Since 2013, companies that meet the definition of micro-entities have been able to prepare and file simplified accounts. The micro-entities’ regime also imposes a simpler approach to some aspects of accounting – for example, properties cannot be revalued in the accounts. Although the regime has been available for some time, relatively few companies have taken the decision to use micro-entity accounting, instead preparing and filing small company accounts.
However, the withdrawal of the Financial Reporting Standard for Small Entities (FRSSE) means that, for financial years beginning on or after 1 January 2016, small companies will use the same accounting standard – FRS 102 – as larger UK companies. This new standard introduces some significant accounting challenges including more widespread use of ‘fair value’ accounting. Companies who choose to apply the micro-entities’ regime will be exempt from FRS 102. Instead they will apply an alternative standard, FRS 105, which is tailor-made for micro-entities.
So if you qualify as a micro-entity, you will need to choose whether to adopt the micro-entities’ regime and use FRS 105, or adopt the small companies’ regime and use FRS 102. This letter outlines some of the likely factors to consider when making that choice.
Qualifying as a micro-entity
There are broadly three criteria which must all be met:
Based on our initial assessment, your company appears to qualify as a micro-entity, although we will be happy to confirm this with you if you decide to apply the micro-entity regime.
As a micro-entity, accounts prepared under FRS 105 need consist of only the following items:
A simplified Profit & Loss Account*;
*the accounts filed at Companies House need not include this.
A sample set of micro-entity accounts can be downloaded here.
Company law presumes that a set of micro-entity accounts prepared as above gives a true and fair view. This means that, as the company’s directors, you are not required to add any further disclosure. There is nothing to prevent you from adding extra notes to a set of micro-entity accounts but you are never required to do so. If instead you opt for the small companies regime, you would be expected to ensure that the accounts gave a true and fair view by adding extra disclosure if need be.
As well as preparing simplified accounts, the micro-entities’ regime imposes simpler accounting treatment within FRS 105 compared to its larger sibling FRS 102. There are numerous differences between FRSs 102 and 105; the three most significant are likely to be as follows:
Revaluation / fair value
This is not permitted for micro-entities under FRS 105. So assets such as trading or investment properties and equipment, and financial instruments such as share-based investments, are held at cost less depreciation (where relevant) and impairment. By contrast, FRS 102 permits (and in some cases requires) such assets or instruments to be measured at fair value annually.
Whether the ban on revaluation / fair value is beneficial depends on your circumstances. If, for instance, you are currently revaluing properties and have significant loans and other debts against these properties, using FRS 105 would mean re-measuring the properties at depreciated cost, which could reduce your balance sheet value considerably. On the other hand, avoiding the need to obtain regular fair values may prove more convenient and less costly for the business.
Fewer intangible assets
Under FRS 105, fewer intangible assets are recognised than under FRS 102. For instance, if your company were to acquire a business, the purchase price will be divided between tangible assets and liabilities and goodwill – you would not need to identify separate individual intangible assets such as customer lists and brand names. It also means, however, that internally-generated intangibles such as development costs cannot be treated as assets; instead, such costs must be expensed through profits as incurred.
No more deferred tax
FRS 105 does not allow companies to recognise deferred tax. By contrast, FRS 102 includes deferred tax more frequently than before – for example, when properties are revalued. Not including deferred tax in accounts will often increase the profits recorded in a financial year – however companies should still consider the future tax effects of transactions when planning ahead.
Tax for micro-entities
Tax law requires that accounts prepared for tax purposes are based on UK generally accepted accounting practice (‘UK GAAP’). Since the micro-entities’ regime is legally permitted for companies and FRS 105 constitutes UK GAAP for such companies, HMRC will accept accounts prepared under the micro-entities’ regime.
Other things to consider
The relatively brief information presented within micro-entity accounts means that less financial detail is available to the public (via the filed accounts at Companies House). You may find this an advantage; however, it remains to be seen whether this lack of information could damage your company’s credit-rating. Remember that you can provide more information in your accounts than the statutory minimum, should you prefer to do so.
You should also remember that the shareholders of the company will also receive less information in their members’ accounts. We will be happy to supplement the minimal statutory information with extra analysis so that you have enough financial detail to make informed decisions in running your business.
If you would like to discuss the impact of the above on your financial reporting feel free to get in touch.