Does the UK have the right accounting framework?

The current framework

The UK accounting framework is built around company categories, with the accounting standard applied by an entity generally depending on its size and listing status.

Qualitative factors, however, are used to establish whether a company is excluded from a regime because of its nature or because it is a member of an ineligible group. For example, public companies and certain financial services companies are not entitled to certain regimes regardless of their size.

In simplified terms, the current framework can be summarised as follows:

A notable feature of the current framework is the degree of choice available to many entities. An entity may choose to prepare accounts under a ‘higher’ regime that goes beyond the minimum requirements associated with their size category.

The current framework is familiar to preparers, auditors and users and provides a broadly proportionate structure under which different requirements apply to different sizes of entity. That proportionality is important as the costs and benefits of reporting are not the same for a micro-entity as they are for a listed multinational group, for example.

Any reform should recognise the value of stability and the cost of wholesale change. Significant restructuring of the accounting framework and development of new accounting standards would create implementation costs, require changes in systems and processes and affect preparers, advisers and users.

ICAEW’s starting point is that the framework should be clear, proportionate and underpinned by a coherent rationale for determining company categories and associated reporting requirements.

Has the framework become too fragmented?

While the UK's corporate reporting framework is familiar, it is not always easy to navigate. Over time, different categories and thresholds have developed across company law, accounting standards and related reporting regimes.

Companies may need to consider whether they are micro, small, medium-sized or large, whether they are listed, whether they are eligible to apply a particular size regime and whether other regime-specific thresholds apply.

These distinctions may each have a rationale. However, taken together, they can make the framework harder to explain and can result in companies moving between regimes because of changes in size, even where there has been little corresponding change in user needs.

A modernised framework should therefore be capable of explaining why particular categories exist, what purpose they serve and how they connect to the information needs of users.

Is size the right organising principle?

Company size is a central feature of the UK reporting framework. It is relatively objective, measurable and administratively workable. It can also act as a proxy for economic significance, reporting capacity and the likely extent of external interest in the organisation.

Previous ICAEW thinking has identified scope to review thresholds and streamline size categories, but that any such reform should be linked explicitly to the purpose of reporting and the information needs of users.

While monetary size thresholds have recently been revised, these changes did not address broader questions about how company categories are determined and whether reporting requirements continue to be allocated on the most appropriate basis.

Size does not always align neatly with user needs. Companies of a similar size may have very different ownership structures, financing arrangements and user groups. Likewise, some privately owned companies may attract significant public interest or have substantial external stakeholders, despite not having public shareholders.

A modernised framework should therefore consider whether size should remain the dominant organising principle, or whether greater weight should be given to factors, such as:

• public interest,
• ownership structure,
• access to external finance,
• economic significance, and
• the nature of users of the accounts.

The micro-entities regime

The micro-entities regime illustrates the wider challenge of balancing proportionality with useful information.

A simplified regime can reduce burdens for the smallest entities, where the cost of preparing more detailed information may be disproportionate. However, proportionality should not be assessed by cost alone. It also requires consideration of the users of the accounts and the minimum level of information needed to support transparency and market functioning.

ICAEW has previously called for a review of the micro-entities regime, emphasising that decisions on what information is disclosed publicly should be driven by an understanding of user needs to ensure it is meaningful.

More broadly, the debate highlights the need to consider what minimum level of reliable financial information should be available from companies benefiting from limited liability, and how that should be balanced against proportionality for the smallest entities.

There may also be scope to consider whether a modernised framework could provide a genuinely less complex accounting regime for smaller or lower-risk entities, while still producing information that is useful to users. Any simplification should be based on an understanding of user needs and linked clearly to purpose. 

Questions being asked by government