On 16 July 2015 the Financial Reporting Council (FRC) issued the new UK GAAP for small and micro-entities. This marked the end of several years’ work by the FRC in introducing an international-based financial reporting framework for companies across the UK and Republic of Ireland.
FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland has already become mandatorily effective for companies not reporting under the FRSSE for accounting periods commencing on or after 1 January 2015. The FRC had no choice but to “fast-forward” the issuance of a new set of standards for small and micro-entities because of the EU Accounting Directive which has been transposed into company law with effect from 6 April 2015 and is applicable for accounting periods commencing on or after 1 January 2016, but for accounting periods commencing on or after 1 January 2015 (but before 1 January 2016) if the directors so wish.
In addition to the issuance of the new standards for small and micro-entities, the FRC took the opportunity make additional minor amendments to the suite of FRSs.
Suite of UK GAAP standards
As well EU-adopted IFRS (which are mainly used for the listed and AIM-listed companies), the following suite of standards will apply to all companies in the UK and Republic of Ireland (although FRS 105 cannot be used in the Republic of Ireland as the legislation has not yet been enacted):
- FRS 100 Application of Financial Reporting Requirements
- FRS 101 Reduced Disclosure Framework
- FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland
- FRS 102 (with reduced disclosures for small companies)
- FRS 103 Insurance Contracts
- FRS 104 Interim Financial Reporting
- FRS 105 The Financial Reporting Standard applicable to the Micro-entities Regime
Small companies have a choice of three standards which they can apply in the preparation of their financial statements:
- FRS 105
- FRS 102 with reduced disclosures
- Full FRS 102
For small companies which are part of a group they can apply FRS 102 with reduced disclosures and FRS 101.
There are differences between FRS 101 and FRS 102 with reduced disclosures. FRS 101 is based on the requirements in EU-adopted IFRS; whilst the reduced disclosures for subsidiaries and parent companies in FRS 102 are based on FRS 102 itself. It is to be noted that both disclosure regimes are optional. Charities are not eligible to apply FRS 101.
The smallest companies in the UK (coined ‘micro-entities’) can use FRS 105 (and indeed some companies are at present using the regime as it has been incorporated into the FRSSE (effective January 2015)). FRS 105 has been developed around the legal framework and from the requirements in FRS 102. However, the micro-entities regime has not been favourably welcomed by a lot of accountants and commentators due to the fact that the disclosure requirements are heavily condensed in comparison to the FRSSE (effective January 2015) requirements and because of the ‘deeming provisions’ within the legislation. The deeming provisions say that where micro-entity financial statements are prepared in accordance with the legislation they are ‘presumed’ to give a true and fair view.
Key features of FRS 105 are shown in the following table:
|Directors have a legal obligation to ensure that the financial statements give a true and fair view and hence must make appropriate disclosures where necessary.||Deeming provisions mean the financial statements are presumed to give a true and fair view. The directors do not need to consider any additional disclosures to give a true and fair view.|
|A profit and loss account, balance sheet and (where appropriate) statement of total recognised gains and losses is needed. A cash flow statement is encouraged but not mandated.||Only a Format 2 profit and loss account and a Format 1 or Format 2 balance sheet is needed. A Format 2 profit and loss account is structured as follows:· Turnover
· Other income
· Cost of raw materials and consumables
· Staff costs
· Depreciation and other amounts written off assets
· Other charges
· Profit or loss
|The balance sheet is disaggregated e.g. tangible fixed assets are split into various components (intangible, tangible and investment property).||No disaggregation of the balance sheet is permitted hence current assets are not shown in the order of liquidity (stock, debtors, bank and cash); the balance sheet will simply show ‘current assets’.|
|More disclosure requirements are needed under the FRSSE.||Only disclosures in respect of advances, credit and guarantees granted to the directors and financial commitments, guarantees and contingencies need be shown at the foot of the balance sheet. No other disclosures are needed as the accounts will be presumed to give a true and fair view.|
|The FRSSE allows the revaluation model or fair value model of accounting to be applied (e.g. to investment property and freehold property).||No fair values or revaluations can be used and hence all previous fair values or revaluations must be removed on transition to FRS 105.|
|More accounting policies exist in the FRSSE (e.g. capitalisation or writing off of borrowing costs).||No accounting policy choices exist in FRS 105 and hence most transactions will be recognised in profit or loss rather than deferred in the balance sheet.|
|Company law requirements are reproduced in the FRSSE.||Not all company law requirements have been reproduced – only those that relate to the financial statements themselves have been reproduced.|
|Deferred tax is recognised.||No deferred tax needs to be accounted for.|
- If the client can apply a particular standard (for example a company whose financial statements are included in group accounts cannot apply the micro-entities regime).
- The needs of users – for example banks may view the substantially reduced disclosure levels in micro-entity accounts unfavourably if the micro-entity needs additional sources of finance and hence the accountant may need to prepare additional, non-statutory information.
- A company in the Republic of Ireland may not yet apply FRS 105 because it depends if the Irish Department of Jobs, Enterprise and Innovation enact the micro-entities legislation and hence they must apply FRS 102 with reduced disclosures as a minimum.
FRS 102 for small companies
When the Department for Business Innovation and Skills (BIS) increased the size thresholds for small companies, they did so quite substantially as they took advantage of the maximum thresholds available in the Accounting Directive (turnover has gone from £6.5 million to £10.2 million for a small company which is not part of a group). According to BIS this will result in an additional 11,000 medium-sized companies being eligible to be re-classified as small and hence being able to take advantage of the new small companies’ regime. This is one of the reasons why BIS was keen to include an early-adoption clause in the revised small companies’ legislation.
Understandably, where a company has to report under FRS 102 with reduced disclosures, the regime is more comprehensive than FRS 105 (the idea being the levels of complexity and disclosure increase the further up the suite of standards you go).
The presentation and disclosure requirements for a small company are outlined in Section 1A Small Entities. This is a new section in FRS 102 and has been substantially re-structured than what was contained in the Exposure Draft and is structured as follows:
- Scope of Section 1A
- True and fair view
- Complete set of financial statements of a small entity
- Information to be presented in the statement of financial position (balance sheet)
- Information to be presented in the income statement (profit and loss account)
- Information to be presented in the notes to the financial statements
- Voluntary preparation of consolidated financial statements
The FRC have also included four appendices to Section 1A. The idea of these appendices is to help preparers in understanding exactly what is required for financial statements of small companies under FRS 102. The FRC recognise that all this is new to a lot of accountants and have therefore included the appendices to help to try and alleviate any difficulties or confusion when applying the requirements.
The appendices are as follows:
- Appendix A: Guidance on adapting the balance sheet formats
- Appendix B: Guidance on adapting the profit and loss account formats
- Appendix C: Disclosure requirements for small entities
- Appendix D: Additional disclosures encouraged for small entities
Appendices A and B
The revised Companies Act 2006 allows companies to adapt the balance sheet formats and profit and loss account formats (Appendix A and B). The idea behind this was for those companies whose accounts are consolidated in with those of a parent company reporting under EU-adopted IFRS. Allowing the statutory formats of the balance sheet and profit and loss account to be adapted allows the consolidation process to be less complicated than before because previously the statutory formats could not be adapted. IAS 1 Presentation of Financial Statements offers flexibility in how the financial statements of an entity reporting under EU-adopted IFRS are presented so difficulties were encountered in the consolidation process. Therefore BIS decided to allow the statutory formats flexibility to be adapted.
In addition, small companies can prepare ‘abridged’ accounts under the revised Companies Act 2006, which essentially allows for less information to be contained in the financial statements provided all the members (shareholders) unanimously agree to the abridgement. In an abridged Format 1 profit and loss account, for example, turnover and cost of sales are not disclosed and the Format 1 profit and loss account starts with ‘Gross profit or loss’.
Appendices C and D
Appendix C covers the disclosure requirements that are needed to comply with the Companies Act 2006 and hence must be contained in the financial statements where they apply.
Appendix D covers the additional disclosures which are encouraged to be included in a small entity’s financial statements. This is in recognition of the fact that directors of small companies still have a legal duty under the Companies Act 2006 to prepare financial statements which give a true and fair view (there are no deeming provisions in FRS 102 for small companies as there is in FRS 105). The encouraged disclosures are as follows:
- statement of compliance with this FRS as set out in paragraph 3.3, adapted to refer to Section 1A;
- a statement that it is a public benefit entity as set out in paragraph PBE3.3A (where applicable);
- the disclosures relating to going concern set out in paragraph 3.9;
- dividends declared and paid or payable during the period (for example, as set out in paragraph 6.5(b)); and
- on first-time adoption of this FRS an explanation of how the transition has affected its financial position and financial performance as set out in paragraph 35.13.
More responsibility will be placed on the directors of a small company (and their advisors) when it comes to the disclosure requirements because merely including the legally required minimum disclosures may not be enough for the financial statements to give a true and fair view. An objective view will have to be taken as to whether the financial statements do give a true and fair view so the directors can adequately discharge their responsibilities under company law.
Key features of FRS 102 versus the FRSSE
Only the presentation and disclosure requirements relating to small companies are set out in a separate section to FRS 102 (Section 1A and the associated appendices). In all other respects, the full recognition and measurement principles of FRS 102 will apply. Some of the key differences between the FRSSE (effective January 2015) and FRS 102 are as follows:
|FRSSE||FRS 102 for small companies|
|Contracted rate for foreign currency can be used.||Contracted rate cannot be used (only spot rate) and a small company will have to use hedge accounting in Section 12 of FRS 102 where it wants to achieve similar results to that of the FRSSE.|
|Disclosure requirements are more extensive as they reflect additional disclosure requirements pre-transposition of the EU Accounting Directive into company law.||Only a limited number of disclosures are required for small companies (13 in total) but directors will have more responsibility to ensure sufficient disclosures are made (over and above the legally required minimum) to achieve a true and fair view.|
|Some financial instruments (e.g. derivatives) do not need to be recognised on the balance sheet.||Derivative instruments (e.g. forward foreign currency contract derivatives and interest rate swaps) will have to be recognised on the balance sheet.|
|Deferred tax is recognised using the timing difference approach and hence no deferred tax is recognised in respect of transactions such as revaluations of certain fixed assets.||Deferred tax is recognised using the timing difference ‘plus’ approach which widens the scope of deferred tax to additional transactions (e.g. the revaluation of certain fixed assets).|
|No performance method available for grant accounting.||FRS 102 allows the use of both the performance method and the accruals method in accounting for grants.|
|Fair value gains and losses in respect of investment property are recognised in a revaluation reserve in equity.||Fair value gains and losses on investment property are recognised in profit or loss.|
|No specific requirement to account for short-term employee benefits (e.g. holiday pay) - although FRS 12 did cite unpaid holiday pay at the balance sheet date as meeting the definition of a liability.||Section 28 of FRS 102 requires any short-term employee benefits accrued by the employee at the balance sheet date but not paid to be accrued.|
This article has focused on the main issues relating to the new accounting standards for small and micro-entities in the UK and Republic of Ireland and more detailed technical articles will be published in the coming months to aid practitioners in applying the new requirements. The new accounting standards will apply to accounting periods commencing on or after 1 January 2016 and earlier adoption is permissible (although if you early-adopt the new standards you can’t ‘mix and match’ old and new – you adopt the entire new package of standards).
The FRSSE (effective January 2015) will no longer apply and this will mark the end of UK GAAP as we have known it.
About Steven Collings
Steve Collings, FMAAT FCCA is the audit and technical partner at Leavitt Walmsley Associates Ltd where Steve trained and qualified.