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Dáil Éireann debate -
Thursday, 3 Nov 2016

Vol. 927 No. 2

Companies (Accounting) Bill 2016: Second Stage

I move: "That the Bill be now read a Second Time."

I am pleased to bring the Companies (Accounting) Bill 2016 before the House. In Ireland, the majority of the law on financial reporting for companies is contained in the Companies Act 2014. It is only a few years since we debated the Bill that would become that milestone Act. So many Deputies will remember that our objective then was to ensure a balance between simplifying the day-to-day running of a business, maintaining necessary protections for those dealing with companies such as creditors and investors, and putting in place an effective corporate governance regime to ensure compliance.

This Bill is the first one to amend that Act. The same policy objective that we had in 2014 is also behind its provisions. Accordingly, the Bill strikes an appropriate balance between simplification of the financial reporting obligations of a company on the one hand, and the need for disclosure and transparency to inform third parties of the company’s financial position on the other. This balance is evident throughout the Bill. In some sections, there are reductions and simplifications for small and very small business.

The Bill will require financial statements that will focus on meaningful information and dispense with the extraneous. These changes will bring tangible benefits to those enterprises and are appropriate, given their size. At the same time, the Bill introduces new reporting and filing requirements. In some cases, they are aimed at certain types of company in which greater transparency is justified because of its size and activities. In others, they are intended to close off a lacuna or appropriate following other changes in the Bill. However, all share the same goal: to set the balance between protecting and informing third parties, on the one hand, and keeping the administration of companies efficient, on the other.

The main purpose of the Bill is to transpose the EU accounting directive into Irish law. The directive has two objectives. First, it aims to reduce the administrative burden on smaller companies. Second, it is intended to increase the clarity and comparability of financial statements, especially of larger companies as they are more likely to operate across EU borders. To achieve these goals, the accounting directive harmonises many aspects of the law on company financial reporting across the European Union.

Alongside these mandatory harmonising elements, the accounting directive also provides options for member states to consider. Many of these options were included in the two directives that the accounting directive repeals and some of them were already in Irish law; therefore, they cannot be described as new. Those that are new and considered to fit with the balanced approach in our company law are taken up in the Bill. We are inserting these provisions into national law; therefore, our own policy and thinking must determine our approach.

As well as transposing the directive, the Bill has a secondary purpose. As I mentioned, this is the first Companies Bill to be introduced since the passage of the Companies Act 2014. That Act was a landmark legislative project as it reformed and restructured Irish company law of the previous 50 years. It was commenced on 1 June 2015 and since that time some oversights, typographical errors and omissions have come to light. Given the size and complexity of the Act, this was to be expected. This Bill is the first opportunity to address these issues and it does so by correcting cross-references and other errors, rectifying omissions and providing clarity on the intention of existing law, where necessary.

I turn to the structure and substance of the Bill. As it is technical, I will group together the provisions by theme, rather than giving a detailed explanation of each section. The supplementary information circulated to Deputies in the Chamber gives more detail.

The current Irish law on the financial reporting obligations of limited liability companies is found largely in Part 6 of the Companies Act 2014 which is entitled, Financial Statements, Annual Return and Audit. Accordingly, most of the Bill amends sections in that Part or related to it. Part 6 also has two Schedules associated with it and the Bill replaces both and inserts three new Schedules, also associated with Part 6. The additional Schedules are provided for the purposes of clarity and to separate out the reporting regimes for the different categories of company. As a result, a small company can refer only to the new Schedule 3A or, in the case of a small group, Schedule 4A, with all of the relevant information in one Schedule. This follows the innovative architecture of the Companies Act 2014 which places all of the law relating to a single company type together for ease of reference.

Section 84 of the Bill inserts a new Part 26 at the end of the Companies Act 2014. As these are stand-alone provisions, confined to specific types of company, dealing only with reporting particular payments to governments, it is appropriate to include them in a separate Part in the Act. Schedule 6 to the Bill will add a Schedule associated with Part 26. Part 3 of the Bill amends sectoral pieces of legislation as these types of company are in the scope of the directive but regulated outside the Companies Act 2014.

One of the most significant provisions of the Bill is the increase in the thresholds in categorising companies as small or medium, set out in section 15. These thresholds refer to annual net turnover, balance sheet total and the average number of employees. A company must exceed any two of the thresholds in order to move up to the next size category. The directive harmonises the maximum thresholds for medium companies across the European Union; therefore, there is no choice in that regard. In the case of Ireland, there will be a significant increase in the thresholds, two of which are being doubled. To qualify as a medium company, a company must not exceed any two of 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, a number which remains unchanged. When it comes to the thresholds for small companies, the directive allows some discretion. 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, a company must not exceed any two of an annual net turnover of €12 million, up from €8.8 million currently; a balance sheet total of €6 million, up from €4.4 million currently; and an average number of employees of 50, which number, again, remains unchanged.

As a result of the increases in section 15, some companies currently classified as medium will qualify in the future as small. Similarly, other companies 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 become eligible to meet the fewer reporting requirements on small companies. There is no obligation on small companies to prepare consolidated financial statements; there are fewer requirements in respect of 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 becoming a small company is that it will be exempt from the requirement to have an annual statutory audit.

As well as bringing more companies into the scope of a small company, 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 considered necessary for larger enterprises. While it is difficult to quantify the savings these exemptions bring to business, it is widely acknowledged that they are important in keeping the cost of doing business down. The Bill maintains this approach and goes further, in particular, by reducing the number of note disclosures that small companies must make in their financial statements. As a result, they will be allowed to prepare a simpler profit and loss account, balance sheet and a limited number of accompanying notes to provide narrative information on the financial position of the company. Only the balance sheet and notes must be filed. These are seen as very useful improvements for small business.

That said, the directive does permit a few additions to the financial disclosures in its basic requirements to be met by small companies. The Bill requires all of the permitted additions to ensure 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 them in the Bill is the fact that some of them will not be new for Irish companies. They are an analysis of movements in fixed assets, an obligation that will not be onerous; including 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 will not be onerous; indicating the nature and business purpose of material off-balance sheet arrangements - this will only arise where the company has such arrangements; including material post-balance sheet events, information which is essential to understanding the financial position of a company, regardless of its size; including details of transactions with specific related parties, including the amount, the nature of the relationship with the related party and any other information on 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 just 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 and there will be no obligation to prepare and file a directors’ report. The Bill also deems their financial statements to give a true and fair view, which will save time for the directors and for these small companies. Micro-companies will also qualify for audit exemption.

Alongside the many benefits for small enterprise, the Bill introduces some important improvements in corporate transparency. As I mentioned, two of the thresholds for medium companies will double, which will bring companies that we currently consider as large into the medium category. In recognition of that fact, the Bill will remove two existing facilities that will become inappropriate. Under the Companies Act 2014, the scope for medium companies to abridge their financial statements was reduced. In today’s Bill, the remaining scope for abridgement is removed. Medium companies will have to prepare and file full accounts in future. Current company law exempts medium groups from the requirement to consolidate their financial statements. Recognising again the forthcoming increase in the size of medium groups, the Bill will remove that exemption.

Many Deputies will be familiar with so-called country-by-country reporting. Section 84 of this Bill introduces a specific form of such reporting. The new obligation is designed to enhance the transparency of payments made to governments around the world by companies in the extractive and logging industries. The objective is to provide civil society with information to hold governments to account for income made through the exploitation of natural resources. The scope of the Bill here is confined to large companies and companies that are known as public interest entities, such as banks, insurers, companies that are listed on the main market and large companies. These companies must also be active in mining, quarrying or the logging of primary forests. The Bill will require them to prepare annual reports on specific payments that they make to the governments of the countries in which they have their mining, quarrying or 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 also set out in section 84 and they are production entitlements, taxes levied on income, production or profits of the companies excluding VAT, sales tax or personal income tax, royalties, certain dividends, bonuses paid that are related to signature, discovery or production, certain fees such as licence fees and payments for improvements in infrastructure.

The last of the main new reporting requirements can be found in sections 76 and 78 of the Bill. These sections are related to one of the most significant features of our current company law, which is the benefit of limited liability given to owners of companies. This benefit is in the legislation to encourage entrepreneurship and the creation of business. However, it comes with obligations, most notably the obligation for the company to disclose its financial position to third parties. The company is a separate person and the assets of the company’s owners are not the assets of the company. Therefore, the only way for a third person to assess that company’s ability to pay its way is to see its financial statements. This disclosure obligation is well accepted as an important protection for employees and others, such as suppliers, who do business with a limited liability company. Company law does not extend this obligation to unlimited liability companies, as the assets of the owners and of the company are one and the same.

Sections 76 and 78 are designed to address a gap in the law that allows companies to have that benefit of limited liability without that accompanying obligation of disclosure. As a result of this gap, companies are able to register in Ireland as "unlimited companies" while managing to shield their ultimate owners with limited liability by establishing corporate structures. Some of these structures are complicated and all involve offshore companies that are incorporated outside the EEA. This makes it difficult for third parties to identify the ultimate owners or the extent of those owners’ liability. The main effect is that these companies, which are limited liability companies in all but name, are exempt from the obligation to file financial statements because they are registered as unlimited.

The Bill will place these companies on the same footing as companies that register as limited liability companies and oblige them to meet the same filing requirements. This maintains the long-standing distinction between companies with limited liability and those without. It only addresses the situation where a company is registered as one type while securing the benefits of another. Accordingly, there will be no change for any company that is registered in Ireland as unlimited and truly is unlimited.

Before I conclude, I will outline an issue 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 this year of 2016. The directive also allows member states to apply the provisions earlier for financial years that started in 2015. However, we are now coming to the end of 2016 and the Bill has not yet been enacted. As a result, it could be next year before businesses could apply the new rules. By then, the new financial year will have begun. Given the savings that the reduced reporting regime in this Bill will bring to small business, it is important that enterprise gets to avail of those at the earliest opportunity. Since the publication of the Bill, 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 also been developed, but cannot be used until this Bill is on the Statute Book. Therefore, the Bill provides in section 4 that directors may decide to apply the reduced reporting requirements to financial statements for years beginning in 2015 and 2016. This is not retrospective legislating as we would usually understand it. Rather the Bill is permitting companies to apply new reporting requirements to activity that has already happened. It its the form and content of reporting, not the actions of the company, that we are addressing in this Bill. It is hoped that this provision will mitigate some of the effects of the delay in transposing the EU directive.

In conclusion, as the Minister with responsibility for small business, I am particularly delighted with the simplifications and reductions that the Bill will bring to small and very small businesses across the country. Furthermore, as a result of the increase in the thresholds, many companies will also be able to benefit from the advantages of the small company reporting regime. I am also pleased that the Bill recognises that the obligation to prepare and publish financial information must be both meaningful and proportionate. When it comes to small companies, members and third parties may not need reams of information, but they do need sufficient information to make sense of it. The Bill also takes account of the fact that more information is needed as a company grows or becomes more complex. Similarly, certain corporate activities, such as the use of the world's natural resources justify new forms of reporting. I believe this Bill will boost Ireland’s position as a place to set up and do the business, grow a business and enhance its reputation, with respect to corporate transparency at the same time. I commend the Bill to the House.

Fianna Fáil supports the general principles of the Companies (Accounting) Bill 2016, which implements a 2013 EU directive. My party will support the passage of this Bill through Second Stage and looks forward to strengthening its provisions on Committee Stage.

That will address some issues highlighted by practitioners in the current context and make legislation fit for purpose for small enterprises and microenterprises. The EU accounting directive will be of benefit to Irish small and medium enterprises, SMEs because it simplifies financial reporting requirements and reduces the administrative burden and compliance cost on such companies.

Ireland's economy is grounded on small and medium-sized indigenous businesses. The health of the sector is vital to that of the overall economy. Every additional job created by a SME results in an immediate gain for the State as there is one less person on social welfare and one more person contributing through taxation. Micro, small and medium-sized enterprises account for 99.7% of all business enterprises in this country. SMEs are the backbone of the domestic economy with 829,045 people employed in approximately 185,000 active enterprises. The Companies (Accounting) Bill 2016 sets out new criteria for companies to qualify as small, medium or large and introduces a new category of company, namely, microenterprises. Significantly, 91% of all SMEs are microenterprises. They are enterprises containing fewer than ten employees.

I welcome the provisions in the directive that will be transposed into Irish legislation. It is, however, a damming indictment of successive Fine Gael-led Governments that the Bill was published in August, more than three years after the EU accounting directive was finalised during Ireland’s EU Presidency in 2013. In addition, Ireland has missed the transposition deadline of 20 July 2015.

The raising of the thresholds for small companies to the EU maximum levels of turnover not exceeding €12 million and balance sheet total not exceeding €6 million is a welcome measure for Irish SMEs. The introduction of a small and micro-companies regime will enable such companies to adapt financial reporting standards applicable in the UK, if they wish to do so. The Bill also contains remedies to anomalies arising from the 2014 Companies Act, which is also welcome.

Small and micro-companies will be allowed to file abridged financial statements with the Companies Registration Office. However, it is quite extraordinary that Irish SMEs have been left in limbo on the application date of legislation to implement the directive. The directive states that the new rules must apply for financial years commencing on or after 1 January 2016 at the latest. We welcome clarification from the Department in a note circulated to Oireachtas Members yesterday that there will be early application of the Bill before enactment, thereby allowing companies to apply the provisions of the Bill to financial years that begin after 1 January 2015. Regardless, the directive requires the inclusion of financial information relating to the previous financial year, which must appear in the first set of financial statements filed after the enactment of the Bill. While practitioners in the field have welcomed the Bill, the delay in transposing the directive "has caused difficulties for many small and micro-companies in Ireland in meeting their financial reporting requirements". That is according to Chartered Accountants Ireland.

Smaller companies should not be disproportionately burdened by the inept progress in implementing the directive agreed more than years ago. Surprisingly, the directive was enacted by the UK in 2015 and the changes have been effective for accounting periods beginning on or after 1 January 2016, with early application permitted for accounting periods beginning on or after 1 January 2015. That has put Irish SMEs at a direct disadvantage as current qualifying thresholds are not as benign as those that are set out in the directive. That is yet another example of the slow response by the Government pre and post the Brexit referendum in taking every contingency measure at its disposal to safeguard Irish company jobs and exports. Instead, the Government has placed Irish SMEs and especially microenterprises at a competitive disadvantage and on an unequal playing pitch for accounting and reporting purposes with their European competitors. That follows the general trend of the recent budget where token action was taken to improve competitiveness.

We remain very disappointed that the UK will still have a more attractive capital gains tax, CGT, relief which applies a 10% rate to entrepreneurial gains of up to £10 million sterling, which is far in excess of the €1 million Irish limit. We must improve our competitiveness with the UK much further. The chief executive of the Irish Exporters Association, IEA, has said that the reduced CGT rate "does not bring us onto the racetrack" when the UK has a ceiling ten times the scale of Ireland’s €1 million threshold.

The Taoiseach often trots out the line that he wants Ireland to be the best small country in the world in which to do business. He famously set the target of 2016 to achieve that. While the World Bank ranks Ireland in the top 20, many other similar scale OECD countries rank higher than Ireland. They include New Zealand, Finland, Denmark, Norway and Singapore. The Government has continued a general policy of inequity in concentrating job creation sparsely nationwide. There has been a clear failure by Government to create a balanced jobs policy towards the regions, as evidenced by the emergence of a two-tier recovery, with job creation concentrated nearly exclusively in the capital and the commuter belt region. A total of 43% of Ireland's GDP is generated in the capital, while more than 50% of all jobs created in the 12 months to the fourth quarter of 2015 were in the same location.

Ease of doing business is vital for attracting new participants into the marketplace, whether they are home-grown enterprises or businesses seeking to gain a foothold in Ireland. It is also vital that we have a regulatory framework that permits businesses to flourish. There needs to be immediate transposition of the directive and enactment of the legislation in order to ensure that Irish small and micro-companies are on a level playing field with counterparts in Northern Ireland, the UK and other European member states.

I welcome the legislation, the main purpose of which is to transpose the EU accounting directive into Irish law. In particular, I welcome chapter 10 of the accounting directive which allows for greater oversight of companies working in the extractive industry and the logging sector. Essentially, the purpose of the legislation is to introduce a small companies regime and a micro-companies regime which, when enacted, will bring this country into line with other EU countries and the UK.

The Bill will allow for the use in Ireland of sections of the financial reporting standards applicable in the UK for small companies and the financial reporting standards applicable to micro-entity regimes by micro-companies. The Bill allows for change in the definition of small and micro-companies, which in the new legislation are specified as those with an EU maximum threshold of turnover not exceeding €12 million and a balance sheet not exceeding €6 million. In the case of employees, the maximum threshold for qualifying companies is a maximum of 50 employees. It is important to note that in order to qualify as a small company, one must not exceed two or more of the above criteria.

The Bill is a lengthy one with 92 sections and it contains 161 pages. It contains new Schedules to replace current Schedules 3 and 4 of the Companies Act 2014. The new Schedules separate the general entities and group financial statement requirements of Schedules 3 and 4 from those pertaining to small companies, Schedules 3A and 4A, and micro-companies, Schedule 3B.

The Bill also proposes to insert a new Part 26 relating to payments to governments which contains the directive's requirements with regard to paying and filing with the register of companies by large companies, large groups and, as noted previously, by public interest entities active in the mining and extractive industries, annual reports on payments made to governments.

Also included in the Bill are amendments to various sections of the Companies Act 2014. They cover, for example, filing requirements for unlimited companies, matters relating to the Irish Auditing and Accounting Supervisory Authority, IAASA, and the prescribed accountancy bodies, and the corporate governance statement required in section 1373 of the Companies Act 2014.

Essentially, the recategorisation process entailed in the Bill means that some companies previously classified as medium will now become small and will, under the new legislation, qualify for a range of benefits contained in the Bill.

One such benefit about which I am concerned is the exemption from the requirement to have a statutory audit. As I noted at the outset, Sinn Féin welcomes this Bill. Like its predecessor, the Companies Act 2014, this legislation is complex, long and dense. I can say at this stage that we have concerns about some aspects of it. As I said, any legislation that results in increased transparency and accountability is most welcome. Conversely, we are sceptical about legislative measures or sections within particular Bills that do the opposite. That is what is happening here with the dumbing down of the requirement for statutory audit. We are not happy with this section. We will consider submitting amendments on the issue without taking away from the larger aims of the Companies (Accounting) Bill 2016. We are concerned that the proposed legislation will allow small companies to give fewer note disclosures in their financial statements.

Debate adjourned.