Abbreviated accounts for micro companies

1Office UK’s country manager Ivar Veskioja discusses the transposition of the European accounting directive and the recent decision of the European court and explains, what the directive actually changes.

The position of Estonia’s last government

When criticising the directive, the Estonian government has found that the original aims, reducing the administrative burden of smaller enterprises and increasing the comparability of financial reporting, cannot be achieved on the basis of the directive. On the contrary – as a result of transposing the directive, transparency of the Estonian economic space and the companies’ competitiveness would reduce. With the application of the directive, not only the state but also the private sector would have to start asking for additional information directly from the enterprise itself for assessing the enterprise’s economic situation, as the required reporting form does allegedly not ensure the sufficient availability of information. The government has taken the position that sufficient measures have been taken nationally for simplifying enterprises’ reporting, such as submitting annual accounts through the company registration portal.

The law in force does not distinguish between enterprises

The Accounting Act currently in force does not distinguish enterprises by size and requires all accounting entities to prepare an annual accounts when a financial year ends. This consists of annual accounts and a director’s report. The annual accounts consists of the main reports, which are the balance sheet, income statement, cash flow statement and statement of changes in shareholders’ equity and mandatory notes to the accounts.

A new draft bill was prepared in the Ministry of Finance at the beginning of June

Regardless of the decision of the European Court of 18 June to dismiss the Estonian action to revoke the directive, the government has still already taken steps to harmonise legislation. Lesser requirements have been set on the mandatory parts of the financial reporting of micro- and small enterprises in the draft act to amend the Accounting Act and other acts in relation to it submitted by the Ministry of Finance in June. The term “micro-enterprise”, i.e. a company, whose indicators correspond to all of the following conditions on the balance sheet day of the accounting year, is also provided in the draft for the first time:

– assets are a total of up to 175 000 Euros;

– obligations are not greater than equity;

– one shareholder, who is also a member of the board;

– not a party liable to account for VAT.

Possibility of a abbreviated annual accounts

According to the draft a micro-enterprise’s annual statement must give the user of the report the information about the enterprise’s financial situation and results that are required by law, however also prescribes a possibility for preparing annual accounts in a simplified procedure. Abbreviated accounts must consist of at least the balance sheet, income statement and the notes listed in the Act, the cash flow statement, statement of changes in shareholders’ equity and the director’s report have been excluded. A micro-enterprise’s mandatory notes to the annual statement are as follows:

– sum total of conditional obligations and appropriations;

– obligations about the performance of which the enterprise has given a collateral and the type and description of the collateral given;

– the sum of advance payments paid and loans given to a member of the management and the highest supervisory body, including sum of repayment, writing off and discharge of a loan, also payment deadlines and interest rates and other important conditions;

– the number of shares obtained or taken as collateral and their nominal value and the size of the fee paid for the shares and the reason for obtaining them or taking them as collateral.

The specified legislative amendments should come into force by the end of 2015.

What is going to change?

According to the draft of the new Accounting Act, in case of micro-enterprises therefore the cash flow statement, statement of changes in shareholders’ equity and director’s report are waived. The Ministry of Finance had already prepared the relevant draft prior to the European Court’s decision. The requirements, which apply to micro-enterprises in Estonia that are stricter than the Council’s directive, should alleviate. Changes also await small enterprises, which the new draft notes for the first time. The definition of a micro-enterprise suggested in the draft does however not overlap with the European Commission’s definition from 2003. The exclusion of parties liable to account for VAT and a restriction on shareholder structure is particularly odd. The Commission’s definition prescribes that the turnover and/or balance sheet total of a micro-enterprise does not exceed 2 million Euros and the number of employees is below 10. The same definition is used in their work by Enterprise Estonia (EAS) and the Statistical Office. The exclusion of VAT payers means that over 16 000 Euros of taxable turnover takes the opportunity of simplified reporting provided in the directive from a micro-enterprise. The European Commission’s definition of a micro-enterprise provides for an allowed turnover of over 125 times that.

Good to know

According to the Statistics Estonia’s data from 2014, 90% of Estonian companies are micro-enterprises according to the European Commission’s definition. In Great Britain for reporting purposes a micro-enterprise is a company, which has fulfilled two indicators of three. A turnover of up to 632 000 pounds (about 877 000 euros), balance sheet total of up to 316 000 pounds (about 444 000 euros) and up to 10 employees. This is also stricter than the European Commission’s definition but there are no connections with VAT registration and shareholder structure. In addition it is possible to send abbreviated accounts to the public Companies House database, which only contains the simplified balance sheet and notes. The accounts sent to Her Majesty’s Revenue and Customs contains a more detailed overview of the company’s economic transactions, but this information is not available to the public. The notes to abbreviated accounts are normally the description of accounting standards, list of creditors and debtors in case of long-term arrears, share capital structure and fees and loans of members of the board. Other notes apply if the conditions are fulfilled.

Author: Ivar Veskioja, 1Office UK country manager

Published on the raamatupidaja.ee website 30.06.2015.