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Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008

Volume 698: debated on Thursday 31 January 2008

rose to move that the draft regulations laid before the House on 17 December 2007 be approved.

The noble Lord said: My Lords, we are here today to debate three sets of regulations to be made under the Companies Act 2006—the Small Companies and Groups (Accounts and Directors’ Report) Regulations 2008, the Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008, and the Companies Act 2006 (Amendment) (Accounts and Reports) Regulations 2008.

I begin by setting these draft regulations in some sort of context. The Companies Act 2006—which a number of noble Lords will remember with affection—will help business reap the rewards of simpler, clearer and more cost-effective legislation in more modern language. It is a major part of the Government’s better regulation simplification plan and will reduce annual administrative burdens on business by over £300 million. It has been necessary to put back final implementation of the Act from October 2008 to October 2009. Needless to say, the Government regret that this has been necessary, but I am certain we took the right decision in the light of the advice from the Registrar of Companies that he could not be absolutely confident that the necessary changes to Companies House systems and processes could be made in time.

Businesses need to be able to plan ahead with certainty. We have learnt the lessons from other major IT projects, both within and outside government, that delays in decisions can greatly increase costs and inconvenience for users. It is also important to emphasise that many of the key provisions of the Companies Act 2006 will be commenced in line with the timetable announced in February last year.

A large number of important provisions, including most of the statutory statement of the director-general’s duties and the enhanced business review, were commenced in October 2007. Another important tranche, including the accounting reporting provisions, will be commenced with effect from 6 April 2008. I am also pleased that it will still be possible to commence some provisions, of particular importance to business, in October 2008, including the new solvency statement route for capital reduction by private companies. Part 15 of the 2006 Act concerns company accounts and reports. It will come into force on 6 April this year, applying to financial years beginning on or after that date. Part 15 confers powers on the Secretary of State to make regulations as to the detailed form and content of the accounts and reports of companies.

The first two regulations—the small companies regulations and the large and medium-sized companies regulations—replace the 11 accounting schedules to the Companies Act 1985 and their equivalent in the Companies (Northern Ireland) Order 1986. These schedules to the 1985 Act and the 1986 order set out the detailed contents of the accounts and the format in which they must be prepared. They cover specific types of disclosures or apply to certain categories of companies. Not all schedules apply to all companies.

There is a logic in separating out the requirements in this way, so that each schedule deals with a different subject. Companies have got used to it over the years, but there is no denying it can be confusing, particularly for a small company. To work out what its accounts must contain, a small company must look at a minimum of four accounting schedules to the 1985 Act and possibly six. It will not to have to make all the disclosures required by some of those schedules, so it will need to look at the relevant section of the 1985 Act to work out which parts of those schedules are relevant to it.

When it came to restating the detailed requirements on the format and content of accounts and reports under the 2006 Act, we wanted to make things easier for all companies but particularly for small companies. Therefore, we have taken a different approach. We have proposed a single set of regulations for small companies. This gathers together in a single document all the requirements from the six accounting schedules to the 1985 Act that are applicable to small companies. This approach means that small companies will have to look in only one place to establish what they are required to include in their account and reports. They will not have to look through regulations that also apply to large companies and work out which parts apply to them and which parts do not. We believe that this approach has clear benefits for small companies. Indeed, stakeholders agreed; when we consulted, all those who commented supported the proposal.

We followed the same approach for all other companies, with a single set of regulations applying to large and medium-sized companies. This sets out the basic requirements applying to all companies other than small ones. It also contains the exemptions for medium-sized companies and the additional requirements for quoted companies, banking and insurance companies and group accounts. This approach has less obvious benefits for large and medium-sized companies and we considered other approaches, such as replicating the existing structure of the accounting schedules or making a separate set of regulations for each category of company. However, we believe that, in the long run, a single set of regulations with all the requirements in a single place will be easier for companies to use. When we consulted, the majority of those who commented supported this approach. Among those who did not, there was no consensus on a preferred option.

These two sets of regulations largely restate the requirements in the accounting schedules to the 1985 Act and the 1986 Northern Ireland order without changing the substance of those requirements. However, the regulations make a small number of substantive changes to the accounting requirements. For all companies, the threshold for disclosure in the directors’ report of political donations and expenditure and charitable donations has been raised from £200 to £2,000. A new disclosure requirement for donations to independent election candidates has been introduced, consequential on new provisions in Part 14 of the 2006 Act.

For all companies that prepare consolidated accounts, a few minor technical amendments have been made to address the potential for differences in the context of UK accounting standards being converged with international financial reporting standards by increasing flexibility. For medium-sized companies preparing abbreviated accounts for filing at Companies House, the exemption from disclosing turnover in the abbreviated profit and loss account that they file with the Registrar of Companies has been removed. However, there is still exemption from disclosing detailed particulars of turnover in the notes to such accounts. For quoted companies, there is a new requirement to report in their directors’ remuneration report on how they have taken into account pay and employment conditions elsewhere in the group when setting directors’ pay. This requirement will be applicable to reports for financial years beginning on or after 6 April 2009.

These two sets of regulations also have a function beyond restating the accounting schedules to the 1985 Act. Together with the third set of regulations that we are debating—the Companies Act 2006 (Amendment) (Accounts and Reports) Regulations 2008—they implement European directive 2006/46/EC, which amends the European accounting directives. The measures in this directive are intended to contribute to EU market confidence, encourage cross-border investment and facilitate cross-border access to capital. It is important to get the right balance between ensuring that proper disclosures are made and not imposing undue burdens on business. We believe that we have done this.

To that end, these two sets of regulations give all companies—small, medium and large—the option of including a wider category of financial instruments in their accounts at fair value than is permitted under the 1985 Act. They also impose a new requirement on large companies to make certain disclosures about transactions with related parties; small and medium-sized companies are exempt from this disclosure.

The Companies Act 2006 (Amendment) (Accounts and Reports) Regulations 2008 contain further implementing measures for the directive. They increase the thresholds defining small and medium-sized companies for accounting and reporting purposes and the audit exemption threshold for small companies. They also impose a new requirement for companies to make certain disclosures about off-balance-sheet arrangements in the notes to their accounts. Small companies are exempted from this requirement and medium-sized companies may limit disclosure to information about the nature and business purpose of such arrangements. Finally, this set of regulations makes a number of technical improvements and corrections to Part 15 of the 2006 Act.

In conclusion, the regulations are an important part of the implementation of the Companies Act 2006. They make a small number of substantive changes to the accounting requirements under that Act but primarily they restate the detailed requirements on the format and contents of accounts in a way that will be easier for companies, particularly small companies, to use. I beg to move.

Moved, That the draft regulations laid before the House on 17 December 2007 be approved. Sixth Report from the Statutory Instruments Committee.—(Lord Bach.)

My Lords, I thank the Minister for introducing the regulations. He was lucky to escape having to deal with the monster that is now the Companies Act 2006 when it went through your Lordships' House, but I imagine that in his current role he is becoming all too familiar with its aftermath.

I am tempted to say that the regulations are strictly for accountant anoraks. I think that the noble Lord will be aware that I am a chartered accountant by profession, but I assure him that I do not qualify for anorak status. So I will not be undertaking a line-by-line critique of the regulations, for which I am sure the Minister will be grateful.

Let me start with some support for some aspects of the regulations. When dealing with the Companies Act 2006, the Government undertook to think small. We fully supported that and I applaud the separation of the reporting requirements for small companies in the regulations on small companies. We think that that is the right approach.

I support the raised thresholds in the Companies Act 2006 (Amendment) (Accounts and Reports) Regulations 2008. I can remember when the small company thresholds were first raised eight or nine years ago. There were predictions that great harm would ensue in various ways but, as far as I am aware, no harm has ever ensued. So it is entirely right that we should continue to increase the thresholds. The Government estimate that this will produce an annual benefit of around £37 million, largely through reduced audit fees, as more companies fall below the threshold for obligatory audit. I was never convinced that the earlier changes produced much in the way of cost savings to companies, and I am not much convinced by these figures. The Government assume that fees called “audit” will not be incurred as accountancy or other fees. However, I shall not object to the regulations on the basis that the department has over-egged the savings figure because I do not see audit as a value-adding activity for the majority of small companies below the threshold.

I am aware that BERR has carried out consultation on these regulations, as it should; the Explanatory Notes indicate the range of responses that were received. The Institute of Chartered Accountants in England and Wales, which provided me with briefing for today and which responded to the consultation, while broadly content, reported that it has,

“emphasised to BERR that in view of the pace and volume of Companies Act 2006 material published we have not endeavoured to scrutinise each and every aspect”.

I do not seek to criticise the department or the Government on this, because I know that it is a difficult job to implement that huge Act in a reasonable timescale. But it is clear that the volume of new material has overwhelmed bodies which are usually expected to contribute at a high level on such drafts and consultations. If the anoraks cannot cope, there is certainly no hope for mere parliamentarians.

More seriously, the overwhelming volume raises the issue of unintended consequences. I am sure that the Minister is aware of some of the gremlins that are starting to emerge from the Companies Act where the sheer scale of the Act meant that his officials and outside commentators were stretched and missed things. I believe that the Minister said that one set of regulations contains some corrections to the Companies Act 2006. Issues have arisen outside the accounts parts of the Companies Act 1996. They are not large in number so far, as I understand it. Where they have arisen, however, some have caused genuine problems, so it is quite possible that these orders will have missed something or got something wrong. My purpose in raising this is not to berate the Minister or his officials, but to ask him to confirm that, if issues arise when they are actually translated into practice, the Government stand ready to make further orders if necessary.

The Institute of Chartered Accountants has also raised with me the issue of gold-plating. This is not a new point for these regulations, but perpetuates the fact that the existing accounting regulations go beyond those required by EU law. It is often far from clear that, if there ever was a justification for the gold-plating, there continues to be one. The institute would like to see a commitment from BERR to review the accounting requirements of the Act and the regulations, to identify and, I hope, eliminate any excessive requirements. I assure the Minister that these Benches would give any order reducing gold-plating the warmest of welcomes.

The Government’s response to the consultation on the corporate governance directive was published in July last year. In that document, the Government noted that they would be having discussions with the standard setters to agree what action needs to be taken in respect of UK accounting standards or the changes implemented in these orders for related party disclosures and off-balance-sheet transactions. Will the Minister now say whether any actions are required on UK standards? Will they require additional disclosures? Does that have implications for the relationship between UK accounting standards and international ones? I am sure that the Minister will agree that it would be undesirable for this order to open up new gaps between UK accounting standards and international reporting standards.

Lastly, I shall come to the one aspect of these orders that is unnecessary. As the Minister said in his introductory remarks, in the Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations, the Government have introduced an additional requirement for the remuneration report of listed companies to say how they have taken pay and employment conditions elsewhere in the group into account when setting directors’ pay. This issue was raised during in Committee during the passage of the Companies Bill in 2006. The noble Lord, Lord Lea of Crondall, led the attack on directors’ pay in characteristic style and demanded a number of things, including worker representatives on remuneration committees. The Government wisely resisted that and the other suggestion that they get further involved in remuneration disclosures—for example, on the ratios between directors’ pay and that of the rest of the workforce. We supported them on that in Committee.

The new requirement in this order will add nothing to UK plc. It will add nothing of value to shareholders. It might satisfy the anti-corporate pay lobby which exists on the Government's Back Benches. I am afraid that it bears all the hallmarks of a concession made to the Labour Party's paymasters, the trade unions.

In fact, the particular issue is not of huge importance. Remuneration committees will devise some boilerplate wording to satisfy the new requirement. My concern is with the principle that the Government are legislating for some half-baked political reason rather than something which will help to create shareholder value. Whatever the new reporting requirement, the task of remuneration committees will still be to set pay for directors in a way that reflects market conditions for them and, more importantly, incentivises them to deliver profits and shareholder value. Of course remuneration committees keep an eye on the prevailing rates of increase for the workforce overall, but directors’ pay is driven primarily by the items that are not basic pay—bonuses, LTIPs, STIFs and so on—which are, in turn, dependent on business success. Anything that interferes in the hugely difficult process of creating an executive pay system which is based on rewarding success is at best a distraction. I end my remarks on these regulations on the unhappy note that the Government have, in this one respect, let themselves down.

My Lords, I thank the Minister for telling us about the regulations. Interestingly, he reminded us about the lifting of thresholds and that the thresholds in the Companies Act 2006 are now lifted, and lifted quite seriously, in 2008. Yet he also referred to the thresholds for listing donations, whether political or charitable, and said that they were being lifted after 28 years. This gives one the opportunity to say that the Government are looking at thresholds in terms of regulatory reform and considering whether it should be someone’s job to look out across the field of government and decide whether they should be lifted. I was concerned, and still am concerned, about the threshold in the intestacy regulations, which has not been lifted for years. I asked a question in this House about this, and a committee has looked at it, but nothing has happened. Thresholds are important, and they should be part of regulatory reform.

I, too, am a chartered accountant and a member of the Institute of Chartered Accountants in England and Wales, to which I pay my subscription. I note from the documentation that it has sent us that it is “broadly content” with the regulations, although it has not had time to look at everything—dearie me, what about little me? The institute has a squad of people but has not had time. It tells us, however, that it is concerned about off-balance-sheet arrangements. It says that information must be disclosed, but there is a problem because there is no definition of what “off balance sheet” means. This means what it says; if it is not there, you cannot see it. It comes down to this: is the company exposed to something that is not being made clear? Does everyone who has to prepare accounts and put notes on them see these things in a similar way? That is the institute’s problem, and I think it is saying, “Help!”, because it wants a level playing field for the reader of accounts.

My third point is that, as the Minister indicated, the documentation helpfully sets out in one place what has to be disclosed in accounts. Does he believe that it is the department’s job to set out a pro forma, or several pro formas or templates, of how this work should be done? That would be very helpful, but the Minister may say, “We’ll leave that to commercial sources”. If it is clear how accounts should be produced in accordance with the Act, it seems reasonable that a pro forma or template is produced.

I happened to spot in both sets of accounting regulations that if there were such a pro forma—or indeed if we look at the required formats—Regulation 7 for the small companies and Regulation 9 for the large companies state that you must not have a heading or sub-heading if there are no numbers on either side. You can have the heading if you had it the previous year, but otherwise you do not have a heading. I wonder how sinful it would be if, for example, you said in your accounts, “Land and buildings, nil; last year, nil; plant machinery, nil; last year, nil”. That does not seem too sinful. Indeed, it might be helpful because people think, “I am amazed that that company does not have any plant or any land and buildings”. I am surprised that it says that a company must not have a heading or sub-heading in those circumstances. It struck me as rather strange that that is so prescriptive.

My Lords, I am grateful to both noble Lords for their contributions, their brevity, and resisting the temptation for two chartered accountants to join forces against one criminal lawyer. It must have been very great for them, but they managed to resist and for that they deserve some congratulation. But I am more grateful for the general support given across the House to these regulations, particularly for the way in which the regulations are now set out under the new Act and for the raising of thresholds. I know that both noble Lords will be looking carefully to see how this works out in practice. Indeed, the noble Baroness asked whether, if in practice things do not work out as we hope they will, we will come back and make sure that they do. The answer is of course yes, although that will be subject to time and legislative ability. Everyone is in the business of trying to make these detailed and complex matters work for businesses and, I stress again, particularly for small concerns.

I was asked a number of questions which I shall see if I can answer. I turn first to off-balance-sheet arrangements. These are not defined in the directive, as the noble Lord, Lord Shutt, pointed out. We believe that it would be very difficult, if not impossible, to provide a watertight legal definition that covered all the types of transactions that should be covered both now and in the future. Recital (9) of the directive provides useful examples such as the creation or use of special purpose entities and securitisation. The department intends to publish guidance on its website drawing attention to recital (9), and the Accounting Standards Board is keeping the relevant accounting standards under review. We think that this less prescriptive approach gives companies some more flexibility and therefore decreases the burden on them, and they can consider what is most appropriate for their circumstances.

The noble Baroness was also concerned about accounting standards in relation to balance sheets, both UK and international standards. The standards are likely to have to keep changing in order to deal with off-balance-sheet arrangements, because those arrangements keep changing as the regulations change. We feel that it is best if the law remains at a principles-based level.

We understand what the noble Baroness is saying about gold-plating. The 2006 Act as a whole introduced a range of deregulatory measures that have been widely welcomed by business. Annual administrative burdens on business will be reduced by over £300 million. It is a huge task to implement the Act and the secondary legislation under it, and we have to get it right. In the mid-1990s the then Government carried out an extensive review of statutory accounting requirements and a number of changes were made to simplify them where the UK had gone beyond what was required by EU accounting directives. The European Commission is currently working on proposals to simplify company law requirements, in particular the accounting requirements for small and medium-sized businesses. As a country we have been actively involved with the Commission on the work it is doing. When the EU proposals have been finalised and the Government come to implement the changes, there will be an opportunity for us to look at the few remaining areas where the accounting requirements could be more closely aligned with the EU accounting directives. We think it makes more sense to look at accounting simplification as a package rather than take a piecemeal approach, and we hope very much that all interested parties will help in this by bringing forward suggestions.

The noble Baroness mentioned the new remuneration disclosure requirement and, in a gentle way, told us that she thought it was a bad thing. We think it is a proportionate response to the representations we received. Indeed, quoted companies should always apply the principles as part of the combined code. We are giving them the opportunity to look at how they do that over the next year so that they are ready to report on it when the requirement is implemented for financial years beginning on or after 6 April 2009. The noble Baroness said that she did not think this new disclosure requirement would cause industry a lot of trouble.

We believe that it is a good thing that directors receive bonuses on the basis of increased productivity. It is important also to look carefully at what kind of remuneration other members of the company are getting because they, too, add to its profits in small and large ways. I do not think this is a big point between us—there are bigger ones.

On templates, I hope the noble Lord, Lord Shutt, will be pleased to hear that Companies House is working on a standard template or format especially for small companies to make financial reporting easier for them. I hope that he and business will be pleased by what I am about to say. In general, figures that are zero will not be reported. This generally does not cause any problems at all. Companies House already allows electronic filing on a template for dormant company accounts and small company abbreviated accounts, so I do not think this is likely to be a large issue, if one at all.

The noble Lord referred to thresholds and said that someone should look at them across the board. We appreciate his concern. Thresholds arise from different places so it is difficult to take a common approach to them. Company law thresholds are determined by EU directives, as are these rises in the thresholds. The consequence, of course, will be that more companies fall into the small company bracket. That must be a good thing because it means that they will have less regulation to fulfil and should aid them in being successful companies.

I hope I have dealt with most if not all of the points so helpfully raised by noble Lords in this important statutory instrument debate. We believe that this is a business-friendly package of regulations and we are grateful for the support that it has around the House. It makes a small number of modest beneficial changes for companies.

On Question, Motion agreed to.