A SIMPLE GUIDE TO CONSOLIDATED ACCOUNTS
This is a basic guide prepared by the Technical Advisory service for members and their clients. It is an introduction only and should not be used as a definitive guide, since individual circumstances may vary. Specific advice should be obtained, where necessary.
Requirement to Prepare
The Companies Act 2006 gives exemption from the requirement to prepare group accounts to small groups but not medium sized groups. Previous legislation permitted both small and medium sized groups exemption from preparing consolidated accounts. Therefore for accounting periods beginning on or after 6 April 2008 small groups will still not be required to produce consolidated accounts but medium sized groups will.
Under Companies Act 2006 section 399, consolidated financial statements have only to be prepared where, at the end of a financial year, an undertaking is a parent company. Therefore, parent undertakings that are not companies are not required by the Act to prepare consolidated financial statements, but they are required to do so in certain circumstances by FRS 2. If the statutory framework under which an undertaking is established requires the undertaking to prepare consolidated financial statements and to prepare financial statements that give a true and fair view (and therefore comply with FRS 2) the partnership would be required to prepare consolidated financial statements in accordance with FRS 2. Also entities such as partnerships could be subsidiaries and therefore may be required to be included in group accounts.
The Companies Acts apply to parent undertakings registered in the UK. However if a UK parent undertaking has subsidiary undertakings overseas those subsidiaries would need to be included in the consolidated financial statements.
For accounting periods beginning on or after 6 April 2008 small companies and small groups need to satisfy the following conditions for two out of the last three years:
1. A small company must meet at least two of the following conditions:
(a)annual turnover must be not more than £6.5m;
(b)the balance sheet total must be not more than £3.26m;
(c)the average number of employees must be not more than 50.
2. To qualify as small, a group must meet at least two of the following conditions:
(a)aggregate turnover must be not more than £6.5m net (or £7.8 m gross);
(b)the aggregate balance sheet total must not be more than £3.26m net (or £3.9m gross); and
(c)the aggregate average number of employees must be not more than 50.
There are also various criteria whereby companies and groups may become ineligible to be small (see section 384 Companies Act 2006) or where a company is exempt from the requirement to prepare group accounts for example, subject to conditions, if it is itself a subsidiary undertaking.
A parent company is exempt from the requirement to prepare group accounts if under section 405 CA 2006 all of its subsidiary undertakings could be excluded from consolidation.
Section 405 CA 2006 allows a subsidiary undertaking to be excluded from consolidation if its inclusion is not material for the purpose of giving a true and fair view. However, two or more undertakings may be excluded only if they are not material taken together.
A subsidiary undertaking may be excluded from consolidation where:
(a)severe long-term restrictions substantially hinder the exercise of the rights of the parent company over the assets or management of that undertaking, or
(b)the information necessary for the preparation of group accounts cannot be obtained without disproportionate expense or undue delay, or
(c)the interest of the parent company is held exclusively with a view to subsequent resale.
An “undertaking” is defined in section 1161 of the Companies Act 2006 as:
• a body corporate or partnership, or