Changes to UK-based small company disclosure requirements
Following the UK’s departure from the EU, the Financial Reporting Council (FRC) is now able to require more disclosure for small companies in the UK. Prior to Brexit, the FRC had stated that it was constrained by the requirements of the EU Accounting Directive, but this is no longer the case.
As part of the periodic review amendments issued on 27 March 2024, the FRC has made amendments to FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland, Section 1A Small Entities, Appendix C Disclosure requirements for small entities in the UK by extending the disclosure requirements. The FRC is of the view that this will be helpful to small entities as there will not be as much reliance needed on professional judgement to enable a true and fair view to be presented in the financial statements; although there will be some element of this required and additional disclosures may still be required to achieve a true and fair view.
These amendments apply mandatorily for accounting periods commencing on or after 1 January 2026 with early adoption permissible (provided all of the periodic review amendments are applied at the same time).
The amendments to FRS 102, Section 1A, Appendix C are as follows (note: where appropriate, reference to other relevant paragraphs have been reproduced in the boxed text for convenience):
General
FRS 102, para 1AC.1 has been amended to clarify that a small entity need not provide a specific disclosure set out in Appendix C if the information resulting from that disclosure is not material. The exception to this rule would be where the disclosure is required by company law.
This additional clarification has been included because the revised Appendix C now mandates disclosure information that may not necessarily be required by law. If that disclosure information is required by law, it must be made regardless of materiality.
Statement of compliance
A small entity must make an explicit and unreserved statement of compliance with FRS 102 (adapted to refer to Section 1A) in the notes to the financial statements.
Keep in mind that a small entity will not be able to make such an explicit and unreserved statement of compliance unless the financial statements comply with all the requirements of FRS 102 (including Section 1A).
Public benefit entities that apply the ‘PBE’ prefixed paragraphs must also make an explicit and unreserved statement of compliance that it is a public benefit entity.
Going concern
A new paragraph 1AC.2C is included which requires a small entity to provide the disclosures set out in paragraphs 3.8A and 3.9. For clarity, paragraphs 3.8A and 3.9 are reproduced as follows:
| When an entity prepares financial statements on a going concern basis, it shall disclose that fact, together with confirmation that management has considered information about the future as set out in paragraph 3.8. It shall also disclose, in accordance with paragraph 8.6, any significant judgements made in assessing the entity’s ability to continue as a going concern. [FRS 102, para 3.8A] |
| When management is aware, in making its assessment, of material uncertainties related to events or conditions that may cast significant doubt upon the entity’s ability to continue as a going concern, the entity shall disclose those uncertainties. When an entity does not prepare financial statements on a going concern basis, it shall disclose that fact, together with the basis on which it prepared the financial statements and the reason why the entity is not regarded as a going concern. [FRS 102, para 3.9] |
Current and deferred tax
Small entities are required to provide the disclosures relating to deferred tax set out in paragraph 29.27(e). For clarity, this paragraph is reproduced as follows:
| The amount of deferred tax liabilities and deferred tax assets at the end of the reporting period for each type of timing difference and the amount of unused tax losses and tax credits. [FRS 102, para 29.27(e)] |
In addition, FRS 102, para 1AC.32C requires a small entity to provide information relating to current tax and deferred tax as set out in paras 29.26 and 29.27(b). Paragraphs 29.26 and 29.27(b) are reproduced as follows:
An entity shall disclose separately the major components of tax expense (income). Such components of tax expense (income) may include:
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A reconciliation between:
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Leasing
Given the significant changes to lease accounting in FRS 102, it was unsurprising that the FRC included additional disclosure requirements for small entities in the UK concerning a small entity’s leasing arrangements as follows:
- Where the small entity is a lessee, a general description of its significant leasing arrangements must be made. There is a similar disclosure requirement in FRS 102, para 20.76.
- Where necessary to enable users to understand the small entity’s significant leasing arrangements, a lessee must provide additional qualitative and quantitative information. There is a similar disclosure requirement in FRS 102, para 20.77, which requires the following minimum information:
- information concerning future cash flows to which the lessee is potentially exposed that are not reflected in the measurement of the lease liability;
- information concerning restrictions or covenants imposed by leases;
- the type of discount rate used in the calculation of lease liabilities; and
- specific information concerning sale and leaseback transactions.
- A small entity must provide the disclosures concerning short-term leases, leases of low-value assets and variable lease payments as set out in paragraphs 20.80(b) to 20.80(d).
For clarity revised paragraphs 20.80(b) to 20.80(d) are reproduced as follows:
| The expense relating to short-term leases accounted for applying paragraph 20.6. This expense need not include the expense relating to leases with a lease term of one month or less. [FRS 102, para 20.80(b)]
The expense relating to leases of low-value assets accounted for applying paragraph 20.6. This expense shall not include the expense relating to short-term leases of low-value assets included in paragraph 20.80(b). [FRS 102, para 20.80(c)] The expense relating to variable lease payments not included in the measurement of lease liabilities. [FRS 102, para 20.80(d)] |
Provisions and contingencies
A small entity is required to provide the disclosures concerning provisions and contingencies as set out in paragraphs 21.14 to 21.17A. For clarity, these paragraphs are reproduced below:
| Disclosures about provisions
For each class of provision, an entity shall disclose the following:
Comparative information for prior periods is not required. [FRS 102, para 21.14] |
| Disclosures about contingent liabilities
Unless the possibility of any outflow of resources in settlement is remote, an entity shall disclose, for each class of contingent liability at the reporting date, a brief description of the nature of the contingent liability and, when practicable:
If it is impracticable to make one or more of these disclosures, that fact shall be stated. [FRS 102, para 21.15] |
| Disclosures about contingent assets
If an inflow of economic benefits is probable (more likely than not) but not virtually certain, an entity shall disclose a description of the nature of the contingent assets at the end of the reporting period, and, when practicable, an estimate of their financial effect, measured using the principles set out in paragraphs 21.7 to 21.11. If it is impracticable to make this disclosure, that fact shall be stated. [FRS 102, para 21.16] |
| Prejudicial disclosures
In extremely rare cases, disclosure of some or all of the information required by paragraphs 21.14 to 21.16 can be expected to prejudice seriously the position of the entity in a dispute with other parties on the subject matter of the provision, contingent liability or contingent asset. In such cases, an entity need not disclose all of the information required by those paragraphs insofar as it relates to the dispute, but shall disclose at least the following:
In relation to contingent liabilities, the following information shall be given:
shall each be stated separately; and
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| Disclosure about financial guarantee contracts
An entity shall disclose the nature and business purpose of the financial guarantee contracts it has issued. If applicable, an entity shall also provide the disclosures required by paragraphs 21.14 and 21.15. [FRS 102, para 21.17A] |
Share-based payment transactions
The small entity must make disclosures in connection with any share-based payment arrangements it undertakes as set out in paragraphs 26.18(a), 26.18(b)(i), 26.18(b)(vi), 26.18(b)(vii) and 26.23. These paragraphs are reproduced as follows (although only the disclosure information that will be required by small entities in the UK is reproduced):
| A description of each type of share-based payment arrangement that existed at any time during the period, including the general terms and conditions of each arrangement, such as vesting requirements, the maximum term of options granted, and the method of settlement (eg whether in cash or equity). An entity with substantially similar types of share-based payment arrangements may aggregate this information. [FRS 102, para 26.18(a)]
The number and weighted average exercise prices of share options for each of the following groups of options: · outstanding at the beginning of the period; · outstanding at the end of the period; and · exercisable at the end of the period. [FRS 102, para 26.18(b)(i), (vi), (vii)] An entity shall disclose the following information about the effect of share-based payment transactions on the entity’s profit or loss for the period and on its financial position:
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Revenue recognition
A small entity is required to provide the disclosures relating to its performance obligations in contracts with customers – specifically the information required by paragraphs 23.135(a) to 23.135(c). The required information from these paragraphs is reproduced as follows:
An entity shall disclose information about its performance obligations in contracts with customers, including a description of:
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Related parties
In contrast to the current (limited) disclosure requirements of FRS 102 (January 2022), para 1AC.35, the FRC has redrafted this entire paragraph and instead requires a small entity to provide the disclosures required by paragraphs 33.9 and 33.14 (subject to the provisions of paragraphs 33.1A and 33.11). Much more comprehensive disclosures will be required by small entities in the UK in respect of related parties and transactions with related parties. Paragraphs 33.9 and 33.14 are reproduced as follows:
If an entity has related party transactions, it shall disclose the nature of the related party relationship as well as information about the transactions, outstanding balances and commitments necessary for an understanding of the potential effect of the relationship on the financial statements. Those disclosure requirements are in addition to the requirements in paragraph 33.7 to disclose key management personnel compensation. At a minimum, disclosures shall include:
Such transactions could include purchases, sales, or transfers of goods or services, leases, guarantees and settlements by the entity on behalf of the related party or vice versa. [FRS 102, para 33.9] An entity may disclose items of a similar nature in the aggregate except when separate disclosure is necessary for an understanding of the effects of related party transactions on the financial statements of the entity. [FRS 102, para 33.14] |
As noted above, FRS 102 provides an exemption from disclosing transactions entered into between two or more wholly owned members of a group and the small entity can take advantage of this disclosure exemption. For clarity, FRS 102 para 33.1A is reproduced as follows:
| Disclosures required by paragraph 33.9 need not be given of transactions entered into between two or more members of a group, provided that any subsidiary which is a party to the transaction is wholly owned by such a member. |
Paragraph 33.11 also provides an exemption as follows:
An entity is exempt from the disclosure requirements of paragraph 33.9 in relation to related party transactions, outstanding balances, and commitments, with:
However, the entity must still disclose a controlling party relationship as required by paragraph 33.5. |
Dividends declared and paid or payable
A small entity must disclose dividends paid or payable during the reporting period.
Transition information
On first-time adoption of FRS 102 (e.g. when the entity transitions from FRS 105 to FRS 102, including those that choose to apply the presentation and disclosure requirements of Section 1A), the small entity must provide an explanation of how the transition has affected its financial position and performance as required by paragraph 35.13. For clarity, paragraph 35.13 is reproduced as follows:
To comply with paragraph 35.12, an entity’s first financial statements prepared using this FRS shall include:
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Impact of the additional disclosure requirements
The FRC has moved all the encouraged disclosure requirements from Appendix E to Appendix C and included additional disclosures relating to:
- Leasing
- Provisions and contingencies
- Share-based payment arrangements
- Taxation
- Revenue recognition
The encouraged disclosures contained in FRS 102 (September 2024), Section 1A, Appendix E are only relevant to small entities in the Republic of Ireland.
Conclusion
On first-time adoption of the periodic review amendments, UK-based small entities are encouraged to ensure the disclosures comply with the new requirements and not simply rely on accounts production software as this could result in errors or omissions. The consequences could be the financial statements are misleading and do not present a true and fair view. Where appropriate, it may be advisable to use an up-to-date disclosure checklist to ensure the completeness and accuracy of disclosure information.
Category: Accounting and standards
