There has been a flurry of activity recently concerning accounting matters and the contents of annual returns. We discuss the latest news on narrative reporting elsewhere in this newsletter. This article looks at the following topics:
- the obligation to disclose information about subsidiaries in the notes to the accounts or in the annual return
- plans by the government to reduce the financial reporting burden on smaller companies
- planned changes to the obligation to include shareholder details on the annual return.
Information about subsidiaries
Regulations under section 409 of the Companies Act 2006 require companies to disclose information about their subsidiaries in the notes to their accounts. Section 410, however, provides a means of "alternative compliance": where a company has so many subsidiaries that the length of the disclosures required in the notes to the accounts would be excessive, the directors can elect to disclose details only in respect of key subsidiaries, provided that full disclosure is made in the company's next annual return.
This rather obscure requirement has been attracting some attention recently, amidst suggestions that a number of well-known companies may not be complying with it fully, in particular in relation to their overseas subsidiaries. The issue has even been raised in Parliament, with the opposition asking the government whether the requirement is being enforced with sufficient vigour.
The statutory obligation to make full disclosure is clear, but companies need to make sure that appropriate systems are in place to enable them to comply with it. If, when the accounts are being prepared, the directors decide to take advantage of the "alternative compliance" option, those who are responsible for preparing the annual return need to be informed, and need to remember to include the information when the next annual return is submitted to Companies House.
A failure to disclose the required information could, ultimately, result in criminal sanctions, but the government has stressed that prosecution will normally be a last resort, used only where a company wilfully refuses to comply. At present, the greater risk, at least for large companies, is that their reputation could be damaged if a failure to comply is portrayed by activists as a deliberate attempt to conceal financial details rather than an innocent mistake.
Reducing the financial reporting burden for smaller companies
Against the backdrop of the Accounting Standard Board's on-going, and very wide-ranging, review of financial reporting in the UK, the government has announced two changes to the accounting and auditing regime which will benefit smaller companies and subsidiaries:
- it will relax the test which small companies have to satisfy in order to qualify for an exemption from the requirement to have their accounts audited. Draft legislation to introduce the amendment, which the government believes will benefit as many as 42,000 businesses, has not yet been published, but the relaxation is due to be introduced next year
- it will exempt many subsidiaries whose debts are guaranteed by their parent company from the requirement to prepare audited accounts. The details of this change are not yet available, but when the government raised the issue earlier in the year it suggested that dormant subsidiaries with a guarantee could be exempted from the requirement to prepare accounts altogether, while "wholly owned non-financial subsidiaries" with a guarantee (a category which is potentially very wide indeed) could be exempted from the audit requirement. Legislation to introduce this reform is not expected until next year, so we may have to wait some time to find out precisely what shape it takes.
The UK is not alone in considering ways to reduce the administrative burden on SMEs from a financial reporting perspective: the European Commission has been looking at this area for some time now. In the circumstances, the changes summarised above should be seen as the beginning of a process, rather than the end.
Shareholder details on the annual return
BIS has recently published draft regulations amending the Companies Act 2006 in relation to the requirement to disclose information about shareholders in the annual return. At present, the scope of the disclosure obligation depends on whether the company's shares are traded on a "regulated market", such as the main market of the London Stock Exchange. Companies whose shares are traded on a regulated market must disclose details in respect of shareholders who have a stake of five percent or more. Other companies must disclose details in respect of all their shareholders.
The draft regulations, which are expected to apply in respect of annual returns made up to 1 October 2011 or a later date, reform the regime, essentially in order to avoid duplication with the requirement under the UKLA's Disclosure Rules and Transparency Rules for details of major shareholders to be made public (DTR 5). The key change, broadly, is that companies which fall within the ambit of DTR 5 will not have to make additional disclosures in their annual return. Since DTR 5 applies not only to companies on the main market, but also to AIM companies (amongst others), this is quite a far-reaching change.
If the regulations are adopted in their current form, companies which are
- on the main market or AIM, and
- subject to DTR 5
will not need to disclose shareholder details in their annual return. They will, however, remain subject to other, related requirements. In addition to their obligations under DTR 5, main market companies have to include certain shareholder details in their annual report, while AIM companies have to post details of their significant shareholders on their website. On the whole, the change seems a sensible one; the requirement to include shareholder information in the annual return does not particularly benefit the public, and its removal should result in time and cost savings for the companies concerned.
The draft regulations do not alter the position for unlisted companies.
Statement of capital in the annual return?
We reported in the February 2011 issue of this newsletter that the government has decided to simplify the contents requirements for the statement of capital in the annual return, such that details of the amounts paid up on the company's shares will no longer need to be disclosed. The requirement to describe the voting rights attached to the shares will also be abolished.
These changes are due to take effect in October 2011, and the draft regulations dealing with shareholder details on annual returns (discussed in the section above) would seem the obvious vehicle for introducing them. The regulations are, however, silent on this point.