2013: A year of change in financial reporting

2013 has certainly been an interesting year in terms of financial reporting!  In March we had the new UK GAAP published which is going to affect many companies in the UK and Republic of Ireland.  In addition, the cash basis for accounting for unincorporated businesses beneath the VAT threshold came into effect and, of course, we have the new ‘micro-entities’ legislation that was eventually published recently. FRED 52: Draft Amendments to the Financial Reporting Standard for Smaller Entities (effective April 2008) was released on 10 December 2013 outlining the Financial Reporting Council’s (FRC) proposals to simplify financial reporting for those entities eligible to apply the FRSSE in light of The Small Companies (Micro-Entities’ Accounts) Regulations 2013 (SI 2013/3008) which was issued in November 2013.

The FRC are proposing to amend the FRSSE (effective April 2008) to allow ‘micro-entities’ to take advantage of the exemptions available in legislation.  Comments on FRED 52 are open until 12 February 2014 and the definition of a micro-entity is contained in sections 384A and 384B Companies Act 2006 and contains three qualifying criteria.  An entity can qualify as a micro-entity if two or more of the following are not exceeded in a year:

• Turnover                         £632,000
• Balance sheet total         £316,000
• Employee head count    10

Companies that fail to meet two out of the above three criteria for two consecutive years will fail to meet the qualifying criteria for micro-entities.

Under the new proposed regime, micro-entities will prepare a balance sheet which will present (where applicable):

Format 1 balance sheet

• Called up share capital not paid
• Fixed assets
• Current assets
• Prepayments and accrued income
• Creditors due within one year
• Net current assets (liabilities)
• Total assets less current liabilities
• Creditors due after more than one year
• Provisions for liabilities
• Accruals and deferred income
• Capital and reserves

Format 2 balance sheet

Assets:

• Called up share capital not paid
• Fixed assets
• Current assets
• Prepayments and accrued income

Liabilities:

• Capital and reserves
• Provisions for liabilities
• Creditors (those due within and more than one year are separated)
• Accruals and deferred income

The profit and loss account for a micro-entity will only show:

• Turnover
• Other income
• Cost of raw materials and consumables
• Staff costs
• Depreciation and other amounts written off assets
• Other charges
• Tax
• Profit or loss

The notes to the financial statements will consist only of:

• Guarantees and other financial commitments
• Directors benefits: advances, credits and guarantees

These notes are to be placed at the foot of the balance sheet.

The micro-entities regulations are effective for financial years ending on or after 30 September 2013 for companies filing their accounts on or after 1 December 2013.  The proposals will not affect the recognition or measurement of amounts included in a micro-entity’s financial statements.  In addition, the proposed amendments will only relate to companies who apply the FRSSE.

FRS 102

FRS 102 is mandatory for accounting periods commencing on or after 1 January 2015 and earlier adoption is permissible.  Over the last 12 months I have lectured on the practical issues relating to FRS 102 and it is fair to say that the reaction by accountants to FRS 102 is mixed with some opinions concerning the new regime being very polarised.  Many accountants argue that there is no need for a new set of accounting standards whilst others agree that changes to the existing standards need to be made.

I see the new UK standards as a welcome change.  The FRC have significantly reduced the standards from approximately 3,000 pages to 300 and this reduction has to be commended.  Rewriting UK GAAP was clearly not an easy job and the FRC have listened to commentators’ remarks about various aspects of UK GAAP and have tried, where possible, to ensure their comments are taken on board (for example, not withdrawing the use of the revaluation model for fixed assets and allowing borrowing costs to be capitalised).  The upshot of this is a UK GAAP that is largely similar to existing standards, although understandably there are some key differences that exist.

In 2014 there will be a document available for download which will illustrate the way to tackle first-time adoption of FRS 102 using figures and disclosure notes to aid practitioners who will be affected by FRS 102 in getting to grips with the new regime as well as giving illustrative disclosure notes relating to first-time adoption.

The main issue relating to the transition will be the cost to the practitioner.  Clearly many clients will be unwilling to pay additional fees for the work involved in moving from existing UK GAAP to FRS 102 and, from experience on the lecture circuit and talking to many practitioners, the cost element is certainly a key concern which has been raised by many.  In a lot of cases the additional work on transition to FRS 102, where accounting policy changes are concerned, will be fairly minimal – this is largely due to the fact that UK standard-setters have always foreseen this change, so have aligned current standards as far as possible to an international-based framework.  However, for some clients, the changes will have more of an impact and these are the ones where the cost element will need careful consideration (for example where stock is valued using LIFO or where the client has investment properties).  Larger practices with medium-sized clients will need to ensure technical staff are up to speed with the new regime and can handle the transition.  The most complex part of the transition will be arriving at the opening balance sheet at the date of transition (which is the start date of the earliest period reported in the accounts – i.e. 1 January 2014 for a 31 December 2015 year-end).  Essentially, the 2013 trial balance will have to be restated to be FRS 102 compliant to arrive at an opening balance sheet as at 1 January 2014 which is where the bulk of the work will lie.  Many software providers are geared up for the change, but it is the practitioner that will have to do the bulk of the work.

Professional bodies are already on the case where FRS 102 is concerned and certainly ACCA member firms will have access to model financial statements prepared to FRS 102 which will be a helpful resource to many.  In addition, this site will also contain more resources next year to help practitioners get ready for the new standards.

Conclusion

Changes to financial reporting are gathering lots of pace and 2014 will see this pace get faster!  This is my final article of 2013 and I would like to take this opportunity of wishing you all the very best for the Festive season.

Category: Accounting and standards, Audit