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ABAF Annual Accounting update – October 2016

© M Ulrich

UK Technical Update

Presented by

Mike Ulrich

ABAF Annual Accounting Update – October 2016

© M Ulrich Page 1

1 INTRODUCTION 2

2 IDENTIFYING THE RIGHT GAAP 3

2.1 What are the options 3

2.2 Accounting standards 3

2.3 Revised company law framework 6

2.4 Effective date 6

3 UNDERSTANDING THE REVISED COMPANY LAW FRAMEWORK 8

3.1 Categories of company 8

3.2 Revision of the definition of ineligible companies 9

3.3 Formats 9

4 COMPANY LAW CHANGES FOR SMALL COMPANIES 10

4.1 Introduction 10

4.2 Directors’ reports 10

4.3 Preparation of accounts - Old regulations 10

4.4 Preparation of accounts – new regime 11

4.5 Applying the framework in practice 12

5 ACCOUNTS PRESENTATION UNDER NEW UK GAAP 16

5.1 Formats 16

5.2 Titles for financial statements 16

5.3 Changes affecting all small companies (1) – reductions in the numberof notes 17

5.4 Changes affecting all small companies (2) - Related parties under newregulations 19

6 MICRO-COMPANY ACCOUNTS UNDER THE NEW REGIME 24

6.1 Eligibility 24

6.2 Micro-entity accounts 24

6.3 Accounting standards 25

6.4 Transition to FRS 105 26


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1 IntroductionFor many accountants they have now acquired experience of new UK GAAP asmedium sized and large entities have been required to adopt FRS 102 for periodscommencing on or after 1 January 2015. Additionally, a number of small companieshave early adopted FRS 102 Section 1 A and some very small companies haveadopted FRS 105, Micro-entities.

However, many will have continued with FRSSE and are just now coming to termswith the need for their clients to adopt new UK GAAP. The majority of hot topicscontinue therefore to be around the eligibility to use new UK GAAP, the requirementsof new UK GAAP, making the transition to new UK GAAP, and for the auditors, theaudit implications of new UK GAAP, including the impact on the audit report.

Finally, the FRC has updated its auditing and ethical standards effective for periodscommencing on or after 17 June 2016.


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2 Identifying the right GAAP

2.1 What are the options

Accounts prepared under new UK GAAP are required to follow CA 2006 and therelevant accounting regulations and accounting standards.

2.2 Accounting standards

On 16th June 2015, following the publication of the revised accounting regulations,FRC issued revised standards as outlined in the revised accounting framework.

FRSSE is withdrawn and a revised version of FRS 102 has been produced withguidance for small companies, incorporating the recognition and measurementprinciples of FRS 102 but applying the presentation and disclosure requirements ofthe updated formats and disclosure requirements of company law. Note that this isdescribed as FRS Section 1A small entities. This is because all of the disclosurerequirements have been included within that section and not because that is the onlysection a small company has to comply with! The recognition and measurementrequirements for small companies are the same as in the rest of FRS 102

Note that FRS 102 remains as a single standard but will have three applications:

(a) FRS 102 reduced disclosure applicable to qualifying entities. A qualifying entity isa parent or subsidiary included in consolidated accounts prepared under FRS 102.This option is not available for the group accounts;

(b) FRS 102 Section 1A small entities. For the purposes of this standard, a smallentity includes small companies as defined above together with entities which wouldhave qualified as small if they had been companies; and

(c) Full FRS 102 as applied by everybody else.

Note that (a) and (b) are primarily reductions in disclosure as compared to (c) and donot affect the basic recognition and measurement criteria. For simplicity we will referto the provisions applicable to small entities as FRS 102 for small entities as if it were


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a stand-alone document as was FRSSE. The structure of FRS 102 allows it to beread as such.

If a small company is also a qualifying subsidiary it is able to adopt either FRS 102for small entities or the reduced disclosure option. In practice it will usually preferFRS 102 for small entities for its own accounts as there are fewer disclosures. It willhowever need to collate additional information to enable group accounts to beprepared.

In addition, a new standard has been introduced, based on FRS 102, but designedfor micro-companies (FRS 105).

Finally, there are the two IFRS options:

• IFRS available for any entity;

• FRS 101 which is available for qualifying entities.

In practice, a UK subsidiary of a parent producing group accounts under IFRS willfind that FRS 101 facilitates the preparation of group accounts, but FRS 102 shouldbe considered as it may be a better option in that it may result in an easier transition,lower taxable profits, or stronger balance sheet.

A UK subsidiary of an overseas parent not following IFRS, e.g. one preparing groupaccounts under US GAAP, is unlikely to find FRS 101 attractive, as it will still need toidentify consolidation adjustments to convert to parent GAAP.


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The following table outlines the various options available, together with an indicationof which option a typical entity in each category will elect for.

EUadopted

IFRS(Note 1)

FRS101

(Note 2)

FRS102

FRS 102reduced

disclosure(Note 3)

FRS 102:Section1A smallentities(Note 4)

FRS105

(Note 6,7 & 8)

Listed entity

Group Must

Stand-alone (e.g. VCT) Option Option

Large or medium unlisted

Group Option Option

Stand-alone Option Option

Parent or subsidiary included in publicly available group accounts

IFRS group accounts Option Option Option Option

Non-IFRS groupaccounts

Option Option Option Option

Small group accounts Option Option Option Option Option

Small entity Option Option Option

Micro-entity Option Option Option Option

The key to the table is as follows:

- This option is not available, for example because a plc cannot qualify as small,the reduced disclosure option can only be used in stand-alone accounts, and notgroup accounts.

Option – this option is available

Option – this is the option that the entity is expected to adopt.

Option – this option may be attractive and should be considered. For example, aparent or subsidiary which can use FRS 101 may be better off using FRS 102 giventhe number of disclosures required by FRS 101 or because a lower tax liability or astronger balance sheet results. See also note 6 below where a micro-entity may wishto use fair values and this is precluded from using the micro-standard.

Note 1 – New UK GAAP does not require any entities to move to IFRS, althoughIFRS remains an option for most entities. IFRS may not be used by charities;


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Note 2 - FRS 101 is based on IFRS but with UK presentation and disclosure.Technically, therefore, it represents UK GAAP, although the accounting profit is likelyto be equivalent to the profit included in IAS accounts.

Note that it only applies to the separate accounts of the parent and subsidiaries ofqualifying entities i.e. parents and subsidiaries which are included in publiclyavailable consolidated accounts and where the conditions have been complied with.They are not available in the group accounts themselves.

There is no reason why, in theory, a qualifying entity may not use FRS 101 where thegroup accounts are not prepared under IFRS but in practice an entity is unlikely to doso, as it will still have to prepare a second set of accounts for consolidation purpose.Hence the difference in the rows dealing with group accounts under IFRS and non-IFRS group accounts.

Note 3 - As with FRS 101, FRS 102 reduced disclosure is only available to qualifyingentities i.e. parents and subsidiaries which are included in publicly availableconsolidated accounts and where the conditions have been complied with. They arenot available in the group accounts themselves.

Since the disclosure reductions under FRS 102 are more limited than those for smallcompanies under FRS 102: Section 1A, it is expected that small groups whichchoose to prepare group accounts, and small companies included in group accountsprepared under FRS 102 will opt for FRS 102 Section 1A rather than FRS 102reduced disclosure.

Note 4 - Note that in practice a small company will have two options under companylaw in which to apply FRS 102 for small entities – full accounts or abridged accounts.

Note 5 - FRS 105 states that this option would only be available to micro-companies.See chapter 4 below for an assessment of the impact on unincorporated businesses.

Note 6 - Very small unincorporated businesses (but not LLPs) may elect to use thecash basis of accounting, in which case GAAP is irrelevant!

Note 7 - A micro-entity which wishes to use fair values may not use the micro-entityregime and hence may not use FRSME. Such an entity will therefore opt for FRS 102for small entities.

2.3 Revised company law framework

Statutory Instrument 2005/980 The Companies, Partnerships, and Groups (Accountsand Reports) Regulations 2005 revise the definitions of small medium sizedcompanies and make significant changes to the accounting and filing requirementsfor small companies, which are considered in further detail in below.

2.4 Effective date

2.4.1 Company law

The revised regulations are mandatory for periods commencing on or after 1 January2016, although early adoption is permitted for periods commencing on or after 1January 2015. Note that the ability to early adopt only applies to the accountingregulations and not audit exemption.


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2.4.2 Accounting standards

The effective dates for the various standards are as follows:

Standard Effective date Early adoption

FRS 102 Periods commencing on orafter 1 January 2015

Periods ending on or after31 December 2012

FRS 102 Section 1A smallentities

Periods commencing on orafter 1 January 2016

Periods commencing on orafter 1 January 2015

FRS 105 Periods commencing on orafter 1 January 2016

On issue (16th June 2015)for periods ending after 30September 2013

FRS 102 was revised in September 2015. This version of FRS 102 is mandatory foraccounting periods commencing on or after 1 January 2016. It can be adopted earlyfor accounting periods commencing on or after 1 January 2015 provided the newRegulations are also adopted early. It is not possible to adopt the revised version foraccounting periods commencing prior to 1 January 2015. For example, a companyincorporated on 1 October 2014 with the period end 29 February 2016 would havethe following options.

If you qualified as a small company then it will be able to use FRSSE 2008 for thatperiod end and then adopt FRS 102 (either using or not using section 1A) the periodended 28 February 2017.

If the company was small then it can adopt FRS 102 for this period but it would notbe entitled to use section 1A as the accounting period commenced before 1 January2015. Therefore, it would need to comply with all the measurement and disclosurerequirements of FRS 102.

If the company was not small then it could adopt the previous accounting standardsand transition to FRS 102 accounting period ended 28 February 2017. This wouldresult in a transition date of 1 October 2014 which would then require the necessaryadjustments. Alternatively the company could adopt FRS 102 for its first accountingperiod but would be unable to use the September 2015 revisions of the accountingperiod commenced before 1 January 2015 and the company would not be able toadopt the new Regulations.

In practice the revisions in September 2015 are not wide-ranging. The only one thathas been identified of being significance is that if the directors are unable to make areliable estimate of the life of goodwill then the amortisation period has been revisedto 10 years from the previous 5. As this will only apply in exceptional circumstancesit is unlikely to have a significant impact for many entities.

2.4.3 Link between company law and accounting standards

FRS 102 permits a company to early adopt FRS 102 for small entities, provided thatit also applies the revised company law requirements from the same date.

It also requires an entity to adopt FRS 102 for small entities if it adopts the companylaw changes for a period beginning before 1 January 2016.


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3 Understanding the revised company law framework

3.1 Categories of company

Company law gives four options, although in reality, only three have significantaccounting implications:

(a) The micro-entities regime. Initially introduced for periods ending on or after 30September 2013 in micro-entities regulations, these have now been included in theSmall Companies and Groups (Accounts and Directors’ Report) Regulations 2008 asamended;

(b) The small-companies’ regime. This has been with us for many years. TheCompanies Partnerships and Groups (Accounts and Report Regulations) 2015 SI2015/980 have made significant changes to eligibility, formats, notes and filingrequirements by amending the small companies’ regulations;

(c) Exemptions for medium-sized companies. They have been eligible to fileabbreviated accounts, although the reductions in disclosure are insignificant andmany companies did not use the option. This option now disappears. There are a fewsimplifications for medium sized-companies, but for today we will not consider themseparately from large companies. They are required to comply with the LargeCompanies and Groups (accounts and Directors’ Report) Regulations) 2008, asamended;

(d) Large companies. This is a catch all group which includes anyone not eligible tobe small or medium-sized. They too have to comply with the medium and largecompany regulations.

The revised size criteria are given below.

Turnover Balance sheet total Employees

Old New Old New Old New

Micro-company 632,000 632,000 316,000 316,000 10 10

Small company 6.5 m 10.2 m 3.26 m 5.1 m 50 50

Medium sizedcompany

25.9 m 36.0 m 12.9 m 18.0 m 250 250

Small group

Gross 7.8 m 12.2 m 3.9 m 6.1 m 50 50

Net 6.5 m 10.2 m 3.26 m 5.1 m 50 50

Medium sized group

Gross 31.1 m 43.2 m 15.5 m 21.6 m 250 250

Net 25.9 m 36.0 m 12.9 m 18.0 m 250 250


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For a parent to qualify as small it must head a small group. A group is a small group,if it meets the size criteria and is not an ineligible group. Note the two tests indetermining whether a group is small, the net and gross tests, both of which areincreased in line with the increase in individual company accounts.

The qualification rules require a company to meet at least two out of the three criteriafor two successive years to qualify, except in the first year. Thereafter, if it fails tomeet at least two out of three criteria for two successive years it loses the right to usethe relevant provisions.

3.2 Revision of the definition of ineligible companies

3.2.1 Member of a group including a plc can be small

A public company has not previously been entitled to use the small companies’regime. BIS consulted on extending the eligibility rules to permit a plc to be within thesmall companies’ regime, but decided not to go that far. They did, however, revisethe definition of an ineligible group such that, although a plc itself cannot be a smallcompany, a member of a group which contains a plc can be, unless the plc is traded.

Therefore, a subsidiary of a plc which is not traded is eligible to use the smallcompanies’ regime. As such it will be eligible to use the simplified accountingrequirements of company law and accounting standards and be audit exempt. Itwould also appear that such a company may qualify as a micro-company, if smallenough. There are no other changes in eligibility.

3.2.2 Group including a plc eligible not to prepare group accountsif would be small on a size basis

The definition of an ineligible group, has been amended such that a group whichincludes a plc is entitled to the exemption from the requirement to prepare groupaccounts if it meets the size criteria. This does not apply if the plc is traded i.e. listedon a market such as the main listing or AIM.

3.3 Formats

Statutory Instrument 2015/980 made some amendments to the formats for examplereducing the options for the balance sheet from 4 to 2. It also introduced someflexibility in the layout and terminology for the balance sheet and profit and lossaccount. In practice it is expected that little will change.

Appendix 1 illustrates the formats available under the revised regulations which nowadopt a building-block approach as follows:

• A micro-company is only required to include items with an alphabetic prefix;

• A small company producing abridged accounts (see below) is only required toinclude items with an alphabetic or roman prefix;

• All other companies are required to include all three prefixed headings.


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4 Company law changes for small companies

4.1 Introduction

The changes for small companies are significant, both under company law andaccounting standards, which as noted above must be adopted as a package. In otherwords, the company law changes and FRS 102 for small entities must be adopted atthe same time. An entity cannot early adopt one without early adopting the other.

4.2 Directors’ reports

A small company is required to include a directors’ report but is not required toinclude a strategic report.

4.3 Preparation of accounts - Old regulations

4.3.1 Introduction

The position before the new regulations can be illustrated as follows.

CA 2006

Shareholders Full

Filing Full Abbreviated Filleted

Audited Audit Report Special Report Notes

4.3.2 Accounts for shareholders

A small company could adopt the small companies’ regime and comply with theSmall Companies and Groups (Accounts and Directors’ Report Regulations 2008 (SI2008/410). If not adopting the small companies’ regime it was required to follow theLarge and Medium Sized Companies and Groups (Accounts and ReportsRegulations 2008 (SI 2008/409).

Additionally, a small company had a choice between FRSSE 2008 and full UKGAAP.

4.3.3 Filing options

In theory a small company had three options for filing:

(a) It could file the full accounts as prepared for the shareholders;

(b) The directors could prepare a second set of accounts, abbreviated accounts, inaccordance with the provisions of Schedule 4 to the Regulations; or

(c) File the full accounts prepared for the shareholders, but without filing the directors’report, profit and loss account, or notes to the profit and loss account.


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In practice option (c) was not attractive as more information was required to be filedthan within abbreviated accounts. In particular the related party transactions note hadto be included.

As we will see below, following the abolition of abbreviated accounts, this filing optionmay become attractive.

Unfortunately, CA 2006 does not provide a name for such accounts. Over time theexpression “filleted accounts” has been commonly used for such accounts and wewill use it within this course.

4.4 Preparation of accounts – new regime

4.4.1 Introduction

The position can be summarised as follows:

CA 2006

Shareholders Full Abridged

Filing Full Filleted Full Abridged FilletedAbridged

Audited AuditReport

Notes Audit Report Notes

4.4.2 Accounts for shareholders

A small company now has two options in preparing its accounts under the smallcompany regulations. It can prepare full accounts, or with the unanimous approval ofall of the shareholders, it can prepare abridged accounts. The abridgements relate tothe format information required, in that information required by Arabic numerals is notrequired (see above).

Note that abridged accounts are the accounts for the shareholders, they are not aseparate set for filing. Also it is important to note that if abridged accounts areprepared for the shareholders, they are the basis for what is filed and what is sent toHMRC.

4.4.3 Filing

Note that the options available for filing are initially determined by the company’sdecision relating to the accounts for the shareholders:

• If the company has produced full accounts for the shareholders, it may notprepare abridged accounts for filing but has to choose between filing the fullaccounts, or the “filleted accounts” based on those full accounts;


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• If it has prepared abridged accounts for the shareholders, it can file thoseaccounts, or fillet them.

4.4.4 Issue for small company accounts – the need to give a trueand fair view

Unlike micro-entity accounts which are presumed by the Companies Act to be trueand fair, there is no such presumption and there is a requirement to be true and fair.FRS 102 therefore states that “A small entity may need to provide disclosures inaddition to those set out in order to enable the financial statements to give a true andfair view” (1A.6) and encourages but does not require the following disclosures:

• A STRGL (Statement of other comprehensive income) where there are gains orlosses not recognised in the profit and loss account (1A.9(a));

• A Statement of changes in equity, or a Statement of income and retainedearnings ((1A.9(b));

• Where relevant to the transactions, other events and conditions, a small entity isencouraged to provide the following disclosures:

• A statement of compliance with this FRS adapted to refer to Section 1A;

• A statement that it is a public-benefit entity as set out in PBE 3.3A;

• The disclosures relating to going concern set out in paragraph 3.9. This wouldrequire it to disclose material uncertainties that cast doubt on its ability tocontinue as a going concern, and where relevant, the fact that the going concernbasis has not been used, together with a note of the basis adopted;

• Dividends declared and paid or payable during the period (for example as set outin paragraph 6.5(b));

• On first-time adoption of this FRS an explanation of how the transaction hasaffected its financial position and financial performance as set out in paragraph35.13 (1AD.1)

There is a problem with the abridged balance sheet as it starts with gross profit (butnot gross profit as known previously as it includes other operating income.) Canaccounts be true and fair if turnover is not disclosed? Will practitioners be able topersuade clients to include a note not strictly require (indeed will they even try?)

4.5 Applying the framework in practice

The following illustrations are designed to assist delegates to identify the optionsavailable and the issues which need to be addressed.

Illustration 1

Adam Ltd has traded as a medium sized company for some years. The turnover,gross assets, and employee figures, which have been stable for a few years, are asfollows:

2014 2015 2016

Turnover £8.0 m £8.2 m £8.5m

Gross assets £4.0 m £4.2 m £4.3 m

Employees 35 38 40

Advise the directors of Adam Ltd on the options for 2015 and 2016.


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Comments on illustration 1

Year ended 31 December 2014

Adam is medium sized and requires an audit.


Unless Adam early adopts the revised regulations it remains medium sized and istherefore required to adopt FRS 102 in full.

Under the revised regulations Adam considers whether it qualifies as small this yearunder the revised size criteria, and whether it would have qualified as small last yearhad the revised size criteria been operative. Adam would have qualified on that basisand can therefore qualify as small for the year ended 31 December 2015.

If it chooses to early adopt the size criteria, it must early adopt the whole of theregulations and must also adopt FRS 102 for small entities. It cannot use FRSSE2015.

If it chooses to adopt the regulations it can prepare abridged accounts and may notprepare abbreviated accounts.

It is however still required to have an audit.


Adam now qualifies as small. It can, of course choose not to prepare its accountsunder the small companies’ regime and choose to follow full FRS 102, but is likely towant to follow the simplifications in the regulations and in FRS 102 Section 1A.

It is now audit exempt, irrespective of which accounting framework it adopts.

Illustration 2

Barbara Ltd has traded for some years. The turnover, gross assets, and employeefigures, which have been growing substantially over recent years and are expected todo in future, are as follows:

2013 2014 2015 2016

Turnover £6.0m £7.2m £8.0m £8.5m

Gross assets £3.0m £4.2m £4.1m £4.3m

Employees 35 38 40 40

Advise the directors of Barbara Ltd on the options for 2015 and 2016.


Since Barbara exceeded the small company limits for the first time in 2014, it wasable to continue as a small company. Accordingly, it was able to file abbreviatedaccounts.

Unless it early adopts the regulations it will become a medium sized company andhave to adopt full FRS 102 and will not be able to file abbreviated accounts,especially as in 2016 it will become small again. As with Adam, choosing to earlyadopt the revised regulations means that Barbara many not adopt FRSSE 2015 andmust adopt FRS 102 for small entities.


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Illustration 3

You are given the structure of the Colin Plc Group. Diana, Eric, and George wouldqualify as small for the year ending 31 December 2015 on a size basis. Thepercentages represent the shares held by the investor.

Colin plc

80% 100% 75%

Diana Ltd Eric Ltd Freda Ltd

60%

George Ltd

Diana, Eric, and George would qualify as small in their own right. Freda would not.

Outline the changes in the options available to the members of the Colin Group.


In previous years none of the companies would have been eligible to be smallbecause they were members of an ineligible group. This means that they could nothave followed FRSSE, filed abbreviated accounts etc. Additionally, since three of theentities were not owned at least 90% by their parent would not have been exemptfrom the requirement to prepare a cash flow statement.

The changes in the regulations mean Diana, Eric, and George now qualify as small.Accordingly, they can follow FRS 102 Section 1A and do not need to produce a cashflow statement, although they may have to provide information to Colin to produceone at group level.

As Freda is not a small company it needs to comply with full FRS 102. FRS 102gives a wider exception for subsidiaries not to produce a cash flow statement thanwas the case under FRS 1 in that the exemption is open to all qualifying subsidiaries.

However, it is conditional on shareholders having been notified of the use of theexemptions, and them not objecting. Colin, as the immediate parent, and anyshareholder holding more than 5% of the shares, or more than 50% of the shares notheld by Colin have the right to require that Freda does not take advantage of thereduced disclosure options. The notice must be given in writing but we are advisedthat it only needs to be given once and does not need to be given when shareholderschange, although good corporate governance many suggest that it should.


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FRED 65 proposes an amendment to FRS 102 (and FRS 102) for periodscommencing on or after 1 January 2016, removing the requirement for shareholdernotification.

Diana is also a parent and provided the group headed by it satisfies the smallrequirements it would not have to prepare group accounts. In the past it would havebeen a member of an ineligible group and would not be entitled to this small parentexemption. In the past it could use the exemption in s400. If this sub group is notsmall then Diana can take advantage of s400. As the shareholding is less than 90%this will be available provided no notice is received has been served by a minorityshareholder. If the holding had been 90% or more then the remaining shareholderswould have had to approve the use of s400.

Illustration 4

Which is the first year for which the following medium-sized companies have toprepare their first FRS 102 accounts.

• Hannah’s year end is 31 July?

• Ian’s last accounts were for the 52 weeks ended 30 December 2014?

• Jeanette was incorporated on 28 December 2014 and started trading on 7February. The first accounts are being prepared to 31 March 2016?

• Keith has historically had a 31 January year end. Following its acquisition byLeslie, the year-end has changed and it is producing nine months’ accounts to 31October?


Hannah

First accounting period starting on or after 1 January 2015 starts on 1 August 2015and therefore ends on 31 July 2016.

Ian

Last accounting period ended 30 December 2014. Next accounting period started 31December 2014 and therefore is before 1 January 2015. New UK GAAP adoption isnot mandatory. The accounting period ending in late December 2016 is the firstmandatory period.

Jeanette

The first accounting period begins with the date of incorporation and thereforetheoretically, Jeanette’s first accounts to 31 March 2016 need not be prepared underFRS 102, but why would the company want to use old GAAP, knowing that it wouldhave to change to FRS 102 next year?

This would be much more interesting, if Jeannette was a small company. It would notbe able to early adopt the regulations and FRS 102 Section 1A as they only apply toaccounting periods beginning on or after 1 January 2015. Therefore, Jeanette wouldhave a choice to prepare the accounts to 31 March 2016 under FRSSE or FRS 102.FRS 102 would mean no further transition but would mean much

Keith

The accounts to 31 October 2015 are the first accounting period starting on or after 1January 2015 (start 1 February 2015) and therefore need to be prepared under FRS102.


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5 Accounts presentation under new UK GAAP

5.1 Formats

The Companies Act 1982 implemented the EU 4th Directive and introduced strictformats for company accounts. Statutory Instrument 2015/980 made someamendments to the formats for example reducing the options for the balance sheetfrom 4 to 2. It also introduced some flexibility in the layout and terminology for thebalance sheet and profit and loss account. In practice it is expected that little willchange.

5.2 Titles for financial statements

Currently companies are required to prepare accounts in accordance with theformats of the Companies Act. FRS 102 makes some changes to the form andcontent of accounts, while allowing the retention of their existing titles.

Current UK GAAP FRS 102

Profit and loss account Income statement

Statement of total recognised gains andlosses

Statement of comprehensive income

Balance sheet Statement of financial position

Cash flow statement Statement of cash flows

Movement on reserves Statement of changes in equity

Notes Notes

It is essential to appreciate that these statements are not identical or synonymous!

The following examples illustrate these changes:

• The revaluation of investment properties currently is recognised within theStatement of Total Recognised Gains and Losses (STRGL), which FRS 102refers to as Statement of Other Comprehensive Income, whereas under FRS 102such gains are recognised in what we traditionally refer to as Profit and LossAccount but FRS 102 calls the Income Statement;

This change will, of course affect the tax computation, since you will need todeduct such revaluation gains as they will not be taxable until the investmentproperty is sold.

The draft updated guidance on realised profits indicates that such a gain is notrealised. There is no requirement to disclose the amount of realised profits butmany commentators recommend doing so. This can be done by transferring theunrealised surplus from profit and loss to a fair value reserve, or by noting theamount, probably at the foot of the Statement of changes in equity.

However, FRS 102 requires deferred tax to be provided on such revaluationsurpluses, whereas FRS 19 currently provides an exemption.


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• Listed investment are currently included at cost less impairment with a note of themarket value. FRS 102 requires such investments to be recognised at fair value.In other words, FRS 102 requires the currently unrealised gain to be recognisedin the profit and loss account. This gain is not taxable as it is unrealised. Again,FRS 102 requires deferred tax to be provided.

Note that the draft guidance on realised profits under company law, indicatesthat, since listed company shares can be sold at the push of a button, they canbe considered as realised for CA 2006 purposes.

• The Cash Flow Statement under FRS 1 deals with balances and movements incash. FRS 102 deals with cash and cash equivalents;

• As noted above, the Statement of changes in equity is a primary statement,whereas the movement on reserves is usually included as a note to the accounts.The SOCE also includes the prior year adjustments which were previously shownat the foot of the STRGL.

• Also as noted below, there is a significant change in the treatment of errors.

5.3 Changes affecting all small companies (1) –reductions in the number of notes

The Accounting Directive prescribes a maximum number of notes which a smallcompany is required to include. These have been included in the revised AccountingRegulations and are:

1. Accounting policies

2. Fixed assets revaluation table

3. Fair value(s)

4. Financial commitments, guarantees or contingencies not on the balance sheet

5. Advances & credits etc.

6. Items of exceptional size or incidence

7. Amounts due or payable after > 5 years and entire debts covered by security

8. Average number of employees during the year

9. Fixed Asset note

10. Name and registered office of the smallest entity producing consolidatedaccounts in which the company is included

11. Nature/purpose of arrangements not on the Balance Sheet

12. Material non adjusting events after Balance Sheet date

13. Related Party transactions (with scope for exemption for wholly owned groupcompanies)

Note that, in addition to the requirements in the regulations there are a couple ofother disclosure requirements, which may be dropped in due course:

• A new note is required by S396A1 of certain statutory information;

• The disclosure of auditors’ remuneration is not covered by the Small Companiesand Group Regulations and is therefore still required (if the company is audited.).

The government, (and standard setters) are not allowed to include additionaldisclosure requirements. This restriction does not apply in the case of not-for-profit


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entities. This is partly why the FRC has decided that the FRSSE should be withdrawnand small companies included within FRS 102. It cannot include many of thedisclosures previously required by FRSSE and now included in FRS 102.

Illustration 5

Your client is a farmer and has the following employees:

Whole year 2

During lambing March 5

During harvest June 11

What is the average number of employees?


CA 2006 outlines the basis of calculation as the number of employees per month,added up and then divided by 12 i.e. 3 (10 months @ 2 = 20 + 5 March + 11 June =36 divided by 12!)

Illustration 6

Your client operates in the corporate hospitality sector and advises you that he hasthe following “staffing” structure:

• 20 full time employees working during the year;

• 10 part-time employees working throughout the year;

• 60 agency workers on a self-employed basis;

• 180 students on zero-hours contracts throughout the year but only working atspecific events and locations;

• 3 full time executive directors;

• 2 non-executive directors.

Which of the above need to be included in the average number of employeesdisclosure?


The definition of employee includes those with a contract of employment. Therefore:

• The full-time employees are clearly included at 20;

• The part-time employees are each included as individuals and not as full timeequivalents;

• Those on a self-employed basis are excluded;

• The consensus view is that those on zero-hours contracts are included for thewhole year and not just when they are working;

• Directors with employment contracts (real and implied?) are included but thosewho do not have employment contracts (typically non-executive directors) areexcluded.

It should be noted that the above considerations also apply when determiningeligibility to use the small or micro-entity regimes.


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5.4 Changes affecting all small companies (2) - Relatedparties under new regulations

5.4.1 Introduction

The disclosure of related party transactions and control is one area where manyclients are sensitive and will always seek to disclose as little as possible. There areminor changes between the FRSSE 2008 disclosures and those under FRSSE 2015/ FRS 102, and very significant changes between FRS 102 and FRS 102 for smallentities. These derive from the simplifications in company law.

You should consider with your client whether these simplifications support a decisionto early adopt.

5.4.2 Controlling party

There is no requirement to disclose the name of the controlling party, or ultimatecontrolling party under the new small company regulations, unless the entity is asubsidiary, in which case disclosure of the name and registered office (or principalplace of business if the parent is unincorporated) of the parent is required. However,this only applies where the parent prepares group accounts. The requirement is todisclose the parent of the smallest group for which consolidated accounts are drawnup. The previous requirement to disclose the name of the immediate parentundertaking (was in Sch 2 which has been removed).

Consider the following; assume 100% holdings:

Colin

Eric Ltd

Freda Ltd

Diana Ltd

In the financial statements of Diana, under previous requirements, the followingwould have been disclosed:

Colin as the ultimate controlling party – FRSSE or FRS 8

Eric Ltd – as the ultimate parent company – Sch 2 SI 409

Freda Ltd – as the immediate parent – FRSSE or FRS 8

If Eric or Freda prepared group accounts then this would also have been disclosed –Sch 1 SI409.


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The requirements of Sch 2 have been removed. The requirements of Sch 1 remain.Section 1A reflects the current legal requirements, i.e. Sch 1. Hence if neither Ericnor Freda prepare consolidated accounts no disclosure is required.

However, there is a catch. The financial statements must still show a true and fairview. Is the disclosure of control necessary for this?

5.4.3 FRSSE 2008 definition

The FRSSE definition was as follows:

Two or more parties are related parties when at any time during the financial period:

(a) one party has direct or indirect control of the other party; or

(b) the parties are subject to common control from the same source; or

(c) one party has significant influence over the financial and operating policies of theother party. Significant influence would occur if that other party is inhibited frompursuing its own separate interests.

For the avoidance of doubt, related parties of the reporting entity include thefollowing:

(a) parent undertakings, subsidiary and fellow subsidiary undertakings;

(b) associates and joint ventures;

(c) investors with significant influence and their close families; and

(d) directors of the reporting entity and of its parent undertakings and their closefamilies.

The FRSSE definition of close family members is “Close members of the family of anindividual are those family members, or members of the same household, who maybe expected to influence, or be influenced by, that person in their dealings with thereporting entity.”

5.4.4 FRS 102 and FRSSE 2015

The definition of a related party in FRS 102 is that used in FRS 8 and IAS 24. Itdiffers from that in the old FRSSE as follows:

A related party is a person or entity that is related to the entity that is preparing itsfinancial statements (the reporting entity).

A person or a close member of that person's family is related to a reporting entity ifthat person:

(a) has control or joint control over the reporting entity;

(b) has significant influence over the reporting entity; or

(c) is a member of the key management personnel of the reporting entity or of aparent of the reporting entity.

An entity is related to a reporting entity if any of the following conditions apply:

(a) the entity and the reporting entity are members of the same group (which meansthat each parent, subsidiary and fellow subsidiary is related to the others).

(b) one entity is an associate or joint venture of the other entity (or an associate orjoint venture of a member of a group of which the other entity is a member).

(c) both entities are joint ventures of the same third party.


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(d) one entity is a joint venture of a third entity and the other entity is an associate ofthe third entity.

(e) the entity is a post-employment benefit plan for the benefit of employees of eitherthe reporting entity or an entity related to the reporting entity. If the reporting entity isitself such a plan, the sponsoring employers are also related to the reporting entity.

(f) the entity is controlled or jointly controlled by a person identified in (a).

(g) a person identified in (a)(i) has significant influence over the entity or is a memberof the key management personnel of the entity (or of a parent of the entity).

(h) the entity, or any member of a group of which it is a part, provides keymanagement personnel services to the reporting entity.

Item h above is a late amendment to FRS 102 included in the recent amendmentsissued in July 2015.

The FRS 102 version of close family member is “Those family members who may beexpected to influence or be influenced by that person in their dealings with the entityincluding:

(a) That person’s children and spouse or domestic partner;

(b) Children of that spouse or domestic partner; and

(c) Dependents of that person or that person’s spouse or domestic partner.

5.4.5 Revised small company regulations and FRS 102 for smallentities

The requirements for disclosure of related party transactions under the Regulationsare less stringent than under FRSSE or FRS 102. SI409 Sch 1 paragraph 66includes the following “Particulars may be given of transactions which the companyhas entered into with related parties and must be given if such transactions arematerial and have not been concluded under normal market conditions with:

(a) Owners holding a participating interest;

(b) Companies in which the company has a participating interest; and

(c) The company’s directors”.

Note the significant items no longer requiring disclosure:

(a) Since a participating interest is 20% of the shares, this means that transactionswith individuals holding < 20% of the shares are not disclosable.

(b) Neither are transactions with members of the close family of the directors.

(c) Nor are transactions between companies under common control!

This is even before discussions as to whether transactions are not disclosablebecause they are concluded under normal market conditions!!

Illustration 7

Leonard Ltd is a training and conference company. The shareholders are Leonard,his wife Michelle, daughter Norma and son, Owen. Leonard owns 70% of the shares,and each of the others own 10%. Leonard and Pauline (no relative) are the directors.During the year the following transactions took place:

(a) The company made loans of £10,000 to Michelle and Pauline. The loans arerepayable on demand.


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(b) Leonard Ltd guaranteed the overdraft of another business controlled by Pauline.

(c) The company paid fees to training businesses operated by Pauline and anothercompany owned by Owen for training services provided. The fees are on normalcommercial terms.

(d) Day to day management is in the hands of Rose, Pauline’s daughter who is paid£15,000;

(e) Leonard and Pauline earned £5,000 in directors’ fees. Pauline’s director feeswere paid to her training business.

(f) Leonard was also paid a salary was £50,000.

(g) The company paid dividends of £100,000 in total.

How does the adoption of FRS 102 Section 1A change the disclosure requirements?


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FRS 102 / CA 2006 FRS 102 section 1A/CA2006

Loans to directors Disclosable under CA2006

Disclosable under CA2006

Loan to director’s spouse Not disclosable under CA2006.

Disclosable under FRS102 as spouse is amember of director’sclose family.

Not disclosable under CA2006

Not disclosable underFRS 102 1A as spouse isnot an owner with > 20%of shares and not adirector.

Guarantee Disclosable under CA2006

Disclosable under CA2006

Fees to director’s tradingentities

Transactions andbalances disclosable asdirectors are relatedparties

Not disclosable asagreed under normalmarket conditions

Salary to Pauline’s daughter Disclosable if keymanagement personnel

Not disclosable

Directors fees Disclosable – withseparate disclosure offees paid to third partiesto provide keymanagement personnelservices – Michelle’sbusiness?

Leonard’s disclosable aspaid to director, Pauline’snot. Only disclosable ifnot on market conditions.What are marketconditions for director’sfees?

Robert’s salary This would not have beendisclosable under FRSSE2015 (specific exemptionfor remuneration.)

There is no disclosure ofdirector’s remunerationunder CA 2006 but ispotentially disclosableunder FRS 102 1A, againsubject to the normalmarket conditionsexemption.

Dividends Disclosable to all 4shareholders as controller/ director or close familymember

Robert dividenddisclosable subject tomarket conditions test.None of the others are.


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6 Micro-company accounts under the new regime

6.1 Eligibility

Note that the following could not initially qualify as a micro-entity:

• Charity;

• LLP.

The recent changes in LLP regulations harmonise the size criteria and accountingrequirements for LLPs and companies, such that an LLP can now use the micro-regulations.

Similarly, company law prohibits a micro-entity from using the micro-regulations if it isincluded in group accounts. Therefore, such a company cannot use FRS 105.

There is no change in the size criteria for micro-entities as a result of SI 2015/980and they continue to be:

Turnover no more than £632,000

Balance sheet total no more than £316,000

Employees no more than 10

6.2 Micro-entity accounts

A micro-company is only required to include items within the balance sheet with analphabetic designation. It does not have the flexibility available to other companies toinclude prepayments and accrued income within debtors or accruals and deferredincome within creditors.

It must use format 2 for the profit and loss account.

A micro-entity is not permitted to include assets at fair value.

There are only two notes required under the Regulations and they are required to beincluded “at the foot of the balance sheet.”

The notes which are required for periods commencing on or after 1 January 2016 oron earlier adoption of FRS 105 and the revised Regulations must include:

(a) Advances and credits to directors including guarantees and commitments enteredinto on their behalf by the company or its subsidiaries (S 413 CA 2006); and

(b) The total amount of financial commitments, guarantees and contingencies notincluded in the balance sheet, together with

(i) An indication of any valuable security given by the company in respect of thecommitments, guarantees and contingencies within paragraph (b);

(ii) The total amount commitments in (b) relating to pensions;

(iii) Individual amounts and the total amount of commitments in (b) which areundertaken for the benefit of:

• Any parent undertaking, fellow subsidiary or subsidiary of the company; or

• Any undertaking in which the company has a participating interest. (Paragraph 57Schedule 1 to the revised Regulations)

Note that the wording of S57 was changed considerably by the revisions to theregulations on the implementation of the EU Accounting Directive, although the


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overall disclosures are unlikely to change. Care should be taken in the first yearunder the new rules to ensure that what was disclosed previously both satisfies therevised requirements and does not include more than is required.

FRS 105 requires that the entity should determine the amount of financialcommitments, guarantees, and contingencies within each of the following areas:

• Financial instruments (FRS 105 9.29);

• Investments in joint ventures (FRS 105 11.9);

• Property, plant and equipment and investment property (FRS 105 12.28);

• Intangible assets other than goodwill (FRS 105 13.17);

• Business combinations and goodwill (FRS 105 14.3);

• Leases (FRS 105 15.17 and 15.33);

• Provisions and contingencies (FRS 105 16.9);

• Employee benefits (FRS 105 23.22);

• Biological assets and agricultural produce (FRS 105 27.5)

Note that it is only the total amount of the commitments, guarantees andcontingencies required to be disclosed, and there is no requirement to disclose thenature of the commitments.

Illustration 8

Simon Ltd has future operating lease commitments of £10,000 and capitalcommitments of £30,000. It has also guaranteed the overdraft of £25,000 for asubsidiary company and there is an unrecognised contingent liability of £40,000.

What is required to be disclosed?


The disclosures are therefore

Total amount of commitments guarantees and contingencies is £105,000.

The required disclosure in respect of parent, fellow subsidiary, and subsidiaryrequired by S 57(3) and FRS 105 6A.2 relates only to commitments. Therefore, theoverdraft guarantee does not require separate disclosure under this heading.

6.3 Accounting standards

FRS 105 is based on FRS 102 with the following three principles:

• Since company law prohibits the use of fair values, FRS 105 cannot include thefair value requirements of FRS 102;

• Since there are no accounting policy notes, FRS 105 removes all accountingpolicy choices from FRS 102, so that the accounting policy adopted can beinferred from the fact that it is a micro-entity; and

• Some of the accounting requirements are simplified from those in FRS 102.

Examples include:

• There is no requirement to provide deferred tax (given principle (b) above anentity cannot choose to include deferred tax):


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• The treatment of defined benefit pension schemes;

• The use of amortised cost using the effective interest method is not required fordebt instruments.

A micro-company will, therefore, always find the preparation of accounts under FRS105 easier than under FRSSE or FRS 102, as the recognition and measurementcriteria are simpler as are presentation and disclosure, with very few notes required.The downside is the lack of accounting policy choices, including the fact that fairvalues may not be used. Although micro-entity accounts are presumed to be true andfair, there are many who are firmly unsupportive of their use, questioning whetherthey can have any real value given the lack of information.

Illustration 9

Thomas Ltd and Ulrika Ltd are investment property companies. Both would qualify asmicro-companies (based on the turnover and employee criteria) and currently followFRSSE 2008. The market value of the investment properties according to the lastfinancial statements was in the region of £6 m. The cost was £2.5 m.

Thomas Ltd is financed entirely by equity, whereas Ulrika has borrowings of £4 m,secured on the property.

Advise the directors of Thomas and Ulrika Ltd as to the implications of adopting FRS105.


Under FRSSE 2008, both companies will currently include a revaluation reserve of£3.5 m. If a company moves to FRS 105, it is required to restate the investmentproperty to cost less accumulated depreciation. As a minimum, this would requireremoval of the revaluation reserve, and there may be a depreciation charge toreduce net assets and retained earnings, although it may we relatively easy todemonstrate that little or no depreciation is required because of the high residualvalue.

If Ulrika Ltd removes the revaluation reserve this will have an adverse impact on thebalance sheet and the lenders are unlikely to be happy with this approach. AsThomas is entirely equity financed, the removal of this revaluation reserve is lesslikely to cause problems of perception.

Note that if Ulrika does not adopt FRS 105, but moves to FRS 102, it will have toinclude a provision for deferred tax which it did not have to do under FRSSE 20008.

6.4 Transition to FRS 105

The general provisions requiring an entity to restate its financial statements as if thenew standard had always applied, apply equally on transition from FRSSE to FRS105. In practice there will be two potential significant accounting adjustments:

• Reversal of any provision for deferred tax; and

• Reversal of previous revaluations, particularly of investment properties.

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