Audit and Technical Partner Leavitt Walmsley Associates Ltd
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FRSME emerges as new micro accounts format

2nd Sep 2014
Audit and Technical Partner Leavitt Walmsley Associates Ltd
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The Financial Reporting Council has released a much anticipated consultation document detailing the future direction for micro-entity accounts following the publication of the government’s outline plan for implementing the EU accounting directive. Steve Collings takes a closer look at the propsals for the Financial Reporting Standard for Micro-Entitites (FRSME).

The most significant changes arising from the EU accounting directive is the change in the small companies’ regime. This shift affects current accounting standards because they may not specify disclosure requirements in addition to the limited number of disclosures contained in the new Accounting Directive. 

Under the new accounting directive a company must still make additional disclosures over and above those contained in the proposed legislation if the minimum disclosures imposed do not enable the financial statements to give a true and fair view.

The FRC was concerned that Europe’s additional disclosures would impose a greater burden on company directors and those charged with governance. For most practitioners, the biggest challenge will be working with clients to ensure their financial statements do give a true and fair view.

The FRC proposals

The FRC set out the new “micro” reporting framework as follows:

  1. Micro entities will apply the ‘Financial Reporting Standard for Micro-Entities’ (FRSME).
  2. Small entities which are not micro-entities will apply FRS 102 ‘The Financial Reporting Standard applicable in the UK and Republic of Ireland’.  The FRC proposes inserting a new section in FRS 102 that will outline presentation and disclosure requirements for small companies based on the new legal provisions.  In all other respects FRS 102 will remain unchanged.
  3. Entities which prepare their financial statements under EU-endorsed IFRS will continue to do so.
  4. Qualifying entities will continue to have the option to prepare financial statements in accordance with the provisions in FRS 101 ‘Reduced Disclosure Framework’.
  5. An entity can still have the option to apply a more comprehensive accounting standard if it wishes.  For example a micro-entity could choose between the new FRSME, FRS 102 applying the small companies’ regime, full FRS 102 or EU-endorsed IFRS.

The FRC is planning to withdraw FRSSE and bring small companies under the scope of FRS 102 (as in point (b) above). The proposals are likely to take effect for accounting periods commencing on or after 1 January 2016.

The consultation document contains a table outlining the revised framework:

Micro-entity Small Larger Listed/group
Current framework (from 1 January 2015)
Turnover limit £632,000 £6.5m N/A N/A
Accounting standard FRSSE special rules FRSSE FRS 102 FRS 101
Based on Old UK and Irish GAAP Old UK and Irish GAAP IFRS
Proposed framework (from 1 January 2016)
Turnover limit £632,000 £10.2m N/A N/A
Accounting standard FRSME - simplified FRS 102 FRS 102 - ltd mandatory disclosures FRS 102 FRS 101

The FRSME

The FRSME is going to be based on the recognition and measurement requirements of FRS 102.  As a consequence, regardless of whether small companies apply the FRSME or the simplified FRS 102 regime they will apply accounting treatments that are consistent with the new UK GAAP (ie full FRS 102).  For example, currently under FRSSE a company with investment property would take fair value fluctuations to the revaluation reserve within equity and report these through the statement of total recognised gains and losses.  Under FRS 102, fair value fluctuations are taken to profit or loss so there would a disparity between the old and new accounting treatment (although under the FRSME such properties would not be subject to revaluation as the legislation does not recognise the alternative accounting rules). 

The FRC said more consistency within accounting treatments will reduce the number of accounting changes necessary as entities grow.

The definition of a micro-entity is contained in sections 384A and 384B of the Companies Act 2006 and the qualifying conditions are met by an entity in a year which it does not exceed two, or more, of the following criteria:

  • Turnover - £632,000
  • Balance sheet total - £316,000
  • Number of employees - 10.

The micro-entities regime is optional and a company that would otherwise qualify to apply the FRSME could choose not to and apply the simplified FRS 102, full FRS 102 or EU-endorsed IFRS (although it is highly unlikely a micro-entity would choose full FRS 102 or EU-endorsed IFRS to prepare its financial statements).  Companies in the Republic of Ireland cannot use the micro-entities regime because no legislation currently exists, but this has been included as part of the DJEI Consultation Document.

The FRSME will be derived from FRS 102 to reflect the requirements of the micro-entities legislation, but with further simplifications. 

The FRC plans to simplify the accounting framework for micro-entities in the new FRSME as follows:

  • Presentation and disclosure requirements as set out in legislation.
  • FRS 102-specific recognition and measurement requirements except for:
    - Financial instruments which will only be measured at amortised or historical cost
    - No requirement to account for deferred tax (many accountants will rhapsodise this simplification)
    - No requirement to account for equity-settled share-based payments prior to the issue of shares
    - Simplified accounting for post-employment benefits.  A micro-entity will be able to account for a defined benefit pension plan as a defined contribution plan
    - Withdrawal of the option to capitalise borrowing costs
    - No requirement to apply sections of FRS 102 which will not generally apply to micro-entities (eg Section 19 on “Business Combinations and Goodwill”, Section 31 “Hyperinflation” and most of Section 34 “Specialised “Activities; the Agriculture sub-section, however, will be retained).

If a micro-entity has derivative financial instruments, the FRSME will not allow these to be accounted for at fair value or require disclosure of the existence and nature of such instruments because the legislation prohibits this - the micro-entities regime does not recognise any provisions of the alternative accounting rules.  However, the FRC said the FRSME will clarify when a derivative instrument becomes onerous and hence the obligation will be recognised at present value.

Conclusion

Financial reporting in the UK continues to undergoing a significant amount of change and accountants are encouraged to submit their comments - particularly if there are any areas of the consultation document concerns them.  The invitation to comment on the proposals is open until 30 November 2014.  After this date the FRC will develop the proposals further and issue exposure drafts for comment.  The FRC are planning to issue final standards on the small companies regime in the summer of 2015.

Replies (17)

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By coolmanwithbeard
02nd Sep 2014 16:10

Thanks for this

As I currently prepare most of my accounts under FRSSE this will be good as I have liked the fact that where there FRSSE wasn't clear I could go to the big brother and check out the principles. It looks like FRSME will work the same way as a simplification of the main standards which is a good thing in the long term. It should also remove the uncertainty that we currently face as users of FRSSE.

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By paulwakefield1
03rd Sep 2014 10:45

Bit of a bore but it's a function of the legislation..

All my clients were on the FRSSE. Now they will split between the FRSME and FRS102 Lite.

The FRSSE is currently 100 pages and FRS102 342 pages. I hope they make the FRS102 version usable and don't tuck away the differences from the full version in occasional small paragraphs.

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By frankdavid
03rd Sep 2014 14:01

????

All my clients are Micro entities.

 

The minimum disclosure under those rules results in a totally meaningless result, anyone doing a Co Ho search is wasting their £1.

 

To make sense of the accounts for the client, HMRC AND me I include a load of notes described on each page as  being "for information only and not  part of the statutory accounts".

 

Anyone filing only the minimum required with HMRC must be surely asking for trouble

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By ljp
03rd Sep 2014 18:09

Comment on Micro-Entities from A/cs Production Software Supplier
ljp of Relate Software We produce FRS 102 compliant templates and software for use by accountants in practice.We have previously advocated the single GAAP approach incorporating a reduced version of FRS 102 for small entities and the dropping of the FRSSE is consistent with this approach. The FRSME when it comes into operation in 2016 will be a further reduction of the measurement rules, but it too will bring consistency with the new GAAP. What we don’t need are both historical GAAPs and modern GAAPs both operating according to the size of the entity. This will increase the amount of work accountants will need to do with no obvious benefit to the client. Of course treating the client as a micro-entity is optional and there are many arguments in favour of rejecting micro-entity accounting, because of the reduced ability of lenders and others to identify whether the client operates a viable business in the current economic conditions. One of the key notes under FRS 102 is “Significant accounting judgements and key sources of estimation uncertainty.” Another is the nature of the financial instruments such as credit, marketing, liquidity, cash flow interest rate and foreign currency risks as well as a sensitivity analysis. This explains a lot about the viability of a client’s business. Small businesses are particularly volatile and such businesses should be required to disclose these matters. Maybe in summary we would advocate the use of FRS 102 throughout, but certain irrelevant matters can be excluded from disclosure according to size.

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By ronlfoot
03rd Sep 2014 23:30

Incomprehensible alternatives using ludicrous acronyms

FRSSEs (various dates), FRS 102, FRSME, GAAPs of various flavours and so on and with a new Brussels-based directive also hurtling towards us down the track.

As if any of it made a jot of difference in the real world.  Tell me, you Masters of the Accounting Universe, who really cares?  Don't you think we could have more important stuff to occupy our chargeable (or mainly non-chargeable!) time?

You know, trivial stuff like helping clients make a profit and pay the "correct" amount of tax.  Or is all that secondary to complying with ever-changing reporting legerdemain?

Answers please in an Exposure Draft not exceeding 500 pages or, If rushed, a UITF abstract (abstract as in ".existing in thought or as an idea but not having a physical or concrete existence".)  Just about defines the stuff up with which we nowadays have to put.. 

 

 

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Replying to lionofludesch:
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By frankdavid
04th Sep 2014 15:36

Too True

ronlfoot wrote:

FRSSEs (various dates), FRS 102, FRSME, GAAPs of various flavours and so on and with a new Brussels-based directive also hurtling towards us down the track.

As if any of it made a jot of difference in the real world.  Tell me, you Masters of the Accounting Universe, who really cares?  Don't you think we could have more important stuff to occupy our chargeable (or mainly non-chargeable!) time?

You know, trivial stuff like helping clients make a profit and pay the "correct" amount of tax.  Or is all that secondary to complying with ever-changing reporting legerdemain?

Answers please in an Exposure Draft not exceeding 500 pages or, If rushed, a UITF abstract (abstract as in ".existing in thought or as an idea but not having a physical or concrete existence".)  Just about defines the stuff up with which we nowadays have to put.. 

 

 

 

Will any of this nonsense stop companies going bust ?  I dont think so

 

Did all those notes and audit reports save Northern Rock, RBS, Lloyds TSB, et al  ?? , maybe not,  but boy did the audit firms do well, they should hang their heads in shame

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By Jas28
04th Sep 2014 09:56

Investment properties

My concern is with the treatment of freehold investment properties held by micro-entities (turnover about £30K from rental income).

I understand that if I use FRS102, I will have to continue to revalue them every year, but the revaluation reserve will have to be transferred to the P&L account, which I think is misleading. Also, (I think) I would have to account for deferred tax on the revaluations.

The alternative is to use the micro-entities regime, which uses historical cost, less depreciation.  It would be much simpler to revert to just showing the properties at cost, and not have to revalue them every year, but it is quite ridiculous to depreciate them when they are worth considerably more than cost.

One of the properties was bought in 1962 for about £16,000 and is currently worth over £200,000, so it would be ridiculous to have to start depreciating the £16,000. Does anyone have any idea what depreciation rates one would be expected to use for an investment property?  Or, is it acceptable to say that (provided the property is maintained) the expected useful life is over 100 years, and the expected residual value is in excess of cost, therefore the depreciation is nil?

I think the mirco-entities regime needs to be amended to say that, where investment properties are shown at cost, there should be no requirement to depreciate them, provided that the directors are satisfied that their value is no less than cost.

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By Bluffer
11th Sep 2014 16:37

Eligibility?

Sorry if I'm missing the obvious but there are three criteria for determining whether an entity qualifies as a micro-entity. However, the table taken from the consultation document shows only turnover as being relevant in determining which accounting standard can be used.

Does this mean that it is proposed that an entity may qualify as a micro-entity by being within the balance sheet total and number of employees criteria but won't be able to use FRSME as its turnover is greater than £632,000?

Thanks in advance.

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Replying to lionofludesch:
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By jizzlebizzle
12th Sep 2014 09:11

the table is misleading...

I attended a course on Tuesday and brought this up. The other 2 tests (gross assets and number of employees) should still be considered - not turnover on its own. I wonder whether the table would get a little crowded with these other bits in!

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By ronlfoot
12th Sep 2014 22:02

Wow ...

... a course on FRSME.  I would have cleared my diary to go to  that.  

I'm just an innocent abroad when it comes to these matters so could some wise old accountant tell me exactly who is going to notice, and more to the point, care which particular set of arcane constructs my local window cleaning company has used in reporting its annual numbers.

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collings
By Steven Collings
13th Sep 2014 16:05

Table
The table above was taken from the FRC's Consultation Document but the "fuller" table is shown in the article linked below:

https://www.accountingweb.co.uk/article/financial-reporting-changes/563374
Regards

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By AndrewV12
17th Sep 2014 10:07

FRSME, EU Accounting directive, Micro entity, FRS

Who is going to be brave enough and first to file a set of Accounts under the new regulations.

Who is going to lay their understanding and cards on the table, it will not be me, or shall we all see what Iris and other Accounting software produces. and take a view.

 

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Teignmouth
By Paul Scholes
17th Sep 2014 23:38

AndrewV12?

You list a number of regs, which one(s) do you think will require bravery? 

We've been filing micros (via Iris) for a few months now and I have no plans to shift from this meaning that my one or two non-micro clients are likely to need to find a new accountant in a year or two. 

(OK so I'm a wuss).

 

 

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Replying to anonanonanon:
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By AndrewV12
18th Sep 2014 09:39

Which regs

Hi Paul

Thank you for the reply, all of the new regs frighten me, you know there are always one or two Accountants that do not understand changes/ are not aware of changes/ mis-interpret changes,  I just dont want to be one of them.

 

Andrew 

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Teignmouth
By Paul Scholes
18th Sep 2014 09:53

Threat & Opportunity

Hi Andrew - Ah I see.  

Until recently, the way I've always looked at these things is that, without changes in regs & legislation I, and most other accountants, would be out of a job, so all of this headless chicken stuff is a godsend to squeeze more money out of clients who are more bewildered (and headless) than you are.

Having now been through over 30 years of this stuff however I (and more importantly my clients) need to put it in the same bucket as VAT returns, ie there's far more interesting stuff to deal with, and so Micro accounts is now my godsend until retirement in a couple of years.

Cluck-Cluck

 

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Replying to Tax Dragon:
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By AndrewV12
19th Sep 2014 09:12

Cluck - Cluck

Got ya!,

See change as an opportunity.  Nice one, something else to bamboozle them.

 

Andrew :) 

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By tigger8596
26th Oct 2015 22:25

Goodwill and share capital
Hi -
I am working on some micro-entity accounts and am unsure what to do with the goodwill of 2000 and share capital of 100 on the formatted accounts. Can you help explain? Do I need to amortised the goodwill? They haven't been in business for more than 2 years.

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