Accounting Requirements under the UK Companies Acts

The Companies Act 1985 section 221(1) provides that every company must keep accounting records which:

• show and explain business transactions;
• accurately disclose the financial position of the company at any point in time; and
• allow company directors to show that any balance sheet and profit and loss account prepared under the Companies Act 1985 complies with the accounting provisions in the Act.

Breach of the Companies Act

If a company fails to comply with any of the above provisions, every officer of the company who is in default is liable unless he shows that he acted honestly and that in the circumstances in which the company’s business was carried on the default was excusable. Otherwise he is liable on conviction on indictment to imprisonment for a term not exceeding two years or a fine, or to both, or on summary conviction to imprisonment for a term not exceeding six months or a fine not exceeding the statutory maximum, or to both.

The accounting records must contain entries from day to day of all sums of money received and expended by the company, and the matters in respect of which the receipt and expenditure takes place, and a record of the assets and liabilities of the company: Companies Act 1985 s 221(2).

If the company deals in goods, the accounting records must contain:

• statements of stock held by the company at the end of each financial year;
• statements of stock-takings from which any such statement of stock as is mentioned in head (a) above has been or is to be prepared; and
• except in the case of goods sold by way of ordinary retail trade, statements of all goods sold and purchased showing the goods and the buyers and sellers in detail to enable them to be readily identified.

Duties of a Parent Company

A parent company which has a subsidiary undertaking in relation to which the above requirements do not apply must take reasonable steps to secure that the undertaking keeps such accounting records as to enable the directors of the parent company to ensure that any balance sheet and profit and loss account are duly prepared: Companies Act 1985, s 221(4).

Location and Inspection of Accounting Records

The Companies Act 1985, s 221(1) provides that the accounting records must be kept at the company’s registered office, or where the company directors deem appropriate; they must be open to inspection by the company officers.

Auditors have a right of access to the accounting records: Companies Act 1985, s. 389A(1).

If the accounting records are not kept in Great Britain, accounts and returns with respect to the business must be sent to, and kept in, a place in Great Britain, open to inspection by the officers of the company. The accounts ad returns must:

• accurately disclose the financial position of the business at intervals of not more than six months; and
• allows directors to ensure that balance sheets and profit and loss accounts for the company are prepared in accordance with the statutory requirements.

Retention of Accounting Records

Accounting records which a company is required so to keep must be preserved by it, under the Companies Act 1985, s.222(5):

1. in the case of a private company, for three years from the date on which they are made; and
2. in the case of a public company, for six years from the date on which they are made.

There is no definitive guide on what records must be retained; they usually cover records of prime entry and related documentation. These include:

• the nominal ledger, sales ledger, purchase ledger and journal;
• sales invoice and credit notes and related transactions listings or day books
• purchase invoices, credit notes and any related transactions listings or day books;
• register of fixed assets;
• cash book; and
• bank statements.

Computerised Records

It is important to ensure that any hardware or software needed to retrieve or access the stored information is retained. Arrangement must be made to enable all information retained in non-legible form to be accessed.

Annual Accounts

Individual Company Accounts

The directors of every company must prepare for each financial year of the company:

• a balance sheet as at the last day of the year; and
• a profit and loss account: the company’s ‘individual accounts’.

The balance sheet must give a true and fair view of the state of affairs of the company as at the end of the financial year; and the profit and loss account must give a true and fair view of the profit or loss of the company for the financial year.

A company’s individual accounts must comply with the statutory provisions as to the form and content of the balance sheet and profit and loss account and additional information to be provided by way of notes to the accounts.

Where compliance with those statutory provisions, and the other provisions of the Companies Act 1985 as to the matters to be included in a company’s individual accounts, or in notes to those accounts, would not be sufficient to give a true and fair view, the necessary additional information must be given in the accounts or in a note to them.

If in special circumstances compliance with any of those provisions is inconsistent with the requirement to give a true and fair view, the directors must depart from that provision to the extent necessary to give a true and fair view. Particulars of any such departure, the reasons for it and its effect must be given in a note to the accounts.

Group Accounts

If at the end of a financial year a company is a parent company, the directors must prepare group accounts. Group accounts must be consolidated accounts comprising:

• a consolidated balance sheet dealing with the state of affairs of the parent company and its subsidiary undertakings; and
• a consolidated profit and loss account dealing with the profit or loss of the parent company and its subsidiary undertakings.

The accounts must give a true and fair view of the state of affairs as at the end of the financial year, and the profit or loss for the financial year, of the undertakings included in the consolidation as a whole, so far as concerns members of the company.

A company’s group accounts must comply with the statutory provisions 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.

Exemption from Group Accounts Requirement

A company is exempt from the requirement to prepare group accounts if it is itself a subsidiary undertaking and its immediate parent undertaking is established under the law of a member State of the European Community in the following cases:

1. where the company is a wholly-owned subsidiary of that parent undertaking;
2. where the parent undertaking holds more than 50% of the shares in the company and notice requesting the preparation of group accounts has not been served on the company by shareholders holding in aggregate more than half of the remaining shares in the company or 5% of the total shares in the company.

Such notice must be served not later than six months after the end of the financial year before that to which it relates.

Exemption is conditional upon compliance with all of the following conditions:

• that the company is included in consolidated accounts for a larger group drawn up to the same date, or to an earlier date in the same financial year, by a parent undertaking established under the law of a member State of the European Community;
• that those accounts are drawn up and audited, and that parent undertaking’s annual report is drawn up, in accordance with the provisions of the Seventh Directive;
• that the company discloses in its individual accounts that it is exempt from the obligation to prepare and deliver group accounts;
• that the company states in its individual accounts the name of the parent undertaking which draws up the group accounts referred to above and:
  • if it is incorporated outside the UK, the country in which it is registered;
  • if it is unincorporated the address of its principal place of business;
• that the company delivers to the registrar of companies, within the period allowed for delivering its individual accounts, copies of those group accounts and of the parent undertaking’s annual report, together with the auditors’ report on them; and
• subject to the statutory right to deliver certain Welsh documents without a translation, that, if any document comprised in accounts and reports delivered in accordance with head (e) above is in a language other than English, there is annexed to the copy of that document delivered a translation of it into English, certified in the prescribed manner to be a correct translation.

The exemption does not apply to a company any of whose securities are listed on a stock exchange in any member State of the European Community.

Overseas Companies

The Companies Act 1985, s. 700, requires an overseas company to prepare and file, for each financial period:

• a balance sheet; and
• a profit and loss account.

Accounting Reference Date

A company’s ‘financial year’ is determined as follows:

Its first financial year begins with the first day of its first accounting reference period and ends with the last day of that period or such other date, not more than seven days before or after the end of that period, as the directors may determine.

Subsequent financial years begin with the day immediately following the end of the company’s previous financial year and end with the last day of its next accounting reference period or such other date, not more than seven days before or after the end of that period, as the directors may determine.

In relation to an undertaking which is not a company, references in the Companies Act 1985 to its financial year are to any period in respect of which a profit and loss account of the undertaking is required to be made up, by its constitution or by the law under which it is established, whether that period is a year or not.

The directors of a parent company must secure that, except where in their opinion there are good reasons against it, the financial year of each of its subsidiary undertakings coincides with the company’s own financial year.

A company’s accounting reference periods are determined according to its accounting reference date.

A company incorporated before 1 April 1996 may, at any time before the end of the period of nine months beginning with the date of its incorporation, by notice in the prescribed form given to the registrar of companies specify its accounting reference date, that is the date on which its accounting reference period ends in each calendar year. Failing such notice, the accounting reference date of such a company is:

1. in the case of a company incorporated before 1 April 1990, 31 March;
2. in the case of a company incorporated after 1 April 1990, the last day of the month in which the anniversary of its incorporation falls.

The accounting reference date of a company incorporated on or after 1 April 1996 is the last day of the month in which the anniversary of its incorporation falls.

First Financial Period

A company’s first accounting reference period is the period of more than six months but not more than 18 months, beginning with the date of its incorporation and ending with its accounting reference date.

Subsequent Financial Periods

Its subsequent accounting reference periods are successive periods of 12 months beginning immediately after the end of the previous accounting reference period and ending with its accounting reference date.

Change of Accounting Reference Date

The Companies Act 1985, s. 225 sets out guidelines for a company wishing to change its accounting reference date. A company may by notice in the prescribed form given to the registrar of companies specify a new accounting reference date having effect in relation to the company’s current accounting reference period and subsequent periods or the company’s previous accounting reference period and subsequent periods.

The notice must state whether the current or previous accounting reference period:

1. is to be shortened, so as to come to an end on the first occasion on which the new accounting reference date falls or fell after the beginning of the period; or
2. is to be extended, so as to come to an end on the second occasion on which that date falls or fell after the beginning of the period.

A notice stating that the current or previous accounting reference period is to be extended is ineffective, except as mentioned below, if given less than five years after the end of an earlier accounting reference period of the company which was so extended; but this provision does not apply:

1. to a notice given by a company which is a subsidiary undertaking or parent undertaking of another EEA undertaking if the new accounting reference date coincides with that of the other EEA undertaking or, where that undertaking is not a company, with the last day of its financial year; or
2. where an administration order is in force, or where the Secretary of State directs that it should not apply, which he may do with respect to a notice which has been given or which may be given.

An accounting reference date may not in any case, unless an administration order is in force, be extended so as to exceed 18 months; and a notice is ineffective if the current or previous accounting reference period as extended in accordance with the notice would exceed that limit.

Laying and Delivering Accounts

The directors of a company must lay before the company in general meeting copies of the company’s annual accounts, the directors’ report and the auditors’ report on those accounts: CA 1985, s. 241.

Any breach, will make a director guilty of an offence and liable on summary conviction to a fine not exceeding the statutory maximum or, on conviction after continued contravention, to a daily default fine not exceeding one-tenth of the statutory maximum.

It is a defence for a person to show that he all reasonable steps were taken for securing that those requirements would be complied with.

A copy of the annual accounts, directors’ report and auditors’ report must be sent to every member of the company, holder of the company’s debentures, and those entitled to receive notice of general meeting not less than 21 days prior to the meeting at which copies of such documents are to be laid out: CA 1985, s. 238(1).

Electronic Communication

Companies Act 1985 (Electronic Communications) Order 2000 (SI 2000/3373) inserts further guidelines, clarifying that references to sending accounts and reports to those entitled to receive them include:

• sending copies by electronic communication to the address notified to the company for that purpose by the person entitled to receive the documents; or
• where the company and the person entitled to receive the accounts agree, publishing the documents on a website, notifying the person in the manner agreed that they have been published in this way and providing him/her with the address of the website and details of where and how the documents may be accessed on the website.

Right to Demand Accounts

Under section 239 of the Companies Act 1985, any member of the company and any holder of the company’s debentures are given a right to be given a single copy of the company’s last annual accounts, directors’ report and auditors’ report. An officer of the company must comply within 7 days of notice, or be liable to a fine.

Under section 252 of the Companies Act 1985, a private company may dispense with the requirement to lay the accounts and reports before the members in general meeting, through elective resolution.

The CA 1985, s.242(1) provides that the directors are required to deliver a copy of the annual accounts, directors’/auditors’ reports for each financial year to the Registrar of Companies.

Public company – documents must be delivered within seven months of the end of the accounting reference period.

Private company – documents must be delivered within ten months of the end of the accounting reference period.

First Accounting Period

CA 1985, s.244(2): if first accounting reference period is longer than 12 months, the date for laying and delivering the first accounts and reports is the later of:

• Seven months (public company) or ten months (private company) from the first anniversary of incorporation; or
• Three months from the end of the first accounting reference period.

Change of Accounting Reference Date

CA 1985, s.244(4) – when an accounting reference period is shortened because the accounting reference date is changed, the due date for laying and delivering the accounts is the later of:

• Seven months (public company) or ten months (private company) from the new accounting reference date; or
• Three months from the date of the notice of the change of accounting reference date.

Where a company has business interests outside the UK, section 244(3) allows the directors to apply for a three-month extension of the period allowed for the laying and delivering of accounts by giving notice to the Registrar in the prescribed form before the end of that period.

The due date for delivery of accounts and reports strictly by Companies House. Common errors are:

• errors in the company’s name or registered number;
• accounts made up to the incorrect accounting reference date
• signatures omitted on directors’ report, balance sheet and auditor’s report; and
• failure to include exemption statements where appropriate.

When filing annual accounts and reports, be sure that they are printed in black on good quality white paper;

• paper has matt finish;
• A4-sized;
• Letters and figures are clear, legible, of uniform density – no less than 1.8mm high or have a line width of less than 0.25mm;
• No shaded areas or photos; and
• The company’s registered number must be shown prominently on the front page.