It’s great when clients prosper. But for small entities that have previously chosen to apply the small entities regime of FRS 102 Section 1A, growing to become a medium-sized entity that must apply FRS 102 in full requires a step change in financial reporting. Here are some of the more common issues.
More disclosure, more detail
FRS 102 requires more bespoke disclosures compared to those in Section 1A. The box, left, contains examples of disclosures that might be added when you switch off Section 1A exemptions in a software package. While software can create the outline, client-specific, tailored narrative must be added and templates, checklists and disclosures from similar companies will only be useful as a starting point. This can be time consuming and the balance between efficiency and quality isn’t always easy to achieve. Now that recognition is a significant audit risk, ‘boilerplate’ turnover notes need elaboration. Judgements and estimation uncertainty must be disclosed. And notes for related parties, share options and financial instruments will also require more detail.
Strategic report
Medium-sized entities must prepare a Strategic Report, which should be fair, balanced and understandable. A recent example I’ve seen started with a tongue-in-cheek ‘this family-owned business isn’t bothered, neither is anyone else, I’ve ticked through the disclosure checklist, is this enough?’ Here’s what happened when we took their original comments and discussed it further.
Performance: “Profit in the year was £x, (XX18, £y)”
To make it ‘fairer’ we added the position at the year end and explained the increase in profits, in this case, due to a significantly improved lead time. The bigger the business, the more detail is likely to be needed.
Risk and uncertainties: “The business faces various risks and uncertainties”
This is too vague! For many businesses, Brexit and COVID-19 are dominant risk areas. Adding this detail and linking it to ‘important events occurring since the year end’ in the Directors’ Report helped, alongside detail on the exposure level and how the risks are being mitigated. Risks and uncertainties are specific for each client so tailored disclosures are needed.
KPIs: “Sales per head are £x (XX18 £y)”
For a machine-intensive manufacturing business, there are more appropriate KPIs. Since the directors use margin-based measures of performance for rewards like bonuses, we discussed including percentage return on fixed assets, stock turnover and lead time changes, plus the current ratio. Although non-financial KPIs are not required for medium-sized companies, they can help.
Future activities: “The directors expect improvements in performance in the coming year”
In light of the coronavirus situation, this highlights the danger of using ‘standard’ paragraphs. We suggested stating that the impact for this business is not yet known and including specific detail on how shutdowns for the company, its suppliers and customers are likely to affect trading results.
Cash-flow statement
No longer being small also means having to prepare a cash-flow statement. Unfortunately the version that pops out of the software may contain errors. Problem areas include netting off of new debt and debt repaid, errors in payments made on leases, tax and interest, rounding errors and some figures being misposted under ‘spare’ or ‘other’. Even when it seems to balance, differences can be found within line items such as the movement in creditors. It might be worth doing your own!
ICAEW’s website has checklists and example accounts that include all of the additional disclosures required when moving from Section 1A to full FRS 102 for the first time. The Financial Reporting Faculty also has online guidance to help companies prepare a Strategic Report. See icaew.com/frs102 and icaew.com/ukregulation.
Examples of disclosures that might appear automatically when you turn off Section 1A exemptions in your software
- A Statement of Comprehensive Income (SOCI*)
- A Statement of Changes in Equity (unless included in SOCI)
- A Statement of Cash Flows
- R&D activities and recommended dividend (directors report*)
- Audit report*
- Audit fees
- Directors’ remuneration and possibly highest-paid director note
- Turnover, tax and interest notes
- Key management personnel compensation
- Information about associates and holdings of more than 20%
*No option to remove on filing under full FRS 102
About the author
Sarah Flint, Director, Benee Consulting Ltd
