For accounting periods beginning on or after 1 January 2016, small entities (both companies and LLPs) will face significant changes to financial reporting arising from changes to accounting standards and Company Law requirements. There are three significant impacts of the changes on small entities.
Accounting changes: Applying FRS 102 instead of the FRSSE
The application of FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland, becomes mandatory for entities qualifying as small under new and higher limits. This accounting standard replaces the Financial Reporting Standard for Smaller Entities ("FRSSE"). It brings small entities into an accounting regime which includes accounting for certain financial instruments at fair value, accounting for the effect of equity settled share based payment arrangements, the recognition of deferred taxes on assets carried at valuation, booking holiday pay accruals and changes to the recognition of lease incentives. The extent of the financial and commercial impact of such changes will vary from business to business. Our experience of guiding entities for whom this applies already confirms that careful analysis of the accounting and taxation implications will be required.
Preparation of accounts for shareholders and the filing of accounts at Companies House
Alongside these accounting changes, changes to Company Law will mean small companies will lose the option of filing abbreviated accounts. They will instead file the accounts that are prepared for shareholders with the continued option of omitting the director’s report and profit and loss account (‘filleted accounts’). Whilst the new regime makes slight changes to the content of the accounts for shareholders, the most significant impact is the potential sensitivity of disclosing on public record items which were previously omitted in abbreviated accounts. These include directors’ remuneration, dividends and related party transactions.
With approval from each and every shareholder each year, directors may elect to prepare ‘abridged accounts’ including either an abridged balance sheet, abridged profit and loss account or both. Abridged accounts may also be ‘filleted’ and given this option, abridged accounts do not offer substantial advantages over full accounts and we expect the take up to be limited.
Arguably the most significant change is the raising of thresholds that apply to audit exemption. For periods that commence on or after 1 January 2016 the new thresholds are turnover not exceeding £10.2 million, a balance sheet total not exceeding £5.1 million and average number of employees not exceeding 50. Accordingly, entities that previously could not avail of an audit exemption by virtue of their size may now have that possibility. Whilst these measures are truly deregulatory for smaller entities, the option to take this exemption will need careful consideration alongside the interests of external stakeholders, who may still want some form of assurance over the figures in the accounts. Even if there are presently no external stakeholders, plans for business expansion or raising finance may change that and hence demand an audit or an alternative. Equally, where responsibility for accounting is devolved to a finance function, owners may want a degree of independent oversight. Options for different types of assurance do exist in this case:
- Accountant’s report: This involves verifying that the figures in the accounts have been extracted accurately from the underlying accounting records and that the accounts comply with all the relevant disclosure requirements. The engagement does not involve any validation of the underlying accounting records and no conclusion or opinion is provided. A report is appended to the accounts to confirm that they have been compiled by a qualified professional.
- Assurance review: Slightly more detailed, an assurance review entails performance of analytical procedures on the financial statements and judgemental testing of certain areas. Whilst still providing substantially less assurance than an audit, the review concludes with a report included in the accounts communicating that a review has taken place.
- Agreed upon procedures: A flexible approach to assurance, this includes performing agreed procedures on certain areas of interest or risk in the accounts that have been agreed with the directors. A private report is issued on the factual results with no opinion or conclusion to allow the directors to form their own conclusions.
Planning ahead for December 2016 year ends will therefore require careful consideration of the accounting changes, filing requirements and deciding upon the level of external assurance on the accounts that is desired where no audit is now required.
For more information, please contact your usual Blick Rothenberg contact or Sunil Bhavnani at email@example.com