Transitioning from a small to a medium-sized business is an exciting time in a company’s journey. However, it also introduces new complexities in terms of financial reporting. For instance, as the audit exemption is not available for standalone medium-sized companies, this will often be their introduction to the audit process.
Here are ten things directors of businesses that are moving from small to medium-sized companies should consider when preparing their financial statements for medium sized entities. It’s not exhaustive but should get you off to a good start.
Table of Contents
1. Plan ahead for medium-sized accounts requirements
As your business grows, it becomes necessary to make more accounting disclosures. Planning for these at least a year before you need to prepare medium-sized accounts is crucial. As an example, additional notes are needed. For instance, turnover notes that analyse revenue between business categories or geographical locations. Without proper planning, this data might not be readily available when needed.
If the company is a parent with one or more subsidiaries, it will usually be necessary to prepare consolidated accounts for the group, with comparative figures for the prior year. Exemption from preparing group accounts might be available if the company is itself a subsidiary but this is subject to certain conditions.
Being proactive means that when it’s time to prepare your accounts, everything is organised and ready. This makes the process more efficient and accurate.
2. Review accounting policies and estimates early
When you transition from small to medium-sized company status, it is time to reassess your accounting policies and estimates. Ideally, this should be a year before your first audit is required. Policy choices might include the way business transactions or events in a company’s financial statements are recorded and presented.
Accounting policies should be complete and all material balances – key items in financial records that could influence decisions if misstated – should be reflected in the accounts. Waiting until the year of an audit can cause delays in completing the accounts.
Therefore, address these early to ensure that your financial statements reflect your business’s new size and complexity.
3. The Strategic Report is now mandatory
Once you reach medium-sized status, your company is legally required to prepare a Strategic Report. This report, outlined in the Companies Act 2006, informs shareholders about the company’s business model, strategy, risks and overall performance for the financial year. It helps stakeholders understand the broader picture of your business and its direction.
Make sure your Strategic Report is clear and aligns with your business objectives and goals.
4. Financial KPIs in the Strategic Report
The business review included in the Strategic Report must include financial Key Performance Indicators (KPIs) that are specific to your company. Generic KPIs may not provide stakeholders with the valuable insights they need. Instead, identify KPIs that are meaningful and directly linked to your company’s performance and objectives. Non-financial KPIs are not required, but directors might want to add them as they can help show the company’s strategy and performance more clearly.
5. Employee disclosures for companies with over 250 employees
If your company has more than 250 employees, you must include additional disclosures in the front half of your accounts. These include policies related to disabled employees and employee consultation practices.
Including these details ensures compliance with legal requirements and demonstrates your company’s dedication to employee welfare.
6. Reduced disclosures for Qualifying Subsidiaries
If a medium-sized company is a subsidiary in a group, it may be able to take advantage of reduced disclosure requirements in their financial statements. For example, you may not need to include a cash flow statement or detailed disclosures including key management remuneration, share-based payments, or financial instruments as some examples. However, it’s important to verify whether your company meets the definition of a Qualifying Subsidiary for these reduced disclosures to be taken in the accounts.
These options can simplify your financial reporting while still keeping you compliant with relevant regulations.
7. Critical accounting judgements and estimation uncertainty
As a medium-sized company, you must disclose critical accounting judgements and key sources of estimation uncertainty (financial elements that go into a forecast that are inherently imprecise). Directors and management need to explain the assumptions they’ve made and the sensitivity of these assumptions. They also need to disclose the impact of potential changes in these assumptions on your financial statements.
This is often a key area that auditors scrutinise closely, particularly where changes in assumptions could lead to a materially different outcome on the financial statements. Be prepared to explain your judgements and ensure transparency.
8. Directors’ remuneration above £200k
If the total of the directors’ remuneration in the company exceeds £200k, you must disclose the highest-paid director’s remuneration. This disclosure should include both current-year figures and comparative figures from the previous year.
This transparency allows shareholders and stakeholders to understand executive compensation, providing them with insights into how the company remunerates its leadership.
Read our guide on directors’ remuneration, where we explain how SMEs can structure their director and shareholder drawings.
9. Significant additional tax disclosures
When preparing medium-sized accounts, your business will also need to include more detailed tax disclosures. These include making sure your tax records match what is reported to the tax authorities and reviewing taxes that are owed in future based on current financial activities. Both activities might require additional accounting work to compile comparative figures from previous years.
By addressing this early, you’ll ensure that your tax disclosures are complete and accurate, helping you stay compliant with reporting standards.
10. Enhanced share-based payment disclosures
If your company offers share-based payments to employees, you are required to provide enhanced disclosures. This includes a detailed narrative, movement notes and the weighted average exercise price of the shares. Additionally, you’ll need to disclose the accounting policies used, including the type of model and the vesting period.
By including this detail, you help stakeholders understand how your share-based compensation plans impact your business.
Final thoughts
Becoming a medium-sized business brings exciting growth opportunities, but it also introduces new accounting disclosure responsibilities. By planning ahead, you can focus on compliance with disclosures and being audit ready alongside demonstrating and supporting the ongoing success of your business.
It’s important to be aware that once a business becomes medium-sized, there are no filing exemptions. Full accounts, including profit and loss notes become public record. That’s why it’s so important to get it right.
Get in touch
For expert advice on preparing your medium-sized business accounts, get in touch with Accounts Partner, Rachel Jackson. She is here to help you navigate the complexities with confidence.
