Reporting reforms: Accountants fight back

After taking soundings from around the profession, Steve Collings summarises the arguments surrounding government plans to lessen the administrative burden on micro entities.

In August 2011, the Department for Business Innovation and Skills (BIS) issued a discussion paper entitled ‘Simpler Reporting for the Smallest Businesses’. This discussion paper seems to have caused quite a stir within the profession, mainly because it’s not very clear how the proposals would work in real life. The controversy surrounds the accounting and reporting requirements for clients who would fall to be classed as a ‘micro entity’.

The BIS argues that small companies suffer from over-complex and burdensome reporting requirements that need simplification. The document also highlights small firms' concerns about laws and regulations, accounting and auditing standards and their associated complexities.

Many accountants in practice would, and do, argue that the Financial Reporting Standard for Smaller Entities (FRSSE) is not over-burdensome. And many companies classed as ‘small’ in the eyes of the Companies Act do not require an audit, so why would they be complaining about auditing standards?

The simplification proposals remain vague at the moment and are currently alongside the Office of Tax Simplification’s consultations on small business taxation.

Eligibility
So who would the proposals apply to? In May 2011 the Competitiveness Council defined a ‘micro entity’ as a company with a turnover of less than €500,000 (£440,000), net assets of less than €250,000 (£220,000) and a head count of fewer than 10 people. The proposals estimate that around 60% of firms registered at Companies House will meet this criteria using the ‘two out of three’ test for eligibility.

Savings
The BIS proposals cite savings from £250m to £400m per year purely from exempting eligible firms from preparing accounts. These preliminary figures are based on an estimated benefit range of £60-235 per business, and the overall savings would depend on achieving similar reductions in reporting for the purposes of tax. I think these figures are somewhat misguided.

Structure of the proposals
The proposals suggest that micro-entities will produce very simple sets of ‘accounts’. In summary, a micro-entity eligible to apply the proposals would produce:

• A simplified trading statement (which would replace the profit and loss account)
• A statement of position
• A simplified annual return.

The simplified trading statement would be prepared on a cash (receipts and payments) basis as opposed to the accruals basis. However, the statement of position would include details of shareholders’ funds, fixed assets, cash, debtors, loans, short- and long-term creditors. Presumably the ‘statement of position’ would simply be a list of balances at the end of the accounting period because clearly one cannot apply the concepts of double-entry to a ‘set’ of accounts where one primary statement has been prepared on a cash basis, whilst the other would need an element of the accruals basis being applied in order to recognise things like debtors and creditors. 

In addition to the number changes, the proposals also suggest that the simplified annual return would need to be filed at Companies House within 12 weeks of the end of the financial period. It is also worth pointing out that the proposals would require all companies reporting under this proposed regime to have the same accounting period, which would presumably cause bottlenecks in the workflow of smaller practices.

Regard has to be given to sole practitioners who may struggle with these bottlenecks because whilst 12 weeks is not impossible to produce a set of the simplified accounts, it is generally well-known in practice that many clients leave things until the last minute. Some firms also have a mix of small clients (who would fall to be classed as a ‘micro entity’) and larger clients so if these firms were to have a deluge of micro-entities all needing their accounts done at the same time, it might cause a few logistical issues.

Dissidents
Many accountants believe these proposals are nonsensical and that the people who have been involved with compiling these proposals are so detracted from the day-to-day ‘real life’ occurrences in the world of accountancy that they are just shaking their heads in disbelief. One accountant said to me on a recent lecture that he thought it was quite amusing how people who have clearly never worked in accountancy can suddenly propose to make wholesale (and backward) changes to it.

The Scottish Institute (ICAS) has slammed the proposals saying they fail to see the benefits of these proposals. ICAS have also questioned the cost savings cited by the BIS. James Barber, director of technical policy at ICAS has summed the proposals up by saying, “This proposal could be damaging. It removes a crucial layer of transparency from small businesses. The proposal to introduce a new category of companies prior to a full scale review appears at best to be unwise.”

James Barber is certainly not alone when it comes to these issues. However, some accountants are for the proposals. Some accountants believe that the profession must consider what is right in the interests of micro-entities; some even consider that these proposals are ‘common sense’. 

Which side are you on?
The profession will split between those who welcome the proposals and those that do not. However, my current research suggests the latter group is much, much larger. Many accountants, particularly those in smaller practices whose clients are largely small entities, cannot understand why the proposals talk about “over-burdensome” reporting requirements.

Most people who prepare accounts for small companies using the FRSSE do not find it difficult, or time-consuming. The costs of preparing abbreviated financial statements for submission to Companies House are not high, especially when they are prepared with automated accounts production software. I can find no evidence to show that accountants think that FRSSE is over-burdensome, and many are quite protective of the small business reporting standard. 

So what are the motives behind the proposals? Perhaps we should look at how the proposals link to HMRC’s requirements. Tax legislation in the UK requires accounts to be prepared on an accruals basis under UK GAAP and in addition HMRC now require accounts to be filed electronically using iXBRL as part of the Corporation Tax return. Will HMRC support these proposals if profitability is distorted by a company trading statement prepared on a cash basis? Clearly turnover will be reduced as debtors will not be accounted for, and costs will also be understated due to the fact that creditors won’t be brought into the trading statement. And is HMRC likely to backtrack on its iXBRL filing requirements?

Company legislation requires accounts for entities that have to apply Companies Act 2006 to prepare financial statements that give a true and fair view. It is difficult to see how the true and fair view provisions will be complied with, unless this legislation is also going to be changed.

The proposals are only at consultation stage. Responses to the proposals are open until 30 October 2011 and the document itself contains all the contact information to where your responses should be sent to (on page 7). 

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.