The new small companies’ regime: FAQs

The new accounting standards for small and micro-entities were issued by the Financial Reporting Council (FRC) in July 2015 and become mandatory for accounting periods commencing on or after 1 January 2016.  As the move over to a new UK GAAP draws closer, a number of questions have been asked by accountants who have concerns about the impact that the new frameworks will have on their clients and businesses.  This article addresses some of the most commonly asked questions about the new regime.

The FRSSE has always been fit for purpose.  Why has it been withdrawn?

The FRSSE has been withdrawn because of the EU Accounting Directive (the Directive).  The government completed the transposition of the Directive into company law earlier in 2015.  The Directive basically reduces the level of legally required disclosures that small companies and micro-entities have to make.  As a direct result, the FRC had to reflect the revised Companies Act 2006 in the UK and Republic of Ireland accounting standards.

The FRC decided that the FRSSE could not be sustained in its current format because it mandates more disclosures than would be legally required under the new Companies Act 2006 and hence it is withdrawn for accounting periods commencing on or after 1 January 2016.

Why can a micro-entity not carry investment properties at market value?  It seems wrong that such properties have to be depreciated.

FRS 105 does not recognise any of the alternative accounting rules.  This is not something which the FRC have decided upon; the prohibition of applying the alternative accounting rules for assets such as investment property is because the EU Accounting Directive does not allow micro-entities to carry assets at revaluation or at fair value.  As a result, the FRC had no choice but to prohibit investment properties being measured at revaluation because the standard had to reflect the law.

Under Section 12 Property, Plant and Equipment and Investment Property in FRS 105, the depreciable amount of an investment property is written off on a systematic basis over its useful life (paragraph 12.17).  The depreciable amount is the property’s cost less residual value.  The term ‘residual value’ is defined in the Glossary as:

“The estimated amount that an entity would currently obtain from disposal of an asset, after deducting the estimated costs of disposal, if the asset were already of the age and in the condition expected at the end of its useful life.”

I have a few limited liability partnerships – will it be possible for them to use the new accounting regime?

Limited liability partnerships will not be able to use FRS 105.  They will, however, be able to use FRS 102 with reduced disclosure.  Care should be taken in this respect because eligibility for the small companies’ regime is set out in company law and different thresholds apply to the small companies’ regime and the small LLPs regime as the LLP Regulations have not yet been updated.  Therefore care should be taken to ensure that limited liability partnerships are, in fact, eligible to apply Section 1A of FRS 102.

I have heard that information relating to subsidiaries have to be included in the accounts.  Is this correct?

Yes.  Section 410 of the Companies Act 2006 is being repealed through the Companies, Partnerships and Groups (Accounts and Reports) Regulations 2015 (SI 2015/980).  The effect of this is that companies will have to include details of all their related undertakings in the notes to the financial statements for accounts approved by the directors on or after 1 July 2015.  These accounts must contain details of all related undertakings.

Why are assets not shown separately in a micro-entity’s financial statements?  I would expect to see a breakdown of fixed assets into intangible, tangible and investment property?

The statutory formats in the micro-entities’ legislation are only preceded by letters and not Roman numerals and Arabic numerals.  For example, in a Format 1 balance sheet for a small company fixed assets are shown as follows:

The statutory formats for a micro-entity in respect of fixed assets are only preceded by a letter, hence there is no disaggregation of the balance sheet.

I heard that if a micro-entity were to receive a government grant it should be written off immediately to the profit and loss account.  Is this still the case?

FRED 58 suggested using the ‘performance method’ of grant accounting which would have meant that a government grant would have been recognised immediately in profit or loss regardless of whether the grant might be a capital-based grant.  Some respondents to FRED 58 agreed that the performance method would be simpler, while others suggested the accrual model would be more appropriate because it was easier to apply than the performance method.  Having taken all feedback on board, the Accounting Council of the FRC agreed that the accrual model would be easier to apply and hence FRS 105 only requires the accrual model to be used.  The rigidity of the financial statements for micro-entities would mean that any unamortised grant is subsumed within creditors (i.e. it will not be shown separately as there will be no breakdown of the creditors’ values).

Why do we have to disclose average staff numbers?

The requirement to disclose the average number of persons employed by the company in the financial year for small companies is a requirement of the EU Accounting Directive which has been reflected in the Companies Act 2006.  This is a new requirement for small companies for accounting periods commencing on or after 1 January 2016 as previously small entities have not been required to disclose such information.

If the new Companies Act 2006 limits the amount of disclosures a small company needs to make in its financial statements, why have the FRC issued ‘encouraged disclosures’ as part of FRS 102?

Directors of small companies still have a legal obligation to ensure the financial statements which they approve on behalf of the company give a true and fair view.  There are no ‘deeming provisions’ in the small companies’ legislation as there are in the micro-entities’ legislation.  The FRC are keen to emphasise that the mere application of the legally required minimum disclosures might not be enough to enable a true and fair view to be achieved.  As a result, the FRC have included Appendix D Additional disclosures encouraged for small entities in Section 1A of FRS 102 which the FRC are advising that small companies should be encouraged to disclose.

Where the directors consider additional disclosures are needed to enable a true and fair view to be achieved, they must make those disclosures as per the applicable section of FRS 102 (relevant disclosure requirements are at the end of each section of FRS 102).

Category: Accounting and standards, Audit