Moving on from abbreviated accounts to abridged and “filleted” accounts

While all companies have to prepare statutory accounts at the end of the financial year, many small companies have in the past chosen to file ‘abbreviated accounts’ with Companies House, rather than full accounts. (Abbreviated accounts can no longer be filed for any company accounting periods beginning on or after 1 January 2016.)

Abbreviated Accounts

Abbreviated accounts proved popular with small companies, particularly because they required much less information than full accounts – so competitors and the general public did not see detailed information about your business.

Companies were defined as ‘small’ if they had any two of the following:

• an annual turnover of £6.5 million or less
• a balance sheet total of £3.26 million or less
• 50 employees or less.

If a company met two of these criteria for two consecutive periods, it was able to follow the abbreviated accounts route.

This meant that while statutory accounts – which include a full balance sheet (ie the value of everything the company owns, owes and is owed), a full profit and loss account, notes to accompany the accounts, a director’s report, and (where applicable) a full audit report – were required to be sent to all shareholders, to those who go to company meetings, and to HMRC, the accounts filed with Companies House were much shorter.

They only needed to include a basic balance sheet, which showed your business assets (such as bank balances, equipment, vehicles, and any debtors) and liabilities (including loans, overdrafts, and any money you owe suppliers), giving a snapshot of your company’s net value.

However, recent changes to UK company law – the Companies, Partnerships and Groups (Accounts and Reports) Regulations 2015 – abolished abbreviated accounts, and they can no longer be filed for any company accounting periods beginning on or after 1 January 2016.

This does not mean that small companies will now have to file full accounts at Companies House as there are other options available , including a new option for ‘abridged accounts’, an alternative that allows small companies to prepare and file less detailed accounts, but with some significant changes.

Changes for small companies

One major change from the new regulations is a revision of the ‘small company’ definition, which will potentially open up the new account filing options to many more businesses. While the threshold for the number of employees stays the same (no more than 50), small companies are now defined as having a turnover of not more than £10.2 million (previously £6.5 million), and a balance sheet of not more than £5.1 million (previously 3.26 million). As before, companies need only meet two out these three criteria to qualify as ‘small’.

Micro entities

The opportunity still remains for very small companies, known as ‘micro-entities’, to prepare a balance sheet and profit and loss account with even less detailed information than a small company, and to take advantage of an exemption from the requirement to prepare a directors’ report. Micro-entities are defined as companies which meet any two of the following criteria:

• an annual turnover of £632,000 or less
• a balance sheet total of £316,000 or less
• 10 employees or less.

Abridged accounts

Another important major change is that small companies will now prepare and file the same set of accounts for its members as they do for the public record  (although may exclude some information when filing).

So while previously you would prepare full accounts for your members, and then decide whether or not to abbreviate them for Companies House, the new regime – described by some as a ‘file what you prepare’ model – means that you will need to decide at the point you are preparing your accounts whether or not to abridge them.

Small companies will be able to choose to abridge the balance sheet, the profit and loss account, or both. An abridged profit and loss account will start from gross profit rather than showing turnover and cost of sales and an abridged balance sheet will not have notes showing how the main headings (debtors, creditors etc.) are made up, although it will show movements on each type of fixed asset in total.

If you do decide to abridge the accounts, in whatever combination, the directors will need to obtain approval by each and every shareholder each year.

“Filleted” accounts

However, whether the accounts prepared for the members are full, abridged or micro, small or micro companies have the option not to include the profit and loss account (including the notes supporting the profit and loss account), and/or the directors’ report, with the accounts filed with Companies House.

Many believe that this option – sometimes referred to as ‘filleted’ accounts – will become the model of choice to replace abbreviated accounts.  If the company has had an audit and they decide to not file the profit and loss account, they will also exclude the audit report from the filed accounts but must disclose some information about it in the notes to the balance sheet.

The accounts for the shareholders must still present a true and fair view, even when abridged accounts are prepared.  It may be that the abridged profit and loss account is not considered to show a true and fair view as it does not disclose the turnover or cost of sales for the year.

In this instance, the company may choose to prepare a full profit and loss, an abridged balance sheet (which in effect means that the accounts will not contain some of the balance sheet notes), and then file “filleted” accounts with Companies House removing the profit and loss account and directors report.  This will dramatically reduce the amount of information filed on public record but it will also mean that the members don’t receive the balance sheet notes – this is why the members must agree unanimously every year to abridge the accounts.

In most cases shareholders are likely to still want the full accounts and then will remove (fillet) the accounts for filing with Companies House.

Going forward…

So for accounting periods that start on or after 1 January 2016, small companies basically now have three choices:

• prepare micro-entity accounts if they meet the criteria (but only file the balance sheet)
• prepare full accounts (with the option of not filing a directors’ report and profit and loss account)
• prepare abridged accounts (with the option of not filing a directors’ report and profit and loss account).

The UK regulations aim to introduce greater flexibility in the formats of small company accounts, and although some companies were early adopters of the new legislation, it remains to be seen which route proves the most popular for businesses. But with the regulations introducing a wide range of changes alongside the new small companies regime, it’s important to get expert advice on what is the most beneficial option for your business.

If you have a question about filleted accounts and would like us to help you, then please get in touch with Tony Pennison by filling in the form further below.