The Irish GAAP for micro companies in Ireland could expose those companies to a number of business threats, according to the Association of Chartered Certified Accountants (ACCA).
The Companies Accounting Act 2017, arising from an EU Directive, will introduce the new micro company category defined as meeting two of the three criteria of; having less than €700,000 in sales, gross assets of less than €350,000 and less than ten employees.
The GAAP for micro companies will provide an option for small businesses to adopt accounting rules that greatly reduces their financial statement disclosure which the ACCA said could potentially impact their credit rating, funding and wider business relationships. Micro companies have the option to continue to produce full financial statements under the existing rules.
The financial statements for a micro entity will not be required to disclose related party transactions, post balance sheet events, market value of investment property, and details of creditors or a director’s report. Micro entity financial statements will be two to three pages long compared to 15 to 20 pages SME’s would have, according to the ACCA.
CPA Ireland knowledge manager Maureen Kelly said: “We are concerned about the possible negative impacts of the new Micro Company regime in Ireland. The reduced disclosure provided for by this new reporting regime will provide less information for decision making by Directors of the company and their potential or existing funders.”
ACCA members in the UK have had this regime available for a year and their experience is that some companies had their credit rating downgraded by rating agencies and had credit facilities refused by banks after adopting the regime. “We do not want to see that for any Irish businesses,” ACCA head of Ireland Liz Hughes said.
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A director could mislead a lender into thinking their company is very profitable and assets could have been significantly devalued or destroyed just after the year end, yet readers of the financial statements will have no indication of their being any issue, Hughes explained.
Kelly added: “There will be a greater risk to those considering entering into a business arrangement with any company which is reporting using this new regime as they may not have adequate information on the financial stability of the company. We are recommending all companies proceed with caution before deciding on which of the new reporting regimes to adopt.”
Hughes said: “These new accounting principles for micro company’s financial statements are so lacking in information that the law had to include a specific provision that deemed them to be true and fair; something no lender, supplier or credit rating agency would agree with. This is something that presents challenges for micro companies and will not present cost savings from preparing micro entity accounts, although there is a privacy advantage as directors pay is not disclosed. We recommend that an eligible entity should consider the business implications and consider providing sufficient information.”