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Micro-entities: what are the rules?

13th Jan 2016
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Roger Morris explains the accounting requirements for a micro-entity.

Micro-entities are the smallest of companies, and the requirements for their financial statements are much simpler than those of small companies (which in turn are simpler than those of companies than cannot qualify as small).

These requirements are relatively new, in that they first became effective for accounting periods ending on or after 30 September 2013, and could be applied from that date for any company that qualified. To date, the requirements have not been widely adopted, but with all of the changes to UK GAAP that have been covered in the last two editions of Accounting Practice, simplified requirements for the smallest of companies are likely to become more popular.

Definition of a micro-entity

Legislation only permits private limited companies to qualify as a micro-entity, although the following are ineligible to be treated as a micro-entity:

• Any company which does not qualify to be treated as a small (for example, a bank, an insurer, or a financial services business authorised under MiFID).
• A company which is included, anywhere on a worldwide basis, within consolidated financial statements (either as a parent or subsidiary undertaking).
• A charitable company.

So long as it does not fall within a category to render it ineligible, to be treated as a micro-entity a limited company needs to satisfy at least two of the following:

• Turnover should not be more than £632,000, pro-rata if not a 12 month period.
• Its total assets should not be more than £316,000, as reported on the balance sheet.
• It should not have more than 10 employees, averaged on a monthly basis.

On first application, these limits also apply to the comparative period when considering in a current period whether or not a company is a micro-entity, and it will continue to qualify as a micro-entity until it fails to meet two of the above three criteria for two consecutive years.

Presentation and disclosure

Legislation regarding micro-entities sets out minimum presentation and disclosure requirements. Financial statements that comply with these requirements are presumed, in law, to give a true and fair view, and no further disclosures need to be made. These requirements are that micro-entity’s financial statements should include:

• A directors’ report, which should apply ‘small company exemptions’.
• A summarised profit and loss account and balance sheet.
• Disclosure of advances made to directors.
• Disclosure of guarantees provided, and other financial commitments.
• A statement above the signature in the balance sheet stating that the accounts are prepared in accordance with provisions applicable to companies that qualify as micro-entities. Any company preparing accounts in accordance with the micro-entities regime must file a copy of those accounts at Companies House, as legislation has removed the option for that company to file abbreviated accounts.

Recognition and measurement

Legislation regarding micro-entities prohibits the use of alternative accounting and fair value rules, as set out in the Companies Act. Otherwise, the recognition and measurement requirements in the Financial Reporting Standard for Smaller Entities (‘FRSSE’) apply.

The following are examples of accounting treatments that a micro-entity is not permitted to apply:

• Recognition of an investment property at open market valuation.
• Recognition of actuarial gains and losses on a defined benefit pension scheme.
• Recognition of tangible fixed assets at a five yearly valuation.
• Recognition of the fair value of equity settled share based payments.

Items such as depreciation and provisions against assets such as obsolete stock and doubtful debts are adjustments to the carrying value of assets, and are not regarded as ‘fair value accounting’. These will therefore continue to apply for a micro-entity.

Accounting for micro-entities in the future

For accounting periods commencing on or after 1 January 2016 (when the FRSSE is withdrawn from use in the UK), there will be a specific accounting standard for use by a micro-entity, FRS 105: The Financial Reporting Standard applicable to the micro-entities regime. FRS 105 may be applied for any earlier accounting period that ends on or after 30 September 2013.

FRS 105 is based on FRS 102 (a commentary of certain key changes was set out in Accounting Practice, Summer 2015), and as such, when FRS 105 is first applied, certain measurement principles will need to be amended. These will include, for example:

• An amendment to the way in which lease incentives (such as rent free periods) are recognised.
• Forward foreign exchange contracts can translate foreign currency assets and liabilities at the contracted rate of exchange. • The requirement to include, where appropriate, holiday pay accruals.
• FRS 105 additionally prohibits the recognition of deferred tax assets and liabilities.
Separately, for accounting periods commencing on or after 1 January 2016 (or for accounting periods commencing on or after 1 January 2015 if directors so choose), a micro-entity will no longer be required to prepare a directors’ report.
When considering financial reporting requirements applicable to micro-entities, it should be highlighted that this article presents a summary of the financial reporting requirements for a micro-entity, and does not therefore cover every possible scenario.
• Roger Morris, Compliance and Advisory Director, HAT Group of Accountants

This article is taken from “Accounting Practice” the ICPA quarterly magazine. Dedicated to supporting and promoting the needs of the general practitioner. You can find us at www.icpa.org.uk or email [email protected] or by phone on 0800-074-2896.

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