FRSSE tweaks to accommodate micro reporting

Major simplification

For companies that qualify I think the micro entity regime is a great improvement. No notes are required except that loans to directors etc must be noted at the foot of the balance sheet. That in my view is a major simplification.

The abbreviated balance sheet/notes (which had a different content to the full accounts) no longer need to be prepared for Companies House. Instead you just send the balance sheet from the full accounts on its own.

In terms of disclosure, the FRSSE is no longer relevant. The regulations state that the directors must disregard any accounting standard that requires additional disclosure. The FRC can no longer endlessly tweak the required disclosures. Only parliament can make changes.

In short, I think this is a revolution in reporting which will eventually be almost universally adopted by those companies that qualify, just as few small companies choose not to adopt the FRSSE today.

There are also reduced disclosure requirement for the directors' report for all sizes of company for periods ending on or after 30 Sep 2013. The directors' report for most small and micro companies will only contain a list of the directors who served during the year.

Philip Hodgson
VT Software

HMRC view?

Do we know yet what HMRC's position is?

Either (i) they will insist on fully tagged FRSSE accounts as is the case now, in which case it is a waste of time or (ii) they will have to accept accounts filed in this micro-entity format which then runs a coach and horses through iXBRL which HMRC, software developers and accountants have just invested a lot of time and money in.

HMRC

I raised this specific point with HMRC at a recent developers' meeting. HMRC were very clear: they require only what is required for the members under company law. In other words, micro entity format accounts are acceptable to HMRC (in iXBRL format).

As with all sizes of company, HMRC would also like but cannot insist upon a detailed profit and loss account.

Philip Hodgson
VT Software

Detailed P&L

@Locutus

Yes. In our experience most companies do include a detailed p&l with their Corporation Tax return, and that is what we recommend. The point is they do not legally have to, but as you suggest it may well be in their best interest.

Philip Hodgson
VT Software

Detailed P&L

I maybe wrong here but the preparation of a detailed P&L account has always been something that has been done for the directors/HMRC, last time I looked at a set of small company accounts there is a note at the foot of the Detailed P&L that states "these pages do not form part of the statutory accounts".

So has micro entity accounting actually changed anything here?

What HMRC cannot see they cannot see.

Job done.

An instant reduction in tax evasion. (Civil service style)

maybe but....

@ The Black Knight ..."What HMRC cannot see..." they can question.

Hence discovery.

But getting back to the actual micro reporting rules....

....I'm unclear on where we've got to.

I certainly agree with Philip that knocking all the unnecessary disclosures (both from accounting standards and the Companies Act as well to be fair) on the head is a massive improvement for the micro entity and means they might actually get some accounts which are readable and not complete overkill for a change. Do I take it that VT will be issuing an update to allow us to do that in the near future?

What I'm much less clear on are the recognition rules. Were these changed in the end or can we still use straightforward accruals accounting? If we can't then I for one won't be bothering with the new regime.

Thanks

Many thanks for that, Steve. All I have to do now is wait for the VT update which is hopefully coming my way.

*

Thanks, VT.

Simplification = Cost reduction?

As an adviser to over 200 micro entities, this is a massive problem for me and it is no longer lurking in the long grass.

I cannot see how any of this un-simplification will lead to reduced costs which is what it was implemented for.

Aside from the short term pain we will all go through and have to fork out money to the software companies for, we will now have a further discussion with our clients who see the press dribble on about reduced disclosures and they all think wahey cheaper fees!!!

I would be able to swallow a reduction in costs for my clients and an adjustment to our business model if our costs were going to go down.  BUT THIS WILL NOT HAPPEN!!  The accountancy practices supporting these companies will end up footing the bill for the governments poorly informed and even worse advertised simplification strategy.

And even more likely, clients will continue to move to online accounting software if they perceive the barrier to preparing accounts is gone and in the next few years the companies who sell the bookkeeping software will add on accountancy services and cut us out completely.  The irony is that this will lead to the Treasury witnessing a reduced tax take, a higher incidence of non-compliance and no longer will we be there to temper or mitigate the risk through representation.

No wonder there has been a massive increase in compliance practices putting their businesses on the market!

Is anyone in practice seeing this in any other way than I am???

Accept it and move on

I accepted that we will have less fees from compliance services. However, I fear that this will effectively increase supply and prices/margins down.

North London Accountants

Will your fees really go down?

For most micro entities, dealing with the disclosure side of things takes about an hour and I'm not planning to reduce my fees for that.

The advantage I see from this simplification is a) returning accounts to the realm of the useful rather than the abstruse and b) making me feel like I'm not wasting my life completing inane disclosure checklists, and that is the line I will be taking with my clients.

So clients will benefit, just not in terms of reduced costs.

Will fees really go down

Tend to agree with Adam.

The micro entity will now just be the same as a Sole Trader/Partnership and I am sure we all still have these as clients, prepare accounts and tax returns in return for a fee.

It will just take away preparation of all the notes, that small business owners do not understand, and reduce the risk of being fined for non compliance with some small inconsequential piece of legislation that no one is in the slightest bit interested in other than the regulators.

Still slightly concerned on the levels though, it occurs to me that a service company with turnover say £1.5m and let's say 9 employees, runs an overdraft and has average 60 day sales balances is a Micro Entity? An investment company with £5m property portfolio and £4m bank loans, receives £600k in rent and is run by its 2 directors is a Micro Entity?

The customer should come first.

The customer is the company and it's participators.

Provided third parties do not require all the extra pages and pages of notes, then it is good to see a reduction in the number of pages and notes.

A concise document can be more meaningful for a non-accountant than a 14-page document that I sometimes see labelled "Financial Statements"

There's still some way to go on this as some accountants still put non-essential information in micro-entities accounts - information of little apparent value over and above the legal requirements.

On the other hand, perhaps "Financial Statements" of some 14 pages might give the company and it's participators the impression that a lot of work has gone into producing them, that is compared to a concise and more meaningful 4-page set of Accounts that could be adequate.    So the longer version accounts could have some financial advantages to non-customer-focussed accountants as it could help justify their fees: the 14 page document will be perceived by the preparers as something impressive and to be proud of that earns more fees; however not all customers will realise that a more concise set of accounts is perfectly adequate. 

Regarding any cost savings these might arise as follows:

Companies who prepare their own accounts can concentrate on getting the profits right and put less emphasis on arguably meaningless disclosure of a string notes telling them what they already knowFor accountancy practices it will depend upon the particular Accounts Production software that a practice uses.  Some software is so complicated to use that errors in the notes is commonplace, other software might be easier to use and therefore less prone to create errors.  Some very small accounting praxctices and in-house compay accounts may be produced in Xero or Excel neither of which is geared up to UK disclosure requirements (In the case of Xero as an example when I last looked at it had references to New Zealand Companies Act dates).   In the case of Excel and Xero knowledge of disclosure requirements and manual intervention is required, so reduced requirements for disclosure notes is to be applauded.   One of these days Xero, I hope, will produce iXBRL and full Statutory / Abbreviated Accounts averting the need to use additional accounts production software that in some cases is a horrible user experience.

Unsure myself
I am classed as one of those that doesn't understand it!
Aren't accounts meant to give a true and fair view? Won't watered down accounts fail to do this?
To me HMRC will just increase the level of enquiries which will surely counteract the savings.
My portfolio is small businesses and to be honest there won't be any savings - it's the numbers that take the time not the disclosures in my opinion. Also what are the implications when we have a QAD visit?

Agree with Grantthechelseaboy

Agree with Grantthechelseaboy

There is nothing good in what is happening for small accountants. Fees have remained static for about 15 years and are now set to fall over the next decade. 

There are crumbs of comfort.

Employing people remains hideously expensive and I suspect the contractor model will continue to be expanded, and as most people have no idea about accounts there will continue to be a good flow of business for the micro accountant. The government will be very nervous about tightening up on contractor accounting because imagine you were the government that was to oversee 1 - 2 million company closures.

Also it is unlikely the gap between the accountancy and tax rules will close anytime soon and therefore internal accountants tend to feel out of their depth beyond basic bookkeeping.

However my advice to anyone starting in practice is to find a good company where they are trusted and get on with the directors, and become the internal accountant because compliance work is on its way out. Over the next few years we will see margins squeezed even further and I suspect in the next ten years we will see a whole raft of mid tier firms go out of business.

It would be interesting to know from VT Software whether they are already in talks with other software providers to bolt on there reporting function to third party software or whether they are just keeping it as part of their own bookkeeping package.

As interesting as you post is DMGb what you fail to mention is that the accounts are for compliance purposes. If you took away the legal requirement. 3m+ companies would stop producing any form of accounts. Accounts are not produced for the customers and there stakeholders that's just stuff from a textbook. They are produced for tax and CH purposes. 

But finally a word of caution for this simplification process - The reason why the country is in a financial mess is because compliance is viewed as red tape and unnecessary. Anyone who deals with micro and small businesses will tell you that what stops directors over claiming deductions and not putting the proverbial yacht through the business is the external accountant. Not HMRC, not the internal bookkeeper. It is the external accountant that acts as the brake and if you take that away who knows what will happen.

I think that most of my small clients will not bat an eye lid on these changes as they see my role mainly as a compliance one and effectively trust me to get on with the job and present them with something to sign.  Of course I explain the results if they are not blatantly obvious.

So how is this going to effect the profession?  Not that much in my opinion, I surely don't see accountants fiercely knocking their fees down as a lot of their work has gone as it won't have. For small business these notes are not that onerous and are fairly standard and routine, I therefore see them as part of my process and not a big extra obstacle.

Overall I think the new simplification rules will be good thing for accountants as it will be one less technical / legislative area for HMRC and the rule setters to police us on.

Steve