On 16 July 2015, the Financial Reporting Council (FRC) issued the new UK GAAP which will apply to the small companies’ and micro-entities’ regime. The issuance of these new frameworks marked the end of several years of work by the FRC in moving UK GAAP to an international-based financial reporting framework.
The small companies’ regime as accountants currently know it will be split into two distinct components:
- the small companies’ regime; and
- the micro-entities’ regime.
The small companies’ regime has been split into two components because of the revised Companies Act 2006 which came into force on 6 April 2015 and which applies to accounting periods commencing on or after 1 January 2016 or for accounting periods commencing on or after 1 January 2015, but before 1 January 2016, if the directors’ so wish. The Companies Act 2006 has been revised due to the EU Accounting Directive which was issued in June 2013.
The UK government had until July 2015 to transpose the requirements of the EU Accounting Directive into company law and this completed earlier in 2015. The Department for Business, Innovation and Skills has taken advantage of the maximum thresholds in the EU Accounting Directive which classify a small company/group, a medium-sized company/group and a large company/group.
For a small company the revised size limits are as follows:
Turnover: from £6.5 million to £10.2 million
Balance sheet total (gross assets): from £3.26 million to £5.1 million
Number of employees: unchanged at 50
Small companies’ regime
Currently the majority of companies that are classed as small, and apply the small companies’ regime when preparing their financial statements, report under the FRSSE. The current version of the FRSSE is the FRSSE (effective January 2015). This came into effect for accounting periods commencing on or after 1 January 2015.
The FRSSE (effective January 2015) will be the final version of the FRSSE as it is being withdrawn, in its entirety, for accounting periods commencing on or after 1 January 2016. As a result, the FRSSE (effective January 2015) will only have a one-year lifespan.
Small companies that are not micro-entities (or who are micro-entities but choose not to apply the micro-entities’ regime) will report under FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland. FRS 102 has been amended so that the presentation and disclosure requirements are all contained in Section 1A Small Entities in FRS 102, but the full recognition and measurement principles of FRS 102 will apply.
The revised Companies Act 2006 limits the amount of disclosures that are legally required in a small company’s financial statements and Section 1A reflects the requirements of the Companies Act 2006, but also includes further disclosures which are encouraged disclosures. The encouraged disclosures have been included because directors of small companies still have a legal obligation to ensure the financial statements give a true and fair view.
FRS 102 with reduced disclosures will be mandatory for small companies with accounting periods beginning on or after 1 January 2016, but earlier adoption is permissible. It is important to note, also, that FRS 102 must be applied retrospectively as far back as the date of transition (which is the start date of the comparative period in the financial statements) and hence a sufficient programme of planning must be undertaken to ensure this is done accurately.
Micro-entities are the smallest types of entity in the UK. At the time of writing this article there was no equivalent legislation in the Republic of Ireland and hence the micro-entities’ regime was not applicable to companies based in the Republic of Ireland.
The FRC have ‘carved out’ the micro-entities’ regime into its own standard, being FRS 105 The Financial Reporting Standard applicable to the Micro-entities Regime. Again, this standard will be mandatory for accounting periods commencing on or after 1 January 2016, but earlier adoption is permissible. As with FRS 102, FRS 105 is applied retrospectively as far back as the date of transition. The standard is optional and a micro-entity can choose a more comprehensive framework if it so wishes.
The eligibility criteria is very strict and despite the term ‘micro-entities’, only companies can use the standard. Charities cannot use FRS 105 and neither can LLPs (among other types of entity). Therefore it is strongly advisable to ensure an entity meets the eligibility criteria before using FRS 105.
The thresholds for micro-entities are as follows:
Turnover: not more than £632,000
Balance sheet total: not more than £316,000
Employees: not more than 10
There are significant differences between FRS 105 and the FRSSE which will affect micro-entities’ reporting under FRS 105 and hence it is advisable to undertake an impact assessment as to whether FRS 105 is appropriate. For example, FRS 105 does not recognise any of the alternative accounting rules or fair value accounting rules and therefore items such as investment properties cannot be carried at revaluation (as they had to be under the FRSSE (effective January 2015)). Such accounting changes will clearly have an impact on the balance sheets of micro-entities and the different accounting methodologies should also be carefully considered as part of the impact assessment.
In addition to the accounting changes, there are considerably less disclosure requirements under FRS 105 than the FRSSE because of the way the legislation works. ‘Deeming provisions’ exist within the legislation which say that financial statements prepared to the legally required minimum will mean that the financial statements are presumed to give a true and fair view. Again, this significant reduction in disclosures will need to be carefully considered when determining whether or not FRS 105 is appropriate for the entity.
Small companies and micro-entities are undergoing a huge amount of change in the way they will report their financial information. It is important that practitioners, auditors and directors fully understand the way that the new regimes work in order to ensure the financial statements correctly reflect the requirements of the new regimes as well dealing appropriately with any consequential tax implications arising from transitional and prior-period adjustments.
Steve Collings FMAAT FCCA
Author and Director at Leavitt Walmsley Associates Ltd. Author of Small Company Financial Reporting and Accounts and Audit of Limited Liability Partnerships from Bloomsbury Professional.