Group Accounts Exemption

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Group Accounts Exemption This article will focus on the group accounts exemptions and the process of consolidation in terms of fair value accounting.

The group accounts exemption is a simplification major, that avoids the need to prepare consolidated accounts.

Group accounting exemptions The general rule is that a parent company provides group accounts however there are a variety of exemptions available, dependent on the company’s circumstances.

Example 1 - Relying on the group exemption A BV

Parent company based in the Netherlands

T Ltd

Intermediate holding company in the U.K.

F Ltd

Subsidiary company in the U.K.

All companies have a 31 December year end.

S.402 Companies Act 2006 If we consider on an aggregate basis T Ltd and F Ltd, we may be able to rely on the small group exemption, figures dependent. If this were the case, then T Ltd would not be required to prepare consolidated accounts.

However, on a consolidated basis, if T Ltd and F Ltd are deemed medium or large, then we may need to consider s. 400 – 402 Companies Act 2006. Each is explained in brief below.

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In considering s.402 Companies Act 2006, T Ltd would not need to consolidate, if all of its subsidiaries are excluded from consolidation; such as if F Ltd was under administration. F Ltd would therefore not be under T Ltd’s long-term control.

Further, if F Ltd was immaterial from a group perspective, making T Ltd account for all of F Ltd’s numbers at group level, then the s.402 exclusion may be relied upon.

S.400 - 401 Companies Act 2006 S.400 - 401 Companies Act 2006, considers intermediate holding companies. This piece of legislation has been impacted by the departure from the E.U. and it is worth noting the differences; as stating the wrong piece of legislation could cause your accounts to be rejected by Companies House.

Prior to Brexit, s.400 exemption applied wherever the parent was established under the law of an E.U. member state and s.401 applied for parents outside the E.U. For accounting periods commencing 1st January 2021, the E.U. is now considered as the U.K. within s.401.

Looking at Example 1, for the year end 31st December 2020, T Ltd could use s.400 as an intermediate holding company; as A BV is established under the law of an E.U. member state.

For the year end 31st December 2021, T Ltd would have to rely on s.401.

In using the exemptions of s.400 & 401, T Ltd would have to disclose within the financial statements that it is utilising the s.401 exemption. A BV would need to produce audited consolidated accounts that include both T Ltd and F Ltd, which are equivalent to the E.U. Seventh Directive. This Directive coordinates national laws on a consolidated (i.e. group) accounts level and takes into consideration: IFRS, U.S. GAAP etc.

A BV would need to translate these accounts into English and file these accounts at Companies House, together with T Ltd’s financial statements.

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Late filing of accounts S.401 Companies Act 2006, requires that the group accounts of A BV are required to be filed at Companies House before the filing deadline of T Ltd. It must be borne in mind, that if the accounts are filed late, the exemption may be lost and late filing penalties will be levied.

Late filing of accounts can also potentially affect the credit score of companies.

Business acquisitions, mergers and take-overs We will briefly discuss acquisition and merger accounting.

Acquisition accounting considers the purchased identifiable assets and liabilities in its balance sheet at their fair value at the date of acquisition. Profits (or losses) generated by the acquired business are entered into the profit and loss account from the date of acquisition. The difference between the fair value of the consideration as well as any deferred consideration and the fair value of the net assets acquired is accounted for as purchased goodwill.

While the main issue here is the fair value adjustments, it must be remembered that most assets and liabilities should have a book value which mirrors the fair value.

Notable exceptions are property, plant, equipment, intangible assets and contingent liabilities to name a few.

The difficulty with contingent liabilities, is as the namesake suggests, they are contingent and therefore do not appear on the balance sheet but are simply disclosed in the notes of the accounts.

When a business is acquired, contingent liabilities can impact the purchase price, such as pending the outcome of a legal case. These liabilities will need to be considered in the fair value adjustments. The contingent liability must be recognised at fair valued and disclosed in the consolidated accounts. This can be done by calculating the likely amount of the contingent liability based on probabilities presumably estimated by your lawyer and discounting the amount to present values.

Merger accounting is a method of accounting for a business combination that could be used as an alternative to acquisition accounting. It is restricted to reorganisations

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and considers book value and not fair value. Any variance in the book value and the nominal value of the shares, is placed in the merger reserve.

If you require any business assistance, please feel free to contact us on the email address: accstobalance@gmail.com

Legal disclaimer This summary is for information purposes only. It provides only an overview and no action should be taken without seeking professional advice. Therefore, no responsibility for loss occasioned by any person acting or refraining from action as a result of the material contained in this summary can be accepted by the author or the firm.

© Accounts to Balance Ltd You must not copy, make available, reproduce, sell, distribute, publish or otherwise circulate publicly or commercially any part of this material in any format whatsoever unless you have obtained the prior written consent of Accounts to Balance Ltd.