The Financial Reporting Standard for Smaller Entities (FRSSE) has been withdrawn and small company size thresholds included within the Companies Act have risen for accounting periods commencing on or after 1 January 2016.
More sophisticated accounting standards will apply to both small and micro entities.
Thresholds as at 1 January 2016
Remember that thresholds do not reflect all the nuances of your business so you need to look at all options before choosing which framework to report under:
- the qualifying conditions must not exceed two or more of the above criteria;
- the qualifying conditions must be met for two consecutive years, assuming that the company is not a newly incorporated company. The new limits are applied to prior year numbers to determine the current period qualification. and
- limits for parent companies rise to £12.2m and £6.1m on a gross basis for annual turnover and gross assets respectively.
Reporting options under UK GAAP
If you qualify as a small entity (but not a micro entity) you will need to report under FRS 102 if applying UK GAAP. There are various options for small entities which mean you may not have to apply all the disclosure requirements of the full standard. However, you will need to apply the recognition and measurement requirements, which can be considerably different to those applied under the FRSSE.
If you qualify as a micro entity you can choose to report under FRS 102 or FRS 105.
Reporting under FRS 102
FRS 102 has, at its basis, IFRS which is quite different to old UK GAAP. If there are any transition adjustments arising from changes in recognition or measurement from old UK GAAP to FRS 102, these will be processed at the opening date of the comparative accounts eg 1 January 2015 for a 31 December 2016 year end. This means that your accounts may need to be restated. In addition, the formatting of your accounts will certainly change under FRS 102.
You will need to identify areas in your accounts where transition adjustments are likely to arise. The consequences of these adjustments could affect your ability to pay dividends and the amount and timing of tax due. For example:
- If your staff holiday year is either not the same as the financial year end, or you allow staff to carry forward unused holidays, a holiday pay accrual may be required, potentially reducing your profits over the past three years.
- Interest free loans that are in effect financing transactions may require to be discounted.
- Financial instruments may require to be booked at fair value.
It is not all bad news, there may be opportunities on transition to boost your balance sheet if you have fixed assets that are worth more than they are recorded in the accounts for, and this can be recorded as a one off transition adjustment which is treated as deemed cost.
Options available to small entities under FRS 102
If you qualify as ‘small’, you can report under full FRS 102 (with some reduced filing options). Alternatively, you can report under FRS 102 Section 1A, FRS 102 Section 1A abridged or FRS 102 Section 1A amended formats. If you choose any of these options you can potentially:
- retain the ability to omit the Profit & Loss account and Directors’ report when filing accounts at the Registrar* but no longer have the option to prepare separate abbreviated accounts;
- reduce the volume of disclosure notes in your accounts compared to applying all the disclosure requirements of FRS 102; and
- prepare abridged accounts as your statutory accounts (if all members agree).
* does not apply to charitable companies.
In addition, parent companies of small groups continue to be exempt from the consolidation requirement and, together with their subsidiaries, may also be eligible to apply reduced disclosure options under FRS 102, the latter being an alternative to section 1A.
However, Directors will still have to comply with the Companies Act and show a true and far view of the company’s performance. You will, therefore, need to include all relevant disclosure notes.
Taking the abridged option requires shareholder approval. It will result in certain items being condensed together on the face of the primary statements. Additional details may be required in the notes to the accounts to show a true and fair view.
Is early adoption possible?
Companies where the accounting period commenced between 1 January 2015 and 31 December 2015 can adopt section 1A early if they wish to do so – this may be the case if accounts had been prepared to a date a few days before 31 December 2015.
If you qualify as a micro entity you will be able to report under FRS 105: the financial reporting standard applicable to the micro-entities regime. The micro entities regime may become a more attractive option as micro companies can continue to:
- prepare much reduced accounts;
- apply historical cost accounting (with no fair value options available);
- not be permitted to account for deferred tax; and
- omit the profit and loss account and directors’ report when lodging with the Registrar.
The micro entities regime does not allow departure from historical cost accounting, and FRS 105 similarly does not allow this departure. This means there will be no fair value accounting for items such as listed investments, investment properties or derivatives and so it may become a more favourable option for lifestyle companies or asset rich standalone entities.
However, given the simplified nature of the statutory accounts, you will need to consider whether the accounts will meet the needs of the users of your accounts. You can of course provide additional disclosures to the minimum in micro accounts, such as if you have a secured bank loan or extensive fixed assets that you wish users to know the details about.
How can we help?
We can identify the accounting frameworks which are appropriate for your business and set out the advantages and disadvantages of applying each one.
We can explain the implications of implementing your chosen framework.
We can draft your accounts under the new standard including transition adjustments and advise on relevant disclosures and transition options.
For further information, please speak to your usual RSM contact.