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Tame the new small companies regime

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8th Mar 2016
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Over the last few months many practitioners have been getting to grips with the new small companies’ reporting regime.

The Companies Act 2006 was revised following the transposition of the EU Accounting Directive and the new regime becomes mandatory for accounting periods starting on or after 1 January 2016, although earlier adoption is permissible for accounting periods starting on or after 1 January 2015 but before 1 January 2016, if the directors so wish.

This article will focus on some of the more common questions that have been asked by practitioners over the last few months, particularly in light of the fact that abbreviated financial statements are abolished.

Early-adopting the new regime

The revised Companies Act 2006 becomes mandatory for accounting periods starting on or after 1 January 2016. However, there has been an early-adoption clause built into the legislation which says that a company can choose to early-adopt the regime if the directors so wish.

An early-adoption clause was built into the legislation because the government anticipate that some 11,000 businesses which would have fallen to be classed as medium-sized under the previous Companies Act 2006 will now fall to be classed as small and hence be able to apply the small companies’ regime when preparing their financial statements.

There are two points worthy of emphasis where early-adoption is concerned. First, where a company that was previously medium-sized now falls to be classed as small it can choose to early-adopt the legislation and prepare its financial statements for the year-ended 31 December 2015 under the small companies’ regime.

However, the company will not be allowed to use the Financial Reporting Standard for Smaller Entities (the FRSSE) to do this; the company must instead use FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland and Section 1A Small Entities.

Secondly, early-adopters of the revised legislation will not be able to claim audit exemption. This is because the revised audit exemption thresholds (which reflect the new small company thresholds) can only be applied to periods starting after 1 January 2016 and no early-adoption is permitted.

Filing requirements at Companies House

The concept of abbreviated financial statements is abolished for accounting periods starting on or after 1 January 2016 and it is fair to say that this has caused an element of concern among practitioners and their clients.

Companies must, as a minimum, file the balance sheet together with the balance sheet notes with the registrar. The balance sheet filed will be the balance sheet that has been prepared for the members (i.e. the shareholders). The company can choose to file its profit and loss account and directors’ report if it so wishes, although in practice very few small companies file the full accounts with Companies House.

If the company has prepared ‘abridged’ financial statements then a statement must be made on the balance sheet confirming that all the shareholders have agreed to the company preparing abridged financial statements.

There have been no changes to the filing deadlines and these will remain at nine months for private companies and six months for listed companies.

Limited liability partnerships (LLPs)

For a while there have been differences between the revised small company thresholds and the small LLPs thresholds. The Department for Business Innovation and Skills have now confirmed that these are to be aligned and hence a small LLP will have turnover of not more than £10.2 million, a balance sheet total of not more than £5.1 million and no more than an average number of 50 employees during the year.

In addition, the revisions to the LLP regime means that there are now limits on the number of mandatory notes required in the financial statements (to reflect the same provisions as small companies). Small LLPs can also use alternative layouts when preparing the profit and loss account and balance sheet and can also prepare abridged financial statements (provided all the members of the LLP unanimously agree).

Where the LLP has participating interests, these can be accounted for using the equity method of accounting in the individual financial statements.

Finally, a new micro-entities’ regime is to be incorporated for LLPs and qualifying partnerships. Prior to the deregulatory changes, micro-entities were not permitted to use the micro-entities’ regime.

The new framework for LLPs will apply to financial years starting on or after 1 January 2016. The revised Regulations are to be made available by the summer of 2016.

Financial instruments

FRS 102 will bring some added complexities for businesses because the standard itself is based on the principles in IFRS. A concern of many practitioners is the fact that more emphasis is placed on fair value accounting under FRS 102 and FRS 102 requires certain financial instruments to be measured at fair value (such as derivative financial instruments).

The September 2015 edition of FRS 102 (which includes the presentation and disclosure requirements for small companies) includes an optional exemption at paragraph 35.10(u) which says that a small company adopting FRS 102 for an accounting period starting before 1 January 2017 need not restate comparative information to comply with the fair value measurement requirements of Section 11 Basic Financial Instruments or Section 12 Other Financial Instruments Issues. However, if the small entity has previously carried financial instruments at fair value under outgoing UK GAAP then it should restate those financial instruments to comply with Section 11 and Section 12.

  • Where a small entity takes up the optional exemption then it must:
  • Apply its existing accounting policies to the relevant financial instruments in the comparative information (and is encouraged to disclose this fact);
  • Disclose the accounting policies which the small entity has applied; and
  • Treat any adjustment between the comparative balance sheet date and the balance sheet at the start of the first reporting period which complies with the requirements in Sections 11 and 12 as adjustments in the current reporting period to opening equity.

Turnover

Companies can now prepare abridged financial statements provided that all the shareholders unanimously agree. Abridged financial statements essentially remove the requirement to disclose information preceded by Arabic numerals in the statutory formats in the entity’s financial statements. An abridged profit and loss account will, therefore, start with the gross profit or loss figure, rather than start with turnover because turnover, other income and cost of sales will be combined.

The Financial Reporting Council are keen to remind small companies that there is still a legal requirement to prepare financial statements which give a true and fair view. Therefore, where the company does prepare an abridged profit and loss account, it is encouraged to disclose the turnover amount in the notes to the financial statements.

Conclusion

There have been significant changes made to UK GAAP and legislation which affect all small companies and it is likely that more questions about the new frameworks will begin to emerge as more companies begin their transition. Small companies choosing not to early-adopt must make the transition to new UK GAAP where the accounting period starts on or after 1 January 2016 (i.e. for December 2016 year-ends) and hence transitional information will need to be gathered now to enable the transition to be done correctly.

The Financial Reporting Council have made some Staff Education Notes available free of charge to help practitioners and companies understand certain aspects of FRS 102. Whilst these Staff Education Notes are not authoritative and are not designed as a substitute for understanding the technical aspects of FRS 102, they are extremely helpful and will help in developing an understanding of the new rules in certain complex areas. 

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