Company Law Reform Bill [HL]

House of Commons

Session 2005 - 06
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Other Bills before Parliament

Company Law Reform Bill [HL]

Company Law Reform Bill [HL]
Part 15 — Accounts and reports
Chapter 4 — Annual accounts
175

(iii)
a contractual right (other than an option) to acquire any such
security otherwise than by subscription.
384
Exemption if no subsidiary undertakings need be included in the
consolidation

A parent company is exempt from the requirement to prepare group accounts
5
if under section 387 all of its subsidiary undertakings could be excluded from
consolidation in Companies Act group accounts.
Group accounts: general
385
Group accounts: applicable accounting framework
(1)
The group accounts of certain parent companies are required by Article 4 of the
10
IAS Regulation to be prepared in accordance with international accounting
standards (“IAS group accounts”).
(2)
The group accounts of other companies may be prepared—
(a)
in accordance with section 386 (“Companies Act group accounts”), or
(b)
in accordance with international accounting standards (“IAS group
15
accounts”).

This is subject to the following provisions of this section.
(3)
The group accounts of a parent company that is a charity must be Companies
Act group accounts.
(4)
After the first financial year in which the directors of a parent company prepare
20
IAS group accounts (“the first IAS year”), all subsequent group accounts of the
company must be prepared in accordance with international accounting
standards unless there is a relevant change of circumstance.
(5)
There is a relevant change of circumstance if, at any time during or after the
first IAS year—
25
(a)
the company becomes a subsidiary undertaking of another
undertaking that does not prepare IAS group accounts,
(b)
the company ceases to be a company with securities admitted to
trading on a regulated market in an EEA State, or
(c)
a parent undertaking of the company ceases to be an undertaking with
30
securities admitted to trading on a regulated market in an EEA State.
(6)
If, having changed to preparing Companies Act group accounts following a
relevant change of circumstance, the directors again prepare IAS group
accounts for the company, subsections (4) and (5) apply again as if the first
financial year for which such accounts are again prepared were the first IAS
35
year.
386
Companies Act group accounts
(1)
Companies Act group accounts must comprise—
(a)
a consolidated balance sheet dealing with the state of affairs of the
parent company and its subsidiary undertakings, and
40
(b)
a consolidated profit and loss account dealing with the profit or loss of
the parent company and its subsidiary undertakings.

Company Law Reform Bill [HL]
Part 15 — Accounts and reports
Chapter 4 — Annual accounts
176

(2)
The accounts must give a true and fair view of the state of affairs as at the end
of the financial year, and the profit or loss for the financial year, of the
undertakings included in the consolidation as a whole, so far as concerns
members of the company.
(3)
The accounts must comply with provision made by the Secretary of State by
5
regulations as to—
(a)
the form and content of the consolidated balance sheet and
consolidated profit and loss account, and
(b)
additional information to be provided by way of notes to the accounts.
(4)
If compliance with the regulations, and any other provision made by or under
10
this Act as to the matters to be included in a company’s group accounts or in
notes to those accounts, would not be sufficient to give a true and fair view, the
necessary additional information must be given in the accounts or in a note to
them.
(5)
If in special circumstances compliance with any of those provisions is
15
inconsistent with the requirement to give a true and fair view, the directors
must depart from that provision to the extent necessary to give a true and fair
view.

Particulars of any such departure, the reasons for it and its effect must be given
in a note to the accounts.
20
387
Companies Act group accounts: subsidiary undertakings included in the
consolidation
(1)
Where a parent company prepares Companies Act group accounts, all the
subsidiary undertakings of the company must be included in the
consolidation, subject to the following exceptions.
25
(2)
A subsidiary undertaking may be excluded from consolidation if its inclusion
is not material for the purpose of giving a true and fair view (but two or more
undertakings may be excluded only if they are not material taken together).
(3)
A subsidiary undertaking may be excluded from consolidation where—
(a)
severe long-term restrictions substantially hinder the exercise of the
30
rights of the parent company over the assets or management of that
undertaking, or
(b)
the information necessary for the preparation of group accounts cannot
be obtained without disproportionate expense or undue delay, or
(c)
the interest of the parent company is held exclusively with a view to
35
subsequent resale.
(4)
The reference in subsection (3)(a) to the rights of the parent company and the
reference in subsection (3)(c) to the interest of the parent company are,
respectively, to rights and interests held by or attributed to the company for the
purposes of the definition of “parent undertaking” (see section 806) in the
40
absence of which it would not be the parent company.
388
IAS group accounts
Where the directors of a company prepare IAS group accounts, they must state
in the notes to those accounts that the accounts have been prepared in
accordance with international accounting standards.
45

Company Law Reform Bill [HL]
Part 15 — Accounts and reports
Chapter 4 — Annual accounts
177

389
Consistency of financial reporting within group
(1)
The directors of a parent company must secure that the individual accounts
of—
(a)
the parent company, and
(b)
each of its subsidiary undertakings,
5

are all prepared using the same financial reporting framework, except to the
extent that in their opinion there are good reasons for not doing so.
(2)
Subsection (1) does not apply if the directors do not prepare group accounts for
the parent company.
(3)
Subsection (1) only applies to accounts of subsidiary undertakings that are
10
required to be prepared under this Part.
(4)
Subsection (1) does not require accounts of undertakings that are charities to
be prepared using the same financial reporting framework as accounts of
undertakings which are not charities.
(5)
Subsection (1)(a) does not apply where the directors of a parent company
15
prepare IAS group accounts and IAS individual accounts.
390
Individual profit and loss account where group accounts prepared
(1)
This section applies where—
(a)
a company prepares group accounts in accordance with this Act, and
(b)
the notes to the company’s individual balance sheet show the
20
company’s profit or loss for the financial year determined in
accordance with this Act.
(2)
The profit and loss account need not contain the information specified in
section 393 (information about employee numbers and costs)
(3)
The company’s individual profit and loss account must be approved in
25
accordance with section 396(1) (approval by directors) but may be omitted
from the company’s annual accounts for the purposes of the other provisions
of the Companies Acts.
(4)
The exemption conferred by this section is conditional upon its being disclosed
in the company’s annual accounts that the exemption applies.
30
Information to be given in notes to the accounts
391
Information about related undertakings
(1)
The Secretary of State may make provision by regulations requiring
information about related undertakings to be given in notes to a company’s
annual accounts.
35
(2)
The regulations—
(a)
may make different provision according to whether or not the company
prepares group accounts, and
(b)
may specify the descriptions of undertaking in relation to which they
apply, and make different provision in relation to different descriptions
40
of related undertaking.

Company Law Reform Bill [HL]
Part 15 — Accounts and reports
Chapter 4 — Annual accounts
178

(3)
The regulations may provide that information need not be disclosed with
respect to an undertaking that—
(a)
is established under the law of a country outside the United Kingdom,
or
(b)
carries on business outside the United Kingdom,
5

if in the opinion of the directors of the company the disclosure would be
seriously prejudicial to the business of that undertaking, or to the business of
the company or any of its subsidiary undertakings, and the Secretary of State
agrees that the information need not be disclosed.
(4)
Where advantage is taken of any such exemption, that fact must be stated in a
10
note to the company’s annual accounts.
392
Information about related undertakings: alternative compliance
(1)
This section applies where the directors of a company are of the opinion that
the number of undertakings in respect of which the company is required to
disclose information under any provision of regulations under section 391
15
(related undertakings) is such that compliance with that provision would
result in information of excessive length being given in notes to the company’s
annual accounts.
(2)
The information need only be given in respect of—
(a)
the undertakings whose results or financial position, in the opinion of
20
the directors, principally affected the figures shown in the company’s
annual accounts, and
(b)
where the company prepares group accounts, undertakings excluded
from consolidation.
(3)
If advantage is taken of subsection (2)—
25
(a)
there must be included in the notes to the company’s annual accounts
a statement that the information is given only with respect to such
undertakings as are mentioned in that subsection, and
(b)
the full information (both that which is disclosed in the notes to the
accounts and that which is not) must be annexed to the company’s next
30
annual return.

For this purpose the “next annual return” means that next delivered to the
registrar after the accounts in question have been approved under section 396.
(4)
If a company fails to comply with subsection (3)(b), an offence is committed
by—
35
(a)
the company, and
(b)
every officer of the company who is in default.
(5)
A person guilty of an offence under subsection (4) is liable on summary
conviction to a fine not exceeding level 3 on the standard scale and, for
continued contravention, a daily default fine not exceeding one-tenth of level
40
3 on the standard scale.
393
Information about employee numbers and costs
(1)
In the case of a company not subject to the small companies regime, the
following information with respect to the employees of the company must be
given in notes to the company’s annual accounts—
45

Company Law Reform Bill [HL]
Part 15 — Accounts and reports
Chapter 4 — Annual accounts
179

(a)
the average number of persons employed by the company in the
financial year, and
(b)
the average number of persons so employed within each category of
persons employed by the company.
(2)
The categories by reference to which the number required to be disclosed by
5
subsection (1)(b) is to be determined must be such as the directors may select
having regard to the manner in which the company’s activities are organised.
(3)
The average number required by subsection (1)(a) or (b) is determined by
dividing the relevant annual number by the number of months in the financial
year.
10
(4)
The relevant annual number is determined by ascertaining for each month in
the financial year—
(a)
for the purposes of subsection (1)(a), the number of persons employed
under contracts of service by the company in that month (whether
throughout the month or not);
15
(b)
for the purposes of subsection (1)(b), the number of persons in the
category in question of persons so employed;

and adding together all the monthly numbers.
(5)
In respect of all persons employed by the company during the financial year
who are taken into account in determining the relevant annual number for the
20
purposes of subsection (1)(a) there must also be stated the aggregate amounts
respectively of—
(a)
wages and salaries paid or payable in respect of that year to those
persons;
(b)
social security costs incurred by the company on their behalf; and
25
(c)
other pension costs so incurred.

This does not apply in so far as those amounts, or any of them, are stated
elsewhere in the company’s accounts.
(6)
In subsection (5)—
“pension costs” includes any costs incurred by the company in respect
30
of—
(a)
any pension scheme established for the purpose of providing
pensions for persons currently or formerly employed by the
company,
(b)
any sums set aside for the future payment of pensions directly
35
by the company to current or former employees, and
(c)
any pensions paid directly to such persons without having first
been set aside;
“social security costs” means any contributions by the company to any
state social security or pension scheme, fund or arrangement.
40
(7)
Where the company prepares group accounts, this section applies as if the
undertakings included in the consolidation were a single company.
394
Information about directors’ benefits: remuneration
(1)
The Secretary of State may make provision by regulations requiring
information to be given in notes to a company’s annual accounts about
45
directors’ remuneration.

Company Law Reform Bill [HL]
Part 15 — Accounts and reports
Chapter 4 — Annual accounts
180

(2)
The matters about which information may be required include—
(a)
gains made by directors on the exercise of share options;
(b)
benefits received or receivable by directors under long-term incentive
schemes;
(c)
payments for loss of office (as defined in section 199);
5
(d)
benefits receivable, and contributions for the purpose of providing
benefits, in respect of past services of a person as director or in any
other capacity while director;
(e)
consideration paid to or receivable by third parties for making available
the services of a person as director or in any other capacity while
10
director.
(3)
Without prejudice to the generality of subsection (1), regulations under this
section may make any such provision as was made immediately before the
commencement of this Part by Part 1 of Schedule 6 to the Companies Act 1985
(c. 6).
15
(4)
For the purposes of this section, and regulations made under it, amounts paid
to or receivable by—
(a)
a person connected with a director, or
(b)
a body corporate controlled by a director,

are treated as paid to or receivable by the director.
20

The expressions “connected with” and “controlled by” in this subsection have
the same meaning as in Part 10 (company directors).
(5)
It is the duty of—
(a)
any director of a company, and
(b)
any person who is or has at any time in the preceding five years been a
25
director of the company,

to give notice to the company of such matters relating to himself as may be
necessary for the purposes of regulations under this section.
(6)
A person who makes default in complying with subsection (5) commits an
offence and is liable on summary conviction to a fine not exceeding level 3 on
30
the standard scale.
395
Information about directors’ benefits: advances, credit and guarantees
(1)
In the case of a company that does not prepare group accounts, details of—
(a)
advances and credits granted by the company to its directors, and
(b)
guarantees of any kind entered into by the company on behalf of its
35
directors,

must be shown in the notes to its individual accounts.
(2)
In the case of a parent company that prepares group accounts, details of—
(a)
advances and credits granted to the directors of the parent company, by
that company or by any of its subsidiary undertakings, and
40
(b)
guarantees of any kind entered into on behalf of the directors of the
parent company, by that company or by any of its subsidiary
undertakings,

must be shown in the notes to the group accounts.
(3)
The details required of an advance or credit are—
45
(a)
its amount,

Company Law Reform Bill [HL]
Part 15 — Accounts and reports
Chapter 4 — Annual accounts
181

(b)
an indication of the interest rate,
(c)
its main conditions, and
(d)
any amounts repaid.
(4)
The details required of a guarantee are—
(a)
its main terms,
5
(b)
the amount of the maximum liability that may be incurred by the
company (or its subsidiary), and
(c)
any amount paid and any liability incurred by the company (or its
subsidiary) for the purpose of fulfilling the guarantee (including any
loss incurred by reason of enforcement of the guarantee).
10
(5)
There must also be stated in the notes to the accounts the totals—
(a)
of amounts stated under subsection (3)(a),
(b)
of amounts stated under subsection (3)(d),
(c)
of amounts stated under subsection (4)(b), and
(d)
of amounts stated under subsection (4)(c).
15
(6)
References in this section to the directors of a company are to the persons who
were a director at any time in the financial year to which the accounts relate.
(7)
The requirements of this section apply in relation to every advance, credit or
guarantee subsisting at any time in the financial year to which the accounts
relate—
20
(a)
whenever it was entered into,
(b)
whether or not the person concerned was a director of the company in
question at the time it was entered into, and
(c)
in the case of an advance, credit or guarantee involving a subsidiary
undertaking of that company, whether or not that undertaking was
25
such a subsidiary undertaking at the time it was entered into.
(8)
Banking companies and the holding companies of credit institutions need only
state the details required by subsections (3)(a) and (4)(b).
Approval and signing of accounts
396
Approval and signing of accounts
30
(1)
A company’s annual accounts must be approved by the board of directors and
signed on behalf of the board by a director of the company.
(2)
The signature must be on the company’s balance sheet.
(3)
If the accounts are prepared in accordance with the provisions applicable to
companies subject to the small companies regime, the balance sheet must
35
contain a statement to that effect in a prominent position above the signature.
(4)
If annual accounts are approved that do not comply with the requirements of
this Act (and, where applicable, of Article 4 of the IAS Regulation), every
director of the company who—
(a)
knew that they did not comply, or was reckless as to whether they
40
complied, and
(b)
failed to take reasonable steps to secure compliance with those
requirements or, as the case may be, to prevent the accounts from being
approved,