The rules and accounting standards under which limited company accounts are prepared have changed. This article looks at what this means to you and how it could affect your end of year reporting.

Before we dive into the detail, let us take a moment to remind ourselves of the various acronyms and what they mean!

What is UK GAAP?

UK GAAP is the overall set of regulations covering how a company’s annual accounts must be prepared.

What is FRSSE?

In April 2008, a simplified basis for preparing and presenting their financial statements called the FRSSE – Financial Reporting Standard for Smaller Entities was introduced.

  • Published April 2008
  • Revised in January 2015
  • Replaced by FRS 102, FRS 103, FRS 104 and FRS 105 from January 2016

Who are the FRC?

The FRC (Financial Reporting Council) is the independent audit regulator for the UK and Republic of Ireland.  It is the independent disciplinary body for accountants and accountancy firms in the UK and also promotes high-quality corporate governance and reporting, publishing Codes and Standards that companies, auditors, actuaries and accountants adopt.

New UK GAAP

From 1 January 2015, a new financial reporting framework came into effect which consisted of 4 standards published by the FRC. These new standards, collectively known as the New UK GAAP, have been phased in gradually to replace the old system.

  • Accounting periods starting on or after 1 January 2015 – early adoption allowed
  • Accounting periods starting on or after 1 January 2016 – new rules come into effect

 

FRS ???Who does the standard apply to?
FRS 102FRS 102

is the standard that applies to most businesses and is based on the pre-existing IFRS for small and medium-sized enterprises (SMEs).

Significant changes to:

  • investment properties,
  • deferred tax
  • defined benefit schemes.
  • Annual Reporting – FRS102 adds a new prominence to cash flow statements, error correction and a move towards alignment with international terminology.

FRS 102 Section 1A

  • FRS 102 Section 1A – a simpler version for Small Entities who previously reported under FRSSE
FRS 103This standard applies to insurance contracts for companies that use FRS 102.
FRS 104This standard relates to interim financial reporting for entities that utilise FRS 102.
FRS 105This is a super simplified version of FRS 102 for micro businesses – presentation is very much deregulated or simplified.

Not available to:

  • Charities
  • Financial Institutions
  • Companies whose accounts are included in consolidated accounts

Also see:

Why change?

The changes have been driven by changes in the EU directives that have been written into the Companies Act. This means that the FRSSE simply no longer works and had to be replaced by FRS 102 which was designed to comply with the new changes in the Companies Act.

Why does this matter?

The transition to these new accounting standards will mean that a business’ assets, liabilities, profits and losses will be recognised and measured in a new way.

This may not sound like a particularly large change to those who are focused on a business’s day-to-day operations, but changes in measurement often lead to changes in the numbers being reported. This can have a significant effect on a company’s financial position.

For example, some loans have conditions that are based on profit or balance sheet measures and the subtle changes resulting from the move to FRS 102 may move these around.

FRS 102 is likely to apply to the majority of the large and medium-sized businesses in the UK. Smaller entities can use FRS105

The Difference in Reporting Formats

 

 Old FRSSE (Now Retired!)FRS 105 – MicroFRS 102 section 1A – Small
Where two of the following three criteria must apply for two consecutive accounting periods:
  •  Turnover less than £6.5m
  • Assets less than £3.26m
  • Less than 50 employees
  • Turnover less than £632,000
  • Assets less than £316,000
  • Less than 10 employees
  • Turnover less than £10.2m
  • Assets less than £5.1m
  • Less than 50 employees
The potential impact?It may affect:

  • how much tax you pay,
  • or your ability to pay dividends

 

 

It may affect:

  • how much tax you pay,
  • or your ability to pay dividends
  • may change the value of a current contract – loan covenant, profit based remuneration and bonus schemes
  • ‘artificially’ increases the value
Formats
  • Abbreviated Accounts
  • Full Accounts

 

 

 

  • Abbreviated – abolished
  • Full
  • Abridged – simpler format starts at gross profit but requires approval of all members (rather pointless to hide turnover from members)
  • Filleted – filing exemption to remove profit and loss
  •  Abbreviated – abolished
  • Full
  • Abridged – simpler format starts at gross profit but requires approval of all members (rather pointless to hide turnover from members
  • Adapted – more flexible
  • Filleted -filing exemption to remove profit and loss

The accounts filed with Companies House must be those presented to the members – Full or Abridged, they can be filleted to remove P&L and directors report.

Reporting FormatFull Micro Entity Accounts

  • Profit and Loss
  • Balance Sheet with limited required disclosures.

 

 

 

 

Filleted Micro Entity Accounts

  • Balance Sheet with limited required disclosures.

 

 

 Full Small Entity Accounts

  • Directors Report
  • Profit and Loss
  • * STRGL/OCI – Statement of Recognised gains or Losses / Other Comprehensive Income
  • * SOCIE – Statement of Changes in Equity
  • Balance Sheet and notes

*Encouraged but not required

Filleted Small Entity Accounts

  • * STRGL/OCI – Statement of Recognised gains or Losses / Other Comprehensive Income
  • * SOCIE – Statement of Changes in Equity
  • Balance Sheet and notes

*Encouraged but not required

True and fair viewDirectors had a legal obligation to present true and fair view, directors must critically evaluate.True and fair view is presumed.Directors have a legal obligation to present true and fair view, directors must critically evaluate.

Director may choose to disclose additional information if it will provide a true and fair view.

Profit and Loss AccountCompanies Act Format 1 or 2

Flexible format:

  • Turnover
  • Cost of sales
  • Gross profit
  • Overheads
  • Operating profit or loss
  • Tax
  • Profit or loss after tax

 

Accounting policies listed in notes to the accounts

Statutory format for micro companies, based on European formats:

  • Turnover
  • Other income
  • Cost of raw materials and consumables
  • Staff costs
  • Depreciation and other amounts are written off assets
  • Other charges
  • Tax
  • Profit or loss

No accounting policies required

Companies Act Format but:

Becomes Statement of Comprehensive Income (mixes realised profits and losses with unrealised profits and losses, and distributable and non-distributable income – potentially misleading, easily misread.

Businesses have the option to present a P&L and OCI or combine the two statements.

Other Comprehensive IncomeRequired where amounts had been taken to equityNot requiredEncouraged if it helps to present true and fair view.

The OCI statement recognises unrealised gains or losses such as revaluations of assets at fair value, gains or losses due to a change in accounting policy and unrealised currency gains or losses.

 Statement of recognised gain or losses Required where amounts had been taken to equity Not required 

Encouraged if it helps to present true and fair view.

The SRGL starts with the profit or loss for the year and shows gains or losses that are not reported in the profit and loss –  such as revaluations of assets or a prior year adjustment which might correct an accounting error in an earlier period.

 The Balance SheetBalance sheet was analysed into component parts – to help the reader understand the accounts – fixed assets split between intangible, tangible, and investment property.

  1. Debtors notes
  2. Creditors notes
  3. Details of shares

 

Headings only:

  • Fixed Assets
  • Current Assets
  • Creditors due within 1 year
  • Equity

And:

  • No notes
  • No accounting policies

Could be as short as 4 lines.

 Detailed Balance Sheet

Plus Accounting policies

  • Accounting policies
DisclosuresSufficient disclosures to ensure true and fair view is presented:

  • Directors loans
  • Post balance sheet events
  • Exceptional items
  • Going concern
  • Fixed asset notes
  • Analysis of debtors
  • Analysis of creditors
  • Share capital
  • Controlling entity
  • Ultimate parent

 

2 disclosures appended to balance sheet:

  • Advances credits and guarantees (Directors loans owed to company. Balances owed to the director do not need to be reported.)
  • Commitments, contingencies and guarantees (Operating leases)

 

 

  • Fixed Asset Note
  • Fair valuation note
  • Advances credits and guarantees (Directors loans owed to the company)
  • Commitments, contingencies and guarantees (Operating leases)
  • Exceptional items
  • Amounts due or payable after more than 5 years and entire debts covered by valuable security

4 further disclosures:

  • Average number of employees
  • Fixed asset note
  • Revaluation table
  • Related parties
  • Going concern – encouraged (T&F)
  • Dividends declared – encouraged
  • Requirement for true and fair

 

Filing requirementsAbbreviated accounts have been withdrawn.

 

Option 1: Full Accounts required if audited or preferred. Not required.

Option 2: Fillited Accounts will be filed:

  • have fewer disclosure notes than a full set of accounts
  • no directors report required
  • no P&L required
  • no requirement to file auditors report if P&L has not been filed

 

Option 1A: Full Accounts required if audited or preferred. Not required.

Option 1B: Abridged Accounts will be filed:

  • have fewer disclosure notes than a full set of accounts
  • will be available for shareholder purposes
  • includes a separate statement that all shareholders have consented
  • will be filed with HMRC and Companies House

Option 2: Filleted Accounts will be filed:

  • no directors report required
  • no P&L required
  • no requirement to file auditors report if P&L has not been filed
Transition Must derecognise assets, liabilities and accounting estimates

 

Dec 2015 – Restate P&L and BS under FRS 102

Dec 2016 – Prepare P&L and BS under FRS 102

Filing Abridged Accounts

Small businesses and micro entities can no longer submit abbreviated accounts to Companies House – unless they relate to accounting periods beginning before 1 January 2016.

Previously, you may have prepared your full accounts for your members and HMRC and abbreviated accounts for filing on the public record.

For accounting periods that start on or after 1st January 2016, you can send abridged accounts instead of full accounts to Companies House.

These contain a simpler balance sheet which means less information about your company will be publicly available.

Abridged accounts are prepared in a similar way to abbreviated accounts, although the decision to abridge all or part of your annual accounts must be universally pre-agreed by your members.

Abridged accounts are prepared in a European format which means – oddly that the Profit and Loss account starts at the Gross Profit line. In my opinion, if ever there was a way to make your accounts less meaningful for your members – it would be removing the sales and cost of sales lines! But never mind – we can always rely on our management accounts for that information!

Fortunately – we can also opt to remove the P&L from our filings with companies house so the new FRS 102 abridged accounts don’t look an awful lot different to the old FRSSE accounts.

Members’ consent must be obtained in the previous financial year and an accompanying statement must contain the sentence: “members have consented to the abridgement” to outline their approval before the accounts are filed with Companies House.

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