Mary Mitchell O'Connor (Dún Laoghaire, Fine Gael) | Oireachtas source

My speech is being circulated along with an information pack of supplementary documentation, which I hope will be of interest to Senators.

I am pleased to bring the Companies (Accounting) Bill 2016 before the House. It marks a significant milestone in the development of Irish law on financial reporting for companies. It is a milestone because it is a wide-ranging overhaul of this important aspect of Irish company law. It builds on the work of simplification and improving corporate governance that was done in that other legislative milestone, the Companies Act 2014. However, the Bill is most significant because the vast majority of Irish companies will see real benefits and savings as a result.

As Senators know, the context for the Bill is the transposition of the EU accounting directive into Irish law. That directive is notable as it restructured and modernised EU law on company accounting. The directive takes a "think small first" approach and is intended to ensure that the requirements it places on small and very small companies are in proportion to their resources and size.

While both the Bill and the directive are a new departure in some ways, both are based on long-standing and important principles. First, that reporting obligations of companies must be proportionate to the size, complexity or business of the company. Second, that transparency of a company’s financial position is an important protection for third parties, so it must be meaningful. These are the principles that underpin the Companies Act 2014 and they can be seen here too. They have informed the approach in the Bill and shaped the policy choices that have been made.

The main challenge in preparing this Bill is to find the right balance. On the one hand, too many reporting obligations on companies can be costly and time consuming. They can stifle enterprise and entrepreneurship but, on the other hand, if the law requires too few or inappropriate disclosures, then suppliers, investors and employees are effectively asked to do business with a company on the basis of blind trust. That can undermine good corporate governance and commerce. I believe that the Bill before the Members today strikes the correct balance. This is evident throughout the Bill. In some sections there are reductions and simplifications for small and very small businesses. For those businesses, the Bill will require financial statements that focus on meaningful information and dispense with the unnecessary. These changes will bring tangible benefits to those enterprises. This is appropriate given their size.

At the same time, the Bill introduces new reporting and filing requirements. Again, this is appropriate given the circumstances. In some cases, the new obligations are aimed at certain types of companies where more transparency is justified because of the company’s size and activities. In others, they are intended to close off a gap in the law or are appropriate following other changes in the Bill. Read together, they aim for the same goal, namely, to set the balance between protecting and informing third parties on the one hand, while keeping the administration of companies efficient on the other.

As well as transposing the directive and updating the law on financial reporting, the Bill has a secondary purpose. It is the first companies Bill since the enactment of the Companies Act 2014.That Act was a major undertaking and, since it was commenced in June 2015, a few issues have come to light. This Bill is an opportunity to address those issues.

I now turn to the structure and substance of the Bill. As it is a technical Bill, I will group together the provisions by theme rather than give a detailed explanation of each section. The supplementary information that has been circulated to Senators gives more detail.

The Bill is divided into four parts. Part 1 contains the preliminary and general provisions. Part 2 is the main part of the Bill as it is concerned with the financial reporting obligations of companies. The existing law in this area is largely found in Part 6 of the Companies Act 2014, which is entitled "Financial Statements, Annual Return and Audit". As the main purpose of the Bill before the House today is to update that law, most of the provisions amend sections in Part 6 of the Companies Act. Part 2 of the Bill also replaces the two Schedules associated with Part 6 of the Companies Act. These will become Schedule 3, which provides for entity financial statements, and Schedule 4, which provides for group financial statements.

The Bill also inserts three new Schedules. These additional Schedules are provided for clarity, to separate out the reporting regimes for different sizes of company. As a result, a small company can refer only to new Schedule 3A or, in the case of a small group, to Schedule 4A, with all the relevant information in that Schedule. This follows the innovative architecture of the Companies Act 2014, which places all the law relating to a single company type together, for ease of reference. The new Schedule 3B will apply to the new category of micro company.

Section 87 of the Bill inserts a new Part 26 at the end of the Companies Act 2014, while Schedule 6 of the Bill inserts a new Schedule that is associated with that new Part 26. These provisions only apply to specific types of company, and refer only to reporting particular payments to Government. Therefore, it is appropriate to give them a separate part in the Act.

Part 3 contains the various amendments to the Companies Act 2014 that are not related to financial reporting by companies. Finally, Part 4 of the Bill amends sectoral legislation as these types of companies are in the scope of the directive but regulated outside of the Companies Act 2014.

One of the most significant provisions of the Bill is the increase in the thresholds for categorising companies as small or medium. This is set out in section 15. These thresholds refer to annual net turnover, balance sheet total and an average number of employees. A company must exceed any two of the thresholds in order to move up into the next size category. The directive harmonises the maximum thresholds for medium companies across the EU. There is no choice here. In the case of Ireland, this will lead to a significant increase in those thresholds, with two of them doubling.

To qualify as a medium company, the company must not exceed any two of the following: an annual net turnover of €40 million, up from €20 million currently; a balance sheet total of €20 million, up from €10 million currently; and an average number of employees of 250, which is unchanged. When it comes to the thresholds for small companies, the directive allows some discretion and the Bill provides for the maximum levels. Again this is an increase on the levels set in the Companies Act 2014. To qualify as a small company, the company must not exceed any two of the following: an annual net turnover of €12 million, up from €8.8 million; a balance sheet total of €6 million, up from €4.4 million; and an average number of employees of 50, which is unchanged.

As a result of these increases in section 15, some companies that are currently classified as medium will now qualify in future as small. Similarly, other companies that are currently in the large category will come within the new thresholds for medium companies. This change brings one of the more notable benefits of the Bill, as those companies that will be reclassified as small will then become eligible for the fewer reporting requirements that apply to small companies. These include the fact that there is no obligation on small groups to prepare consolidated financial statements, there are fewer requirements for the content of their directors’ reports, and there is no obligation to file a profit and loss account or the directors’ report with the Companies Registration Office. Another benefit of changing from a medium to a small company, is that it will become more eligible to qualify for the exemption from the requirement to have an annual statutory audit.

As well as bringing more companies into the scope of the small company category, the Bill will simplify further the existing financial reporting obligations on small companies. Unnecessary and disproportionate administrative costs can hamper economic activity and impede growth and employment. Company law recognises this and already exempts small companies from many of the obligations that are considered necessary for larger enterprises. While it is difficult to quantify the savings that these exemptions bring to business, it is widely acknowledged that they are important in keeping the cost of doing business down.

The Bill reduces the number of note disclosures that small companies must give in their financial statements. As a result, small companies will be allowed to prepare a profit and loss account and balance sheet with a limited number of accompanying notes to provide information on the results and financial position of the company. Only the balance sheet and notes must be filed. These are seen as practical improvements for small business.

By way of balance, the Bill also requires some financial disclosures that are additional to the basic requirements set out in the EU accounting directive. When it comes to the disclosures that small companies must make, the directive does not allow member states to go far beyond its basic provisions, but the Bill avails of what discretion there is. I believe that this is appropriate to ensure that key information, necessary for an understanding of a company’s financial position, is not lost in the drive for simplification.

Another factor in deciding to include these in the Bill is the fact that some of these will not be new for Irish companies. The additions are: an analysis of the movements in fixed assets, this obligation is not onerous; the name and registered office of the holding company of the smallest group that includes the small company in its consolidated financial statements, this is basic information and is not onerous; the nature and business purpose of material off-balance sheet arrangements, this will only arise where the company has such arrangements; material post balance sheet events, this information is essential to understanding the financial position of a company regardless of its size; details of transactions with specific related parties including the amount, the nature of the relationship with the related party; and any other information about the transactions necessary for an understanding of the financial position of the company.The Bill goes on to make a new distinction between small and very small companies. It does this by introducing a new category known as the micro company. These are companies with turnovers of €700,000 or less, balance sheet totals of €350,000 or less and ten or fewer employees, on average.

For these micro companies, the financial statements will comprise a highly-condensed balance sheet and profit and loss account with few notes. Furthermore, there will be no obligation to prepare and file a directors report. The Bill also deems their financial statements to give a true and a fair view. This will save time for the directors of these micro companies. Micro companies will also qualify for the audit exemption.

The establishment of the new micro company category is a choice for member states under the directive. I believe that the Government decision to introduce this will bring real benefits for a significant number of companies in Ireland.

Alongside the many benefits for small and micro enterprises, the Bill introduces some important improvements in corporate transparency. As I mentioned earlier, two of the thresholds for qualifying as a medium-sized company will double. This means some companies that we currently consider to be large will qualify in future as medium-sized. In recognition of that fact, the Bill removes two existing provisions that will become inappropriate. Under the Companies Act 2014, the scope for medium-sized companies to abridge their financial statements was reduced. The Bill removes the remaining scope for abridgement. As a result, medium-sized companies will have to prepare and file full accounts in future.

Second, current company law exempts medium-sized groups from the requirement to consolidate their financial statements. Again, in recognition of the forthcoming increase in size of medium-sized groups, the Bill will remove that exemption.

Many Members will be familiar with so-called country-by-country reporting. Section 87 introduces a specific form of such reporting. The new obligation is designed to enhance the transparency of payments made to governments throughout the world by companies active in mining or in the logging of primary forests. The objective is to provide public access to information to enable society to hold governments to account for income arising from the exploitation of natural resources. The scope of the Bill in this area is confined to specific types of companies. As well as being in particular sectors, they must also be large companies or companies that are known as public interest entities. These include companies such as banks, insurers and companies that are listed on the main market. The Bill will require such companies to prepare annual reports on specific payments that they make to the governments of the countries in which they have mining, quarrying or certain logging operations. In the case of Irish registered companies, those reports are then filed with the Companies Registration Office, where they can be inspected by the public. The specific payments that must be reported are set out in section 87. They include: taxes levied on income, production or profits of the companies, excluding VAT, sales tax or personal income tax; bonuses paid that are related to signature, discovery or production; and certain fees, such as licence fees and payments for improvements in infrastructure.

The last of the main new reporting requirements are in sections 78 and 80. These sections are related to one of the most significant features of our current company law, namely, the benefit of limited liability given to owners of companies. This benefit is in legislation to encourage entrepreneurship and the creation of businesses. However, it comes with obligations, most notably the obligation for the company to disclose its financial position to third parties. This obligation to disclose is important because a limited company is a separate legal person and the assets of that company's owners are not the assets of the company. As a result, the only security that limited companies offer to third parties doing business with them is the assets that the company itself owns. Disclosure of that company's assets in its annual financial statements allows third parties to assess the ability of a company to pay its way. For this reason, the obligation to file financial statements in public is well accepted as an important protection for employees and others, such as suppliers who do business with a limited liability company.

The vast majority of companies in Ireland are registered as limited liability. They manage to conduct their businesses and grow while meeting the standards of transparency.

When it comes to unlimited companies different considerations apply. In this case, company law exempts unlimited liability companies from the obligation to file financial statements in public, as the assets of the owners and of the company are one and the same. This exemption is significant and is based on good reasons. However, it is still an exemption from the general principle of transparency and therefore we need to ensure that the criteria for using the exemption are clear cut and fit for purpose.

As things stand, there is a gap in the law here. The gap arises when companies set up structures that mix limited and unlimited liability companies. In some cases, these structures include companies registered outside the EU. In other cases, they are groups that trade through limited liability subsidiaries. The effect of these layers of limited and unlimited companies in corporate structures is that the owners of companies and groups can get the advantages of limited liability without having to comply with the obligations that should go with that limited liability. Sections 78 and 80 address this gap.

Some provisions in the Bill amend the Companies Act 2014 but are not related to the law on financial reporting. These are mainly technical and do not reflect changes in policy. The Bill clarifies some definitions, reinstates some provisions that were inadvertently left out in the consolidation that led to the Companies Act 2014, corrects some typing errors and addresses issues that have come to light since the commencement of the 2014 Act. For example, section 92 restores the priority and standing of various creditors, such as employees and the Revenue Commissioners. This was necessary following a recent judgment of the Supreme Court that resulted in the holder of a floating charge being able to leap-frog preferential creditors, contrary to the intention in the Companies Act 2014.

I am keen to outline another issue that is of practical concern to many stakeholders. The EU accounting directive applies at the latest to financial statements for financial years that start in the course of 2016. The directive also allows member states to apply the provisions earlier, for financial years that started in 2015. However, we are now in April 2017 and the Bill is not yet enacted. For many businesses, the new financial year will have begun and they may already have prepared financial statements for 2016. Given the savings that the reduced reporting regime in this Bill will bring to small businesses, it is important that enterprise gets to avail of those at the earliest opportunity.Indeed, since the publication of the Bill last August a good deal of interest has been expressed in applying the new measures as soon as possible. New accounting standards for small and micro entities have been developed but cannot be used until this Bill is on the Statute Book. Therefore, section 14 of the Bill provides that directors may decide to apply the reduced reporting requirements to financial statements for financial years beginning in 2015 and 2016. This is not retrospective legislation as we would usually understand it. Rather, the Bill is permitting companies to apply new reporting requirements to activity that has already happened. It is the form and content of reporting, not the actions of the company, that we are addressing here. While most financial statements for 2015 will have been filed by now, there may still be a benefit in section 14 for any company whose financial year started in late 2015. When it comes to financial years that began in the course of 2016, section 14 should be of benefit to a wider group of companies. It is hoped that this provision will mitigate some of the effects of the delay in transposing the EU directive.

I am pleased to introduce a Bill that brings real and meaningful benefits to the vast majority of companies in Ireland and that will ensure that our law on financial reporting is fit for purpose. I commend the Bill to the House.