10 things you may not know about the FRSSE (effective April 2008)
The Financial Reporting Standard for Smaller Entities (FRSSE) (effective April 2008) has been with us since 1997. It’s become a much-loved standard for the profession because it offers a lot less onerous disclosure requirements than full UK GAAP and simplifies a lot of areas.
The reduced reporting requirements inherent in the FRSSE often mean that in some cases the FRSSE might not cover a certain issue. In such situations the user has to default back to full UK GAAP to decipher the correct accounting treatment or disclosure requirement in order that the accounts they are preparing under the FRSSE can still achieve the truth and fairness provision under the Companies Act 2006.
In this article I will summarise 10 issues relating to the FRSSE which you might not be aware of and, where relevant, I will point you in the right direction of where to look.
Revaluation of fixed assets
FRS 15 Tangible Fixed Assets requires a qualified external valuer to perform valuations of property (FRS 15 para 48) whereas the FRSSE at paragraph 6.24 only requires an experienced valuer; there is no mention of the valuer having to be qualified in the FRSSE.
Reviews of useful economic lives – tangible fixed assets
FRS 15 at paragraph 93 states that the useful economic life of a tangible fixed asset should be reviewed at the end of each reporting period. Paragraph 6.40 of the FRSSE requires reviews of useful economic lives to be reviewed ‘regularly’ rather than annually and revised when necessary.
Government grants
The accounting requirements under the FRSSE for government grants are contained in paragraphs 6.54 to 6.57. The FRSSE does not give guidance in relation to grants made for immediate financial support or assistance to a company. It also does not give guidance in relation to grants to reimburse previously incurred costs. If you have such a situation on your hands then you need to follow the accounting treatment in SSAP 4 Accounting for Government Grants at paragraph 23.
Research and development expenditure
Companies applying the FRSSE do not have to disclose:
- the total amount of research and development expenditure charged to profit and loss; or
- movements on deferred development expenditure
Taxation
FRS 16 Current Tax requires companies to make detailed disclosure requirements relating to the major components of the tax charge, similar to the following:
| 2011 2010 |
| £,000 £,000 |
| UK corporation tax |
| Current tax charge on income for the period X X |
| Adjustments in respect of prior periods X X |
| X X |
| Double tax relief (X) (X) |
| X X |
| Foreign tax |
| Current tax charge on income for the period X X |
| Adjustments in respect of prior periods X X |
| Tax on profit on ordinary activities X X |
The FRSSE does not require such disclosures. Also, the FRSSE does not make any reference to tax rates which are to be used for measuring tax.
Related party transactions
The FRSSE recognises that applying the full disclosure requirements in FRS 8 Related Party Disclosures would be too onerous for a small company. The FRSSE, therefore, only requires disclosure of those related party transactions which are considered to be material to the small company applying the FRSSE. If this concession had not been applied in the FRSSE small companies would have had to disclose related party transactions which were material in relation to the other related party.
Renewals accounting
Renewals accounting is contained in FRS 15 Tangible Fixed Assets in paragraphs 97 to 99. The FRSSE does not provide any guidance for dealing with renewals accounting and therefore if you have these situations on your hands you must default back to FRS 15 paras 97 to 99 to apply the correct treatment.
Provisions for onerous contracts
FRS 12 Provisions, Contingent Liabilities and Contingent Assets deals with the provisions that will be required when a client has an onerous contract. Paragraphs 71 to 74 deal specifically with onerous contracts. The FRSSE does not contain any guidance on onerous contracts so you will have to default to FRS 12 and paragraphs 71 to 74 when you need to deal with the accounting treatment for these.
Internally-generated intangible assets
FRS 10 Goodwill and Intangible Assets says at paragraph 14 that ‘an internally developed intangible asset may be capitalised only if it has a readily ascertainable market value’. Also paragraph 43 says that ‘where an intangible asset has a readily ascertainable market value, the asset may be revalued to its market value.’ The FRSSE omits these exceptions for internally developed intangible assets. Paragraph 6.16 of the FRSSE also does not allow goodwill and intangible assets to be revalued.
Arrangement fees on bank loans
Banks who agree loans for small companies will often charge an arrangement fee for such loans. FRS 4 Capital Instruments does not cover the accounting treatment of arrangement fees explicitly and therefore the FRSSE does this for us at paragraph 12.4 where it says:
Where an arrangement fee is such as to represent a significant additional cost of finance when compared to the interest payable over the life of the instrument, the treatment set out in paragraph 12.2 shall be followed. Where this is not the case, it should be charged immediately to the profit and loss account.
For completeness, paragraph 12.2 says that finance costs of borrowings are to be allocated to periods over the life of the borrowings at a constant rate on the carrying amount. It also spells out that all finance costs are charged to the profit and loss account.
Conclusion
UK GAAP is on the cards for a significant amount of change in the foreseeable future, however the plan is to retain the FRSSE in its current form, though eventually the FRSSE will have to be aligned to the new UK GAAP so as to avoid any major disparities between the new regime and the GAAP on which the FRSSE is currently based.
Category: Accounting and standards, Audit
