End of FRSSE: proposals for future small business accounting
As the FRSSE gets set for withdrawal, Julia Penny FCA looks at the FRC proposals for small company accounting rules and how the apparently lighter disclosure regime appears to be increasingly complex
At a time when many of us thought that all the proposal stage of new UK GAAP would be at an end, we find ourselves instead with another slew of exposure drafts.
This time it is the implementation of the new EU Accounting Directive, largely dealing with issues for small companies, together with the interpretation of those requirements which has led to the new documents. So what does it mean?
The new FREDs (financial reporting exposure drafts), issued in February 2015, are as follows:
Consultation overview: FREDs 58, 59 and 60 (normally we do not get a separate document like this, but given the length (234 pages) and maybe incomprehensibility of the FREDs to which it refers, the Financial Reporting Council (FRC) has produced a 20-page summary of what they are trying to achieve and how they intend to do so.
FRED 58: the Draft FRS 105: The Financial Reporting Standard applicable to the Micro-entities Regime (not a catchy title, so I shall call it the micro entity standard).
FRED 59: Draft Amendments to FRS 102, The Financial Reporting Standard applicable in the UK and the Republic of Ireland, Small entities and other minor amendments (even less catchy, let’s call it FRS 102 for small entities).
FRED 60: Draft Amendments to FRS 100, Application of Financial Reporting Requirements and FRS 101, Reduced Disclosure Framework – as they are changing who does what in the regime, FRS 100 has to be altered to reflect this and some of the Companies Act changes impact FRS 101.
FRS 100 changes
In outline, the changes proposed create a new structure for the regime, with a separate standard for micro entities and a section within FRS 102 for small (but not micro) entities.
The changes will take effect for accounting periods commencing on or after 1 January 2016 but will be available for early adoption. Note that the requirement for the use of IAS (International Accounting Standards) accounts has not changed.
As always, there is the option for almost all entities to use a regime above the one that is available. So, micro entities may choose to use FRS 102, for example.
The only exception is that charities are not able to use International Financial Reporting Standards (IFRS) for their accounts (see figure 1).
FRS 101 changes
The main point here is that the new Accounting Directive effectively permits some increased flexibility in presentation. This means that entities can either choose normal Companies Act formats or follow the requirements in IAS 1, Presentation of Financial Statements, for the balance sheet and profit and loss. This is available for limited liability partnerships (LLPs) as well as companies.
FRS 102 changes
This is altogether more complicated to get to grips with. The aim, set out by the FRC almost a year ago, was simply to have a version of FRS 102 for small companies with a reduced level of disclosure, or ‘FRS 102 light’.
Essentially, this is still what the FRED is trying to achieve, but the reality is that the changes mix together small company issues, other changes required due to the EU Accounting Directive and a degree of cross-referencing and deletions of requirements that those accustomed to the standalone FRSSE will quite likely find very confusing.
That is before you take into account that the recognition and measurement of items for small (rather than micro) entities have no simplifications compared to full FRS 102.
Remember also, though, that the thresholds set out for which entities qualify as small are changing, as are the rules on ineligibility for certain types of companies. These new limits and the other changes to the accounting regime for small entities are available for early adoption.
So now we know who is using the small regime and that it is available for early adoption, but what does the regime actually require?
As mentioned above, there are no simplifications for recognition and measurement. So for example, if a small entity has a derivative, such as an interest rate swap or a foreign currency forward, it will need to apply the FRS 102 rules.
This means that it is measured at fair value with changes through profit and loss (or consider the option to use hedge accounting).
This might sound harsh for a small entity, but if a small entity is entering into derivative contracts they are better off understanding the nature of the fluctuating values than thinking that this is something only banks need to worry about.
Similarly, if there are share-based payment plans in place they will need to be accounted for fully. But let’s face it, there is nothing to require a small company to enter into a complex arrangement like a share-based payment, so perhaps this is not really too important.
And, of course, there is another, simpler regime, for micro entities, so all is not lost for the smallest companies.
There are some changes in FRS 102 that affect all companies applying it; the maximum period for goodwill write-off where the life cannot be determined will be 10 years instead of five.
But the FRC has clarified in the proposed revisions that this is only going to be applicable in exceptional circumstances, as normally it should be possible to estimate the life of goodwill. There is also a prohibition on the write-back of goodwill (para 27.28).
From a presentation point of view, there is an attempt to set out the requirements for small entities separately, in FRS 102, section 1A. So no requirement for a cashflow statement or statement of changes in equity; though the latter is ‘encouraged’.
This is a word you will see a lot in the new requirements for small entities. The reason is that the Accounting Directive limits the notes that can be required by a member state for small entities to a list of 13.
However, the accounts still need to give a true and fair view. So rather than leave each director or their accountant to consider from scratch which extra disclosures might be needed to give a true and fair view, the new proposed standard is littered with ‘small entities are encouraged to disclose…’.
Interestingly, the limit of 13 on the notes that can be required for small entities appears to have been generously interpreted by the FRC (no doubt in consultation with the Department for Business, Innovation and Services (BIS)).
There are several (notes 1A.14 b–g) which would appear to be outside the list entirely, although presumably are regarded as a subset of para (a), which deals with the disclosure of accounting policies adopted.
As you might expect, the list of 13 is still rather more than that, as many of the notes require a number of subsections. So the list of individual disclosure points is more like 40, rather than 13.
If you were not confused already, then note that the draft FRS 102 also includes changes arising from the implementation of the Accounting Directive, which permits small entities to both prepare and file abridged accounts.
These allow no turnover to be shown and just the main profit and loss, and balance sheet headings – as long as they still give a true and fair view. This change has been matched by a withdrawal of the abbreviated accounts regime.
So, the supposed simplification of accounts for small entities means in summary:
Applying all of the recognition and measurement requirements of FRS 102;
Applying a separate set of disclosure requirements, with consideration of what extra notes might be needed to give a true and fair view;
A decision on whether or not to prepare only abridged accounts, but with members’ permission required for this each year;
The abolition of abbreviated accounts; and
Cross-referencing to the Regulations to check some of the options for presentation.
Next month, we will look at the proposals for micro entities and the comparison between the current FRSSE, Financial Reporting Standard for Smaller Entities’ requirements, the draft FRS 102 requirements for small entities and the draft FRS 105, Financial Reporting Standard applicable to the Micro-entities Regime, requirements for micros say Harris & Co chartered accountants Northampton