Size criteria

What it means

The size criteria are the three measures that place an entity in the micro, small or large class: total assets, net turnover and the average number of employees measured as full-time equivalents. Two of the three decide the class, never one alone.

The criteria have a two-year memory: the class only changes once the entity exceeds the conditions, or stops meeting them, in two consecutive periods. One exceptionally strong year does not turn a small accounting entity into a large one.

Each criterion comes from a different source: assets from the balance sheet, net turnover from the profit and loss statement, and headcount from HR and payroll records. Classification is therefore not a purely accounting question, and it cannot be done properly without whoever runs payroll.

How it works in practice

Net turnover is not total revenue: it covers revenue from selling products, goods and services, not a one-off disposal of assets. And the size class is not the audit obligation, which has conditions of its own that are assessed separately.

The entity classifies itself and nobody notifies it; a newly formed company works from its own expectation at the date it came into being. The class decides the form on which the annual accounts are filed: a micro entity has its own, small and large share one, and the notes differ in scope.

For a growing client we recalculate the criteria at every year end and, when growth is strong, at the half-year too. If it is clear the company will exceed the thresholds for the second year running, we tell the director in advance, so there is time to choose an auditor before the year ends if the new class brings an audit.

What to watch out for

A company treats itself as a micro entity for years because that is how it started, and nobody recalculates the class. After two years of growth it no longer belongs there: the accounts should have gone on a different form and in a different scope, and the correction is filed late, when a bank or a trading partner is already waiting for the figures.

Headcount is not taken at year end or as the number of names on the payroll, but as the average full-time equivalent over the period. A company with seasonal staff or shorter working hours comes out differently from the rough estimate, and a classification made by counting heads can be wrong in either direction.