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 102||FRS 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:
FRS 102 Section 1A
|FRS 103||This standard applies to insurance contracts for companies that use FRS 102.|
|FRS 104||This standard relates to interim financial reporting for entities that utilise FRS 102.|
|FRS 105||This is a super simplified version of FRS 102 for micro businesses – presentation is very much deregulated or simplified.
Not available to:
- UK GAAP: How will the change in reporting standards impact you?
- New UK GAAP: A practical guide to making the transition
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 – Micro||FRS 102 section 1A – Small|
|Where two of the following three criteria must apply for two consecutive accounting periods:||
|The potential impact?||It may affect:
|It may affect:
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 Format||Full Micro Entity Accounts
Filleted Micro Entity Accounts
| Full Small Entity Accounts
*Encouraged but not required
Filleted Small Entity Accounts
*Encouraged but not required
|True and fair view||Directors 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 Account||Companies Act Format 1 or 2
Accounting policies listed in notes to the accounts
|Statutory format for micro companies, based on European formats:
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 Income||Required where amounts had been taken to equity||Not required||Encouraged 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 Sheet||Balance sheet was analysed into component parts – to help the reader understand the accounts – fixed assets split between intangible, tangible, and investment property.
Could be as short as 4 lines.
| Detailed Balance Sheet
Plus Accounting policies
|Disclosures||Sufficient disclosures to ensure true and fair view is presented:
|2 disclosures appended to balance sheet:
4 further disclosures:
|Filing requirements||Abbreviated accounts have been withdrawn.
Option 1: Full Accounts required if audited or preferred. Not required.
Option 2: Fillited Accounts will be filed:
|Option 1A: Full Accounts required if audited or preferred. Not required.
Option 1B: Abridged Accounts will be filed:
Option 2: Filleted Accounts will be 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.