The EU (Adjustments of Size Criteria for Certain Companies and Groups) Regulations 2024 (the “Regulations”) represent a significant update to the regulatory framework governing the classification of companies and corporate groups within the European Union. These Regulations, which took effect on 1 July 2024, aim to modernise and refine the criteria used to categorise companies based on their size. This has significant implications for compliance, reporting, and eligibility for various EU programs and benefits.
The Regulations give effect to the EU delegated Directive 2023/2775/EU, which amended a 2013 Directive known as the ‘Accounting Directive', to adjust the size criteria for certain companies in line with inflation. The Regulations amend specific provisions of the Companies Act 2014 (the “Act”) dealing with the requirement for accounting records and financial statements in different size companies.
Purpose and Objectives
The primary objective of the Regulations is to ensure that the classification system remains relevant and accurately reflects the current economic environment; specifically, the Regulations adjust company size thresholds by approximately 25 per cent to take account of inflation.
This change will widen the scope for companies to potentially avail of various exemptions if they fall under certain thresholds. Therefore, by increasing these thresholds it means more companies will benefit from less burdensome accounting obligations and avail of CRO filing exemptions. In particular:
- companies newly meeting the criteria for ‘small
companies' or ‘micro companies' may:
- get an exemption from making certain disclosures in their financial statements; or
- be allowed to file abridged financial statements with their annual return; and
- a broader range of companies may be entitled to avail of the audit exemption under Chapter 15 of Part 6 of the Act as a result of being classified as a ‘small company' or ‘small group'.
Of course, company size criteria can, and do, have relevant beyond just financial reporting obligations under the Act – many other compliance requirements are determined by reference to a company's size category for the purposes of the Act. By way of example, it means more companies may not have to comply with reporting obligations under the Corporate Sustainability Reporting Directive (“CSRD”) during its initial implementation period. As currently only companies qualifying as ‘large companies' under the Act must comply with the CSRD (aside from ‘public interest undertakings' and listed SMEs). With the increased thresholds there will be a number of companies dropping from ‘large company' status to ‘medium company' status. However, note that a company has to fall outside the relevant criteria for at least two financial years to escape CSRD reporting obligations.
Key Changes
The Regulations amend Part 6 of the Act by increasing certain criteria for turnover and balance sheet total for ‘micro companies', ‘small companies' and ‘small groups' and ‘medium companies' and ‘medium groups'.
The thresholds have been adjusted for turnover and balance sheet total. It must be noted, however, that there has been no change to the average number of employees criteria.
The increased size criteria are as follows:
- Micro company: A balance sheet total of not greater than €450,000 and a net turnover of not greater than €900,000 (and no more than 10 average employees).
- Small company: A balance sheet total of not greater than €7.5 million and a net turnover of not greater than €15 million (and no more than 50 average employees).
- Small group: A group balance sheet total of no greater than €7.5 million net (or €9 million gross) and group turnover no greater than €15 million net (or €18 million gross) (and no more than 50 average employees of the group).
- Medium company: A balance sheet total of not greater than €25 million and a net turnover of not greater than €50 million (and no more than 250 average employees).
- Medium group: A group balance sheet total of no greater than €25 million net (or €30 million gross) and a group turnover no greater than €50 million net (or €60 million gross) (and no more than 250 average employees of the group).
- Large company: A balance sheet total of greater than €25 million and net turnover of greater than €50 million (and more than 250 average employees).1
Implications for Businesses
Companies will need to take their compliance and reporting requirements into account. In particular, the financial position of companies should be reviewed and compared against the new thresholds to determine if the company in question has dropped into a different category, which will then allow a determination of whether the company's financial reporting obligations have changed.
There may be significant benefits for companies moving to a different category aside from benefitting from less onerous accounting requirements. For example, companies previously classified as ‘large companies' may now be classified as an SME under the new criteria and therefore may gain access to a wider range of EU support programs, including funding, grants, and technical assistance. Certain companies, such as those on the threshold of different size categories, might be in a position to make strategic changes in order to optimise their classification and avail of any of these additional benefits. In addition, it must be noted there may be potential impacts on mergers and acquisitions, as companies reassess the size and scale of potential partners to align with the new criteria.
Although the Regulations take effect from 1 July 2024, the adjusted thresholds will apply for the financial year commencing 1 January 2024. Companies will also have the option to apply them from 1 January 2023.
Conclusion
In conclusion, it is hoped that by updating the size criteria, companies will be relieved of unduly burdensome financial reporting requirements, thereby stimulating greater economic growth, innovation, and competitiveness across the EU. Stakeholders in the accounting industry have also welcomed this development. At a time when the costs of doing business are, in many cases, exponentially higher than they were, for some lucky businesses this may offer a degree of relief.
Footnote
1 The previous thresholds were as follows;
- Micro company: A balance sheet total of not greater than €350,000, a net turnover of not greater than €700,000 and no more than 10 average employees.
- Small company: A balance sheet total of not greater than €6 million, a net turnover of not greater than €12 million and no more than 50 average employees.
- Small group: group balance sheet total of no greater than €6 million net (or €7.2 million gross), group turnover no greater than €12 million net (or €14.4 million gross) and no more than 50 average employees of the group.
- Medium company: A balance sheet total of not greater than €20 million, a net turnover of not greater than €40 million and no more than 250 average employees.
- Medium group: A group balance sheet total of no greater than €20 million net (or €24 million gross), group turnover no greater than €40 million net (or €48 million gross) and no more than 250 average employees of the group.
- Large company: A balance sheet total of greater than €20 million, net turnover of greater than €40 million and more than 250 average employees.1
Co-authored by Stephanie Glennon
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