Auditor’s report on group accounts
The new rules are detailed in ACCA Technical Factsheet 175. However, when an audit is required for a company preparing group accounts it could be difficult to identify the right format and content of the auditor’s report as the financial statements may be prepared under different accounting standards, the auditor may choose to issue a single report or separate reports and there could be various permutations between standards adopted and auditor’s report formats.
UK parent companies are permitted by Companies Act 2006 to prepare group accounts either in accordance with UK GAAP (Companies Act group accounts) or in accordance with IFRSs (IAS group accounts). However, some parent companies – ie those whose securities are admitted to trading on a regulated market in the EU – are required to prepare group accounts in accordance with IFRSs.
Section 404 of the 2006 Act requires that Companies Act group accounts must comprise a consolidated balance sheet and a consolidated profit and loss.
The content of IAS group accounts is not indicated in Companies Act but to comply with international accounting standards the financial statements need to include a consolidated statement of financial position, a consolidated statement of comprehensive income, a group statement of change of equity and group cash flow statements.
In addition to group accounts, a parent company must prepare individual accounts that need to be filed with Companies House alongside the consolidated accounts. Individual accounts may also be prepared either in accordance with UK GAAP (Companies Act accounts) or in accordance with IFRSs (IAS accounts). It might therefore be possible to have group and parent company financial statements prepared under different financial reporting frameworks; for example group accounts may be prepared under IFRSs whilst the parent company accounts may be prepared in accordance with UK GAAP.
However, regardless of whether the individual accounts are prepared under UK GAAP or IFRSs, section 408 of Companies Act allows the profit and loss account (or statement of comprehensive income) of the parent company to be omitted from the annual accounts. To claim the exemption the notes to the parent company’s balance sheet should indicate the individual company’s profit or loss for the financial year; there should be disclosure of the use of the exemption and the parent’s individual profit and loss account should nevertheless be prepared and approved by the board of directors.
Where the financial statements of the group and those of the parent company are prepared under different financial reporting frameworks, they may be presented separately within the annual report and in that case it may be appropriate for the auditor to provide separate audit reports for the group and the parent company accounts.
Single audit report
Alternatively, particularly when the group and parent company accounts are prepared in accordance with the same financial reporting standards but not just in that case, the auditor may present a single audit report in respect of both the group and the individual financial statements.
When a single auditor’s report is issued it will need to refer in its opening paragraph to the primary statements and related notes of both the group and the parent company (ie profit and loss accounts, balance sheets, cash flow statements and/or statements of financial position, statements of comprehensive income, statements of change in equity etc.). The auditor’s opinion will also be expressed in respect of both the group and the parent company’s financial statements.
Additionally if the parent company has taken advantage of the exemption under section 408 and omitted its individual profit and loss account or statement of comprehensive income from the accounts, the auditor’s report will need to be amended to remove references to such statements in the opening paragraph of the report and to exclude from the opinion paragraph any mention of the parent company’s profit or loss for the period. The references will need to be removed – both when a single auditor’s report is issued for the group and individual accounts – and when a separate auditor’s report is provided for the parent company’s individual financial statements.
Given the various options available in respect of the preparation and presentation of the financial statements when group accounts are prepared and the alternatives also available to auditors about the choice of separate or single auditor’s reports, many permutations are possible in respect of suitable audit reports.
Bulletin (2010/2 Revised)
The Financial Reporting Council has published a Bulletin (2010/2 Revised), via the now replaced Auditing Practices Board, which includes example auditor’s reports that cover the main circumstances relating to group accounts. Bulletin 2010/2 is a compendium of illustrative auditor’s reports for the financial statements of UK private sector entities.
In particular the Bulletin includes examples of single auditor’s reports in respect of financial statements prepared under UK GAAP and under IFRSs, including the case of the use of different financial reporting frameworks for the group and the parent accounts (example 7). The examples also illustrate the modifications applicable to the report when the profit and loss account of the parent company is omitted from the financial statements.
The Bulletin also illustrates separate auditors’ reports for group and parent company accounts. The fact that the Bulletin provides specific examples of audit reports for individual accounts of a parent that prepares group accounts gives an indication that such reports will differ from those applicable to the individual accounts of a parent company that does not prepare group accounts (which will follow the general formats for individual accounts).
Given the potential complexities arising from different possible circumstances in respect of group accounts, Bulletin 2010/2 should be the first port of call for an auditor required to report when an entity prepares group financial statements.