A new concept in UK company law?
I don’t know whether
they achieve the record for the most uses of the word “and” in the title of
legislation, but the snappily-named Companies
and Limited Liability Partnerships (Accounts and Audit Exemptions and Change of
Accounting Framework) Regulations 2012 break new ground in other ways.
As well as simplifying audit exemptions for small companies
and making it easier to switch between IFRS and UK GAAP, the regulations grant a
subsidiary an audit exemption for its individual accounts – but only if the
parent company gives a guarantee of all the subsidiary’s liabilities as at the balance
sheet date. There are similar exemptions for dormant subsidiaries from
preparing and filing accounts at all. In effect, groups are being invited to
give up the limited liability of the individual subsidiary entities as the
price for avoiding an audit of the subsidiary’s accounts, or to save the cost
of preparing accounts for a dormant subsidiary.
If the subsidiary is material it will have to be included in
the parent company audit anyway (though possibly at a higher materiality
threshold). The parent company audited accounts have to filed against the subsidiary’s
record at Companies House, and there are other conditions to fulfil.
Is it worth it? Parent company directors will want to think
very carefully before giving the guarantee. It guarantees “all outstanding
liabilities to which the subsidiary company is subject at the end of the
financial year to which the guarantee relates”. It includes liabilities not shown
in the accounts. Those would include, say:
- future contracted liabilities, eg the rent for the whole of the remaining term of a lease, or costs to complete current sales contracts
- mis-selling liabilities or regulatory fines and penalties
- liabilities of the subsidiary under guarantees it has given to third parties
- product recall or warranty costs
- environmental clean-up costs
- personal injury claims unknown at the time.
Parent companies may not be insured for liabilities they
undertake voluntarily by way of a guarantee. Would you want to be the parent company
director who exposed the parent company to unknown liabilities to shave a few
quid off the audit fee?
