Micro-entity regime. How might the accounts look?
On 1 December 2013, legislation was introduced in the form of SI 2013/3008 The Small Companies (Micro-Entities’ Accounts) Regulations 2013 which was brought in by the European Union with the objective of reducing costs for small companies. The legislation is effective for financial years ending on or after 30 September 2013 and where the company’s financial statements are filed with the Registrar of Companies on or after 1 December 2013.
Under SI 2013/3008 a company qualifies as a micro-entity if it meets at least two of the following three conditions:
- Turnover not more than £632,000
- Gross assets (balance sheet total) not more than £316,000
- Average number of employees not more than 10
Example
A company with a year-end date of 31 December 2013 and has been trading since 1 April 2013 (i.e. a nine-month accounting period). Are there any additional considerations that the company must take into account if the accounting period is less than one year?
Yes. Where an accounting period is not one year, the turnover figure must be adjusted proportionately. In this case the company will use 9/12 x £632,000 to determine whether the entity qualifies as a micro-entity.
Example
A company is the parent of a group of companies and is trying to establish if it qualifies as a micro-entity under the regime.
For companies which are parent companies, the company will qualify as a micro-entity in the financial year only if:
- The company qualifies as a micro-entity in that year;
- The group headed up by the company qualifies as a small group (as defined in Companies Act 2006 section 383(2) to (7)); and
- The company has not voluntary elected to prepare consolidated accounts.
The important point to emphasise where groups are concerned is that care must be taken in assessing whether each company within the group qualifies as a micro-entity. The exemptions available under the micro-entities regime will NOT be available for subsidiary companies that are included in consolidated financial statements for the year. In addition, the micro-entities regime is not applicable to:
- Investment undertakings;
- Financial holding undertakings;
- Credit institutions;
- Insurance undertakings; and
- Charities.
Compliance with the true and fair concept
Financial statements prepared under the Companies Act must give a true and fair view and this concept has been enshrined in legislation for many years. Micro-entities will only be required to disclose minimal amounts of information at the foot of the balance sheet and additional disclosures will not be required thus the accounts are therefore presumed to give a true and fair view as per the legislation applied to micro-entities. The amounts in the financial statements themselves will continue to be prepared under GAAP – it is only the additional disclosures that will not be required, so recognition and measurement issues will continue as normal.
FRED 52 Draft Amendments to the Financial Reporting Standard for Smaller Entities (effective April 2008)
At the end of 2013, the Financial Reporting Council (FRC) issued FRED 52 which outlined proposals to amend the FRSSE (effective April 2008) to take into account the micro-entities regime. The exposure draft is open for comment until 12 February 2014 and in addition to the disclosure reductions for micro-entities it also proposes to (for micro-entities only):
- Withdraw the use of the revaluation model for tangible fixed assets.
- Withdraw the choice to measure fixed asset investments at market value.
- Require micro-entities to account for investment properties using paragraphs 6.19 to 6.26 in the FRSSE as opposed to the specific accounting requirements for investment properties within the FRSSE (effective April 2008) at paragraphs 6.50 to 6.53 (i.e. they will be accounted for under the normal fixed asset rules rather than at fair value).
There are very mixed opinions as to this reduced disclosure regime. Some practitioners are fearful of reduced fees and BIS is of the opinion that micro-entities may well be able to avoid the need for external accountancy and bookkeeping services. I doubt this will be the case in many circumstances because the requirement to prepare the figures using GAAP is still required and the accounts must still give a true and fair view. I also feel that many companies would not wish the burden to prepare their own accounts to be placed on them and feel that such a task is best placed with their accountancy firm. In addition, certain third parties may well require additional, non-statutory information (such as banks in arriving at a lending or borrowing facility decision) because of the potential loss of transparency within the financial statements due to the reduced disclosure.
A sample set of illustrative FULL financial statements showing how the financial statements COULD look like under the micro-entities regime is shown below:
Micro-Entity A Ltd
Directors’ Report for the year ended
31 December 2013
Directors
The directors who have served on the board during the year are as follows:
Mr J Smith
Mrs A Smith
This report has been prepared by taking advantage of the small companies’ exemption in section 415A of the Companies Act 2006.
Mr J Smith
Director
31 January 2014
Micro-Entity A Ltd
Profit and Loss Account
For the year ended
31 December 2013
|
2013 £ |
2012 £ |
|
| Turnover |
58,341 |
69,546 |
| Other income |
4 |
– |
| Cost of raw materials and consumables |
(28,665) |
(30,549) |
| Staff costs |
(11,130) |
(10,267) |
| Depreciation and other amounts written off assets |
(1,575) |
(1,996) |
| Other charges |
(11,660) |
(15,149) |
| Tax |
(1,297) |
(1,256) |
| Profit |
4,018 |
10,329 |
Micro-Entity A Ltd
Balance Sheet
as at 31 December 2013
|
2013 |
2012 |
|||
|
£ |
£ |
£ |
£ |
|
| Fixed assets |
4,803 |
5,988 |
||
| Current assets |
6,285 |
11,754 |
||
| Prepayments and accrued income |
– |
236 |
||
| Creditors: amounts falling due within one year |
(6,491) |
(11,902) |
||
| Net current assets (liabilities) |
(206) |
88 |
||
| Total assets less current liabilities |
4,597 |
6,076 |
||
| Creditors: amounts falling due after more than one year |
(4,490) |
(5,937) |
||
| Net assets |
107 |
139 |
||
|
|
||||
| Capital and reserves |
107 |
139 |
||
Notes to the financial statements
1. Directors’ benefits: advances, credits and guarantees
During the year the company made an advance of £249 to a director of the company in respect of a personal loan. This amount was fully repaid by the year-end.
2. Guarantees and other financial commitments
The company is currently defending itself in a legal claim brought against it by one of its suppliers who are claiming damages for breach of contract amounting to £4,000. No provision has been made in the financial statements for this amount on the grounds that the legal advisers are uncertain as to whether the company will be successful in its defence.
The company had capital commitments contracted, but not provided for, amounting to £1,000.
The company is entitled to exemption from audit under Section 477 of the Companies Act 2006 for the year-ended 31 December 2013. The members have not required the company to obtain an audit of its financial statements for the year-ended 31 December 2013 in accordance with Section 476 of Companies Act 2006.
The directors acknowledge their responsibilities for:
- Ensuring that the company keeps accounting records which comply with the Companies Act 2006; and
- Preparing financial statements which give a true and fair view of the state of the affairs of the company as at the end of each financial year and of its profit or loss for each financial year in accordance with the requirements of the micro-entity provisions.
The above illustrative full financial statements are only a guideline as to how a micro-entity’s accounts MIGHT look under the new regime as the FRC have only just begun the consultation on the amendments to the FRSSE. Additional disclosures may be needed in the directors’ report relating to political and charitable donations or the company’s policy on disabled employees where the average number of employees exceeds 250 but it gives readers’ an idea as to how accounts for smaller companies might look very shortly.
The above illustration assumes that called up share capital has been fully paid. If it had not been fully paid it would be included as ‘Called up share capital not paid’ in the balance sheet above the fixed assets heading. In addition, the above illustration assumes no provisions for liabilities or accruals and deferred income, both of which would otherwise be shown underneath ‘Creditors: amounts falling due after more than one year’ and before ‘Net assets’.
It is also worth pointing out that the directors’ report of a micro-entity is not required to be filed with Companies House.
Conclusion
The above illustrative financial statements offer a guide only as to the form and content of a micro-entity’s financial statements. There may be other requirements once the FRC have finalised the FRSSE but if you would like to respond to FRED 52, the comment period is open until 12 February 2014.
Category: Accounting and standards
