Better Payment Practice Group www.payontime.co.uk Institute of Credit Management www.icm.org.uk/
Association of Corporate Treasurers www.treasurers.org/
The Factors and Discounters Association www.thefda.org.uk/
ICAEW Finance & Management Faculty www.icaew.co.uk/fmfac
Business Link www.businesslink.gov.uk
Federation of Small Businesses www.fsb.org.uk
UK Insolvency Helpline www.insolvencyhelpline.co.uk Cashflow Management
Company Law
Company Law
3.1 Maintenance and Retention of Accounting Records 3.15 Requirement to Prepare Annual Accounts
3.28 Laying and Delivering Accounts 3.46 Small Companies and Groups
3.63 Medium-sized Companies and Groups
3.75 Banking and Insurance Companies and Groups 3.80 Publication of Accounts
3.85 Revision of Defective Accounts and Reports 3.93 Dividends and Distributions
Appendix 1 Useful Websites on Company Law Issues
3
Company Law
3.1 Maintenance and Retention of Accounting Records
3 Company Law
At a Glance
* CA 1985 includes specific provisions on the accounting records that a company must keep.
* Accounting records should be updated on a regular basis and support- ing documentation retained in an orderly manner for future reference.
* Memorandum records should be maintained of any adjustments that are not entered into the accounting records until the end of the financial year (eg provisions for bad debts).
* If the preparation of accounting records is outsourced, care should be taken to ensure that the arrangements achieve compliance with the CA 1985 requirements.
* A parent company must also take all reasonable steps to ensure that its subsidiaries keep appropriate accounting records.
* CA 1985 also prescribes where accounting records should be kept and for how long they should be retained.
* Where accounting records are computerised, care is needed to ensure that the information remains accessible for the full retention period, especially if the underlying systems change.
3.2 Legal Requirement to Keep Accounting Records
Under section 221(1) of the Companies Act 1985 (CA 1985), every company must keep accounting records which:
are sufficient to show and explain the company’s transactions;
disclose with reasonable accuracy the financial position of the company at any point in time; and
enable the directors to ensure that any balance sheet and profit and loss account prepared under CA 1985 complies with the accounting provisions of that Act.
Being able to establish the financial position of the company at any point in time is particularly important in the context of the wrongful trading provisions of the
Insolvency Act 1986 – it is essential that the directors of the company always have access to accurate information on which to assess the company’s solvency.
3.3 Interpretation of the Requirement
The usual interpretation of the above requirement is that the accounting records do not necessarily need to show the overall financial position of the company at a particular point in time, but that all relevant financial information should be entered into the accounting records promptly, so that the overall financial pos- ition can be established if required. The accounting records should therefore be updated on a regular basis and supporting documentation should be retained in an orderly manner for future reference. The accounting records should also clearly show the date of each transaction. It is not acceptable to keep records in the form of a bundle of documents to be converted into formal accounting records at the end of the financial period.
3.4 Impact of Provisions and Adjustments
When financial accounts are prepared, a number of adjustments will usually need to be made to the information shown in the accounting records in order to comply with the accounting requirements of CA 1985 and of accounting stand- ards. For instance, provision may need to be made for potential bad debts or for other expected losses and liabilities. These items will not usually be incorporated into the detailed accounting records until the end of the financial year, but it is advisable for the directors to keep a memorandum note of such items as they arise during the year so that they can be taken into account in preparing financial information for management purposes and also if the financial position of the company needs to be formally established at a particular point during the period.
3.5 Outsourcing
It is becoming increasingly common for businesses to outsource certain func- tions or activities. Where the preparation of detailed accounting records is out- sourced, steps should be taken to ensure that the company can still be regarded as keeping accounting records (as opposed to causing them to be kept). The contractual arrangements should establish the company’s legal ownership of the accounting records and should provide access to them at all times by the company’s directors, officers and auditors.
3.6 Contents of Accounting Records
The general requirement to keep accounting records is expanded by section 221(2) and (3) of CA 1985, which require the accounting records to include:
entries from day to day of all sums of money received and paid, together with details of the matters to which they relate;
a record of the assets and liabilities of the company; and
in the case of a company dealing in goods:
statements of stock held at the end of each financial year,
statements of stocktakings from which the statements of stocks held are prepared, and
except for goods sold in the ordinary retail trade, statements of all goods sold and purchased, in sufficient detail to enable the buyers and sellers to be identified.
Specialised businesses (eg insurance brokers and other financial services busi- nesses) may also have to comply with additional requirements laid down in rele- vant legislation.
3.7 Statements of Stock and Stocktakings
No specified form is laid down for statements of stock or stocktakings. The requirement is usually interpreted as relating to the stock sheets and related sum- maries that support the stock figure shown in the annual accounts, but where stocks are extensive and some reliance is placed on interim stocktakes carried out at other times of the year, or stocktakes are carried out on a continuous or cyclical basis throughout the year, documentation for these should also be retained.
3.8 Additional Duties of Parent Company
Under section 221(4) of CA 1985, a parent company is required to take all rea- sonable steps to ensure that a subsidiary undertaking keeps accounting records that enable the directors of the parent to prepare accounts which comply with the requirements of CA 1985, even where the subsidiary is not subject to a legal requirement to keep such records. A parent must therefore ensure that all the necessary information is available from its subsidiaries to enable the preparation of consolidated accounts for the group as a whole. This should not be a problem where the subsidiaries are companies based in the UK, and are therefore subject to the same requirements as the parent, but specific action may need to be taken where a parent has unincorporated or overseas subsidiaries.
3.9 Location and Inspection of Accounting Records
Under section 222(1) of CA 1985, the accounting records must be kept at the company’s registered office, or at any other place that the directors consider appropriate, and they must be open to inspection by the officers of the com- pany. Section 389A(1) of CA 1985 also gives the auditors a right of access to the company’s accounting records at any time. If the accounting records are kept outside Great Britain, accounts and returns must be sent to, and kept in, a place in Great Britain and must be open to inspection by the officers of the company.
These accounts and returns must:
disclose with reasonable accuracy the financial position of the business at intervals of not more than six months; and
Company Law
enable the directors to ensure that balance sheets and profit and loss accounts for the company are prepared in accordance with the requirements of CA 1985.
3.10 Retention of Accounting Records
Section 222(5) of CA 1985 specifies that accounting records must be retained as follows:
in the case of a public company, for a period of six years from the date on which they were made; and
in the case of a private company, for a period of three years from the date on which they were made.
The retention periods laid down in CA 1985 should be regarded as minimum periods and, in practice, it will usually be advisable to retain certain items for a longer period. Other legislation may also require the adoption of longer retention periods – for instance, employers operating a PAYE scheme are required to keep records of payments to employees for three years after the end of the relevant tax year and VAT legislation generally requires accounting records and related docu- ments (eg tax invoices, import/export documentation) to be retained for six years.
Particularly significant records and documents may need to be retained indef- initely. As a general rule, directors are recommended to keep other accounting records for at least six years from the end of the relevant accounting period.
3.11 What Needs to be Retained?
It is difficult to find definitive guidance on exactly which records need to be retained. As regards the CA 1985 retention requirements, accounting records are the records and documents that show the financial position of the company at any point in time, give details of the sums received and paid and record details of the company’s assets and liabilities. The requirement is therefore usually inter- preted as covering the records of prime entry and related documentation, such as:
the nominal ledger, sales ledger, purchase ledger and journal;
sales invoices and credit notes and any related transactions listings or day books;
purchase invoices and credit notes and any related transactions listings or day books;
register of fixed assets;
cash book; and
bank statements.
As explained above, there is also a specific requirement to retain stock summaries and stocktaking documentation. The situation is less clear-cut in the case of sec- ondary documentation such as order and delivery documentation. The information in these documents will usually have been transferred onto other documents and records, such as purchase and sales invoices, and secondary documents are there- fore not usually considered to be covered by the CA 1985 retention requirement.
3.12 Computerised Records
Most businesses now maintain their accounting records in computerised rather than in hard-copy format and this raises additional issues. As well as retaining the relevant disks or files for the requisite period, it is also important to ensure that any hardware or software needed to retrieve or access the stored information is also retained, or that arrangements are in place to enable all information retained in non-legible form to be accessed. This is a point that can easily be overlooked when computer systems are upgraded or replaced.
3.13 Documents Retained in Other Forms
Records and documents, especially those relating to significant business transac- tions, should be retained in their original form wherever practicable. However, lack of space will often make it impractical for a company to retain all of its pri- mary accounting documentation in original form for the requisite period. It will therefore usually be acceptable to retain documents in another form, such as microfilm, provided that procedures are put in place to ensure that:
all documents are copied properly;
the microfilm versions are stored securely; and
the microfilm versions continue to be accessible and can be authenticated if necessary.
3.14 Consequences of Non-compliance
Each provision of CA 1985 on the maintenance, content, retention and location of accounting records notes that every officer of the company who fails to com- ply with the legal requirements is guilty of an offence and liable to imprison- ment or a fine, or both. However, it is a defence for an officer of the company to show that he/she acted honestly and that the default was excusable in the circumstances in which the company’s business was carried on.
3.15 Requirement to Prepare Annual Accounts
Company Law
At a Glance
* CA 1985 requires the directors to prepare a balance sheet and profit and loss account for the company for each financial year.
* A parent company must prepare consolidated group accounts as well as its own individual accounts.
* Certain small and medium-sized companies are exempt from the requirement to prepare group accounts.
* A parent company that is the subsidiary of an undertaking established under the law of another EC State may also be exempt from the require- ment to prepare group accounts, provided that certain conditions are met.
* Special provisions on the preparation of accounts apply to an oversea company (ie a limited company incorporated outside the UK but with a branch or place of business here).
* A company’s financial year is determined by its accounting reference date – CA 1985 includes detailed provisions on determining, and chan- ging, the accounting reference date.
3.16 Individual Company Accounts
Section 226 of CA 1985 sets out the requirement for the directors of every com- pany to prepare accounts for each financial year. For accounting periods begin- ning before 1 January 2005, these accounts had to comply with the detailed form and content requirements set out in the legislation. However, for account- ing periods beginning on or after 1 January 2005, section 226 is amended by the Companies Act 1985 (International Accounting Standards and Other Accounting Amendments) Regulations 2004 (SI 2004/2947) to give the directors of most companies the option of preparing either:
Companies Act accounts, by following the form and content requirements of the legislation and UK accounting standards; or
IAS accounts, by preparing the accounts in accordance with international accounting standards (IASs) – in this case, the detailed provisions in CA 1985 on the form and content of annual accounts no longer apply.
The only exception is charitable companies, which must always prepare Companies Act accounts. The directors of a parent company are also encour- aged to ensure consistency in the adoption of IASs within the group, unless there are good reasons against this. Under section 226A of CA 1985, Companies Act accounts must comprise:
a balance sheet as at the last day of the financial year; and
a profit and loss account for the financial year.
The balance sheet must give a true and fair view of the state of affairs of the com- pany at the end of the financial year and the profit and loss account must give a true and fair view of the profit or loss for the year. Companies Act individual accounts must also comply with the detailed requirements of Schedule 4 to CA 1985. There are no detailed provisions in the legislation on the form and content of IAS accounts, but similar requirements to those set out above will generally apply under the requirements of IASs. Also, under section 235 of CA 1985, the auditors’ report is required to include an opinion on whether the accounts show a true and fair view in accordance with the relevant financial accounting frame- work adopted by the company, and this requirement applies to both Companies Act accounts and IAS accounts. Certain additional disclosure requirements are set out in other Schedules to CA 1985 (for instance, those relating to directors’
remuneration and interests in related undertakings) and these continue to apply to both Companies Act and IAS accounts. The preparation of individual accounts is considered in more detail in 11 FINANCIAL REPORTING.
3.17 Group Accounts
Section 227 of CA 1985 sets out the requirement for a parent company to prepare group accounts for each financial year, in addition to its own individual accounts.
For accounting periods beginning before 1 January 2005, these accounts had to comply with the detailed form and content requirements set out in the legislation.
However, for accounting periods beginning on or after 1 January 2005, section 227 is amended in the same way as section 226 (see 3.16 above) to give the directors of most parent companies the option of preparing either:
Companies Act group accounts, by following the form and content require- ments of the legislation and UK accounting standards; or
IAS group accounts, by preparing them in accordance with international accounting standards (IASs) – in this case, the detailed provisions in CA 1985 on the form and content of group accounts no longer apply.
A parent company that is a charity must always prepare Companies Act group accounts, and a listed company must always prepare IAS group accounts under the requirements of the EU IAS Regulation. The London Stock Exchange has also announced that AIM companies will be expected to report under IASs for accounting periods beginning on or after 1 January 2007. Under section 227A of CA 1985, Companies Act group accounts must comprise:
a consolidated balance sheet setting out the state of affairs of the parent com- pany and its subsidiary undertakings as at the last day of the financial year; and
a consolidated profit and loss account dealing with the profit or loss of the parent company and its subsidiary undertakings for the financial year.
The consolidated balance sheet must give a true and fair view of the state of affairs of the group at the end of the financial year, and the profit and loss account must give a true and fair view of the profit or loss of the group for the year, so far as concerns the members of the parent company. Companies Act group accounts must also comply with Schedule 4A to CA 1985. This sets out detailed requirements on the form and content of group accounts, including general rules on consolidation and requirements in respect of acquisition and merger accounting. There are no detailed provisions in the legislation on the form and content of IAS group accounts, but similar requirements to those set out above will generally apply under the requirements of IASs. Also, under sec- tion 235 of CA 1985, the auditors’ report is required to include an opinion on whether the group accounts show a true and fair view in accordance with the relevant financial accounting framework adopted by the parent company for the group accounts, and this requirement applies to both Companies Act group accounts and IAS group accounts. The preparation of group accounts is con- sidered in more detail in 11 FINANCIAL REPORTING.
Company Law
3.18 Exemption from Group Accounts Requirement
Certain small and medium-sized groups are exempt from the requirement to prepare group accounts (see 3.47–3.74 below). A parent company is also gener- ally exempt from the requirement to prepare group accounts if it is itself a sub- sidiary of a parent undertaking established under the law of an EEA State and:
it is wholly owned by that parent; or
the parent undertaking holds more than 50 per cent of the shares and notice requesting preparation of group accounts has not been served on the com- pany by shareholders holding more than half of the remaining shares or 5 per cent of the total shares in the company.
A number of specific conditions (relating mainly to the preparation, audit and fil- ing of group accounts by the ultimate parent or an intermediate parent) are laid down in section 228(2) of CA 1985 and all of these must be met for the exemption to be available. The exemption is also not available to any company whose shares are listed on a stock exchange in any EEA State. For accounting periods beginning on or after 1 January 2005, the Companies Act 1985 (International Accounting Standards and Other Accounting Amendments) Regulations 2004 (SI 2004/2947) extend this exemption to an intermediate parent company which is a subsidiary of a parent established outside the EEA, provided that the parent prepares audited consolidated accounts in a manner equivalent to that required by the EC Seventh Company Law Directive. The conditions under which the exemption is available are broadly identical to those set out above for intermediate parent com- panies within an EC group. The Urgent Issues Task Force (UITF) has issued a draft Abstract on whether financial statements prepared in accordance with International Financial Reporting Standards (IFRS) or Generally Accepted Accounting Principles (GAAP) in other countries meet the requirement for equiv- alence with the EC Seventh Directive. This was published in UITF Information Sheet No 79 and sets out the UITF’s view that:
accounts prepared in accordance with IFRSs adopted by the EU will meet the equivalence requirement;
accounts prepared in accordance with full IFRSs will meet the equivalence test, subject to the need to consider why the EU has not adopted a particular standard or interpretation;
accounts prepared using other GAAPs closely related to IFRSs will meet the equivalence test, subject to the need to consider any differences from IFRSs adopted by the EU;
accounts prepared in accordance with US GAAP, Canadian GAAP and Japanese GAAP will meet the equivalence test, subject to:
ensuring that the scope of entities included in the consolidation is consis- tent with the EC Seventh Directive;
ensuring that consistent accounting policies have been used for all entities included in the consolidated accounts; and
evaluating the effect of any exemptions or modifications to the GAAPs allowed by any specialised industry standards that have been applied; and