FRSME emerges as new micro accounts format
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:
- Micro entities will apply the ‘Financial Reporting Standard for Micro-Entities’ (FRSME).
- 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.
- Entities which prepare their financial statements under EU-endorsed IFRS will continue to do so.
- Qualifying entities will continue to have the option to prepare financial statements in accordance with the provisions in FRS 101 ‘Reduced Disclosure Framework’.
- 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:
|Current framework (from 1 January 2015)|
|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)|
|Accounting standard||FRSME - simplified FRS 102||FRS 102 - ltd mandatory disclosures||FRS 102||FRS 101|
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.
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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.
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.
Steve Collings, FMAAT FCCA is the audit and technical partner at Leavitt Walmsley Associates Ltd where Steve trained and qualified.