The era of the new UK GAAP begins on 1 January 2015 and for many will change again from 1 January 2016. Reporting entities have to choose which of the reporting standards that they are allowed to adopt is best suited to their circumstances.
For accounting periods beginning on or after 1 January 2015, all the current financial reporting standards and guidance issued by the Financial Reporting Council will be withdrawn. That means that all the extant FRSs, SSAPs, UITF Abstracts and the Statement of Principles for Financial Reporting will cease to be effective. Additionally, at the same date, the FRSSE 2008 will be superseded by the FRSSE 2015.
From January the UK GAAP framework will be articulated on the following standards:
- FRS 100 Application of Financial Reporting Requirements, which establishes the applicable financial reporting standards for different UK entities
- FRS 101 Reduced Disclosures Framework, which allows certain qualifying group entities to benefit from a number of disclosure exemptions when preparing individual accounts under EU-adopted IFRS
- FRS 102 The Financial Reporting Standard Applicable in the UK and the Republic of Ireland, the single financial reporting standard that replaces almost all the existing standards and abstracts
- FRS 103 Insurance Contracts, a standard relevant to entities applying FRS 102 that have insurance contracts
- FRSSE 2015 that includes a limited number of changes compared to FRSSE 2008 and also includes the accounting requirements for micro-entities.
FRS 100 clarifies that if an entity is not required, by legislation or regulation, to prepare its financial statements using the EU-adopted IFRS then the financial statements:
a) may be prepared in accordance with the FRSSE 2015, if the entity is eligible to apply that standard
b) if the entity is not eligible to apply the FRSSE, or if it chooses not to apply it, must be prepared in accordance with FRS 102, EU-adopted IFRS or FRS 101, if they are individual financial statements of a qualifying entity.
Effectively from 1 January 2015 the UK financial reporting framework will offer the following options to different types of entities:
a) micro-entities will be able to prepare and file simplified accounts using the micro-entities provisions included in the FRSSE 2015
b) small entities will be able to apply the FRSSE 2015, the full standard, which is almost completely based on the measurement, presentation and disclosure requirements of the withdrawn UK GAAP
c) medium-sized and large companies, public companies and other entities not qualifying as small may apply FRS 102, which is largely based on the IFRS for SMEs, or the EU-adopted IFRS
d) a qualifying group entity will also have the option to prepare its individual financial statements in accordance with FRS 101, ie EU-adopted IFRS with reduced disclosures
e) entities that are required by the IAS regulation or other legislation or regulation to prepare their financial statements in accordance with EU-adopted IFRS will continue to do so, for instance group accounts of entities whose securities are listed on an EU stock exchange.
It is important to point out that entities will have the option to apply a more comprehensive accounting standard if that is deemed to be better suited to their circumstances. For example, a micro-entity will be able to choose between micro-entity accounts, the full FRSSE 2015, FRS 102 or EU-adopted IFRS. Similarly a small entity may choose to apply the FRSSE, FRS 102 or EU-adopted IFRS.
Micro-entities
Micro-entities are defined in Companies Act 2006 as those companies which in a year do not exceed two or more of the following criteria:
|
Balance sheet £ |
Turnover £ |
Average no. of employees |
|
632,000 |
316,000 |
10 |
Companies that fall under the micro-entities regime may choose to prepare accounts that include only an abridged balance sheet, chosen between two available formats in FRSSE 2015, an abridged profit and loss account, for which only one format is available, and a director’s report. There is no need to prepare a separate set of notes for micro-entities’ accounts and the only additional information required, ie advances and guarantees to directors and other financial commitments and guarantees, must be included at the foot of the abridged balance sheet.
The recognition and measurement criteria for items in micro-entity accounts are the same as those of the FRSSE 2015, except for the measurement bases for fixed assets and certain current assets. In particular the revaluation of tangible fixed assets and the choice to measure fixed asset investments at market value are not available. Additionally investment properties are accounted for at impaired historic cost rather than at market value at the balance sheet date and current asset investments cannot be measured at current cost.
Some entities cannot qualify as micro-entities, eg LLPs, partnerships and charities.
Micro-entities can file with Companies House just the abridged balance sheet with the required footnotes.
More detailed guidance on micro-entities from ACCA can be found here.
An entity eligible to apply the micro-entities provisions should consider whether micro-entity accounts would provide sufficient information to the users of its financial statements; for instance finance providers may require more detailed accounts than abridged accounts or the option of revaluing fixed assets may be more important to an entity than reducing disclosures.
Additionally micro-entities should consider the proposals made by the FRC in its consultation document on the accounting standards for small entities. The FRC is proposing to overhaul the accounting standards for micro and small entities in order to make them consistent with FRS 102.
For such purpose the FRSSE 2015 should be withdrawn for accounting periods beginning on or after 1 January 2016 and the accounting provisions for micro-entities currently included within it should be replaced by a new standard, the Financial Reporting Standard for Micro-Entities (FRSME), based on simplified recognition and measurement requirements of FRS 102.
Albeit under the proposed FRSME the presentation and disclosure requirements for micro-entity accounts will not change, ie abridged balance sheet and profit and loss and footnotes, the recognition and measurement requirements will change from those of the FRSSE 2015, essentially the old UK GAAP, to those of FRS 102. Such FRS 102 requirements for micro-entities will be simplified; however, under the FRSME, accounting for individual transactions will be broadly consistent with larger entities, which should assist users in understanding the financial statements.
Switching from the recognition and measurement requirements of the old UK GAAP to those of FRS 102 between 2015 and 2016 may result in some relevant differences for preparers of micro-entity accounts and they should become more familiar with FRS 102 in general.
Small entities
Small entities will be able to apply the FRSSE 2015 under the new UK GAAP framework and therefore entities choosing to do so should be aware of the differences with FRSSE 2008.
The amendments introduced in the 2015 version of the FRSSE are in reality not substantial and relate to the determination of accounting policies, the provisions for amortisation of goodwill and intangibles, the impairment requirements of fixed assets and goodwill and the definition of related party.
Further details about the changes brought about by the FRSEE 2015 can be accessed here.
Additionally ACCA has published individual model accounts for a company applying the FRSSE 2015, so that it could be easy to draw a comparison between the implications of the two versions of the standard. Model accounts are available only to members and can be requested by e-mailing advisory@uk.accaglobal.com and quoting your membership number.
Notwithstanding the fact that the move to FRSSE 2015 may not result in substantial differences for users of that standard, small entities should consider the possible effects of the FRC’s consultation on the overhaul of the accounting standards for micro and small entities.
The FRC’s proposals entail the withdrawal of the FRSSE from 1 January 2016 so that small entities will be brought within the scope of FRS 102. Small entities will be required to follow the full recognition and measurement requirements of FRS 102; however, they will be able to benefit from reduced presentation and disclosure requirements that will be outlined in a new section of FRS 102, Section 1A Small Entities.
Therefore small companies applying FRS 102 will not be required to provide any additional primary financial statements such as a cash flow statement, a statement of total comprehensive income or a statement of changes in equity; and will continue to be exempt from preparing consolidated financial statements.
Applying the recognition and measurement requirements of FRS 102 is deemed to improve financial reporting by small entities by, for example, requiring the recognition of various financial instruments that the FRSSE does not currently require, such as derivatives like interest rate swaps and forward foreign currency contracts, and will result in consistency between the accounting policies of smaller and larger entities.
In any case switching from the recognition and measurement requirements of the FRSSE to those of FRS 102 is likely to be an onerous exercise for small entities and some of them should consider whether adopting the full FRS 102, as early as 2015, would be a better option in terms of costs and consistency of information to the users of the financial statements.
Large and medium-sized entities
Entities that do not qualify as small will need to transition to FRS 102 for periods beginning on or after 1 January 2015, unless they opt for application of EU-adopted IFRS or FRS 101, if eligible.
The changeover from the old UK GAAP to FRS 102 is a complex exercise and guidance on FRS 102 can be obtained from the ACCA website here.
ACCA has also published Technical Factsheet 181 FRS 102 – Making the transition to new UK GAAP, which includes an analysis of the changes to terminology and formats from current UK GAAP, of the adoption timeframe and transition provisions and a detailed comparison of topical areas between the current and the new UK GAAP framework, including analysis of the potential tax impact of the new accounting requirements. Technical Factsheet 181 can be accessed here.
Additionally ACCA has produced individual model accounts for a small company voluntarily applying FRS 102 that are available only to members. The FRS 102 model accounts can be requested by e-mailing advisory@uk.accaglobal.com and quoting your membership number.
Entities transitioning to FRS 102 in 2015 should also be aware of the implications of the Department for Business, Innovation and Skills (BIS)’s consultation on the UK implementation of the EU Accounting Directive (2013/34/EU).
In particular, as a result of the proposed increase in the small company thresholds, a lot more entities previously medium-sized will fall in the small companies’ regime for accounting periods beginning on or after 1 January 2016. These entities will first transition to FRS 102 for periods beginning on or after 1 January 2015 and then, in the following financial period, they will be able to produce simplified accounts using the small entities provisions in FRS 102, effectively implementing two consecutive years of change. Such entities may consider whether it would be preferable to adopt the full FRS 102 in terms of cost and consistency and comparability of financial information.
The proposed UK financial reporting framework at 1 January 2016
As a result of the FRC’s proposed changes to the accounting standards for small entities, the UK financial reporting framework for accounting periods beginning on or after 1 January 2016 will look as follows:
a) micro-entities will be able to apply the new Financial Reporting Standard for Micro-Entities (FRSME) – based on simplified recognition and measurement requirements of FRS 102
b) small entities will be able to apply FRS 102 but with the reduced presentation and disclosure requirements, set out in a new section of the standard
c) medium-sized and large companies, public companies and other entities not qualifying as small may apply FRS 102, or the EU-adopted IFRS
d) a qualifying group entity will also have the option to prepare its individual financial statements in accordance with FRS 101, ie EU-adopted IFRS with reduced disclosures
e) entities that are required by the IAS Regulation or other legislation or regulation to prepare their financial statements in accordance with EU-adopted IFRS will continue to do so, for instance group accounts of entities whose securities are listed on an EU stock exchange.
Entities will still have the option to apply a more comprehensive accounting standard if that is deemed to be better suited to their circumstances.
ACCA is seeking comments on specific issues arising from the BIS consultation on the UK implementation of the EU Accounting Directive and from the FRC’s consultation on the accounting standards for small entities.