Chapter 4: Annual Accounts
Section 393: Accounts to give true and fair view
646.Subsection (1) introduces an overarching obligation on directors (the preparers of accounts) not to approve accounts unless they give a true and fair view of the financial position of the company and, in the case of group accounts, the group. This provision reflects the underlying legal duty already expressed in Community law.
647.Subsection (2) in addition places a requirement on auditors to take this overarching duty to give a true and fair view into consideration when giving an opinion on the accounts. This requirement supplements the functions of an auditor set out in section 485.
648.Sections 394 to 397, which replace sections 226, 226A and 226B of the 1985 Act, concern the duty of the directors to prepare individual accounts. The individual accounts may either be prepared under the Act (Companies Act individual accounts) or (unless the company is a charity) in accordance with international accounting standards adopted under the IAS Regulation (IAS individual accounts). The terms “IAS Regulation” and “international accounting standards” are defined in section 474. Once a company has switched to IAS individual accounts all subsequent individual accounts must be prepared in accordance with IAS unless there is a relevant change of circumstance (see section 395(3) to (5)). The provisions concerning the form and content of Companies Act accounts to be found in the Schedules to Part 7 of the 1985 Act will in future be contained in regulations to be made by the Secretary of State (section 396(3)). The Parliamentary procedure for such regulations is set out in section 473.
Group accounts: small companies
Section 398: Option to prepare group accounts
649.This section provides that a company that is subject to the small companies regime and is a parent company is not obliged to prepare group accounts in addition to its individual accounts, (restating section 248 of the 1985 Act), but it may opt to do so. The current exemption in section 248 of the 1985 Act from preparation of group accounts by parent companies heading medium sized groups has been abolished, following the substantial increase in the financial thresholds for medium sized groups in 2004.
Group accounts: other companies
Sections 399 to 402: group accounts: other companies
650.The sections relating to group accounts have been reorganised to make them easier to follow.
651.Sections 399 to 402 re-enact sections 227(1) and (8), 228, 228A and 229(5) of the 1985 Act. Section 399 concerns the requirements and exemptions from requirements in relation to group accounts. Parent companies not subject to the small companies regime have the duty to prepare consolidated accounts unless exempt from having to do so under sections 400 to 402. Section 400 provides an exemption from preparing group accounts for companies included in EEA group accounts of a larger group. Section 401 provides such an exemption for companies included in non-EEA group accounts of a larger group, and section 402 provides an exemption when all the company’s subsidiary undertakings could be excluded from consolidation in Companies Act group accounts (see section 405).
Group accounts: general
Section 403: Group accounts: applicable accounting framework
652.This section replaces section 227(2) to (7) of the 1985 Act. Parent companies whose securities are publicly traded must prepare group accounts in accordance with the IAS Regulation. Other parent companies (with the exception of charitable companies) have the choice whether to prepare group accounts under the Companies Act (Companies Act group accounts) or in accordance with adopted international accounting standards (IAS group accounts). Once a company has switched to IAS group accounts all subsequent group accounts must be prepared in accordance with IAS unless there is a relevant change of circumstance (see subsections (4) to (6)).
Section 404: Companies Act group accounts
653.For companies preparing Companies Act group accounts, this section gives the Secretary of State power to make provision by regulations as to the form and content of the consolidated balance sheet and consolidated profit and loss account and additional information to be provided by way of notes to the accounts. The regulations will replace the current requirements contained in Schedule 4A to the 1985 Act. These regulations are subject to the Parliamentary procedure in section 473.
Section 405: Companies Act group accounts: subsidiary undertakings included in the consolidation
654.This section replaces section 229 of the 1985 Act. It requires all subsidiary undertakings to be included in the consolidated accounts subject to certain permitted exclusions.
Section 406: IAS group accounts
655.This section re-enacts section 227B of the 1985 Act. A company may opt or may be required to prepare group accounts in accordance with international accounting standards. This section provides that where it does so, this must be stated in the notes to the accounts.
Section 407: Consistency of financial reporting within group
656.This section re-enacts section 227C of the 1985 Act. If the parent company prepares both consolidated and individual accounts under IAS, it is not required to ensure that all its subsidiary undertakings also use IAS. However, it must otherwise ensure that its individual accounts and those of all its subsidiary undertakings use the same financial reporting framework, unless there are good reasons for not doing so.
Section 408: Individual profit and loss account where group accounts prepared
657.This section replaces section 230 of the 1985 Act. A parent company that prepares group accounts and that meets the criteria in subsection (1)(a) and (b) may, subject to the profit and loss account being approved by the directors, dispense with the inclusion of a profit and loss account in the company’s accounts, for example when delivered to the registrar. The profit and loss account may also omit the information on employee numbers and costs required by section 411. The exemption currently provided for in section 230(2) of the 1985 Act for certain information required by provisions of Schedule 4 to the 1985 Act, will be provided for in regulations under section 396.
Information to be given in notes to the accounts
Section 409: Information about related undertakings
658.This section replaces section 231(1) to (4) of the 1985 Act. The requirement to disclose information about related undertakings in the notes to a company’s annual accounts applies whether or not the company has to produce group accounts but there are different disclosure requirements in each case. This section gives the Secretary of State a new power to make regulations requiring information about related undertakings to be given in notes to a company’s annual accounts. These regulations are subject to the Parliamentary procedure in section 473. The regulations will replace the provisions of Schedule 5 to the 1985 Act.
659.Subsection (3) enables regulations under the section to make provision corresponding to section 231(3) of the 1985 Act authorising the omission from the notes to the accounts of information in respect of undertakings established outside the UK, or carrying on business outside the UK where the directors consider that disclosure would be seriously prejudicial to the business of that undertaking, or to the business of the company or any of its subsidiary undertakings. The Secretary of State must agree to the omission. This exemption is sought by a very small number of companies each year.
Section 410: Information about related undertakings: alternative compliance
660.This section replaces section 231(5) to (7) of the 1985 Act. Where there are numerous related undertakings and the directors believe that full disclosure would result in information of excessive length in the notes to the accounts, they may give more limited information. As a minimum this must include information in subsection (2)(a) and (b). Subsection (3) provides that the full information on the related undertakings must be submitted with the next annual return.
Section 411: Information about employee numbers and costs
661.This section replaces section 231A of the 1985 Act concerning particulars of staff. Section 231A was inserted by the 1985 Act (International Accounting Standards and Other Accounting Amendments) Regulations 2004 (S.I. 2004/2947) re-enacting provisions previously in the Schedules to Part 7 of the 1985 Act so that they continued to apply both to companies preparing Companies Act accounts and to those preparing IAS accounts.
Section 412: Information about directors’ benefits: remuneration
662.This section, together with section 413, replaces section 232 of the 1985 Act. Section 232 of the 1985 Act, with Schedules 6 and 7A, provides for disclosure of specified information on directors’ remuneration in notes to a company’s annual accounts. Section 412 of the 2006 Act instead gives the Secretary of State a new power to make provision by regulations requiring information about directors’ remuneration to be given in notes to a company’s annual accounts. Regulations under this section are subject to the Parliamentary procedure in section 473.
Section 413: Information about directors’ benefits: advances, credit and guarantees
663.This section replaces section 232 of the 1985 Act as regards the disclosure of advances, credit and guarantees. Under section 232 of the 1985 Act, information on the following areas must be given in notes to a company’s annual accounts:
details of loans, quasi-loans, credit transactions and related guarantees and security between a company and its directors or persons connected with its directors;
details of any other transactions or arrangements in which a director, indirectly or directly, has a material interest.
This can be seen as an extension of the internal disclosure of directors’ interests required by section 317 of the 1985 Act.
664.Section 413 sets out the new disclosure requirements in respect 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 directors. The wording of section 413 is much closer to that of articles 43(1)(13) and 34(13) of the Fourth (78/660/EEC) and Seventh (83/349/EEC) Company Law Directives.
665.The powers under section 396(3)(b) (Companies Act individual accounts) and section 404(3)(b) (Companies Act group accounts) will be used to require the disclosure of information about certain related party transactions in the notes to Companies Act accounts. Companies will no longer be required to disclose transactions made between the company and officers other than directors.
666.Under section 413(8) banks and the holding companies of credit institutions need only state (a) the amount of an advance or credit, and (b) in relation to a guarantee, the amount of the maximum liability that may be incurred by the company (or its subsidiary). In the light of the simplified disclosure regime for advances, credit and guarantees, sections 343 and 344 of the 1985 Act, which make special provision for financial institutions, are repealed.
Section 414: Approval and signing of accounts
667.This section replaces section 233 of the 1985 Act. It provides that a company’s annual accounts (its individual accounts and any group accounts) must be approved by the board of directors and the balance sheet must be signed. Subsection (3), which requires the balance sheet of accounts prepared in accordance with the small companies regime to carry a statement to that effect, re-enacts section 246(8) of the 1985 Act. Subsections (4) and (5) re-enact the criminal offence in section 233 of the 1985 Act for approval of accounts that do not comply with the requirements of the Companies Act or, where applicable, of Article 4 of the IAS Regulation. Section 233 (4) of the 1985 Act, which required that a director of the company should sign the copy of the balance sheet delivered to the registrar, has not been reproduced. This requirement would have hampered developments in the electronic delivery of accounts.