The changes include the following:
- a new standard, FRS 105 The Financial Reporting Standard applicable to the Micro-entities Regime;
- new Section 1A Small Entities of FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland;
- annual review of FRS 101 Reduced Disclosure Framework;
- the withdrawal of the Financial Reporting Standard for Smaller Entities (FRSSE); and
- other changes necessary for continued compliance with company law.
The main changes are effective for accounting periods beginning on or after 1 January 2016, with early application permitted for accounting periods beginning on or after 1 January 2015.
Key changes
The key changes that you should be aware of are:
Thresholds for determining company size
The thresholds for determining company size (the dividing lines between small and medium, and between medium and large) have been raised, although there is not a corresponding change to audit thresholds at this time.
The maximum size thresholds permitted under the EU Directive have been adopted for determining the size of small and medium companies. As before, these thresholds are relative to the company’s average number of employees, total assets in the balance sheet and turnover.
These size thresholds only apply to companies and qualifying partnerships. Limited liability partnerships (LLPs) will continue to be measured under the current thresholds. At present there is no proposal that the LLP thresholds will be increased to bring them in line with company thresholds.
Slimming down small company accounts
Small company accounts are being “slimmed down”. There is a statutory cap on the number of mandatory notes in small company financial statements, now down to 13 and the FRC is responding to this with amendments to FRS 102.
These changes will generally lead to a reduction in the information provided in a set of small company accounts; although some requirements will be new, for example the requirement to disclose the average number of employees.
The financial statements must, however, still provide any additional disclosures necessary to present a true and fair view. This may cause difficulty for directors and preparers of financial statements as they will need to consider whether the absence of other information, not required by law, will result in their financial statements not providing a true and fair view, and if so, what additional disclosures are required.
The mandatory notes cover the following areas:
- Accounting policies adopted;
- Fixed asset movements table;
- Revalued fixed assets table (in addition to fixed asset movements);
- Financial instruments and other assets measured at fair value ;
- Financial commitments, guarantees or contingencies (not included in the balance sheet);
- Amounts due or payable after more than five years and debts covered by security ;
- Average number of employees during the financial year;
- The amount of advances and credits granted to directors (along with supporting information);
- Related party transactions;
- Name and registered office of the undertaking drawing up the lowest level of consolidated financial statements including the entity;
- Exceptional items;
- The nature and business purpose of off-balance sheet arrangements; and
- The nature and effect of post balance sheet events.
Useful economic life of goodwill
In the exceptional situation where no useful economic life can be estimated, goodwill must be written off over no more than 10 years (compared to 20 under current UK GAAP and 5 under extant FRS 102, although we are waiting to see this changed in the accounting standard).
A fresh approach to public filing of accounts
Although a small company may still elect to withhold its profit and loss account from Companies House, there will no longer be any “abbreviated accounts” prepared to specific disclosure rules.
However, small companies will be allowed to prepare “abridged accounts” for members, if the members agree unanimously. An abridged profit and loss account will start from the “gross profit line” and an abridged balance sheet will have fewer captions.
Whichever format the accounts take, if they have been audited the audit report need not be filed, but a summary of the audit (whether the report was qualified or unqualified, the name of the auditor and the name of the person who signed the auditor’s report as senior statutory auditor) must be disclosed in the notes to the balance sheet.
New exemptions linked to unlisted Plcs
Limited companies (Ltd) that are in the same group as an unlisted public company (a Plc) can use the small and medium-sized companies’ regimes. This is a relaxation of the current rules which stipulate that if any member of a group is a Plc the small and medium-sized companies’ regimes are not available. The exemptions will not be available to a Plc itself, whether listed or unlisted.
Full lists of subsidiaries
Companies are required to include the full details of subsidiaries in consolidated financial statements. The current option to include just the principal subsidiaries with the full list appended to the annual return has been removed.
FRS 105 The Financial Reporting Standard applicable to the Micro-entities Regime
Micro sized companies now have a separate reporting standard (FRS 105) which allows them to submit accounts with reduced disclosures. FRS 105 is based on FRS 102, but its accounting requirements are adapted to satisfy the legal requirements applicable to micro-entities and to reflect the simpler nature and smaller size of micro-entities.
