2004 saw a number of statutory instruments affecting financial statements and annual reports, with application dates affecting 2005 and 2006 year-ends.
Proposed dividends are no longer accrued unless approved before the year-end and unlisted companies now have the option to prepare IFRS accounts. All of these changes have already been covered in our Winter 2005 and Spring 2006 Financial Reporting newsletters.
The final change to come out of these statutory instruments is in relation to the disclosure of auditors’ remuneration. While in the past all but the smallest companies have had to disclose details of amounts paid to their auditors split between audit and non-audit services, for periods beginning on or after 1 October 2005, new rules require that companies and LLPs provide considerably more analysis of the amounts paid to their auditors.
The intention of the changes is to achieve greater transparency in financial statements to help combat the perceived threat to auditor independence where auditors also provide ‘other services’ to their audit clients. In future, the fees from those other services must be analysed and disclosed within one of ten categories specified in the legislation including ‘Other services relating to taxation’, ‘Internal audit services’, ‘Valuation and actuarial services’ and the far from concise ‘Services relating to corporate finance to be entered into by or on behalf of the company or any of its associates’. The rules dealing with which fees should be included within which heading are complicated and not always intuitive. For example, in a set of group accounts the work performed by the auditor on the consolidation return of a subsidiary of the group is disclosed as part of ‘Remuneration for audit services’.
However, fees receivable by the same auditor in respect of the statutory audit of that subsidiary are deemed to relate to ‘other services’ and are included in the group accounts under the heading of ‘The auditing of accounts of associates of the company pursuant to legislation’. It is not just the analysis between these different categories that will increase the amount of time and effort spent to ensure compliance. For a group, the previous disclosure requirements for non-audit services were restricted to only including amounts paid to the parent company auditors for services provided to that company and its UK subsidiaries. Under the new regime, the disclosure must include amounts paid in respect of any ‘associate’ of the company. Confusingly a company’s associates are defined as all of its subsidiaries, whether UK or foreign, and its associated pension schemes. Associates and joint ventures as defined in UK accounting standards are not included in the definition of an associate!
Widening the net further, the definition of ‘auditor’ does not just include the UK firm which provides audit services to the parent company. Where another firm which is part of the same network as the auditor performs services for that company or its subsidiaries, these amounts must now also be included.
In order to produce the disclosures for a set of group accounts, the finance director will need to determine which pension schemes are ‘associated’. They will then need to determine which of the associated pension schemes and subsidiaries had services provided to them by the parent company’s auditors or by firms from the same network as the parent company’s auditors. Information will also need to be gathered about what services were provided and how much was paid for those services. Finally the finance director will need to establish which of the ten categories these services fall into.
There is, however, some good news. Subsidiaries of groups which have included the disclosure of fees for other services in the group accounts are entitled to an exemption from disclosing this information in their individual accounts. In addition, small and medium-sized companies will also continue to be exempt from providing the disclosure relating to other services.
Smith & Williamson commentary
While we support the reasons for these additional disclosure requirements, gathering the information will add further complications to the year-end process. Unfortunately, further changes in this area are also expected over the next few years. The EU 8th Directive on Statutory Audit of Annual and Consolidated Accounts, which is due to be implemented across the EU by 2008, will also require detailed disclosure of auditors’ remuneration, but this is likely to differ from the requirements discussed above.
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