Company Size Thresholds: Unpacking the Implications

Monetary thresholds determining company size are slated to increase by 50% starting October 2024. This will impact non-financial reporting requirements for businesses across the board. Let’s take a look at the potential consequences:

According to March reports, the UK government aims to present legislation to Parliament this summer, proposing a 50% hike in monetary thresholds that delineate company size. This change is intended to take effect for accounting periods commencing on or after 1 October 2024.

The Companies Act 2006 (CA 2006) outlines four size classifications, which dictate the specific content mandates for accounts to be prepared and filed with Companies House: micro-entity, small, medium-sized, and large. Since their inception as part of the EU Accounting Directive in 2016, these monetary thresholds have remained unchanged. To qualify for each regime, companies must meet at least two of three criteria either in their inaugural financial year or for two consecutive financial years. Qualitative factors, alongside quantitative criteria, are also considered in determining a company’s eligibility for a regime, accounting for its nature or membership in an ineligible group.

How will businesses fare? The UK’s reporting framework emphasises proportionality, offering several tailored provisions in the CA 2006 for micro-entities, small, and medium-sized companies during the preparation and filing of their annual accounts and reports. The increase in thresholds could potentially facilitate companies shifting to a lower size category, thereby benefiting from reduced requirements.

Initially, any reduction in reporting obligations and associated cost savings may be viewed as an immediate advantage, with most companies expected to capitalise on it. However, the decision may not be as straightforward as it appears.

Growth Trajectory affects Thresholds

For companies experiencing upward growth trajectories, transitioning to a lower qualifying regime may be transitory. Adjusting reporting processes, only to revert to previous practices in the future, could prove disruptive.

Concerns Regarding FRS 105

Doubts surrounding the efficacy of the micro-entities regime are prevalent in the accounting profession. Many argue that micro-entity accounts lack sufficient information for assessing a company’s past performance, position, or future prospects. The conceptual validity of FRS 105 accounts’ ‘deemed true and fair’ status is contested, leading some accounting firms to abstain from utilising the micro-entities regime.

Interplay with Other Changes

Additional changes in the corporate reporting landscape must also be considered. The Economic Crime and Corporate Transparency Act will necessitate filing requirement adjustments for small and micro-entities in the coming years, mandating the submission of profit and loss accounts. Moreover, Companies House has been empowered with new tools to combat fraud within the companies’ registry.

The final amendments to FRS 102 resulting from the Financial Reporting Council’s second periodic review have been released. These include heightened minimum disclosure requirements in Section 1A, with an effective date of 1 January 2026 for most amendments.

Raising Thresholds: The Tip of the Iceberg

Raising size thresholds will undoubtedly bolster the competitiveness of the UK framework. However, underlying issues, such as turnover, total assets, and employee definitions, warrant scrutiny.

Larger questions loom

Is meeting two of three size criteria sufficient? Should more weight be given to a company’s ownership structure?

With 2024 marked as a General Election year, the parliamentary window for legislative changes in UK reporting is limited. Nonetheless, leveraging available time to solidify the UK’s position as a global leader in quality corporate reporting through size threshold adjustments is a crucial initial step.

How do the size threshold changes affect you?

For further information on how the changes in company size thresholds affect your business, contact us directly as all information in articles is general and could vary for your business.