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Audit exemptions and change of accounting framework

The Companies and Limited Liability Partnerships (Accounts and Audit Exemptions and Change of Accounting Framework) Regulations 2012 (SI 2012/2301) amends the Companies Act 2006 so that it aligns mandatory audit thresholds with accounting thresholds, exempts certain subsidiary companies from mandatory audit and dormant subsidiaries from preparing and filing accounts.

It also makes it easier for companies who currently use IFRS voluntarily to switch from IFRS to UK GAAP when preparing their accounts.

Date published: 6 September 2012

Effective date: accounting periods ending on or after 1 October 2012

Access the legislation The Companies and Limited Liability Partnerships (Accounts and Audit Exemptions and Change of Accounting Framework) Regulations 2012.

Audit thresholds

Audit thresholds for small companies have been aligned with accounting thresholds for small companies. Small companies will therefore be entitled to an exemption from mandatory audit if they meet two out of the three mandatory criteria:

  • No more than 50 employees;
  • No more than gross assets of £3.26 million;
  • Less than £6.5 million in turnover.

Audit exemptions for subsidiaries

Subsidiaries will be exempted from mandatory audit if it fulfils all of the following conditions:

(a) its parent undertaking is established under the law of an EEA state;
(b) the company’s shareholders must unanimously agree to dispense with an audit in the financial year in question;
(c) the parent must give a statutory guarantee of all the outstanding liabilities to which the subsidiary is subject at the end of the financial year;
(d) the company must be included in the consolidated accounts drawn up by the parent undertaking, which must be prepared in accordance with Directive 83/349/EEC (the Seventh Company Law Directive);
(e) the use of the exemption by the subsidiary must be disclosed in the notes on the consolidated accounts drawn up by the parent;
(f) the following documents must be filed by the directors of the subsidiary at Companies House on or before the date that they file the subsidiary’s accounts:
i. written notice of the agreement in (b);
ii. a statement by the parent that it guarantees the subsidiary company under the particular section of the Act;
iii. a copy of the consolidated report and accounts referred to in (d) and the auditor’s report on those accounts;
(g) the company is not quoted within s385(2) of the Companies Act (“the Act”;
(h) it is not an authorised insurance company, a banking company, an e-Money issuer, a MiFID investment firm or a UCITS management company, or carries on insurance market activity; and
(i) it is not a trade union or an employer’s association.

A further 67,000 dormant subsidiary companies will be exempted from the requirement to prepare and file accounts if they fulfil these conditions. An annual return will still be required to be filed at Companies House.

Dormant subsidiaries

Dormant subsidiary companies will be exempted from the requirement to prepare and file accounts if they fulfil these conditions above. An annual return will still be required to be filed at Companies House.

Changing accounting framework

Companies who currently prepare IAS (IFRS) accounts voluntarily will be able to change their accounting framework to UK GAAP for a reason other than a ‘relevant change in circumstances, provided they have not moved to UK GAAP in the previous five years. In calculating the five year period, no account will be taken of a change due to a relevant change of circumstances.