Proposed radical changes to accounting for smaller companies


Filed Under: AIM-listed

During the summer, the Department for Business, Innovation & Skills (‘BIS’) and The Financial Reporting Council (‘FRC’) have both issued consultation documents on their proposals for the revisions to UK company law and the UK accounting regime applicable to small companies. This has been necessitated by the requirement to implement the new EU Accounting Directive.

The key proposals include:
  • raising the threshold for determining what is a small company to turnover not exceeding £10.2 million, balance sheet total not exceeding £5.1 million with number of employees not exceeding 50. The proposals continue to require two out of three of these thresholds to be met. BIS estimate that this would allow approximately 11,000 additional companies to access a lighter-touch financial reporting framework available under the small company accounting regime. BIS have not proposed an increase to the audit exemption thresholds for the small undertakings as part of the initial implementation of the Accounting Directive;
  • small company financial statements will comprise fewer note disclosures compared to those under the current accounting standards. However, further note disclosures may be added by directors in order to meet the requirement to show a true and fair view;
  • to consider whether small companies should be permitted to prepare an abbreviated balance sheet and abbreviated profit and loss account for members; and
  • amending to 10 years, the maximum useful economic life of goodwill and intangible assets in situations where an entity is not able to estimate a useful economic life.

In light of these proposed changes, the FRC have proposed that the Financial Reporting Standard for Smaller Entities (‘FRSSE’) should be withdrawn, and small companies would be brought within the scope of the FRS 102, The Financial Reporting Standard for the UK and Republic of Ireland, applying its recognition and measurement requirements. FRS 102 would then be amended to include a separate section outlining the presentation and disclosure requirements for small companies.

For companies qualifying as micro-entities, a new standard The Financial Reporting Standard for Micro-Entities (‘FRSME’) would be developed from the recognition and measurement requirements of FRS 102, but adapted to reflect the micro-entities regime and further simplified where appropriate. Consequently, all entities, irrespective of size, would prepare financial statements based on accounting standards that derive from the same accounting principles set out in FRS 102.

For small companies that previously applied the FRSSE, this brings some significant changes to the accounting for financial instruments, further deferred taxation (e.g. on revalued properties), the recognition of holiday pay accruals and the accounting for equity settled share based payments. Further information on the recognition and measurement differences arising from applying FRS 102, can be found in our publication: New UK GAAP – are you ready?

Both BIS and the FRC propose that the changes first apply to financial years beginning on or after January 1 2016.

For more information, or a copy of our New UK GAAP publication, please contact  Simon Wagman.