THE FRC is seeking feedback through its latest consultation document on accounting standards for small entities, following the implementation of a new EU Accounting Directive.
After the changes in EU law, the FRC will introduce a new section into FRS 102, the financial reporting standard applicable in the UK and Republic of Ireland for small entities, which is proposed to be those turning over less than £10.2m.
In future, underlying accounting by small entities will be consistent with the standard for financial reporting used by other un-listed companies, subsidiaries of listed companies and public benefit entities such as charities. However, the presentation and disclosure requirements for small entities may be more straightforward and will translate into a far less onerous reporting regime.
Small companies can now include less information in their accounts and fewer mandatory disclosures. The FRC proposes to issue a new accounting standard for micro-entities – companies typically turning over less than £632,000 a year – while the financial reporting standard for micro-entities (FRSME) will make accounts for such companies simpler.
A further fallout from the directive means that the financial reporting standard for smaller entities (FRSSE), which harks back to 1997, is now going to be scrapped.
“We believe the FRSME will provide significant simplifications for the very smallest companies choosing to apply the micro-entities regime,” says Roger Marshall, FRC board member and chairman of its Accounting Council. “For other small entities, there will be improvements in some areas of financial reporting – for example, more information about areas of financial risk, and greater consistency with the accounting by larger private entities which should offer benefits to users.”
The FRC has twice consulted on proposals to increase consistency in accounting by residential management companies. Its consultation document includes further proposals to address this issue as residential management companies will generally be micro-entities or small entities.
In addition, limited amendments will be proposed to FRS 101 Reduced Disclosure Framework and FRS 102 to reflect changes in company law.
Separate amendments have also been put forward by the watchdog to address fears that an overhaul of reporting standards will add millions to corporate liabilities.
There had been fears FRS102 would force private companies in the UK to book their defined benefit (DB) pension obligations along the lines of IFRIC 14, the international standard that applies to listed companies, resulting in extra liabilities on their balance sheet.
Responding to informal consultations, the FRC has issued an exposure draft to clarify that no additional liabilities will be raised as a result of the change to FRS102 under new GAAP, as the new standard will be “consistent with current practice”.
FRC director of accounting and reporting Anthony Appleton says the amendment was necessary “to clarify that FRS102 will mean companies continue to account for DB pensions under old GAAP”.
The current UK standards will be phased out by January 2015 to be replaced by FRS102, which is commonly known as ‘new GAAP’.
“It came to light that there had been a diversity of views about how to recognise liabilities of DB pension schemes under FRS102. These amendments straighten that out,” says Appleton. “We noted a strong consensus in favour of this in our informal consultations.”
The FRC expects to issue the final amendments to FRS 102 in early 2015. ?
Micro-entities are the smallest companies and are defined in company law. The qualifying conditions include not exceeding two of the following thresholds:
• Turnover: £632,000
• Balance sheet total: £316,000
• Number of employees: 10
Small companies are defined in company law. BIS is consulting on changing the qualifying conditions to be eligible for the small companies accounting regime, so they will hinge on not exceeding two of the following thresholds:
• Turnover: £10.2m
• Balance sheet total: £5.1m
• Number of employees: 50
The FRSSE was first published in 1997. It may be applied by entities eligible for the small companies accounting regime and was a simplification of the accounting standards applicable to larger entities, although few recognition or measurement differences were permitted. When the FRC was developing FRS 102, it decided to postpone a full review of the FRSSE until the new Accounting Directive was being implemented. The most recent consultation on the financial statements of residential management companies was set out in FRED 50 Draft FRC Abstract 1 – Residential Management Companies’ Financial Statements.