Cast your mind back a few years and there was something of an anomaly between the financial thresholds below which a company was deemed to be ‘small’ in accordance with the Companies Act, and the thresholds which determined whether it required an audit or not. This sometimes resulted in ‘small company’ accounts being filed at Companies House which included an audit report, but were in an abbreviated format that gave no, or at least very little, financial information to the public.
This was rectified a few years ago when the audit thresholds and small company reporting criteria were aligned, and (as we had all been expecting for at least the last year) those thresholds have now been increased.
Note that all of this applies to both limited companies and LLPs, even though most legislation mentions just companies.
So, for companies with accounting periods beginning on or after 1 January 2016, the company is classed as small (and therefore exempt from the need for a statutory accounts audit) if it meets two out of three of the following criteria:
- Turnover – less than £10.2m for the accounting year
- Total assets – less than £5.1m (at the balance sheet date)
- Number of employees – fewer than 50 (on average, in the year)
This is quite a jump up from the previous thresholds for turnover and total assets of £6.5m and £3.26m respectively. There has been no change to the employee limit.
If a company falls below the criteria in its current accounting period, and was also classed as small in the previous accounting period (using the new thresholds) then it can claim exemptions in the current period. That is, a company does not need to look back and apply the previous lower thresholds to prior periods when determining whether it is small.
It is also possible for a company to exceed the thresholds in the current accounting period, but still be classed as small if it would have been small under the new thresholds for the previous two accounting periods.
If a company is exempt from statutory audit, it can choose whether to have:
- an Assurance Report; or
- an Accountant’s Report.
In simple terms, the latter is a report based on no audit type work being carried out, and the former is designed to be a halfway house between full audit and no audit.
This is a basic overview of the new requirements and there are important exceptions that apply to special circumstances, largely away from the legal sector, such as members of a group or charities that are required to follow separate audit thresholds.
Also, the members of a company may still request that an audit is carried out even if it is technically exempt, or the Company Articles themselves may still impose the requirement.
Any structural changes within a practice, for example conversion from partnership to a limited company, can also complicate things. Please let us know if you would like any assistance with checking what your practice’s choices/obligations are.