listed on any market whether in the State or elsewhere, prior to June 1, 2015 (the commencement date of the 2014 Act).
This amendment is aimed at permanently clarifying the position in relation to a number of companies, including unlimited companies, which had, prior to June 1, 2015, debt securities listed on the Global Exchange Market of the Irish Stock Exchange and on certain other stock exchanges.
Mergers with foreign companies
Section 7 of the Accounting Act amends Section 72 of the 2014 Act, to provide that the relief from the requirement to establish a share premium account on certain issues of shares by an Irish company will be available where the other company involved in a merger with the Irish company is a foreign body corporate, as well as where it is an Irish company.
Court-approved reductions of company capital – notification of overseas creditors
Section 8 of the Accounting Act replaces subsection (2) of Section 85 of the 2014 Act with a new provision which will require overseas creditors to be notified by "electronic means" of the intention to apply to Court, where Court approval is sought by a company for the reduction of its company capital. However, a number of uncertainties remain, including in particular whether posting the information on the company's website would amount to notification "by electronic means", in circumstances where the company has not previously obtained the consent of any creditors to such a means of communication.
New exemption for charges over shares in foreign entities
Section 408(1) of the 2014 Act has been amended by Section 98 of the Accounting Act to extend the existing security filing exemption in respect of "shares" to include "shares in a body corporate". Therefore, charges over shares in foreign entities, which under the 2014 Act fell outside the exemption to the filing requirement, will now also benefit from this exemption.
Floating charges – change in priorities
Under the 2014 Act, where a floating charge crystallised to a fixed charge prior to the commencement of insolvency proceedings, such a fixed charge had priority over preferential creditors. The Accounting Act amends Sections 440(1)(a) and 621(7)(b) of the 2014 by the substitution of "any charge created as a floating charge by the company" for "any floating charge created by the company". Therefore, the new position is that a floating charge, which is created as a floating charge, and whether or not that charge has crystallised, will not have priority over preferential creditors.
Scope of parent company guarantee of a subsidiary company in relation to filing of financial statements
Currently, Section 357 of the 2014 Act allows a subsidiary to file the consolidated financial statements of its parent company, instead of its own entity financial statements, provided that a guarantee from the parent company is in place which satisfies certain criteria laid down in the 2014 Act. Section 55 of the Accounting Act now amends Section 357, to require that the guarantee of the parent must include "commitments" as well as "liabilities" of the subsidiary.
Filing of financial statements by investment companies
Pursuant to amendments made to the 2014 Act by Sections 86 and 100 of the Accounting Act, investment companies (AIFs and UCITS) will be obliged to file financial statements and directors' and auditors' reports with the CRO. Heretofore, investment companies (whether AIFs or UCITS) have not been obliged to file accounts with CRO because of their onerous filing obligations with the Central Bank of Ireland. This new obligation to publicly disclose accounts may cause some investment companies to convert to ICAVs (Irish Collective Asset-management Vehicles), thereby avoiding the requirement to file financial statements and directors' reports with CRO.
Payment to governments by certain companies to be reported
A new Part 26 of the 2014 Act imposes a new requirement on large companies, large groups and public-interest companies involved in the mining, extractive or logging industries to prepare an annual report on any payments they have made to governments of any countries, under a number of different headings. These annual reports must be filed with the CRO, and therefore be publicly available. The new Part 26 will apply to "designated ULCs", i.e. those which will need to file financial statements with the CRO, if they meet the criteria, but will not apply to non-designated ULCs.
This bulletin is a summary, for information purposes only, of some of the key amendments made to Irish company law by the Accounting Act. If you would like further information or advice, please speak to your usual contact at A&L Goodbody.