Memorandum from the Department for Business,
Enterprise and Regulatory Reform
INTRODUCTION
1.1 This memorandum is concerned with the
accounting and reporting requirements imposed on UK companies
by the Companies Acts 1985 and 2006. It does not therefore cover
requirements imposed on companies by the Listing or Transparency
Rules which are the responsibility of the FSA.[1]
1.2 The Committee asked for evidence on
three areas relating to reporting requirements of public and private
companies and the application of the Transfer of Undertakings
(Protection of Employment) Regulations 2006 (TUPE). This memorandum
deals with the specific points raised as well as providing some
additional information relevant to the matters under consideration
by the inquiry.
REPORTING REQUIREMENTS
2. The reporting requirements of public
companies compared with private companies, including content of
reports, timeliness, publication format (ie available on website
or have to purchase from Companies House), corporate social responsibility
including, where appropriate, the positions before and after coming
into force of the relevant provisions of the Companies Act 2006.
2.1 For the purposes of this memorandum,
companies formed under the 1985 & 2006 Acts can be divided
into three basic categories of company defined in the 1985 and
2006 Acts: private companies, public companies and listed companies.
A public company, unlike a private company, is permitted to offer
its shares to the public (though it need not do so). A listed
company[2]
is one whose equity share capital is included in the UK Official
List, is officially listed[3]
in another EEA State or is admitted to dealing on the New York
Stock Exchange or Nasdaq.
2.2 The category of "publicly traded
company" is one which is increasingly used in European legislation.
It is defined as a company whose securities are admitted to trading
on an EEA regulated market. A list of EEA regulated markets is
published. Its greatest significance in the context of the accounting
and reporting provisions of the Companies Acts, is that UK companies
that are publicly traded are obliged to prepare their consolidated
accounts in accordance with EC adopted International Accounting
Standards rather than in accordance with UK accounting requirements.
2.3 At present, companies formed under the
Companies Act 1985 (the 1985 Act) are required under Part 7 of
that Act to produce accounts and reports for their members (shareholders)
to show those members how the company has been run on their behalf.
Companies are required to send those accounts and reports to members,
debenture holders and others entitled to receive notice of general
meetings, and (with certain exceptions) to file those accounts
and reports with the Registrar of Companies, where they are publicly
available to interested parties, for a small charge. A table is
attached comparing the accounting and reporting requirements imposed
by the 1985 and 2006 Acts on private, public, and listed companies.
Companies Act 1985
2.4 While the core requirements on preparing
accounts and reports are in Part 7 of the 1985 Act, detailed provisions
on their content are set out in the accounting Schedules to the
1985 Act. Some Schedules set out the detailed contents of the
accounts and the format in which they must be prepared. Others
cover specific types of disclosures (including in the directors'
report and directors' remuneration report) or apply to certain
categories of companies. Not all Schedules apply to all companies.
Companies Act 2006
2.5 Part 7 of the 1985 Act will be replaced
by Part 15 of the 2006 Act. Part 15 and the accompanying regulations
will come into force on 6 April 2008, applying to financial years
beginning on or after that date. However, the new business review
requirements (see paragraphs 2.8 and 2.9 below) in section 417
of the 2006 Act will be commenced for directors' reports for financial
years beginning on or after 1 October 2007.[4]
2.6 The detailed accounting and reporting
requirements in Part 15 of the 2006 Act and the accounting regulations
to be made under it are substantially the same as those in Part
7 of the 1985 Act and the associated accounting Schedules. Substantive
changes in requirements have been identified in the attached table.
2.7 UK accounting and reporting company
law requirements are based on European legislation.
Directors' Report (including Business Review)
2.8 All companies are required to prepare
a directors' report. As part of that report all companies, other
than small private companies, must prepare a Business Review (section
234ZZB of the 1985 Act) which is a balanced and comprehensive
analysis of the company's business, consistent with the size and
complexity of the business. The Business Review is key to encouraging
directors to provide meaningful strategic, forward-looking information.
For financial years beginning on or after 1 October 2007 the provisions
on the Business Review in section 417 of the 2006 Act will apply
in place of section 234ZZA.
2.9 Section 417 provides expressly that
the main purpose of the Business Review is to inform members of
the company and to help them assess how the directors have performed
their duty to promote the success of the company. It must—to
the extent necessary for an understanding of the business—include:
— analysis using financial key performance
indicators; and
— where appropriate, analysis using
other key performance indicators including information relating
to environmental and employee matters.
In addition, under section 417(5) quoted companies
will be required—to the extent necessary for an understanding
of the company's business—to include in their Business Review
information on:
— environmental matters (including
the impact of the company's business on the environment);
— the company's employees; and
— social and community issues;
including information about any policies of the company
in relation to those matters and the effectiveness of those policies;
persons with whom the company has contractual or other arrangements
essential to the business.
Other entities
2.10 None of the above requirements apply
directly to other entities, for example those established as limited
partnerships. Nonetheless in certain circumstances Companies Act
accounting and reporting rules are applied (with or without modifications)
to other entities that are not companies eg a limited partnership
formed under the Limited Partnerships Act 1907 where the general
partner or partners all have limited liability (eg because they
are limited companies). Such entities have to produce similar
accounts to those of a UK company.
3. THE RATIONALE
FOR ANY
DIFFERENCES IN
REPORTING REQUIREMENTS
3.1 Corporate governance and the need for
financial and other reporting arises from the principal-agent
relationship that occurs in companies where there is usually a
separation of ownership and control, which in turn leads to the
problem of asymmetric information and possibly differing objectives.
Managers who control the company on a day to day basis have access
to more timely and more detailed information than the investors
who own the capital of the company. Reporting requirements are
the attempt to mitigate this market failure and ensure that company
owners are well informed about their investments. The problem
of asymmetric information is particularly acute in public and
listed companies who may have many thousands of investors, many
of whom may hold their shares indirectly, and are therefore at
a greater distance from the management of the company.
3.2 The basic premise behind accounting
and reporting requirements for limited liability companies is
the idea of proportionate transparency. In return for the protection
of limited liability status, companies should have to disclose
information about their activities that will help others to make
decisions about doing business with them. However, the level of
disclosure should be proportionate to the benefit it will provide
to others. The amount of information disclosed and level of detail
in the accounts and reports will therefore vary depending on the
size and type of company.
3.3 In general, a private company that qualifies
as small[5]
will have to disclose less information than a larger company,
and will not have to have an audit report. A small private company
is likely to have fewer shareholders than a larger company, and
those shareholders are likely to be more involved in the day to
day running of the company. It is also likely to have less complicated
dealings with a smaller number of customers and suppliers. A large
private company will have to disclose more and have an audit.
It is likely to have more shareholders who are less likely to
be involved in the day to day running of the business, and will
therefore have a greater need to be provided with information
about the performance of the company. It will have more complicated
dealings with a wider range of customers and suppliers.
3.4 Listed companies are subject to additional
requirements under the Companies Acts, reflecting the fact that
their shares are being traded on key public markets. The application
of certain key requirements to listed companies is also in part
an anti-avoidance measure, as it is not desirable for companies
incorporated in UK to seek to avoid such requirements by listing
their shares only on a major overseas market. For example, listed
companies must produce a directors' remuneration report as part
of the corporate governance framework for listed companies. Listed
companies are also required to include additional information
in their business review—see paragraph 2.9 above.
4. EMPLOYEES—INFORMATION
AND DISCLOSURE
The application of Transfer of Undertakings (Protection
of Employment) Regulations 2006 (TUPE) to takeovers
4.1 The TUPE Regulations 2006 implement
in the United Kingdom the 1977 EU Acquired Rights Directive, and
ensure that employees' terms and conditions are protected when
a business or part of a business is transferred from one employer
to another. This includes pay and hours (for example) and it also
ensures that employees' length of service is unbroken for the
purpose of any later redundancy.
4.2 The Regulations then prevent an employer
from amending these terms by reason of the transfer. However they
do not prevent a new employer from, in due course, seeking to
renegotiate those terms and conditions—in exactly the same
way as the previous employer could have done. In addition, they
do not prevent an acquiring employer from making staff that had
transferred across to his organisation redundant, although he
would have to conduct any redundancy exercise fairly across both
his previous workforce and the transferred staff. The legal obligations
(arising from the Trade Union and Labour Relations (Consolidation)
Act 1992) on employers to consult staff before making collective
redundancies are unaffected by a change in share ownership.
4.3 The Regulations do not apply to share
sales, as they require a change in employer which generally does
not occur where a transfer is effected by a share sale.
4.4 Extending the TUPE Regulations to cover
situations where a business has been transferred by way of a share
sale would go substantially further than the Directive requires.
Such an extension would not prevent employers from either seeking
to renegotiate new terms and conditions after a share transfer
as the old employer would have done, or necessarily from making
redundancies.
Information and Consultation of Employees Regulations
2004
4.5 The Information and Consultation of
Employees (ICE) Regulations give employees in undertakings with
100 or more employees, the right to be informed and consulted
about issues in the organisation for which they work. However,
the obligation on an employer to inform and consult does not operate
automatically but can be triggered either by 10% or more of his
employees asking for an information and consultation (I&C)
agreement, or by the employer starting the process himself.
4.6 The Regulations seek to encourage employers,
employees and their representatives to agree to arrangements which
best suit their respective needs but set a fall-back provision
where it has not been possible to achieve this. Under this fall-back
provision, the employer must provide the I&C representatives
with information on the recent and probable development
of the undertaking's activities and economic situation. The employer
must inform and consult on the situation, structure and
probable development of employment within the undertaking and
on any anticipatory measures envisaged where there is a threat
to employment. The employer is further obliged to inform and
consult with a view to reaching agreement on decisions likely
to lead to substantial changes in work organisation or in contractual
relations. The framework of the ICE Regulations was developed
and agreed with the TUC and the CBI.
Companies Act 1985 & 2006
4.7 The Directors' Report includes requirements
for companies to disclose action it has taken aimed at providing
employees with information on matters of concern to them and consulting
employees or their representatives on a regular basis so their
views can be taken into account. These requirements (paragraph
11 of Schedule 7 to the 1985 Act to be re-enacted in the regulations
to be made under Part 15 of the 2006 Act) apply to all companies
with more than 250 employees, whether private, public or listed.
November 2007
TABLE COMPARING ACCOUNTING & REPORTING
REQUIREMENTS OF DIFFERENT CATEGORIES OF COMPANIES UNDER THE COMPANIES
ACT 1985 AND THE COMPANIES ACT 2006
| Small Private1
| Medium Private2 | Large Private
| Public3 | Listed4
|
1985 Act sections 221 and 222—Duty to keep accounting records.
2006 Act sections 386-389.
| Yes | Yes | Yes
| Yes | Yes |
| | |
| | |
1985 Act sections 226-230—Duty to prepare either Companies Act or IAS individual entity accounts (the choice lies with the company), and either Companies Act or IAS group accounts (publicly traded companies must prepare IAS group accounts). Much of the content of the accounts (particularly of Companies Act accounts) is set out in the Schedules to Part 7 of the 1985 Act (4, 4A, 5, 6, 7, 7A, 8, 8A, 9, 9A and 11).
2006 Act sections 393-408 and regulations.
Under the 2006 Act, the basic requirements on the form and content of accounts that are now in the Schedules to the 1985 Act will be set out in regulations to be made by the Secretary of State, with one set of regulations for small companies and one set of regulations for all other companies. These regulations largely restate the accounting Schedules to the 1985 Act, with only a few changes of substance, mainly to implement Directive 2006/46 to increase SME thresholds and to require note disclosures of related party and off balance sheet transactions. Drafts of the regulations are available at www.berr.gov.uk/bbf/co-act-2006.
| Yes | Yes | Yes
| Yes | Yes.
Parent company whose securities admitted to trading on a regulated market must prepare consolidated accounts in accordance with EC adopted IAS (Article 4 Regulation (EC) 1606/2002).
|
1985 Act Schedules 4, 4A and 8 specify the form and contents of Companies Act individual and consolidated accounts.
2006 Act, regulations.
| Schedule 8 sets out the basic form and content of accounts that small companies preparing Companies Act accounts are required to prepare for members. It requires less information than Schedule 4 for other companies.
Small companies which are parent companies are not required to prepare group accounts (1985 Act, section 248; 2006 Act section 398).
| Schedule 4 sets out the basic form and content of accounts for all other companies. There are some exemptions for medium-sized companies in section 246A. They are exempt from preparing group accounts under section 248.
Under the 2006 Act, group accounts will have to be prepared by medium-sized companies which are parent companies.
| Schedules 4 and 4A set out the basic form and content of accounts for all other companies.
| Schedules 4 and 4A set out the basic form and content of accounts for all other companies.
| Schedules 4 and 4A set out the basic form and content of accounts for all other companies.
|
| | |
| | |
1985 Act sections 231 and 231A and Schedule 5 require note disclosures in all accounts (whether Companies Act or IAS) regarding related undertakings and particulars of staff.
2006 Act sections 409-411 and regulations.
| Yes. Section 246 contains some exemptions from Schedule 5 for small companies.
| Yes | Yes | Yes
| Yes |
1985 Act section 232 and Schedule 6 require note disclosures in all accounts (whether Companies Act or IAS) regarding emoluments and other benefits of directors.
2006 Act sections 412 and 413 and regulations. The provisions on loans and similar benefits in section 413 are less detailed than those in Parts 2 and 3 of Schedule 6.
| Yes. Section 246 contains some exemptions from Schedule 6 for small companies.
| Yes | Yes | Yes
| Yes. Listed and AIM companies subject to additional requirement to show aggregate amount of gains on exercise of share options. Quoted companies exempt from Chapter 2 of Schedule 6 because have to prepare separate directors' remuneration report.
|
| | |
| | |
1985 Act sections 234-234A, 246A(2A) and Schedule 7—Duty to prepare directors' report including business review, and certain disclosures concerning employees.
The main purpose of the Business Review is to inform members of the company and to help them assess how the directors have performed their duty to promote the success of the company.
2006 Act sections 415-419, and regulations.
| Must prepare a directors' report (but not a business review) for members.
Do not have to deliver to the registrar of companies.
| Must prepare and publish a directors' report including a business review. Business review does not have to include non-financial key performance indicators.
| Must prepare and publish a directors' report including a business review. It must—to the extent necessary for an understanding of the business—include:
— analysis using financial key performance indicators;
— and where appropriate, analysis using other key performance indicators including information relating to environmental and employee matters.
| Must prepare and publish a directors' report including a business review. Unless qualifying as medium sized, it must—to the extent necessary for an understanding of the business—include:
— analysis using financial key performance indicators;
— and where appropriate, analysis using other key performance indicators including information relating to environmental and employee matters.
| Must prepare and publish a directors' report including a business review.
Under section 417(5) of the 2006 Act, the business review must also contain, to the extent necessary for an understanding of the business, information about main trends and factors likely to affect company's development and performance, information about environmental, employee and social and community issues and information about those with whom the company has arrangements essential to its business. If any of this information is not included, this must be stated.
|
| | |
| | |
1985 Act sections 234B, 234C, Schedule 7A—Directors' Remuneration Report.
2006 Act, sections 420-422, 439-440, and regulations.
| No. | No. | No.
| No. | Yes.
Under the 2006 Act regulations, it is proposed that the directors' remuneration report should include an explanation of how companies have taken pay and conditions of employees across the company into account when setting directors' pay.
|
| | |
| | |
1985 Act section 235—Duty to have accounts and reports audited.
2006 Act, sections 475-483.
| No. | Yes. | Yes.
| Yes. | Yes. |
| | |
| | |
1985 Act sections 238-241—Publication of accounts and reports. Duty to send accounts and reports to members, debenture holders and every person entitled to receive notice of general meetings at least 21 days before meeting at which accounts to be laid.
2006 Act sections 423-425 and 430-438.
Under section 423 of the 2006 Act, all companies have to send accounts and reports only to persons for whom they have a current address.
| Yes, though can elect not to lay accounts and reports before general meeting (1985 Act section 252).
Under the 2006 Act, private companies are not required to have AGMs. The requirement to send accounts "21 days before an AGM" has therefore been amended to "at the end of the period allowed for filing accounts, or when they are filed if earlier".
| Yes.
Under the 2006 Act, private companies are not required to have AGMs. The requirement to send accounts "21 days before an AGM" has therefore been amended to "at the end of the period allowed for filing accounts, or when they are filed if earlier".
| Yes.
Under the 2006 Act, private companies are not required to have AGMs. The requirement to send accounts "21 days before an AGM" has therefore been amended to "at the end of the period allowed for filing accounts, or when they are filed if earlier".
| Yes. Must lay accounts at AGM, to be held not later than end of period for filing accounts.
| Yes. Must lay accounts at AGM, to be held not later than end of period for filing accounts.
Under the 2006 Act, quoted companies must make annual accounts and reports available on company website as soon as reasonably practicable.
|
| | |
| | |
1985 Act section 251—Option to provide Summary Financial Statement.
2006 Act sections 426-429.
| Yes. | Yes. | Yes.
| Yes. | Yes. |
| | |
| | |
1985 Act sections 242-244—Filing of accounts and reports.
2006 Act sections 441-450.
| Must deliver to registrar of companies balance sheet and auditor's report (if audited).
Must file accounts not later than 10 months from end of financial year.
Under the 2006 Act, the period allowed for filing is 9 months.
| Must deliver to the registrar of companies annual accounts, directors' report and auditor's report. Must file accounts not later than 10 months from end of financial year.
Under the 2006 Act, the period allowed for filing is 9 months.
| Must deliver to the registrar of companies annual accounts, directors' report and auditor's report. Must file accounts not later than 10 months from end of financial year.
Under the 2006 Act, the period allowed for filing is 9 months.
| Must deliver to the registrar of companies annual accounts, directors' report and auditor's report. Must file accounts not later than 7 months from end of financial year.
Under the 2006 Act, the period allowed for filing is 6 months.
| Must deliver to the registrar of companies annual accounts, directors' report, directors' remuneration report and auditor's report. Must file accounts not later than 7 months from end of financial year.
Under the 2006 Act, the period allowed for filing is 6 months.
|
Schedule 8A Form and Content of Abbreviated Accounts of Small Companies Delivered to Registrar.
2006 Act, regulations.
| Schedule 8A sets out a shorter version of accounts that small companies can file with the Registrar of Companies (although they must still provide Schedule 8 accounts to members).
| No. | No. | No.
| No. |
1 For the purposes of the 1985 Act and the 2006 Act, a small company is defined as one which meets two of the following three criteria—turnover not more than £5.6 million, balance sheet total not more than £2.8 million and not more than 50 employees—and does not fall into one of the excluded categories (eg public, banking or insurance company). The Department is consulting on regulations to raise the thresholds for SMEs in implementation of Directive 2006/46.
2 For the purposes of the 1985 Act and the 2006 Act, a medium-sized company is defined as one which meets two of the following three criteria—turnover not more than £22.8 million, balance sheet total not more than £11.4 million and not more than 250 employees—and does not fall into one of the excluded categories (eg public, banking or insurance company). Department is consulting on regulations to raise the thresholds for SMEs in implementation of Directive 2006/46.
3 A public company (unlike a private company) is permitted to offer its shares to the public (though it needn't do so on a market).
4 "Listed" is the commonly used term. In the Companies Acts, the term "quoted" is used. A quoted company is defined in section 262 of the 1985 Act (section 385 2006 Act) as a company whose equity share capital is listed in the UK or in an EEA State, or admitted to trading on the New York Stock Exchange or Nasdaq. The term "publicly traded" is also used in relation to companies preparing accounts using International Accounting Standards. A publicly traded company is one whose securities are admitted to trading on an EEA regulated market.
1
The Listing Rules can be found on the FSA website http://fsahandbook.info/FSA/html/handbook/LR Back
2
"Listed" is the commonly used term for this category.
The defined term used in the Companies Acts for this category
is "quoted". Back
3
"included in the UK Official List" means listed in accordance
with the provisions of Part 6 of the Financial Services and Markets
Act 2000. http://www.fsa.gov.uk/Pages/Doing/UKLA/index.shtml Back
4
See article 2(1)(g) of the Companies Act 2006 (Commencement No.
3, Consequential Amendments, Transitional Provisions and Savings)
Order 2007 (SI 2007/2194 (C.84), with transitional provision in
paragraph 43 of Schedule 3 to that Order. Back
5
For the purposes of the 1985 Act and the 2006 Act, a small company
is defined as one which meets two of the following three criteria-turnover
not more than £5.6 million, balance sheet total not more
than £2.8 million and not more than 50 employees-and does
not fall into one of the excluded categories (eg public, banking
or insurance company). The Department is consulting on regulations
to raise the thresholds for SMEs in implementation of Directive
2006/46. Back
|
