You may already be aware that UK companies are about to experience fundamental changes to the framework of their financial reporting. UK Generally Accepted Accounting Practice (GAAP) has undergone a significant overhaul and the current Financial Reporting Standard for Smaller Entities (FRSSE) is to be withdrawn. A new standard – FRS102 – will take its place.
The new standard applies to medium and large companies from 1 January 2015 and for small and “micro-entities” from 1 January 2016.
The definition of “size” will also change from 1 January 2016. Currently, a company will be “small” if it does not exceed two of the following criteria:
• Turnover: £6.5m net
• Balance sheet total: £3.26m net
• Employees: 50
From 1 January 2016, these will become:
• Turnover: £10.2m
• Balance sheet total: £5.1m
• Employees: 50
A company will qualify as a “micro-entity” from 1 January 2016 if it does not exceed two of the following:
• Turnover: £632k
• Balance sheet total: £316k
• Employees: 10
If a company qualifies as a “micro-entity”, it can adopt FRS105 which will represent a much greater simplification of financial reporting.
However, it should be noted that the ability to file the abbreviated accounts at Companies House (as the vast majority of small limited companies elect to do) is also being removed for accounting periods commencing on or after 1 January 2016.
Obviously, the precise impact of FRS102 will differ from one company to another, but there will be significant changes as to how the accounts will be prepared. The changes will affect the format of the financial statements, the disclosure requirements and most likely the numbers as well. FRS102 will change the recognition criteria for various assets and liabilities, the basis on which some items are measured and the treatment for certain gains and losses. Additionally, all of these changes potentially have taxation implications as well.
The starting point for applying FRS102 will be to restate the opening balance sheet as at the start of the comparative period for the first accounts prepared under FRS102. This date is known as the “date of transition”. So, for example, if a company is to prepare its first accounts under FRS102 for the year ended 31 December 2015, the date of transition will be 1 January 2014. It will therefore be necessary to look back to this date, assess the balance sheet under the new valuation requirements of FRS102 and make any adjustments necessary. There will however be no change to the formal accounts or taxation calculations already completed for this comparative period – these changes are simply to allow direct comparison under FRS102 with the current accounting period. There are a number of areas where FRS102 is like to have a significant impact on a company’s accounts. These include (but are not limited to):
• Investments in listed shares:
• Investment property and revaluations;
• Lease incentives;
• Intangible assets and goodwill;
• Holiday pay;
• Foreign exchange forward contracts;
• Other financial instruments.
Obviously, we cannot possibly cover all eventualities within this blog post, but we hope that this ‘overview’ is clear and gives you the initial information needed to assess the potential changes to a company’s financial reporting. However, if anything requires further clarification please contact a member of the WHA team and they will be happy to help.