Changes affecting small company financial reporting

Eligibility to apply the small companies regime

The small companies regime offers certain simplifications in financial reporting requirements for eligible entities that meet quantitative and qualitative criteria. As a consequence of changes to regulations made in the UK in December 2024, the monetary thresholds for what is regarded as a small company were increased. Consequently, more companies have been eligible to access the small companies regime. This became applicable for financial years beginning on or after 6 April 2025.

For qualifying companies, the revised size limits for determining whether a company is a small company, are met in a year in which the company does not exceed two or more of the following criteria:

(a) Turnover £15 million

(b) Balance sheet total £7.5 million

(c) Average number of employees 50

A company can quality for the small companies regime where it is not excluded for any other reason and meets the above size criteria for two consecutive years. The same limits and criteria also apply to LLPs.

It is expected that more entities can benefit from the reduced reporting requirements that are currently available to small entities.

However, this coincides with significant enhancements to small entity financial reporting arising from the Financial Reporting Council’s (‘FRC’) Periodic Review amendments to FRS 102 The financial reporting standard that applies in the UK.

Disclosures required by FRS 102 Section 1A (Small entities)

Section 1A of FRS 102 sets out the requirements for disclosures in small entity financial statements for entities that choose to apply that section. These are generally less detailed than those for larger entities. The Periodic Review of FRS 102 introduced many changes to the accounting requirements for entities for periods commencing on or after 1 January 2026, and except to the extent excluded in Section 1A of FRS 102, these accounting requirements apply to small entities. These include, but are not limited to, the new revenue and lease accounting models, changes to the fair value concept aligning it with International Financial Reporting Standards, the requirements to disclose material accounting policies, and to make the revised going concern disclosures.

Hitherto, European Law has limited what must be disclosed in small entity financial statements, and the UK, as an EU member state, could not mandate further disclosures other than to encourage additional disclosure with the aim of providing a true and fair view.

With the UK’s exit from the EU, these restrictions have been lifted and the Periodic Review 2024 amendment process provided an opportunity to specify additional disclosures which are expected to be required in order to give a true and fair view, thereby reducing the amount of judgement required of preparers.

Previously encouraged disclosures have now become mandatory, such as a statement of compliance with FRS 102 Section 1A, going concern basis disclosures, and disclosures of dividends paid and payable. Alongside other general Periodic Review amendments and improvements, the key changes are:

1.  The requirements to disclose material accounting policies, this includes extensive and descriptive new policies for revenue recognition and leasing
2.  The removal of the presumption for UK small entities that the entities were a going concern with disclosure only required where there was a departure from this basis. The standard now requires specific disclosure of the fact that the UK small entity’s financial statements have been prepared on a going concern basis, the existence of any material uncertainties relating to the basis or disclosure if the going concern basis is not adopted. As a firm we always believed such disclosure was required to give a true and fair view and this always featured in financial statements prepared by us on behalf of clients
3.  The standard now requires disclosure of all related party transactions for small entities (subject to exemptions available for all sizes of entity such as those transactions with wholly owned members of the group). This removes the judgement that was required in considering whether related party transactions were not conducted under normal market conditions. Disclosure of key management (e.g. directors) compensation remains excluded for small companies, however the overriding requirement of Company Law is that financial statements must give a true and fair view which means that small entities may need to disclose over and above the requirements of the standard. The FRC have stated that this could in principle apply to the disclosure of directors remuneration
4.  Disclosures will now be required in respect of the new lease accounting model which include descriptions of the entity’s significant leasing arrangements, potential cash outflows not included in the measurement of lease liabilities, the discount rates used, the associated expenses and commitments for short term leases and low value leases not included in lease liabilities, variable lease payments not included in the measurement of lease liabilities and reconciliations of right of use asset movements between the beginning and the end of the reporting period
5.  Disclosures are now required in respect of provisions and contingencies as would typically be required for a non-small entity
6.  As would be required for a non-small entity, disclosures will be required in respect of current and deferred taxation which include major components of tax expense, analysis of deferred tax assets and liabilities by type of timing difference and a reconciliation between the tax expense included in the financial statements and the profit or loss on ordinary activities multiplied by the applicable tax rate
7.  The small entity’s performance obligations in its revenue contracts with customers must be disclosed including when the entity typically satisfies those performance obligations, the significant payment terms, the nature of the goods or services that the entity has promised to transfer and an explanation of any instances where the entity is acting as an agent
8.  A small entity now needs to provide a description of the nature and extent of share based payment arrangements it is party to (including group arrangements that its employees or directors participate in), information about the number and weighted average exercise price of options outstanding and the effect on the entity’s profit and loss and financial position
9.  Other disclosures include the impact of applying the Periodic Review amendments and where relevant additional primary statements for total comprehensive income and a statement of changes in equity

Changes to filing exemptions for small companies and other matters

The Economic Crime and Corporate Transparency Act (2023) will introduce further changes aimed at improving transparency over UK companies and other legal entities. As regards what is filed on the public register, changes include the following:

• Remove the option for small companies and micro-businesses to file abridged financial statements
• Require all companies to file profit and loss accounts
• Require small companies to also file their directors’ report
• Require a company claiming an audit exemption to provide an enhanced statement from their directors on the balance sheet, specifying the exemption being claimed and confirming the company is eligible for to take it

Other changes include mandating software-only filing for all financial statements and limiting the number of times that a company can shorten its accounting reference period.

These changes are expected to be applicable to financial statements filed after 1 April 2027. This may therefore coincide with the extensive changes now required for small company financial statement content arising from the FRS 102 Periodic Review amendments.

Would you like to know more?

Get clear, practical guidance on the impact of these changes to you. If you’d like to discuss the above, please speak to your usual Blick Rothenberg contact or Sunil Bhavnani using the form below.