FRS 102 - The new financial reporting standard for 'smaller entities'
2017 will see the majority of ‘small’ Limited Companies and Limited Liability Partnerships (LLP’s) transitioning to the new UK Financial Reporting Standards. The Financial Reporting Standard for Smaller Entities (FRSSE) issued by the old Accounting Standards Board, which most smaller entities previously used, is no longer applicable.
This will perhaps see the biggest change in a generation to our accounts format and presentation.
The overhaul is due to an EU Accounting Directive which the UK has had to incorporate into legislation, despite the subsequent ‘Brexit’. The reasoning behind this directive is supposedly to ensure more accounting consistency across the board and, eventually, reduce some of the burden on small and micro businesses.
This will see a raft of important changes for small businesses and their accountant. These include:
- a potential choice of accounting standard
- one-off transitional adjustments
- tax impact because of the adjustments
- variations on how certain transactions are accounted for
- changes to notes and disclosures
- presentational changes
- new filing requirements at Companies House (abbreviated
What are the choices?
For accounting periods commencing on are after 1st January 2016, small entities will need to choose which new accounting standard to ‘transition’ to. The options are:
- Full FRS 102
- FRS 102 Section 1A (same accounting principles as full FRS 102 but with reduced disclosure)
FRS 105 Micro-entities – discussed on our website - FRS 105: The reporting standard for 'micro entities'
What are the thresholds?
The company size thresholds from 1st January 2016 are as follows:
|Turnover||Balance Sheet Total||Ave. no. of e'ees|
|Micro Entity||< 632k||< £316k||< 10|
|Small Company||< £10.2m||< £5.1m||< 50|
|Small Group||<£10.2m net OR < £12.2m gross||< £5.1m net OR < £6.1m gross||< 50|
|Medium-sized company||< £36m||< £18m||< 250|
|Medium-sized Group||<£36m net OR < £43.2m gross||< £18m net OR < £21.6m gross||< 250|
|Large Company||> £36m||> £18m||> 250|
|Large Group||> £36m net OR > £43.2m gross||> £18m net OR > £21.6m gross||> 250|
There are some additional criteria in addition to the above thresholds.
FRS 105 Micro-entities is discussed in more detail on our website here. Whilst many businesses may qualify as ‘micro-entities’, this standard includes a deemed principle that the accounts are true and fair, if all the standard is applied correctly. Evidence so far suggests this is causing issues for many small business trying to obtain lending, including some cases of credit referencing agencies downgrading them. Based on this we believe that FRS 105 is not appropriate for most businesses, even for a company that qualifies by size criteria.
Disregarding FRS 102 therefore leaves FRS 102 for small companies. This does mean applying the same principles as much larger companies which will result in slightly more complex accounts that will also provide more disclosure than we are previously used to. However, a qualifying small company will be able to apply Section 1A to reduce this disclosure burden as well as using some exemptions to make the transition process easier.
Accounts requirements of FRS 102 Section 1A
FRS 102 Section 1A requires that a full set of accounts contains:
- a balance sheet (statement of financial position)
- a profit and loss account (Income statement)
- notes to the accounts (see below).
In addition, companies will still be required to address company law requirements, and hence include a directors’ report in the annual report for their members.
FRS 102 Section 1A also contains four appendices that lay out various other requirements, guidance and recommendations.
- Appendix A – Guidance on adapting the balance sheet formats
- Appendix B – Guidance on adapting the profit and loss formats
- Appendix C – Disclosure requirements for small entities
- Appendix D – Additional disclosures encouraged for small entities.
What does this mean for you?
In reality, many businesses will be relying on their accountant to ensure that they are moved onto and comply with the most appropriate and relevant accounting standard for them.
It is important to stress however that it remains the responsibility of the directors of a limited company and members of an LLP to prepare accounts that give a true and fair view. It some instances this may mean including the encouraged disclosures or additional disclosures in order to meet the true and fair requirement.
As mentioned above, the same accounting principles as full FRS 102 will still apply.
There can be an increased prominence of fair value accounting, greater volatility of profits and losses, increased instances of deferred tax, removal of the use of contract rate accounting for foreign currency transactions, more financial instruments appearing on balance sheet and some financial instruments (e.g. below market rate transactions) being held at different values.
You can view a summary of key changes that you should be aware of, arising as a result of FRS 102.
As such, there will be new/additional information required to prepare the accounts and changes to the numbers. We will request much of the information needed when requesting your records to prepare the accounts and your client manager will discuss any other subsequent details needed.
In the meantime, you can complete the FRS 102 Impact Checklist below to consider the key impact of FRS 102 Section 1A on your business to discuss with your client manager prior to your year end.
Abbreviated Accounts and Abridged Accounts
Small companies will be familiar with preparing full accounts for the members and then submitting an abbreviated version (which omits the report of the director(s), the profit and loss, many of the supporting notes and reduces the amount of information on the balance sheet).
Under the new rules, regardless of which financial reporting standard is applied, abbreviated accounts will not be allowed.
Instead, companies will be required to file at Companies House whatever accounts they prepare for the shareholders/members but they will still be able to remove the report of director, profit and loss and supporting notes to the profit and loss. This will still mean for many that more information will be publically available than it has previously.
A further step that can be taken to reduce the amount of information on the public record is to prepare accounts with an abridged balance sheet.
An abridged balance sheet removes a breakdown of certain balances such as fixed assets, debtors and creditors. Importantly, the tax creditor is not shown which could be used to estimate net profit; a crucial piece of financial data that most businesses wish to keep confidential.
The downside of abridged accounts is, as mentioned above, only one set of statutory accounts can be prepared which means this information will also be missing from the accounts provided to members/shareholders. It should also be noted that abridged accounts can only be prepared after obtaining consent of 100% of the members and this must be granted annually.
We still believe preparing accounts with an abridged balance sheet to be the best compromise, assuming there is full shareholder/member approval and A4G will provide their clients with an additional supporting management report which will contain most of the numbers missing from the abridged accounts.
If you have any concerns about how the above will affect you, please do give your client manager a call.
FRS 102 Impact Checklist
Please complete the checklist below ensuring you answer all questions and we will be in contact shortly.