Statutory audit 2019/2020. Number of years as an indicator in determining the category of medium and large enterprises
Significant changes made in 2018 to the accounting and audit legislation in Ukraine affected a large number of medium-sized and large companies.
Let me remind you that these companies need to conduct a statutory audit of the financial statements for 2019, and companies that fall under the category of large should transfer to the preparation of financial statements in accordance with International Financial Reporting Standards (IFRS). We have already discussed risks that threaten enterprises for failure to conduct a statutory audit in another article.
Also, I would like to point out that the category of medium-sized enterprises includes enterprises that meet 2 criteria out of 3: revenue of which amounts to EUR 8-40 million, assets – EUR 4-20 million, and the number of employees is 50-250 people. The category of large enterprises includes enterprises with revenue more than EUR 40 million, assets more than EUR 20 million, and the number of employees more than 250 people.
Revenue and asset indicators are taken as at the reporting date for the year preceding the reporting period (line 2000 of the statement of profit or loss and line 1300 of the balance sheet, respectively) at the average annual Euro exchange rate; the number of employees is calculated based on the average annual indicator for the year preceding the reporting period in accordance with Form 1.
It is widely considered that in order to be included in a particular category, an enterprise has to meet the criteria for two years instead of one.
This issue is particularly critical for large enterprises due to the need for IFRS transition and higher requirements for auditing companies of public interest.
Indeed, the Law of Ukraine “On Accounting and Financial Statements in Ukraine” No. 996-XIV dd. 16.11.2018 (hereinafter – the Law), after enumeration of the respective categories of companies (Article 2, paragraph 2), indicates that:
If an entity from one of the above categories does not meet these criteria for two consecutive years in the annual financial statements, it is considered to be in the appropriate category of entities.
However, the Law states quite clearly that this paragraph, so to speak, is intended rather for leaving the category than for entering it.
Criteria for entry into the relevant enterprise category (micro, small, medium, large) are specified several times in the list of categories itself. The Law explicitly states that the analysis of criteria shall be based on the indicators as of the date of annual financial statements for the year preceding the reporting year.
Please note, not for the two previous years, but for the year preceding the reporting one!
Thus, if your enterprise is classified as large, based on indicators as of 31.12.2018, and, for example, as at 31.12.2019 and 31.12.2020 it is classified as medium, then you should submit reports for both 2019 and 2020 as a large enterprise, and only in 2021 you can submit a report as a medium enterprise.
If, for example, as of 31.12.2019, the enterprise became medium, and as of 31.12.2020 – again large, then, accordingly, this single fallout is not taken into account, and the enterprise continues to submit a report as large.
These examples are applicable if the law is followed.
Certainly, the regulators may treat enterprises that have entered a higher category once but have not transferred to the appropriate reporting with the statutory audit, favorably. In particular, it may be the case for large companies that they need to spend a sufficiently large amount of resources to prepare IFRS reports, and that the first report under IFRS 1 must contain two full years (reporting period and comparative one).
However, it is better to confirm the exception to the rules with your regulator in advance – first of all, with the tax authorities.
Andrii Popov, Partner of Kreston GCG
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