Company size and audit exemption - complex examples

This helpsheet has been issued by ICAEW’s Technical Advisory Service to help ICAEW members when considering whether companies or groups are small, and whether audit exemptions are available, when faced with more complex scenarios.

This helpsheet provides examples to support the concepts explained in the following helpsheets and should only be read in conjunction with these other helpsheets:

• Is a company or group small?
• Ineligible companies and groups
• Is an audit required for a company?

Question: How do I calculate group size when a previously small company acquires a medium subsidiary in the year?

Company A acquired Company B during the year to 31 December 20X1.

• Company A, prior to the acquisition, was a small stand-alone company and had been for several years.
• Company B is a medium company and has been for several years.
• No members of the group are ineligible under CA s384⁽¹⁾.

Answer:

At 31 December 20X1, Company A is a parent company so it needs to consider the group size as well as its own.

The group headed by Company A in the year to 31 December 20X1 breaches the thresholds(2) however, since this is not Company A’s first financial year, it has historically been a small company (CA06 S383(2) ⁽¹⁾, and this is the first year the thresholds are breached (Companies Act 2006 (CA) s383(3) ⁽¹⁾), the group is small for the year to 31 December 20X1 (because of the two-year rolling basis).

Company A can still use the small company exemptions from consolidation (CA06 s399⁽¹⁾) and the exemption from audit (CA06 s479⁽¹⁾.

Assuming the group breaches the thresholds again in the following year, Company A would not qualify as a small company for the year to 31 December 20X2.

Alternative Scenarios:

• If Company B made the group ineligible under CA06 s384⁽¹⁾, Company A, and the group, would be ineligible for the small company exemptions in the year to 31 December 20X1 with regards consolidation and audit exemption. Ineligibility takes effect immediately.
• If Company A had been formed in the year to 31 December 20X1, the group would not have any history to refer to in terms of its size so, unlike the original example, it would not benefit from the two-year rolling basis. In Company A’s first year of trading it would be the parent of a non-small group so under CA06 s383⁽¹⁾, (2)⁽¹⁾ Company A would not be small.

Question: How do I calculate group size when members of a group have accounting periods of different lengths and with different year ends?

• Company A is parent of a group with two subsidiaries (Company B and Company C).
• Company A and the group have been below the small thresholds(2) for the last two years.
• There are no intercompany transactions (other than minimal investment values in Company A), so the gross thresholds are being used for turnover and balance sheet total.
• No members of the group are ineligible under CA s384⁽¹⁾.

Answer:

STEP 1 – we need to establish the correct figures to include for each company:

• Company A has a 12 month period so we do not make any adjustment to the figures given above.
• Company B has a short period so when we consider it as a stand-alone company we would pro-rate the turnover threshold(2) to £7.65m (£10.2m x 9/12). This would mean on its own, Company B would breach the threshold for turnover for the year.
  When we consider the group size however, we do not pro-rate the turnover threshold or make any adjustments to the figures as given above (CA06 s383(7)(a)⁽¹⁾.
• Company C has a different year end, but in line with CA06 s383(7)(b)⁽¹⁾ we bring in the full results for its year to 30 September 20X1.

STEP 2 – we find the aggregate of these figures and compare to the thresholds:

• Turnover: £19m (9m + 8m + 2m)
• Balance sheet total: £5.5m (3m + 2m + 0.5m)
• 45 employees: (30 +10 + 5)

As there are no intercompany transactions so we are using the gross thresholds(2).

Company A and the group meet the necessary test of being within two of those thresholds for a small group again for 20X1.

Alternative Scenarios:

• If the group had been not small for the last two years, despite being below 2 of the 3 small company thresholds(2) in 20X1 the group would not be small for 20X1. CA06 s383(3)⁽¹⁾ confirms that it takes 2 years for a group to change size in the same way as a company.

Question: How do I calculate group size with a medium subsidiary and intragroup trading?

Company A has one medium subsidiary (Company B) and there is intragroup trading.

• Company A has turnover of £2m, balance sheet total of £1m (of which £0.5m is the investment in Company B) and 8 employees.
  All of Company A’s turnover is with third parties.
• Company B has turnover of £11m (of which £1.5m is with Company A), balance sheet total of £6m (of which £2m is a debtor from Company A) and 30 employees.
• Within Company A’s balance sheet is an investment in Company B of £0.5m. On consolidation, goodwill of £0.2m is recognised and there are no fair value adjustments to the net assets of Company B. The net effect of removing the investment in Company B is therefore a reduction of £0.3m.

Answer:

CA06 s383(6)⁽¹⁾ allows us to use either the net or the gross basis for either or both turnover and balance sheet total independently. Net means after any set-offs and other adjustments made to eliminate group transactions.

According to s383(6)⁽¹⁾ net means after any set-offs and other adjustments to eliminate group transactions. In the case of Companies Act accounts we look to s404 of the act, for IAS accounts, we make these adjustments in accordance with UK-adopted international accounting standards. In making these adjustments we would remove the investment in the subsidiary and it seems incorrect not to replace this with any other consolidation adjustments – this would mean bringing in any goodwill balance and allowing for other adjustments (such as fair value uplifts as eluded to above).

Our calculations for the group therefore are as follows: 

Company A meets the necessary test of being within two of the three threshold: for the balance sheet total on the net basis, and for employees.

Thus, Company A can, subject to any ineligibility (eg, the group’s including an authorised insurance company), still use the small company exemptions from consolidation (CA06 s399⁽¹⁾) and the exemption from audit (CA06 s479⁽¹⁾), despite being the parent of a medium subsidiary.

Company B is a member of a small group but is medium in its own right so will not qualify for the small companies’ regime and would require an audit (CA06 s477⁽¹⁾).

Alternative Scenarios:

• If Company A chose to prepare consolidated accounts and have them audited, it would be able to provide Company B with a parent guarantee and enable Company B to take audit exemption under CA06 s479A⁽¹⁾, subject to the requirements of this section.

Question: Do subsidiaries held for sale require an audit if they are a member of a non-small group?

Company A has 5 small subsidiary companies, all of which have been acquired exclusively with a view to subsequent resale. Company A does not meet the group thresholds for being small.

These subsidiaries, however, have been excluded from consolidation because they are held for re-sale (CA06 s405(3C)⁽¹⁾ and FRS 102.9.9(b)).

Company A is therefore taking the exemption from preparing consolidated accounts (CA06 s402⁽¹⁾.

Answer:

All 6 companies are members of a non-small group. The fact that Company A is taking an exemption from consolidation does not change the fact that the 5 companies qualify as subsidiaries under CA06 s1162(1).

All 5 subsidiaries would therefore need an audit due to their group membership (CA06 s479⁽¹⁾).

As the subsidiaries are not included in the consolidated accounts, exemption from audit by parent guarantee (CA06 s479A⁽¹⁾) would not be available. For more information on this audit exemption please see our Tech Release 06/20 BL.

Question: What is the impact on group size and audit requirements of having a joint venture?

Company A has a number of wholly-owned subsidiaries and itself holds a 50% interest in Company B, a joint venture.

Answer:

Company B, being a joint venture, should not be considered a member of the group (CA06 s474⁽¹⁾), because it does not meet the definition of a subsidiary under CA06 s1162⁽¹⁾. The joint venture would, therefore, not be included in group size calculations, beyond the investment being an asset in Company A.

Alternative Scenarios:

• If Company A had an investment in an associate there would be no change to the considerations here. An associate is not a member of our group as it also does not meet the definition of a subsidiary under CA06 s1162⁽¹⁾.
• If the other 50% of Company B was held by one of the subsidiaries in the group, the group would have control over Company B and it would be a subsidiary in the group. We would therefore need to bring Company B into our consideration of group size, and into our accounting for the group as a whole.

ICAEW members, affiliates, ICAEW students and staff in eligible firms with member firm access can discuss their specific situation with the Technical Advisory Service on +44 (0)1908 248 250 or via webchat.

Companies Act 2006 – links to sections referred to above (links to legislation.gov.uk):

• Section 382
• Section 383
• Section 384
• Section 399
• Section 402
• Section 405
• Section 474
• Section 477
• Section 479
• Section 479A
• Section 1159
• Section 1162

Small company qualifying condition thresholds (CA06 s382)

Small group qualifying condition thresholds (CA06 s383)