Audit thresholds are the criteria used to determine which companies are required to have their financial statements audited. For group companies, which comprise a parent company and its subsidiaries, special rules apply to determine the audit thresholds. An ACCA article highlights some of the challenges faced with audit thresholds and provides useful tips to circumvent those issues.
CA 2006, s479(4) defines a ‘group’ in relation to a group company as that company together with all its associated undertakings. Generally ‘a parent undertaking and its subsidiary undertakings’ is as defined in CA 2006, s1162 and includes a subsidiary if more than 50% of its voting shares are held by another (parent) company.
In other words, when assessing the size of a group for audit exemption purposes, you must consider the size of the largest group of which the company is part. All companies in the group, including overseas companies, are taken into consideration. If that group exceeds more than one of the thresholds, the company in question needs an audit.
The current audit thresholds to determine the size of the group are as follows:
A group is considered not small and required to have its financial statements audited if it exceeds the following thresholds:
- the consolidated turnover of group is not more than £10.2m net (or £12.2m gross)
- the consolidated balance sheet total is not more than £5.1m net (or £6.1m gross)
- the average number of employees is not more than 50.
These group audit thresholds can be found in s383 of Companies Act 2006. These thresholds are for a full financial year and should be pro-rated for any financial period of differing length.
Even if they qualify as small, the following companies cannot use the small companies regime (CA 2006 s381, s384):
- public companies (ie any UK incorporated public limited company, whether its securities are traded on a market or privately held)
- authorised insurance companies, banking companies, e-money issuers, MiFID investment firms or UCITS management companies
- companies carrying on insurance market activity (as defined by the Financial Services and Markets Act 2000, s316(3), ‘insurance market activity’ means a regulated activity relating to contracts of insurance written at Lloyd’s)
- members of an ineligible group (see details below).
A group is ineligible if any one or more of its members is:
- a traded company
- a body corporate (other than a company) whose shares are admitted to trading on a UK regulated market
- a person (other than a small company) who has permission under the Financial Services and Markets Act 2000, Pt. 4 to carry on a regulated activity
- an e-money issuer
- a small company that is an authorised insurance company, a banking company, a MiFID investment firm or a UCITS management company; or
- a person who carries on insurance market activity.
A traded company is defined in CA 2006, s474 as a company any of whose transferable securities are admitted to trading on a UK regulated market.
How to calculate consolidated turnover/balances sheet
Calculating consolidated turnover and consolidated balance sheet total for new groups can be complex, as it involves combining the financial information of all the entities within the group. The following steps provide guidance on how to determine consolidated turnover and consolidated balance sheet total for new groups formed in the UK:
- Obtain financial statements (profit and loss account and balance sheet) for all the companies within the group, including the parent company and its subsidiaries
- Prepare the necessary consolidation adjustments to eliminate intercompany transactions and balances. Intercompany transactions and balances refer to transactions and balances between companies within the group
- Consolidate financial statements of all the entities within the group using consolidation techniques, such as the equity method or the acquisition method, depending on the ownership and control structure of the group
- The consolidated turnover is the total revenue generated by the group as reflected in the consolidated income statement. It includes the revenue of all the entities within the group, after eliminating intercompany revenue and adjusting for any consolidation adjustments. A fundamental principle of preparing consolidated statement of profit and loss is that the income and expenses are only consolidated from the date of acquisition of subsidiary. If it is a mid-year acquisition, instead of adding all of the income and expenses of the parent and subsidiary company, you add all of the parent’s income and expenses to the time-apportioned income and expenses of the subsidiary. So, if the parent acquired the subsidiary on 1 October 20X1 and the year-end is 31 December 20X1, you should only include three months of the subsidiary’s results
- The consolidated balance sheet total is the combined value of the assets of the group as reflected in the consolidated balance sheet. It includes the assets of all the entities within the group, after eliminating intercompany assets and adjusting for any consolidation adjustments. If the parent has control of the subsidiary at the reporting date, then ALL of the assets and liabilities of the subsidiary must be added in. The golden rule is this – NEVER time-apportion the assets and liabilities in consolidation. The only element of time-apportioning would come with any depreciation on a fair value adjustment, but you would still add 100% of the assets and liabilities of the subsidiary into the consolidated statement of financial position
- Now compare the calculated consolidated turnover and consolidated balance sheet total with the audit thresholds as outlined above.
Further resources
Ten things to know when checking audit thresholds
ACCA's technical factsheet on consolidated statements provides further detailed guidance and legislative references for preparing consolidated financial statements and includes examples.
