Small businesses are not exempt from the changes to accounting and reporting that are affecting their larger counterparts. Further change, driven by changes in UK Company Law, is on the way for smaller companies.
During 2015, the Department for Business Innovation and Skills (“BIS”) implemented changes to the reporting framework for small and medium-sized entities. Some of the more significant implications of this new framework, which became effective for accounting periods commencing on or after 1 January 2016, are set out below. These may be early adopted for accounting periods that commenced on or after 1 January 2015.
More companies will now fall to be regarded as ‘small’ for accounting and reporting purposes
Companies meeting two of the following three conditions can now qualify for the small companies regime:
- net turnover not exceeding £10.2m;
- total assets not exceeding £5.1m; or
- average number of employees not exceeding 50.
These new thresholds replace the previous thresholds of turnover not exceeding £6.5m, total assets not exceeding £3.26m and average number of employees not exceeding 50. Further, entities in a group containing a Public Limited Company (“PLC”) are now no longer treated as being ineligible to participate in the small companies regime provided the public company itself is not a traded company.
BIS has stated that this will allow 11,000 medium-sized companies to be re-categorised as small. This allows them access to the small companies’ regime with its limited financial statement disclosure requirements, which were also revised when the legislation was enacted. Additionally, parent companies that headed a
medium-sized group under the old size limits were previously required to prepare consolidated financial statements. Under the new limits, where that parent now heads a small group, consolidated financial statements will no longer be required – potentially a significant saving in effort and cost. However, this change must be balanced with the needs of any key stakeholders such as providers of finance.
Abbreviated financial statements are abolished
The new legal framework withdraws the option to file abbreviated financial statements at Companies House. However, with shareholder consent, an option will exist to prepare one set of ‘abridged’ financial statements for shareholders and for Companies House filing purposes. This may present an additional source of efficiency and cost saving.
Withdrawal of the Financial Reporting Standard for Smaller Entities (“FRSSE”)
The FRSSE, itself based on a set of old UK Generally Accepted Accounting Principles (“GAAP”) accounting standards that ceased to apply for periods commencing on or after 1 January 2015, will be withdrawn. All small entities will now be required to apply FRS 102 for accounting periods beginning on or after 1 January 2016. This is one year later than all other sized entities; however, early adoption is permitted for accounting periods commencing on or after 1 January 2015. FRS 102 has been tailored to incorporate a section dealing with small company financial reporting and includes the limited disclosure requirements specified by Company Law.
Companies that continue to be small will need to assess the impact of FRS 102 on their 2016 accounting and plan ahead for their 31 December 2016 accounts. Medium-sized companies and groups that would qualify as small under the new framework should now consider the implications for their 31 December 2015 year ends, as important decisions will need to be made. Early adoption of the new small companies regime may well be advantageous since conversion to FRS 102 is required anyway. Decisions regarding the preparation of consolidated financial statements will also need to be taken in consultation with key stakeholders.
Audit exemption threshold raised
In January of this year, BIS confirmed that the audit exemption thresholds will also be based on the new limits described above. More companies may therefore be able to access the audit exemption. However, company directors, guided by stakeholders, should determine whether voluntary audit, another form of external assurance, or indeed no level of external assurance is appropriate. For audit exemption purposes only, these revised limits will apply for accounting periods commencing on or after 1 January 2016 and cannot be early adopted.
For more information, please contact your usual Blick Rothenberg contact, Simon Wagman on +44 (0)20 7544 8828 or at simon.wagman@blickrothenberg, or Sunil Bhavnani on +44 (0)20 7544 8813 or at firstname.lastname@example.org.