The rules governing accounting standards are undergoing the biggest change in 30 years which impacts the way companies have to report their accounts. Here follows a very high-level guide to the new accounting standards that WILL affect your business.

So what is changing and how will this affect your business?

What is changing?

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

Previously, the rules of accounting standards and reporting were governed by a series of regulations under the name of the Generally Accepted Accounting Practice in the UK (UK GAAP) and other guidance published by the UK’s Financial Reporting Council (FRC).

2015 is a transitional period for small and micro businesses who will be able to use an adapted FRSSE, but by 2016 all companies will be reporting under the new UK GAAP.

Small Company Regime

Substantial changes to the Companies Act, are driven by the Companies and Groups (Accounts and Reports ) Regulations 2015 which in turn are driven by changes coming out of Brussels.

What, when and who is affected?

Framework  Overview From 01 January 2015 From 01 January 2016 Company Size
UK GAAP UK GAAP functioned as the overall set of regulations covering how a company’s annual accounts must be prepared.
  •  FRS102
  •  FRS102

 

  • Large
  • Medium
  • Small entities who report under UK GAAP
  • Small entities who did report under FRSSE and want to early adopt FRS 102
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
  •  FRSSE (Revised 2015)

 

 

  • FRS 102 Section 1A – Small Entities
  • Small entities who report under FRSSE
  • Micro

Can’t be used by:

  • Large
  • medium
  • Groups or Co’s prepared under international accounting standards
  • members of ineligible groups
    • PLC
    • Listed Co
    • Regulated by part 4 Financial Services and Markets Act 2000
FRSME FRSME  – Financial reporting standard applicable to the Micro-entities regime N/a To be called FRS105  Micro

Which standard applies to me?

It depends on your company size, so first let us establish whether your company is classed as micro, small, medium or large for reporting purposes.

Micro Small <31/12/2015 Small >01/01/2016 Medium Large
Turnover  ≤£632k  ≤ £6.5m

CA2006 s384a

≤ £10.2m  ≤25.9m
Total assets

(fixed + current assets)

 ≤£316k  ≤ £3.26m ≤ £5.1m  ≤12.9m
Employees  ≤10 ≤ 50 ≤ 50  ≤250
Ref CA2006 s384a CA2006 s382-383  TBC CA2006 s465-466

Note: If a small company is on the threshold of the small/medium definitions, there is a ‘2 year rule’ test that may be applied to see if a company can report under the FRSSE for one more year, even though it may now meet more of the medium company thresholds.

So what are the new standards?

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

Critics of the old system complained that it:

  • was too complex
  • was patchwork in nature
  • placed an unnecessary burden on accounting practitioners
  • was perceived to have an overall lack of consistency
  • failed to ensure standards evolved and adapted to a changing global environment.

In a 2009 policy document, the FRC stated that it wanted the new system to reduce the cost of compliance while effectively balancing the need for less complexity with that of providing “relevant and understandable financial information”.

 

 FRS 100

The Application of Financial Reporting Requirements, this standard sets out the framework of the New UK GAAP. This tells entities which standard to follow.

FRS 101

The Reduced Disclosure Framework, this standard outlines the financial reporting requirements and disclosure exemptions that apply to certain kinds of subsidiary organisations and their ultimate parent companies.

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 102

01 January 2015 – FRS 102 became mandatory for small, medium and large sized entities who report under UK GAAP with accounting periods commencing on or after 1 January 2015

  • Named The Financial Reporting Standard applicable in the UK and Republic of Ireland.
  • This is the standard that applies to most large, small and medium-sized businesses and is based on the pre-existing IFRS for small and medium-sized enterprises (SMEs).
  • FRS 102 replaces almost 3000 pages of current UK and Ireland GAAP with just over 300.
  • While FRS 102 is based on an older standard, it does have some significant differences from the past, namely with regards to investment properties, deferred tax and defined benefit schemes. In terms of what needs to be presented within an annual report, FRS 102 adds a new prominence to cashflow statements, error correction and a move towards alignment with international terminology.

 

FRS 102 Section 1A for Smaller Entities

  • 1 January 2016 replaces FRSSE as the reporting standard for small entities 
  • A simplified version of FRS102 for smaller entities with reduced disclosure requirements for subsidiaries and their ultimate parents

FRS 105

This is a further simplified version of FRS 102 for micro businesses effective for accounting periods beginning on or after 1 January 2016.

 

 How will this change the accounting?

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 reported financial position.

What will the new reports look like?

Abbreviated accounts will no longer exist  – they will be replaced by Abridged Accounts.

Under the current regime, Full Accounts are produced for shareholders, directors and HMRC tax filing and Abbreviated Accounts and produced for filing with Companies House and published in the public domain.

Abridged Accounts

Under the new regime, the Full Accounts will no longer be required and Abbreviated Accounts will be replaced by Abridged Accounts. Abridged Accounts will have less disclosure notes than a full set of accounts and will be available for shareholder purposes and filing with HMRC and Companies house – so long as all shareholders agree. The Abridged Accounts will not need a directors report nor a profit and loss account. In fact, they will provide very little useful detail for the reader of the accounts.

What do businesses need to do?

It should be clear by now that while the New UK GAAP is an important shift in focus and methodology. The new system is likely to have an impact on your business, so it is important to be aware of the changes.

Establish Which of the new reporting standards applies to your businesses? Which reduced disclosures are available?
Identify impact Once you have identified which standard applies to you, drill down into what the likely impacts on your business.
Review Take a look at your internal systems and accounting policies to make sure that all of your records and data is up-to-date and correct.
Know the date The final stage is to be aware of the date that you will be transitioning to the new regime and what changes this is likely to entail.

 

While this might all seem like a confusing mass of acronyms, there is no need to spend your time trying to figure out the complexities of the new system. As accountants, this is our bread and butter, and you can be sure that we already know everything we need to help your business make the shift as painlessly as possible.

Talk to one of our team today to ensure a smooth transition.

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