In spite of the government's plans to simplify financial reporting for small businesses, many firms continue to prepare accounts under the Financial Reporting Standard for Smaller Entities (FRSSE). Steve Collings answers some of the most commonly asked questions about it.
Q. My client is eligible to prepare financial statements in accordance with the FRSSE and they do have a material amount of deferred tax, which I have included within provisions for liabilities and charges. Is this correct?
A. This is the correct treatment, but provisions for liabilities and charges are no longer referred to as such anymore; instead they are termed provisions for liabilities.
Q. My client reports under FRSSE but doesn’t prepare a cash flow statement. I have made disclosure in the notes to the accounts that the company is exempt, but is this disclosure really necessary?
A. Many companies choose to disclose the fact that a cash flow statement has not been produced on the grounds that the company is a small company in the eyes of companies legislation. There is no requirement, however, to disclose this fact.
Q. Where in the FRSSE can I get guidance on onerous contracts?
A. Unfortunately the FRSSE does not contain any guidance on onerous contracts and where the FRSSE does not give guidance on transactions or events, you must default to the full standard, which is FRS 12 Provisions, contingent assets and contingent liabilities. In your particular case you should refer to paragraphs 71 and 74 of FRS 12.
Q. In preparing the financial statements for my client which is eligible to apply the FRSSE, I am presuming it is acceptable for the current tax charge and the deferred tax charge to be combined in the notes to the accounts even when they are both material?
A. No, this is not the correct treatment. The FRSSE at paragraph 9.2 requires both the material components of the current and deferred tax charges to be shown separately where they are material.
Q. Is it only companies which report under full FRS that are required to work out the amount of corporation tax payable if assets which have been revalued are sold at the values shown and disclose this amount of tax?
A. No – companies which apply the FRSSE which revalue their assets, or if the market values of the assets have been disclosed, are required to disclose the amount of corporation tax that would be payable or recoverable if the assets were sold at their carrying amounts in accordance with paragraph 9.12 of the FRSSE (effective April 2008).
Q. My client is planning to revalue his buildings but he has heard he can get an experienced valuer to do this, rather than a valuer with actual professional qualifications. Is this right?
A. Yes, this is correct. FRS 15 Tangible Fixed Assets mandates a company that wishes to revalue their property to appoint a qualified external valuer. However, the FRSSE at paragraph 6.24 only refers to an experienced valuer, but your client may wish to consider the valuer’s experience and certainly if the client is subject to external audit, the auditor will also consider the valuer’s experience, independence, objectivity and qualifications in determining whether the valuation is reliable.
Q. My client’s year-end is 31 December 2011 and at that date will have monetary assets and liabilities which are denominated in a foreign currency that contain matching forward contracts. How should these be translated when preparing the year-end accounts?
A. At each balance sheet all monetary assets and liabilities have to be translated into the functional currency (sterling) using the closing rate at the balance sheet date. However, when you have a matching forward contract in respect of trading transactions, the FRSSE permits the use of the rates of exchange which are specified in those contracts (per para 13.4 FRSSE (effective April 2008)).
Q. My client has a deferred tax liability in respect of its defined benefit pension scheme liability. I have chosen to recognise this within the deferred tax liability account. Is this correct?
A. This is not correct. Any deferred tax relating to a defined benefit pension liability must be offset against the defined benefit pension liability and not included within the deferred tax charge itself (Appendix III FRSSE (effective April 2008) para 1 (h)).
Q. My client has some employees which are disabled. Do any disclosures have to be made in the director’s report?
A. Provided the client’s average number of employees does not exceed 250, no disclosure is required. However, where the average number of employees does exceed 250, then a statement must be included in the director’s report showing the policy the company has adopted for:
- giving full and fair consideration to applications for employment by disabled persons, having regard to their particular aptitudes and abilities (FRSSE 2008 para 18.11(A));
- continuing employment and appropriate training for employees of the company who became disabled during the period when they were employed by the company (FRSSE 2008 para 18.11(B)); and
- otherwise for the training, career development and promotion of disabled persons employed by the company (FRSSE 2008 para 18.11(C)).
Q. My client has got some purchased goodwill and he has calculated the amount to be subjected to amortisation using the formula cost – residual value = amount to amortise. Is this correct?
A. Paragraph 6.14 to FRSSE (effective April 2008) states that the residual amount of goodwill will be zero. The full cost of the capitalised goodwill must be amortised on a straight-line (or more appropriate) basis over its useful economic life which cannot exceed 20 years in accordance with paragraph 6.13.
Q. Can goodwill and intangible assets be revalued in the same way as, say, a building?
A. No. Paragraph 6.16 to the FRSSE does not permit the revaluation of goodwill or other intangible assets.
Steve Collings is the audit and technical partner at Leavitt Walmsley Associates Ltd and the author of ‘The Interpretation and Application of International Standards on Auditing’ (Wiley March 2011). He is also the author of ‘The AccountingWEB Guide to IFRS’ and lectures on financial reporting and auditing issues.
