The Financial Reporting Faculty’s Sarah Dunn explains how recent changes to company law will affect small companies in the UK.
In March 2015 the UK Government approved new regulations that implement the requirements of the new EU Accounting Directive into UK company law. While the changes introduced by the regulations are wide ranging, some of the most significant relate to the small companies regime. An overview of these changes is provided below.
The regulations increase the small company accounting thresholds. An eligible company will now qualify as small if it meets at least two out of three of:
The eligibility criteria for small companies have also changed slightly with a revised definition of an ineligible group. Under the new rules, a group is no longer ineligible solely because a public company is a member. Instead, this condition has been replaced with a reference to a traded company. This will be important for a few companies.
The Accounting Directive restricts the information that can be required by member states in small company accounts. Those restrictions are reflected in the requirements for small companies in FRS 102 The Financial Reporting Standard in the UK and Republic of Ireland, as discussed below.
However, there is no change to the requirement for those accounts to show a true and fair view. Thus, directors will need to consider carefully whether further disclosures, over and above those specifically required in FRS 102, may be required in order for those accounts to show a true and fair view.
The UK regulations also introduce greater flexibility in the formats of small company accounts. In particular, small companies (excluding charities) will have the option to prepare for members abridged (rather than full) accounts. Small companies will be able to choose to abridge the balance sheet, the profit and loss account, or both.
If choosing to abridge the accounts (whatever the combination), the directors will need to obtain approval by each and every shareholder each year.
For accounts prepared in accordance with the new regulations there will no longer be an option for small companies to file an abbreviated version of their full accounts at Companies House.
This means that, generally speaking, small companies will be required to file the version of the accounts as prepared for the members. However, small companies will still have the option, regardless of whether the accounts prepared for members are full or abridged, not to file the profit and loss account and/or the directors’ report at Companies House. If choosing not to file the profit and loss account, specific information regarding the audit report will now need to be disclosed in the notes in the filed accounts.
If a small company chooses to abridge the balance sheet and/or the profit and loss account, it will also be required to deliver to Companies House a statement that all the members consented to the abridgement.
In light of the changes to UK company law, the Financial Reporting Council has revisited UK accounting standards and in July 2015 published a new financial reporting framework for small and micro-entities.
The key changes to the standards include: the withdrawal of the FRSSE, with smaller entities brought within the scope of FRS 102; a separate section in FRS 102 outlining the different presentation and disclosure requirements for such companies; and a new standard (FRS 105) for companies eligible for and choosing to apply the micro-entities regime.
The changes to company law are effective for financial years beginning on or after 1 January 2016, with early adoption permitted for financial years beginning on or after 1 January 2015. However, it is important to note that the increased size limits cannot be early adopted for the purpose of audit exemption.
The changes to UK accounting standards also come into effect for financial years beginning on or after 1 January 2016. Early adoption of FRS 105 is permitted. Early adoption of revised FRS 102 is permitted for financial years beginning on or after 1 January 2015. However, a small company choosing to early adopt revised FRS 102 must also early adopt the changes to UK company law, and vice versa.
Sarah Dunn ACA is a technical manager in the Financial Reporting Faculty.
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