Consolidations – Amendments to Companies Law Cap 113: Article 142
Law 97(Ι) of 2016, which was published in the official gazette on 23 September 2016, amends the Companies Law Cap 113 in order to transpose the EU Accounting Directive (2013/34/EU) into domestic law.
One of the most significant changes is the abolition of the exemption from audit that was previously available to small or dormant companies.
Other changes relate to the exemptions from certain accounting and disclosure requirements available to companies or groups which are classified as small or medium-sized, according to criteria of gross assets at the last balance sheet date, turnover excluding VAT for the financial year and average number of employees during the financial year. In order to fall within a specific category, at least two of the three measures must be below the prescribed threshold.
|Total gross assets||Turnover||Employees|
|Small||Less than €4 million||Less than €8 million||Fewer than 50|
|Medium-sized||Less than €20 million||Less than €40 million||Fewer than 250|
|Large||More than €20 million||More than €40 million||More than 250|
Exemption from consolidation
Prior to the amendment of the law, small groups of companies were exempt from the requirement to compile consolidated financial statements. This exemption has now been extended to apply to small and medium-size groups except where any affiliated company is a public-interest entity or where the obligation to draw up consolidated financial statements arises under other legislation.
The provisions of the Companies Law exempting groups of companies from preparing consolidated financial statements if the ultimate parent or parent companies publish consolidated financial statements on the basis of Generally Recognized Accounting Principles continue to apply.
The provisions for consolidation exemption provided by article 142.A.(5) of the Companies Law (for example on grounds of disproportionate cost or undue delay or for companies held exclusively with a view to subsequent sale) have been abolished.
The Directors Report required to be published under the Companies Law is now called the Management Report. Most of the provisions relating to the content of the report remain unchanged, but there have been some additions and amendments. The principal changes are as follows:
- Individual financial statements and consolidated financial statements should be accompanied by a management report or a consolidated management report setting out the position and the expected developments of the affairs of the company or the group.
- Small companies whose shares are not listed on a regulated market of any EU member state, and which are exempt from the obligation to prepare consolidated financial statements, are not required to prepare a management report, provided any arrangements for acquisition of their own shares are adequately disclosed in the notes to the financial statements.
- Small and medium-size groups are exempt from the requirement to compile a consolidated management report, unless any affiliated company is a public-interest entity.
- The management report must include an objective review of the development and performance of the company’s business and of its position, together with a description of the principal risks and uncertainties that it faces. This review must be a balanced and comprehensive analysis of the development and performance of the company’s business and of its position, consistent with the size and complexity of the business.
- To the extent necessary for an understanding of the company’s development, performance or position, the analysis should include both financial and, where appropriate, non-financial measures relevant to the particular business, including information relating to environmental and employee matters.
- In addition, there are detailed amendments to the corporate governance statement that is required to be included in the management report of companies whose shares are listed in the stock exchange of any EU member state.
- The management report should also cover the following:
- any change during the financial year in the nature of the business of the company or in its subsidiaries or in the classes of business in which the company has an interest, whether as a member of another company or otherwise, and especially in any completed or proposed takeover or merger;
- the projected development of the company;
- activities in the field of research and development;
- details of branches of the company;
- details of the company’s use of financial instruments;
- the company’s financial risk management objectives and policies, including its policy for hedging each major type of projected transaction for which hedge accounting is used, if material for the assessment of its assets, liabilities, financial position and profit or loss;
- the company’s exposure to price risk, credit risk, liquidity risk and cash flow risk;
- changes in the company’s share capital;
- details of any acquisition by the company of its own shares;
- significant changes in the composition, distribution of responsibilities or compensation of the board of directors;
- significant post balance-sheet events; and
- recommendations regarding the distribution of profits, absorption of losses and creation of reserves.
Consolidated management reports should include adequate information to evaluate the position of all companies included in the consolidation.
Additional disclosures required by the amendments to article 142 of the Companies Law
Medium-sized companies, large companies and public interest entities are required to provide additional disclosure in their individual and consolidated financial statements regarding the following matters:
- If they are not disclosed separately in the income statement, the staff costs relating to the financial year, broken down between wages and salaries, social security costs and pension costs;
- Name and registered office of the company which prepares consolidated financial statements for the largest group of companies of which the company is a subsidiary and the location from consolidated financial statements can be obtained;
- Name and registered office of any intermediate holding company which prepares consolidated financial statements.
The requirement to disclose the total fees for the financial year charged by each statutory auditor or audit firm for the statutory audit of the annual financial statements, and the total fees charged by each statutory auditor or audit firm for other services no longer applies to small or medium-sized companies.
In addition, the amending law also introduces a prohibition on payment of dividends if any development and formation costs are included as assets in the balance sheet and have not been completely written off, unless the amount of the reserves available for distribution and profits brought forward is at least equal to that of the costs not written off.
The amending law also makes consequential amendments to the Auditors and Statutory Audits of Annual and Consolidated Accounts Laws of 2009 and 2013 regarding the form of audit reports.