The Future of Accounting for Small Companies in the UK?!

  • By Andrew Guntert
  • 25 June 2014 00:00

When will we know what it is, let alone from when it has to be adopted?

For many practitioners and accountants in the UK, all the accounts they prepare are small company accounts (together obviously with accounts for unincorporated entities as well).

Given that the revised EU Accounting Directive allows the qualifying criteria for a small company in the UK to increase by more than 50% to approximately (2 out of 3 of) a turnover of £10m, gross assets of £5m, and average number of employees not more than 50, an even higher proportion of accountants will only be involved in small company accounts.

Surely therefore clarifying and developing future GAAP for small companies should have been very near the top of the priority list for the Financial Reporting Council ('FRC') and for the Department of Business, Innovation and Skills ('BIS')!

Please read/skim through the following and come to your own conclusion as to whether it is apparently a priority (though I think my own opinion on this may 'seep through'!!)

We must remember that the changes required by FRS 102 for medium and large companies and indeed small companies who choose to adopt FRS 102, must be used for periods beginning 1st January 2015 onwards and as we all know extensive changes of accounting policy and prior period adjustments need to be made as a result.

The big question is from what date will changes to small companies be in place (though we will need to know what they are first!)?

Just to recap or summarise on where we are with this project:

  • FRS 100 was published in November 2012 - in this the FRC said, concerning the Financial Reporting Standard for Smaller Entities (FRSSE), 'The Accounting Council advises the FRC to retain the FRSSE for a period following the application of FRS 102, with a view to consulting again on the FRSSE's future in the short to medium term'. Arguments had been made to suggest that continuing with the FRSSE would minimise disruption for the vast majority of small companies and preparers of accounts. At the same time FRS 100 also said 'The Accounting Council also advises the FRC to undertake further consultation to address the implications for the FRSSE of (a) the European Commission proposals arising from its review of the EU Accounting Directives (an initial proposed Directive was issued in October 2011); and (b) the Directive on annual accounts of micro-entities that was approved by the European Council in February 2012'.
  • The FRC also announced at that time that FRSSE 2015 would replace FRSSE 2008 but with what were called consequential changes made to the FRSSE such as a 'default' maximum life for goodwill of 5 years, a need to consider whether any impairment of assets had taken place, and a change to the definition of related parties. FRSSE 2015 actually making these changes was subsequently published in July 2013 but only in electronic form.
  • In summer 2013 the revised European Accounting Directive passed into European Law, which will require major changes to the form and contents of small company accounts and is required to be passed into UK Law by the summer of 2015.
  • In the autumn of 2013, BIS indicated that they would publish a consultation document in spring 2014 on the legal changes required. These are likely to require extensive changes to be made to the Companies Act 2006. Obviously the other relevant legal change was the introduction of the micro-entity option into the CA which was subsequently incorporated into both the FRSSE 2008 and FRSSE 2015 by the FRC in April 2014 (see our Free Download - Changes in Financial Reporting - Micro-entities Q&A and sample accounts)
  • Then in February 2014 the FRC surprised a number of interested parties by announcing that possibly the FRSSE would not be updated but might be withdrawn!
  • FRC's Setting the Standard October 2013 - February 2014 says on page 6:

    'Initial discussions have been held over a number of high-level issues and the tentative view is that the FRSSE should be withdrawn and instead small entities and micro-entities brought within the scope of FRS 102, so that a consistent framework and principles apply to all entities. FRS 102 would be revised to include specific requirements for small entities and micro-entities to reflect the differing legal requirements, particularly in relation to disclosure. This would include there being no requirement for small companies to prepare a cash flow statement or group accounts.

    We would like to hear from users of the FRSSE. We anticipate that an exposure draft will be issued in June 2014 for consultation'

    Wow - what you might call a small change of plan!

    So with regard to future accounting for small companies, we were expecting a Consultation from BIS in the spring followed by an Exposure Draft ('ED') from the FRC in June.

  • But throughout the spring nothing seemed to be appearing? Then in the published minutes of the Accounting Council's April 2014 meeting (published in May), an 'interesting' comment appeared:
  • 'The Accounting Council noted the following:

    Discussions were taking place in relation to the development of a joint or parallel consultation with BIS to consider the Member State options in response to the EU Accounting Directive'.

    Rumours had been circulating that BIS did not have enough resource to develop the planned consultation and this quote seems to imply that what would have been two separate consultations may now turn into just one!

    The May minutes of the Accounting Council possibly clarify (a little!) by saying 'BIS were expected to issue a consultation document in the summer and it was reported that the FRC intends to issue a consultation alongside the BIS consultation'. So 'summer' it is then!

  • Broadly it is now understood that we may see a relatively high level consultation (either one or two!) in the summer, possibly fairly soon. Relatively high level seems to imply that it will be well short of detailed proposals and indeed may even revisit the conclusion tentatively reached in February? Back to the FRSSE?? Probably not!
  • As FRS 102 has to be complied with for periods beginning 1st January 2015, will it even be possible for BIS to amend the Companies Act for small companies from that same date? Looks very demanding!

    But of course they may resort to what they did for the micro-entity legislation? Apparently available for periods ending 30/9/2013, the measure didn't actually pass into law until the end of November 2013! I'm not sure I'd ever previously heard of 'retrospective application'?

    So are we impressed by the way small company changes are being handled?

    Do we think there might be a better way? Might our software suppliers be challenged in providing what we need, when we need it and without any errors?!

    Please use this blog to give your thoughts and opinions!! Please please! And watch this space, and the FRC's press releases, and BIS, and.......

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