New UK GAAP- FRS102 (Section 1A) for Small Companies And FRS105 for Micro Entity

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1 New UK GAAP- FRS102 (Section 1A) for Small Companies And FRS105 for Micro Entity

2 Changes to small and micro company accounting regimes The new UK financial reporting framework which is already mandatory for large and medium sized companies, has become mandatory for small companies for accounting periods commencing on or after 1 January At the end of 2015 the Financial Reporting Standard for Smaller Entities (FRSSE) was withdrawn and replaced by FRS102 (Section 1A)- The Financial Reporting Standard applicable in the UK and Republic of Ireland. A further new standard FRS105 has also been introduced that deals with the financial reporting for deemed micro entities. This is the biggest change in the UK financial reporting framework for small companies for years. The Changes have arisen because of UK legal amendments that give force to the EU Accounting Directive and consequent changes to the financial reporting standards. The Amendments to company law have to be adopted for periods beginning on or after 1 January 2016 but can be early adopted for periods beginning on or after 1 January How the changes affect you: Compliance with the new standards is mandatory; The new standards are applicable to accounting periods commencing on or after 1 January 2016, but the transitional rules require restatement of balance sheets from 31 December 2014 onwards; Revised presentation of the accounts, including extended disclosure requirements; Abbreviated accounts are no longer an available option for public filing, although a filleted version of the full accounts may be filed; Potential alterations to tax computations and returns to reflect the new standards. So am I Small or Micro? Only companies can be micro entities and a company that is excluded from the small companies regime cannot qualify as a micro entity. Charities and certain other entities cannot be micro entities. A company can only choose to submit Micro accounts if it is below two out of the three following thresholds and is not excluded from the regime such as charities. Turnover*: Not more than 632,000 Balance sheet total: Not more than 316,000 Average number of employees: Not more than 10 *The turnover limit is adjusted proportionately if the financial year is longer or shorter than twelve months. The rules for qualifying in the first and subsequent financial year are the same as those under the small companies regime. Remember the Micro regime is optional, therefore even if you qualify you can still choose to submit under FRS102 Section 1A. We aim to cover the most significant positives and negatives on the following pages.

3 Transition Date Assuming a normal reporting year end, the first FR102 accounts for small companies will be for years ending 31 December However, the balance sheets at 31 December 2015 and 2014 will need to be restated in order to comply with the new standard, as will the profit and loss account for the year ended 31 December Opening Balance Sheet Date of transition Comparative Period Mandatory implementation 1 January 2015(effectively 31 st December 2014 closing) 31 st December st December 2016 In summary it is at the date of transition (I.e. 1 January 15 for December 16 year ends) when the framework from this new standard has to be applied. Which in turn could lead to the prior year balance sheet being restated under the new regulations. As part of the accounts preparation process for your first set of accounts under the new regulations this will be something that we will discuss with you. It appears the biggest potential impact is where land and buildings are held. The only exemption is in relation to financial instruments where the new accounting regulations may be applied from the first date of the year end accounts that are being drawn up to, rather than the first date of the comparative year.

4 FRS102 Section 1A - What are your key changes? Fixed assets Entities will continue to have the choice of carrying property, plant and equipment at depreciated cost or valuation. If a revaluation policy is adopted this must be reviewed under FRS102 with sufficient regularity as opposed to using no more than 3 years for an interim and no more than 5 years for a full revaluation. On transition entities can choose to use either a revalued amount or have a revaluation and take this as the deemed cost into the new regime. Investment Properties Any investment properties will be initially recognised at cost but thereafter will be valued at their fair value at the Balance Sheet date. All changes to this value will be recognised through the Profit and Loss Account. Deferred tax on uplifts in the carrying value of investment properties will be provided in full. Previously, deferred tax was only recognised if the asset was intended to be sold. The disclosures on investment properties have been extended significantly. It is very important for you to review the potential changes to financial reporting to consider whether these will have an impact upon any bank covenants you have given. If any potential breaches to covenants are identified these will need to be discussed with the bank as soon as possible. Related Party Transactions There will no longer be a requirement for the names of related parties. Transactions and balances will be disclosed by class of related party. There is, however, a new requirement to disclose the compensation of key management personnel including all employee benefits, in addition to directors remuneration. This is potentially a very sensitive area. Related party transactions will need to be disclosed only if they are material and have not been conducted under normal market conditions. Holiday Pay Accruals The basic principle under FRS 102 is that employee benefits such as holiday pay will be recognised as a cost as entitlement to the benefit is earned. This will mean that holiday entitlement not taken at the Balance Sheet date will need to be provided for. Intangible assets Under FRS102 intangible assets, including goodwill, must be written off over 10 years unless there is a solid demonstrable basis for a longer useful life. The useful lives of intangible assets must be finite.

5 Leases You will be pleased to learn that FRS 102 makes no significant changes to lease accounting. Leases will still be capitalised as finance leases if substantially all the risks and rewards of ownership are transferred. The current 90% of value test will no longer be required. If leases do not meet the definition of a finance lease, they will be classified as an operating lease with the rent going through the Profit and Loss Account. However, there will be substantial changes to the disclosures required. On first time adoption, you have the option to reassess whether any lease arrangements are finance lease or operating leases based on the facts at the transition date. Lease incentives will now be spread over the length of the lease rather than over the period to the next rent review. On transition entities may opt to continue with existing treatment providing the lease commenced before transition date. The tax impact on the profit and loss account will be matched by an impact on the tax, therefore a change in policy on transition could significantly alter taxable profits. Financial Instruments FRS 102 requires loans and similar transactions which have a payment period in excess of one year to be recognised at their fair value. This is measured at the present value of the future cash flows discounted at a commercial rate of interest. These rules apply to both inter-company and shareholder/director loans. The amount recognised in the Balance Sheet will be less than the sum borrowed and the financing cost will be released to the Profit and Loss Account over the period of the loan. Financial instruments, such as interest rate swaps or forward foreign currency contracts, will be required by FRS 102 to be included on the Balance Sheet for the first time. It will have a direct impact on reported profits. These financial instruments are initially recognised at fair value, which is normally the transaction price. They are subsequently re-measured at fair value with any changes in the fair value recorded in the Profit and Loss Account. You will also notice substantially more disclosure on the nature of your financial instruments and the associated risks required in the financial statements. Deferred Tax You will need to recognise deferred tax on all timing differences in future. This will include revaluations or other fair value adjustments to fixed assets, including investment properties. Under current UK GAAP, deferred tax was only recognised on revalued property if it was intended to be sold. This will have an effect of reducing net reported assets in your case. You should carefully review any banking covenants and discuss any issues that arise with your funders.

6 Presentation A complete set of financial statements of a small entity shall include all of the following: a) a statement of financial position as at the reporting date (balance sheet); b) an income statement for the reporting period (profit and Loss account); and c) notes In addition to the above required by company law: a) when a small entity recognises gains or losses in other comprehensive income it is encouraged to present a statement of total comprehensive income (Similar to a statement of total recognised gains and losses); b) when a small entity has transactions with equity holders it is encouraged to present a statement of changes in equity, or a statement of income and retained earnings, (this will incorporate dividends and other reserve movements as a primary statement.) No more abbreviated accounts Filing abbreviated accounts will no longer be an available option: The accounts prepared for filing will have to be the same as those prepared for the members. Small companies will continue to be able to choose not to file their profit and loss account and/or directors report. FRS 105 the Financial Reporting Standard applicable to the Micro- Entities Regime FRS 105 the Financial Reporting Standard applicable to the Micro Entities Regime sets out the accounting required by companies that qualify as micro entities. FRS 105 is based on the recognition and measurement requirements of FRS 102 but with some key simplifications. The regime requires limited disclosures and constrains the accounting policies that can be applied. In particular: A balance sheet and profit and loss account are the only primary statements required with limited required disclosures (more can be added). Assets cannot be measured at fair value or a revalued amount. There is no deferred tax. There is no share-based payment accounting prior to the issue of the shares. There is no option to capitalise borrowing or development costs. Micro entity accounts that comply with the minimal legal requirements are presumed to give a true and fair view.

7 Careful consideration on a company by company basis of the advantage and pitfalls of the micro regime should be considered before deciding the route to be taken. For instance, the Micro regime is unlikely to be of interest to a business where: There are growth plans as the financial reporting regime is not designed to be flexible current and potential creditors and lenders may require more information than micro-entity accounts provide Credit rating agencies and banks may need provision of additional information that is not included in micro accounts and this in turn may hold up credit decisions However, the micro regime may be useful for one-person companies with little borrowing interests. We are here to help It is therefore no longer a one size fits all model for Small Companies as we embark on 2017 and we want to ensure that you are prepared and informed about the accounting choices for your business, which include (but are not limited to) the above issues. Please do get in touch to discuss your choices further. We will of course guide you through the transition from FRSSE to FRS in the first relevant financial year and subsequent years as required.