The perils of filing abridged company accounts

Filing shortened company accounts could lead to problems obtaining trade credit, financing and the loss of contracts, explains Adam Tucker

In 2013 the rules for SMEs filing accounts at Companies House were relaxed, allowing very small (micro) companies to file even less financial information than before. In addition, in 2015, abbreviated accounts for small companies were abolished paving the way for them to file so-called abridged company accounts.

Slicing through the history of shortened accounts

By 2008 there had already been moves to bring the UK more in line with European regulation. Companies were separated into size bands of small, medium and large with small companies being allowed to file less detailed financial information (abbreviated accounts) to Companies House.

In 2013 a further shift came with “The Small Companies (Micro-Entities Accounts) Regulations” adding a new size band “Micro-entity” for the very smallest (micro) companies. While small, or micro-entity companies are defined by a set of company size parameters, the category isn’t open to every company, there are some exceptions with charities being the most notable.

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The “Companies, Partnerships and Groups (Accounts and Reports) Regulations 2015” came into force on January 1 2016 introducing “abridged accounts”, for all small companies, effectively abolishing abbreviated accounts as they were known.

Abridged accounts contain a balance sheet made up with a subset of the information that is included in a full balance sheet. Likewise, the profit and loss abridged account may also contain a subset of the information that is included in a full profit and loss account.

Abbreviated, abridged, and now filleted

Prior to the 2015 regulation change a small company had to prepare full accounts for its members but was able to abbreviate these for Companies House filing. After January 1 2016, the company decides at the point the accounts are prepared whether these will be micro-entity accounts (if eligible), abridged, or full accounts, but in all cases the filings will be the same for members and the public record.

There is a further change that a small company or micro-entity can apply to their accounts, and this is to “fillet” them. Irrespective of whether the accounts have been prepared in full, or abridged, filleting allows the accounts to be filed without the profit and loss account (including the supporting notes) and/or the directors report. There is a strong belief that filleted accounts will become the norm for small and micro-entity companies filing their accounts, replacing abbreviated accounts.

Filing of filleted accounts has additional considerations when an audit has been carried out. If a profit and loss account has not been filed then an audit report does not need to be filed, but some disclosures from the audit should be included with the notes to the balance sheet.

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So what are the filing requirements?

Currently, the filing requirements for the different size bands are as follows:

►Conditions to qualify as a “small” company (2016 onwards)

A firm must meet at least two of the following conditions:

  • Its annual turnover must be no more than £10.2m (£6.5m before 2016)
  • Its balance sheet total must be no more than £5.1m (£3.26m before 2016)
  • It has fewer than 50 employees

A small company is only required to file abridged accounts: These accounts consist mainly of a balance sheet with a limited number of accompanying explanatory notes. They do not need to contain a profit and loss (P&L) account, no detailed notes and they certainly do not need to have been audited.

►Conditions to qualify as a “micro-entity”

A firm must meet at least two of the following conditions:

  • Its annual turnover must be no more than £632,000
  • Its balance sheet total must be no more than £316,000
  • It has fewer than 10 employees

A micro-entity company enjoys the same exemptions as for small companies (above). However, in addition, a micro-entity does not have to file a director’s report and must only file a very simplified version of its balance sheet, only having to disclose a few key headline (aggregated) items to Companies House.

Small/micro companies are obviously able to submit full accounts to Companies House if they wish, but the above are the minimum that they are required to file.

What are the advantages of filing shortened accounts?

Proponents of the regime which allows companies to file simplified (abridged/micro) entity accounts at Companies House argue that they are easier to prepare, and therefore reduce the administrative burden on small companies. (Although companies taking advantage of “fileting rules” may well have prepared more detailed accounts for shareholders and HMRC). What directors like most about filing shortened accounts is that there is less information in the public domain, preventing competitors from learning much about their business.

As of October 2020, we estimate that 1.13m firms (48 per cent) filed micro-entity accounts in the past year*, whereas approximately 950,000 firms (41 per cent) filed a full balance sheet (with accompanying notes, but no P&L) and 120,000 firms (5 per cent) filed simplified abridged accounts. Only 140,000 firms (6 per cent) of the total population) filed full accounts with a profit and loss (P&L) statement.

Whereas back in 2007 there were around 1.3Mn firms (75 per cent) filing accounts with no P&L, there are now around 2.2Mn (95 per cent).

Perils of filing abridged company accounts

Small companies filing accounts with no P&L are much less useful to banks or lenders if a business is trying to raise money. It follows that they are also only of limited use to trade creditors, or to potential partners trying to establish whether your business is going to be in good enough shape to risk a long-term association.

Lenders/trade creditors will want to have as much information about a company as possible before deciding whether to do business or not. Lenders of any sophistication like to read a P&L statement to look at the risk, so that they can work out your firm’s profit margins. They also like notes that explain why a particular large cost is unlikely to recur. In short, the detail adds considerably to their understanding of the lending risk.

Company Watch’s analysis of the financial strength of companies using the H-Score, which rates the healthiest companies on 100 and the weakest on zero, revealed a telling trend.

In 2007/8 when abbreviated accounts came in, the average H-Score for firms filing just a balance sheet was 46, while for those filing full (a balance sheet and P&L) accounts it was 54, a difference of 8.

In 2019, the average H-Score for companies filing just a balance sheet (micro/small) had fallen to 42 but had increased to 60 for companies filing full accounts.

Abridged too far

So financially weak companies, those which potential creditors should be most concerned about, are the very companies which they have least information on. Furthermore, these companies have the habit of getting even weaker away from the glare of proper scrutiny. The question is what surprises do they hold?

And if you are competing for an exclusive contract with a major new customer, they will want to understand the strength of your business during due diligence.

Say there are six firms bidding for the contract, and all but your firm has filed full accounts with Companies House. It’s easy for them to strike yours off their supplier list because it’s quicker than waiting for you to supply detailed accounts. Your firm failed to make the cut and you never knew why.

The same may well apply if you were turned down for a business loan. The lender applied an automated tick box formula, and your application failed because there was inadequate information for them to complete the process.

And if the government wants more lending and trade credit to stimulate the economy, they should know their accounting regulations are making it harder for lenders and creditors to decide who is credit-worthy, particularly with borderline cases.

*Latest filed financial accounts for active companies are used here, with dormant firms excluded.

Adam Tucker is chief data scientist at corporate finance risk analysis firm Company Watch

Further reading

Personal guarantee and small business – everything you need to know

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