All the secrets of abridged financial statements

Drawing up a company balance sheet document is a heavy burden for any entrepreneur. For this reason, being able to lighten the load of accounting constraints to be met when producing the mandatory documents at the end of each financial year can appear very attractive.

A viable alternative is the abridged balance sheet, a type of balance sheet that is legally valid, but whose preparation is simplified . This type of balance sheet, however, is only applicable to certain types of companies that meet certain requirements.

Are you wondering whether the abridged balance sheet may be suitable for your company? Follow us in reading this article and find out all the information you need!

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Abridged Balance Sheet: What is it?

The abridged balance sheet is a type of balance sheet that can be produced in a simplified form.

This means that the abridged balance sheet does not have to contain all the information considered necessary in the preparation of the annual balance sheet. In fact, certain compilation simplifications are provided for in the preparation of abridged financial statements, which we will see in detail below. For now, we can anticipate that these concern:

• The balance sheet and profit and loss account ;
• The preparation of the cash flow statement ;
• The information contained in the notes to the financial statements;
• The preparation of the management report;

The valuation criteria; Abridged financial statements are suitable for smaller companies, i.e. companies that are below certain size limits .

Current regulations

Abridged financial statements are regulated by Article 2435-bis of the Italian Civil Code , which was updated by Legislative Decree No. 139/2015 . The amendments made by this law came into force on 01.01.2016. They therefore had an effect on the financial statements for the financial years starting from this date.

Abridged Financial Statements: Is it Compulsory?

Abridged financial statements are not compulsory . In fact, its application is optional and can be selected on a voluntary basis if the prerequisites for its use are met.

The non-compulsory nature of the application of abridged financial statements means that only one, or only some, as well as all components of the financial statements can be prepared in a simplified manner.

For example, an entrepreneur whose company meets the requirements for applying abridged financial statements may decide to draw up only the notes to the financial statements in abridged form, but to develop both the balance sheet and the profit and loss account in extended form.

Access Requirements

As mentioned above, the abridged balance sheet is particularly suited to meet the needs of smaller companies if they meet certain prerequisites. These are:

• The companies have not issued securities traded on regulated markets ;
• In the first financial year or, thereafter, in two consecutive financial years the companies have not exceeded the following limits :
  • EUR 4,400,000 for total balance sheet assets, i.e. for the sum of the amounts corresponding to classes A, B, C and D of the balance sheet assets;
  • EUR 8,800,000 for revenues from sales and services , i.e. for the amount of item A1 of the profit and loss account;
  • 50 for the average number of employees employed during the financial year, i.e. with reference to the average number of employees employed per day . It is necessary to indicate part-time employees in proportion to the hours worked in relation to full-time employees.

Verification of application limits

The verification of the limits not to be exceeded in order to be able to apply an abridged balance sheet regime is different if one is considering

1. Companies that have just started business;
2. Companies already in business.

Abridged balance sheet... and new companies

Strictly speaking, it is easy to deduce that the assessment of the limits for the application of abridged financial statements in newly started companies should be made by taking into consideration the first financial year .

In fact, there is the possibility of directly using abridged financial statements already in connection with the first financial year, if it is ensured that the limits imposed by law are not exceeded.

Abridged Financial Statements... and Companies Already in Business

The verification of the limits for companies already in business must be done in two consecutive financial years following the first one.

Caution. In this respect, two slightly different interpretations are recognised. The first interpretation states that, if the limits are respected, the application of this type of abridged balance sheet is already possible from the second financial year.

However, according to the CNDCEC document of November 2012, it would, on the other hand, only be possible to apply it from the financial statements of the financial year in which the limits are not exceeded for the second time.

Drafting the balance sheet

For the preparation of the balance sheet , Article 2435-bis, paragraph 2 of the Civil Code provides for the following simplifications:

• The balance sheet shall only include items marked by capital letters and Roman numerals ;
• Items marked with Arabic numerals may be omitted ;
• Items A ( receivables from shareholders for payments still due ) and D ( accruals and deferrals ) of the assets may be included under item C.II ( receivables in current assets );
• Item E ( accruals and deferrals ) of the liabilities can be included under item D ( payables );
• Only the net value of fixed assets may be stated under assets . In fact, there is no obligation to explicitly deduct depreciation and write-downs (from items B.I, or intangible fixed assets , and B.II, or tangible fixed assets , respectively);

☝ In items C ( receivables ) of the assets and D ( payables ) of the liabilities , receivables and payables due beyond the next financial year must necessarily be shown separately .

☝ Take care not to confuse the abridged balance sheet with the reclassified balance sheet!

Preparation of the Profit and Loss Account

With regard to the preparation of the income statement , the abridged balance sheet allows the following items to be grouped together :

• Value of production:
  • A2 ( changes in inventories of work in progress, semi-finished and finished products ) and
  • A3 ( changes in contract work in progress );
• Concerning personnel expenses:
  • B9 (c) ( severance pay ),
  • B9 (d) ( pensions and similar benefits ) and
  • B9 (e) ( other personnel costs );
• Concerning depreciation and amortisation:
  • B10 (a) ( amortisation of intangible assets ),
  • B10 (b) ( depreciation of tangible fixed assets ) and
  • B10 (c) ( other write-downs of fixed assets );
• Concerning other financial income:
  • C16 (b) ( financial income from securities held as fixed assets other than equity investments ) and
  • C16 (c) ( financial income from securities in current assets not constituting equity investments );
• Concerning revaluations:
  • D18 (a) ( revaluations of equity investments ),
  • D18 (b) ( revaluations of financial assets other than equity investments ),
  • D18 (c) ( revaluations of securities under current assets not constituting equity investments ), and
  • D18 (d) ( revaluations of financial derivatives );
• Write-downs:
  • D19 (a) ( write-downs of equity investments ),
  • D19 (b) ( write-downs of financial assets other than equity investments ),
  • D19 (c) ( write-downs of securities under current assets not constituting equity investments ) and
  • D19 (d) ( write-downs of derivative financial instruments ).

In the preparation of condensed financial statements it is not necessary to provide:

• Disclosure of capital gains in item E20;
• Separate disclosure of capital losses and taxes relating to previous years in item E21.

Preparation of the Cash Flow Statement

The application of an abridged type of balance sheet exempts the preparation of a cash flow statement .

Drafting the Notes to the Financial Statements

The notes to the financial statements are governed by:

• Third, fourth and fifth paragraphs of Article 2423;
• Second and fifth paragraphs of Article 2423-ter;
• Second paragraph of Article 2424;
• First paragraph (No. 4 and 6) of Article 2426;
• First paragraph of Article 2427-bis (No. 1).

According to Article 2427 of the Italian Civil Code, the abridged financial statements must include the following points in the notes to the financial statements: 1 , 2 , 6 ( limited to payables, no geographical indication required), 8 , 9 , 13 , 15 (it is possible to avoid providing a breakdown by category), 16 , 22-bis , 22-ter (it is possible to avoid providing information on: balance sheet, financial and economic effects), 23 and 25 (also avoiding the indication of the place where the copy of the consolidated financial statements is available).

In addition, the preparation of abridged financial statements provides for a waiver of the following provisions of Article 2426:

• Possibility of recording securities at purchase cost,
• Possibility to enter receivables at their presumed utilisation value,
• Possibility of recording payables at nominal value.

☝ The abbreviated financial statements allow for limited disclosure of:

• Transactions entered into directly or indirectly with major shareholders;
• Transactions with members of management and supervisory bodies and with companies in which the company has an interest.

In addition, if the information required by points 3 and 4 of Art. 2428 is also disclosed in the notes to the financial statements, it is not necessary to prepare a management report .

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Abridged financial statements: when do they lapse?

The right to abridged financial statements may lapse . This happens when, in the course of the second financial year , two of the indicated limits are exceeded.

In this case, there is an obligation to resort to an ordinary regime . This means that, in this case, the financial statements must be drawn up in ordinary form for the second consecutive financial year.