Changes to the FRSSE for micro-entities
On 29 April 2014, the Financial Reporting Council (FRC) issued amendments to the FRSSE (effective April 2008) and (effective January 2015) in respect of the micro-entities’ legislation that became effective in respect of financial years ending on or after 30 September 2013 for financial statements that are filed with the registrar of companies on or after 1 December 2013. It is to be noted at the outset that the amendments only relate to companies in the UK which are micro-entities; there is no such legislation in the Republic of Ireland at present. If such legislation is issued in the Republic of Ireland, the FRSSE will be further amended.
Financial reporting in the UK is undergoing a substantial period of change – most notably with the introduction of FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland for accounting periods commencing on or after 1 January 2015 and also small company financial reporting changes.
The micro-entities’ legislation allows qualifying companies to take advantage of certain exemptions in the preparation of their financial statements. This in turn meant that the FRC had to make changes to the FRSSEs (effective April 2008 and January 2015) because without such changes, a micro-entity would not be complying with the requirements of the FRSSE. Financial statements prepared under the micro-entities’ legislation are ‘presumed’ to give a true and fair view. To all intents and purposes, the FRC had their hands tied and did not have much choice but to issue these amendments because the legislation came from the EU and so had to incorporate the micro-entities’ regime into the FRSSE.
The definition of a micro-entity is contained in sections 384A and 384B of the Companies Act 2006. A company qualifies as a micro-entity in a year in which it does not exceed two or more of the following criteria:
- Turnover £632,000
- Gross assets £316,000
- Employees 10
The above conditions must be met for two consecutive years (with the exception of a newly incorporated company) and where a company does not meet the conditions for two consecutive years it must cease to be a micro-entity.
Example – qualification not met in the current period
A company qualifies for micro-entity classification in the previous accounting period. However, in the current accounting period the company no longer meets the criteria.
In this instance, the company may continue to claim the exemptions available in the current period. If, in the succeeding accounting period the company reverts back to meeting the criteria, the exemptions will continue uninterrupted.
The micro-entities’ legislation will not apply to:
- Certain financial institutions (for example investment undertakings and credit institutions);
- Companies that voluntarily prepare consolidated financial statements (and those entities included in consolidated financial statements); and
- Limited liability partnerships.
Amendments
The FRSSE (effective April 2008 and January 2015) has been amended by the inclusion of paragraph 1.2 which says that a micro-entity preparing its financial statements in accordance with section 393(1A) (individual company accounts which give a true and fair view) must disregard all the presentation and disclosure requirements contained in the FRSSEs (and this includes the formats for both the balance sheet and profit and loss account). However, micro-entities should still apply paragraphs 2.40 and 2.42 (which relate to financial statement formats and the notes which only apply to micro-entities).
Example – additional disclosures
A company qualifies as a micro-entity but chooses to provide additional disclosures concerning related party transactions.
Paragraph 1.2(a) says that where a micro-entity chooses to provide an item of information additional to the micro-entity minimum accounting items, it shall have regard to the requirements of the FRSSE relating to that item. As a consequence, the entity should have regard to Section 15 Related party disclosures in the FRSSE.
Micro-entities which prepare financial statements that only comprise of the minimum accounting items specific to such entities can only apply the specific paragraphs of the FRSSE which apply to micro-entities. The intention here is that micro-entities will take advantage of the reduced presentation and disclosure requirements and at the same time comply with the recognition and measurement requirements of the FRSSE (although the amended FRSSEs simplify the recognition and measurement of fixed assets and investments for micro-entities).
Accounting policy amendments
There are some accounting policy issues that have seen a change that relate only to micro-entities as follows:
- Micro-entities will not be able to adopt the revaluation model in respect of tangible fixed assets;
- Fixed asset investments will not be measured at market value;
- Investment properties will be carried under normal fixed asset rules (i.e. cost less depreciation and impairment instead of fair value); and
- Current asset investments will no longer be measured at current cost.
Example – change in accounting policy
A company that qualifies as a micro-entity has a building that was carried under the revaluation model in accordance with paragraph 6.23 of the FRSSE and has chosen to report under the micro-entities’ legislation.
As the company will not be able to adopt the revaluation model it must account for the building at cost less depreciation and impairment. This will be a change in accounting policy and therefore the amounts for the current and corresponding periods must be restated on the basis of the new accounting policy.
If, on the other hand, the company wished to continue reporting under the revaluation model it could continue using the small companies’ regime (and report under ‘full’ FRSSE) as the micro-entities’ regime is not mandatory.
The problem that can be foreseen with this accounting policy change is that a previous revaluation amount cannot be used as ‘deemed cost’ where a micro-entity previously carried tangible fixed assets under the revaluation model. This is because the micro-entities’ regime only allows micro-entities to use the historical cost accounting rules and these rules require fixed assets to be recognised at purchase price or production cost and hence to use a previous revaluation would give rise to inconsistencies with the new legislation for micro-entities.
Financial statement presentation
Under the micro-entities’ legislation, the balance sheet can be prepared under Format 1 or Format 2 as follows:
Balance sheet – Format 1
A. Called up share capital not paid
B. Fixed assets
C. Current assets
D. Prepayments and accrued income
E. Creditors: amounts falling due within one year
F. Net current assets (liabilities)
G. Total assets less current liabilities
H. Creditors: amounts falling due after more than one year
I. Provisions for liabilities
J. Accruals and deferred income
K. Capital and reserves
Balance sheet – Format 2
ASSETS
A. Called up share capital not paid
B. Fixed assets
C. Current assets
D. Prepayments and accrued income
LIABILITIES
A. Capital and reserves
B. Provisions for liabilities
C. Creditors*
D. Accruals and deferred income
*creditors due within and after more than one year should be shown separately.
The profit and loss account can only be prepared under Format 2 as follows:
A. Turnover
B. Other income
C. Cost of raw materials and consumables
D. Staff costs
E. Depreciation and other amounts written off assets
F. Other charges
G. Tax
H. Profit or loss
Notes to the financial statements
Micro-entities must include notes at the foot of the balance sheet which provide disclosure of:
- Guarantees and other financial commitments as follows:
- Charges on the assets of the company to secure third party liabilities and, where practicable, the amount secured;
- Other contingent liabilities not provided for showing the amount (or estimate) of that liability; its legal nature and whether any valuable security has been provided and, if so, what;
- Aggregate, or estimated, amount of contracts for capital expenditure unprovided for (where practicable);
- Particulars of any pension commitments included in any of the provisions headings in the balance sheet as well as any such commitments where no provision has been made;
- Particulars of any pension commitments which relate wholly or in part to pensions payable to past directors of the company as far as it relates to such pensions;
- Financial commitments that have not been provided for and are relevant in assessing the state of the entity’s affairs;
- Any commitments in the sub-bullets above which are undertaken on behalf or, or for the benefit of, a parent company, fellow subsidiary or any subsidiary of the parent. These must also be disclosed separately from other commitments.
- Directors’ benefits: advances, credits and guarantees as follows:
- Details relating to advances and credits granted by the company to its directors as well as details of guarantees of any kind entered into by the company on behalf of the directors;
- In respect of advances or credits, particulars of its amount; indication of the interest rate; main conditions and any amounts repaid;
- For guarantees, particulars of its main terms; amount of the maximum liability that the company may incur and any amount paid/liability incurred by the company for the purposes of fulfilling the guarantee (this also extends to any losses incurred for the enforcement of the guarantee);
- Totals relating to the amount of advances or credits and any amounts repaid; the amount of the maximum liability that may be incurred by the company in respect of a guarantee and any amount paid/liability incurred by the company for the purposes of fulfilling the guarantee together with any loss incurred for the enforcement of the guarantee;
In respect of directors benefits: advances, credit and guarantees, the requirements above relate to any person who was a director at any time during the financial year and apply to every advance, credit or guarantee subsisting at any time in the financial year to which the accounts relate whenever it was entered into and whether or not the person concerned was a director of the company at the time it was entered into.
Effective date
The micro-entities’ accounting regime in the FRSSEs are effective for accounting periods ending on or after 30 September 2013 for those companies filing accounts with Companies House on or after 1 December 2013. Early adoption is not permissible.
Category: Accounting and standards
