SME size criteria in 2022

Mid-March, the Commission for Accounting Standards (CBN) published a new version of its advice on the size criteria for small companies. An interesting document.

Definition of Small Companies and Microcorporations

Traditionally, we use the term 'SME' when talking about small businesses. The 'M' in the abbreviation basically stands for medium-sized companies, but from a legal point of view, these do not exist in our company law. So there are really only 2 types of companies: the companies that are small, and the companies that are not small.

A company is small if, on the balance sheet date of the last closed financial year, it does not exceed more than one of the following criteria:

annual average number of employees: 50

annual turnover, excluding VAT: 9.000.000 euros, and

balance sheet total: 4.500.000 euros.

However, there is still a 'subspecies' of small companies, namely micro-companies. These are small companies that are not a subsidiary or parent company on the balance sheet date of the last closed financial year and that do not exceed more than one of the following criteria:

annual average number of employees: 10

annual turnover, excluding VAT: 700.000 euros, and

balance sheet total: 350.000 euros.

So there are 3 elements: the workforce, the annual turnover and the balance sheet total. The balance sheet total can be consulted as usual in the annual accounts and does not require any further explanation. But what about the workforce and revenue?

Workforce

To calculate the annual average workforce, it is necessary to look at the average number of employees in full-time equivalents registered in the DIMONA database at the end of each month of the financial year. If there are employees who should not be included in the DIMONA database, you should look at the general personnel register or an equivalent file.

For part-time employees, the calculation is based on the contractually agreed number of hours to be performed, related to the normal working hours of a comparable full-time employee (reference employee).

Revenue

The term 'turnover' is defined as the amount of the sale of goods and the provision of services to third parties, in the ordinary course of business of the company.

VAT is not taken into account. Allowed discounts (discount, ristorno, rebate) are deducted. If the company receives government intervention in the context of a pricing policy, as compensation for lower receipts, this amount must also be included.

The CBN emphasizes that this must be revenue from the normal business and gives the following example.

Example 1
An income statement contains the following information:
• annual turnover, excl. VAT: 3.300.000 euros
• other operating income: 200.000 euros
• financial income (dividends): 700.000 euros, and
• non-recurring financial income: 550.000 euros.
The turnover here amounts to 3.300.000 euros.

But if more than half of the revenues from the normal business of a company consist of revenues that do not meet the description of the item 'Revenue', then a different regime applies. In that case, the term 'turnover' is used to refer to the total of operating and financial income, excluding non-recurring income.

Example 2
Suppose the income statement looks like this:
• annual turnover, excl. VAT: 300.000 euros
• other operating income (excluding non-recurring): 850.000 euros
• other financial income (excluding non-recurring): 2.700.000 euros, and
• non-recurring financial and operating income: 550.000 euros
The first three items arise from the ordinary business of the company. Together they make up a total of 3.850.000 euros, more than half of which is composed of elements that do not correspond to the classical definition of turnover.
In this case, therefore, the amount of 3.850.000 euros is taken as turnover for the size criterion.

Duration of the financial year of more or less than twelve months

In the first instance, the CBN emphasizes that it is not the intention for companies to systematically have a financial year that is longer or shorter than 12 months. Exceptionally, this can be allowed, but a financial year can never be longer than 24 months minus one calendar day.

Suppose you are in such an exceptional situation, how do you calculate the criteria?
According to the CBN, you must multiply the turnover limit, excluding VAT, by a fraction whose denominator is twelve and the numerator corresponds to the number of months of the financial year concerned. Each started month is counted as a full month.

Example 3
Take a company with a turnover of 17 million euros, excluding VAT, in financial year X, which lasts 15 months. The turnover limit (9.000.000 euros for a small company) must be converted to a limit over 15 months. In other words:
9.000.000 euros x 15/12 = 11.250.000 euros > 9.000.000 euros.
So, in this example, the company has exceeded the turnover limit for a small company.

Example 4
You could also reduce the turnover of the company over 15 months to a period of 12 months and then compare it with 9.000.000 euros, but the end result is of course the same: the company exceeds the turnover criterion:
17.000.000 euros x 12/15 = 13.600.000 euros > 9.000.000 euros.

Importance

Why do you need to know whether your company is an SME or not? Initially, a series of administrative obligations are different for SMEs and other companies. Just think of the annual accounts, which are more or less extensive for micro companies, small companies or large companies. Besides, there are also tax differences.

Finally, do not lose sight of the fact that in some cases, and more particularly in the European subsidy regulations, very different standards apply.

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