What are accounting standards and who do they impact?
Accounting standards are the principles in place, set by the Financial Reporting Council, that govern how a company and other entities prepare their financial statements each year.
Why and how are they changing?
Some of the existing principles in place date as far back as the 1970’s. In conjunction with changes required from EU legislation, the UK have combined and rewritten all existing rules, regulations and principles into a series of comprehensive new standards. The most important of these are as follows:
This standard is based on International Financial Reporting Standards (IFRS). Many companies that use IFRS have smaller subsidiaries that don’t benefit from using IFRS due to the significant levels of disclosure under this standard. FRS 101 follows the same principles as IFRS but provides specific disclosure exemption to reduce the burden in this area.
This is the standard that will affect medium companies and groups who currently report under UK accounting principles rather than IFRS. As well as cosmetic changes to the financial statements and some additional disclosures, companies will be encouraged and in some cases required to show their results based on the fair value of assets and liabilities instead of the previously used historical cost. The changes may also lead to the recognition of previously unrecognised assets and liabilities.
FRS 102 for small companies
Small companies are used to being able to produce a simpler format of accounts and this will continue. However, the underlying accounting principles of FRS 102 will apply which may lead to changes in the way that certain transactions or balances are accounted for. Small companies will now also have 13 mandatory notes that will have to be included, if they apply.
Another significant change for small companies is that the concept of abbreviated accounts is being abolished. Abbreviated accounts allowed small companies to significantly reduce the amount of information that was filed on public record at Companies House. Under the new requirements, small companies will still have the option not to file a copy of the directors report and the profit and loss account, but all other information contained within their financial statements will now be required to be filed.
For companies that are below a lower threshold, known as micro-entities, there is now an option to produce an even simpler set of accounts. These accounts could show as little as just a balance sheet and possibly a maximum of two mandatory notes. However, whilst these entities benefit from simple accounts, they do lose some flexibility as to how certain matters can be dealt with.
When are they changing?
FRS 101 and FRS 102 come into force for an entity once they are in an accounting period that starts on or after 1 January 2015. Early adoption is permissible and so these can be applied immediately.
FRS 102 for small companies and FRS 105 is applicable for accounting periods starting on or after 1 January 2016, but these can be adopted early as well. Early adoption here is permissible on or after 1 January 2015 for FRS 102 for small companies, and from periods ending 31 July 2015 or later for FRS 105.
What are the key differences under the new standard?
FRS 101 is an entirely new standard for the UK. IFRS has been a form of treatment and disclosure only really used by large companies and foreign groups because of the amount of information that is required to be shown. The new standard allows small and medium sized companies to prepare accounts that are directly compatible with their parent undertakings but without all the additional information being disclosed.
FRS 102 will be applicable to many companies, but may not necessarily lead to significant changes for some entities. Where a company is relatively simple, it is likely that the transition will be fairly simple with only minor changes. However, other companies could see significant changes in how certain transactions and balances are dealt with in their financial statements, possible changes in the valuation basis used for some items, and in some circumstances may see entirely new assets or liabilities being recognised in the financial statements. As well as the normal reports, a company will also now show a statement of changes in equity before the notes as a principal statement.
FRS 102 for small companies follows all the same principles as the full FRS 102, but as mentioned above requires only 13 notes. If any of these notes do not apply for a particular financial period, they are not included. The company may voluntarily include additional disclosures if it feels that this would provide greater clarity to the financial statements. Most of the notes are similar to those previously required, but there are some additional disclosures that small companies will not be familiar with.
How will it impact on my business?
If your business is subject to some of the changes, it could result in significant movements in the reported values of assets and liabilities, which may alter the view of the overall financial position. In some circumstances this could lead to increased asset values, thereby strengthening the balance sheet, but in other circumstances it could lead to the provision of additional liabilities, thereby weakening the view presented.
It is important to recognise that these changes will impact on reported profits, which in turn could impact on a company’s tax liability. Whilst some changes may lead to lower profits, and consequently lower tax liabilities, this will also reduce the level of distributable reserves and therefore impact upon the amount of dividends that the business owners can withdraw.
However, it is not all bad news since some companies will be able to use the change as an opportunity to consider options available which might improve the view of their financial statements and recognise value that has remained hidden under the old guidance.
Company size and audit thresholds
As well as changing accounting standards, the thresholds for small and medium sized companies is increasing from 2016. For periods commencing on or after 1 January 2016, a company will remain small until it exceeds two of the following three conditions for two consecutive years:
- Turnover of £10.2 million
- Gross assets of £5.1 million
- An average of 50 employees
(NB: Groups can also apply a gross threshold for turnover and gross assets which is increased by 20% from the above figures).
It is expected that audit thresholds will increase to these limits in due course, but the exact point that this will happen is yet to be confirmed.
Contact Moore Stephens!
As you have no doubt realised by now, there are big changes in store and it is important that you consider how these will impact your company as soon as possible.
Contact Moore Stephens now to consider how you should be preparing.