Back in June 2013 the EU passed a directive 2013/34/EU which changed the thresholds for small companies.
Present
Proposed
Turnover
£6,500,000
£10,200,000
Total assets
£3,260,000
£5,100,000
Average no. of employees
50
50
As before its a 2 out of 3 test. The Audit thresholds are unchanged.
The UK was required to transpose this into UK Law no later than 20th July 2015.
The Dept for Business Innovation and Skills (BIS) have just concluded their consultation (24th October 2014) and the plan is currently to implement the change for financial years starting on or after 1st January 2016.
This could mean that a company with a turnover between £6.5m and £10.2m will be required to prepare its accounts for year ended 31 December as follows:
2014 as a medium sized company under present UK GAAP;
2015 as a medium sized company under FRS 102;
2016 as a small company under the applicable accounting regime for small companies.
This might depend on whether the company could early adopt the new regulations for its 2015 accounts. The possibility of early adoption is one of the questions asked by BIS.
Surely BIS can see that not allowing early adoption will place an unnecessary reporting burden on Small Companies?
Generally Accepted Accounting Practice in the UK, or UK GAAP, is the overall body of regulation establishing how company accounts must be prepared in the United Kingdom. This includes not only accounting standards, but also UK company law. (Wikipedia)
UK GAAP was over 3,000 pages, but in March 2013 the new Financial Reporting Standard – FRS 102 – was finalised. It’s a mere 342 pages and will succeed UK GAAP and bring the UK closer to International Financial Reporting Standards (IFRS).
FRS 102 will be mandatory for periods beginning on or after 1st January 2015 but you can adopt it for periods ending after 31st December 2012.
It will apply to all entities with the main exceptions being:
Those small companies who have adopted FRSSE (Financial Reporting Standard Small Entities)
Those companies applying IFRS (International Financial Reporting Standards)
The Financial Reporting Council (FRC), in an article in Financial Director Magazine April 2013, claim:
UK GAAP provided inadequate guidance on accounting for financial instruments
There were inconsistencies in standards between IFRS and older standards
Trainee accountants now learn IFRS so knowledge of UK GAAP is being lost
FRS 102 allows for benchmarking which could lead to reduced borrowing costs
There are a number of key areas which you should start to consider now so that you can prepare for FRS 102:
Financial Instruments (FI) – FRS 102 deals with FI in two chapters: Chapter 11 deals with basic FI such as debtors, creditors and simple loans, chapter 12 deals with more complex FI such as forward contracts, interest rate swaps and derivatives. Basic FI will continue to be recognised at amortised cost, however, the more complex transactions that fall into Chapter 12 will need to be measured at fair value with movements being recognised in P&L a/c.
Business Combinations – For most acquisitions accounted for under FRS 10 intangible assets such as brands, customer lists etc are mainly rolled into the goodwill figure rather than recognised separately. Under FRS 102 it is more likely that intangible assets will be recognised separately from goodwill and each might well be amortised over different useful lives.
Investment Property – FRS 102 requires revaluation gains and losses on investment properties are recognised directly in P&L a/c rather than the current procedure under UK GAAP which is for gains and losses to be held in the Statement of Total Recognised Gains and Losses (STRGL) until realised. This is likely to lead to more volatility in the P&L a/c.
Deferred Tax – changes to the deferred tax treatment of revaluations of property, plant, equipment and investment property, fair value adjustments under business combinations, unremitted earnings of overseas associates and joint ventures are likely to result in more deferred tax entries in the future.
