NEW FINANCIAL REPORTING STANDARDS FOR 2015 – IS YOUR COMPANY GETING READY?

The rules, known as Financial Reporting Standard 102 (FRS 102), will come into effect at the end of next year.  FRS 102 is the third and most important of the trilogy of financial reporting standards that form new UK and Irish GAAP (Generally Accepted Accounting Principles). The trilogy is:

• FRS 100 – Application of Financial Reporting Requirements
• FRS 101 – Reduced Disclosure Framework
• FRS 102 – The Financial Reporting Standard applicable in the UK and Republic of Ireland

Irish companies need to start planning for the new standards now as they will have many different impacts related not just to accounting, including repercussions for tax systems and processes.

The new rules simplify accounting procedures. At under 300 pages, the rule book is far shorter than its predecessor GAAP, which is over 2,500 pages long.

FRS 102 now sets out rules for unlisted companies which conform to International Financial Reporting Standards (IFRS) but make more sense for smaller companies.

The new rules will be used by all Irish and UK entities that are not already legally required to comply with IFRS. This includes subsidiaries of listed companies as well as charities.

Increase in Criteria to be classed as a Small Company

On the 3^rd of August 2012 Statutory Instrument 304 of 2012 changed the size criteria of a small company. Under the new legislation a company can now be defined as a small company provided the turnover does not exceed €8,800,000 and the balance sheet total does not exceed €4,400,000.

Prior to the enactment of Statutory Instrument 304 a private company qualified to be a small sized company if in that year and the previous financial year it satisfied two of the three conditions:

• Balance Sheet total not exceeding €1,904,607
• Turnover not exceeding €3,809,214
• Average number of employees not exceeding 50

Now the size criteria are :

• Balance Sheet total not exceeding €4,400,000
• Turnover not exceeding €8,800,000
• Average number of employees not exceeding 50

The big advantage that this change creates for small companies is in relation to the reduced requirement for information in their abridged accounts under the Companies Act 1986. Small company abridged accounts do not need to include directors reports, profit and loss accounts and the notes relating to the profit & loss accounts, substantially reducing the requirements for note disclosures back to the bare statutory note disclosure requirements.

Changes to Audit Exemption

On the 7^th of August 2012 Statutory Instrument 308 of 2012 increased the audit exemption criteria. Under the new legislation a company can now avail of the audit exemption provided the turnover of the Company does not exceed €8,800,000 and the balance sheet total (i.e. asst totals ignoring liabilities) does not exceed €4,400,000.

This represents an increase in the turnover criteria by €1,500,000 from €7,300,000 to €8,800,000 and an increase in the balance sheet total criteria of €750,000 from €3,650,000 to €4,400,000. S.I. 308 updates S.32 of the Companies Act 1999 which sets the criteria for availing of the audit exemption.

Now under Section 32 of Companies (Amendment) (No. 2) Act, 1999 (“the Act”) a private limited company may avail of an exemption from a requirement to have financial statements audited if it meets the following criteria.

1. Is a company to which the Companies (Amendment) Act 1986 applies;
2. The turnover of the Company does not exceed €8,800,000
3. The balance sheet total does not exceed €4,400,000
4. Average employees does not exceed 50
5. The company is not one of the following: – A company limited by guarantee, a public limited company, Bank or Insurance Company, a group company (i.e. parent, holding or subsidiary company), an investment, stock broking, building society, credit institution, management or trustee company.
6. The company must be up to date with its filing requirements at the Companies Registration Office.
7. The company should satisfy all the conditions in respect of the financial year in which the company is to avail of the exemption and the previous financial year.

‘Wake-up call’ for non-exec directors after court ruling

 

Non-participating directors penalised after they failed to keep a close enough watch on a company that engaged in reckless trading. (Article in Irish Independent today):-

Being a Director – You need to know what’s Involved!

Holding the office of Company Director brings with it many duties and responsibilities. These duties and responsibilities are often overlooked. However, in the words of Warren Buffett “it’s only when the tide goes out that you discover who’s been swimming naked” and we are now seeing a significant increase in queries and questions in this area.

Directors are agents of the Company and are in a fiduciary position. The Companies Acts sets out duties and responsibilities to ensure that the Directors act correctly.  At the heart of all the duties and responsibilities Directors must act in the best interests of the company at all times.

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The Duties

Some common law duties of Directors include:-

• Not abuse their powers
• Cannot create self profit and advantage
• Due care, skill and diligence that would be reasonably expected for someone in their position
• Liable for negligent behaviour
• Delegation of their duties permissible but not responsibility

The Companies Acts sets out the statutory duties of Directors including:-

• Duty to maintain proper books of account
• Duty to prepare annual accounts
• Duty to maintain the Statutory Register
• Duty to file forms at the CRO
• Duty to hold meetings

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Problematic Transactions

The Companies Acts sets out provisions regarding transactions with Directors. The main provisions for Directors to be aware of are:-

• Sec 31 CA, 1990 – Loans to Directors & Connected Persons
  • 10% of Relevant Assets or Group Exemption
• Sec 29 CA, 1990 – Substantial Property Transactions
  • Acquisition or Sale of Non-cash assets to Directors or Connected Persons
• Sec 60 CA, 1963 – Financial Assistance in connection with the Purchase of Own Shares
  • The purchase or sale of companies

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The Penalties

If any Director is in breach of Company Law, they may be prosecuted by the Courts. The penalties can include fines and or imprisonment. The most common penalties for Directors are Restriction and Disqualification.

Directors of insolvent companies may face restriction proceedings if the liquidator of the insolvent company is not granted relief from bringing the Directors to Court seeking them to be restricted. The Directors must prove to the Court that they acted “honestly & responsibly” and there is no other reason why they should be restricted. If the Court grants a restriction order, the Directors cannot act as a Director or Secretary of a Company unless the Company they seek to be appointed to is capitalised to a certain amount.

A disqualification order is more serious as regardless of capitalisation:-

“that the person against whom the order is made shall not be appointed or act as an auditor, director or other officer, receiver liquidator or examiner or be in any way, whether directly or indirectly, concerned or take part in the promotion, formation or management of any company or any society”.

The disqualification order lasts for a minimum of 5 years and recent cases have seen orders for 7-12 year disqualifications.

Disqualification of Directors is automatic  if:-

• Convicted on indictment of fraud or dishonesty
• Convicted of acting while restricted
• Convicted of acting as auditor, officer, liquidator or examiner while undischarged bankrupt
• Failure to notify if restricted abroad

The Court may also disqualify if guilty of fraudulent or reckless trading, failure to file annual returns with CRO or 2 or more offences in respect of failure to keep proper books of account

The most common disqualification order is for Companies struck off the register for failure to file annual returns with the CRO.

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Personal Liability of Directors

Directors may be found personally liable for some or all of the debts of the Company by being found guilty of either:-

• Reckless Trading
• Fraudulent Trading
• Failing to Keep Proper Books & Records

There is a high level of proof required before a Director can be found guilty of a reckless or fraudulent trading. There has been 2 recent cases where directors have been found personally liable for the debts of a Company and in one case the Directors was found personally liable for €1.6 million of the outstanding debt.

Disclaimer: This blog is not intended to be professional advice but rather a summary of the subject discussed.  While every effort is made to insure the accuracy of the information, we do not accept any responsibility for loss or damage suffered by any person acting, or refraining from acting as a result of this material.  Full professional advice should be sought before action is taken or not taken as the case maybe.