Category Archives: Micro-entity reporting

Mircro-entities reporting and FRS 105

In a move to reduce administrative burden for small businesses, companies in the UK meeting certain criteria called ‘micro-entities’ will be subject less disclosure requirements when it comes to financial reporting. The Small Companies (Micro-Entities’ Accounts) Regulations 2013 having radically overhauled the reporting regime for micro-entities, FRC is all set to introduce a new accounting standard FRS 105 effective 2016.

Micro-entity

A new section 384A inserted in to the Companies Act 2006, broadly qualifies a company as a micro-entity in a financial year if the qualifying conditions are met in that year. In order to qualify as a micro-entity two or more of the following conditions should be met:

  • Turnover – not more than £632,000
  • Balance sheet total – not more than £316,000
  • Number of employees – not more than 10

Where an accounting exceeds more than 12 months the figures for turnover must be proportionately adjusted. The balance sheet total means the aggregate of the amounts shown as assets in a company’s balance sheet. The number of employees means the average number of persons employed by the company in the year. 

Eligibility criteria

Regardless of whether a company qualifies as a micro-entity its eligibility to apply FRS 105 is further restricted and the following types of entities are not eligible:

  • Public companies
  • Financial institutions including insurance companies and banking companies
  • Companies that are excluded from the small companies regime
  • Charities
  • Limited liability partnerships
  • Small parent companies that choose to prepare group accounts
  • Companies that are not parent companies but whose financial statements are included in consolidated accounts

True and fair view

Given the significant reductions in disclosure requirements the first casualty of this new regime appears to be that ‘true and fair view’ of the financial reports produced under FRS 105 has been compromised. A new section 396(2A) inserted in to the Act says it all:

“In the case of the individual accounts of a company which qualifies as a micro-entity in relation to the financial year the micro-entity minimum accounting items included in the company’s accounts for the year are presumed to give the true and fair view required by subsection”.

Financial statements

FRS 105 requires preparation of only a balance sheet and a profit and loss account, and has scrapped the need to prepare ‘statement of total recognized gains and losses’ and the ‘cash flow statement’. Applying Format 2 the profit and loss account comprises the following line items:

  • Turnover
  • Other income
  • Cost of raw materials and consumables
  • Staff costs
  • Depreciation and other amounts written off assets
  • Other charges
  • Tax
  • Profit or loss

However, for preparing the balance sheet both Format 1 and Format 2 have been detained although having been condensed signficantly.

Format 1

  • A Called up share capital not paid
  • B Fixed assets
  • C Current assets
  • D Prepayments and accrued income
  • E Creditors: amounts falling due within one year
  • F Net current assets (liabilities)
  • G Total assets less current liabilities
  • H Creditors: amounts falling due after more than one year
  • I Provisions for liabilities
  • J Accruals and deferred income
  • K Capital and reserves

Format 2

  • ASSETS
  • A Called up share capital not paid
  • B Fixed assets
  • C Current Assets
  • D Prepayments and accrued income
  • LIABILITIES
  • A Capital and reserves
  • B Provisions for liabilities
  • C Creditors (1)
  • D Accruals and deferred income 
  • Notes on the balance sheet formats – Creditors (Format 2, item C under Liabilities): Aggregate amounts falling due within one year and after one year must be shown separately.

Whilst there are significant reductions in disclosure requirements under FRS 105, certain accounting items get watered down treatments under the new standard. Borrowing costs, for example, aren’t capitalized and are written off to profit or loss, fixed assets will be stated at depreciated historic cost and there is no scope for revaluation or fair value treatment.  Deferred tax accounting has gone the dinosaurs way!

Company law 

It must however, be noted that companies are governed by the provisions of the Companies Act 2006 and reporting under FRS 105 does not anyway compromise on the compliance requirements under that Act.

Micro-entities accounting and reporting

The Small Companies (Micro-Entities’ Accounts) Regulations 2013 came into force on 1 December 2013 and apply to accounting years ending on or after 30 September 2013. So a company that qualifies as a micro-entity can now prepare its accounts in compliance with these regulations if its accounting year ended on or after 30 September 2013.

What is a micro-entity?

A company will need to meet at least two out of the following three thresholds to qualify as a micro-entity:
• Turnover: Not more than £632,000
• Balance sheet total: Not more than £316,000
• Average number of employees: Not more than 10
The turnover limit is adjusted proportionately if the financial year is longer or shorter than twelve months.

Specifically excluded entities

An entity that is excluded from being a small company will not qualify as a micro-entity. Further, charities and LLPs are excluded so are investment undertakings, financial holding and insurance undertakings, credit institutions, qualifying partnerships, overseas companies, unregistered companies and companies authorised to register pursuant to s1040 of the Companies Act 2006.

Group situations

A parent company can only qualify as a micro-entity for the purposes of its individual accounts if it qualifies as a micro-entity individually and the group headed by it qualifies as small. Also, a parent company that prepares group accounts cannot qualify as a micro-entity for the purposes of its individual accounts.

Main features of micro-entity reporting

Simpler balance sheet and profit and loss account presentation as given below.. However, the director’s report requirements still apply.

Balance sheet format – option 1

A Called up share capital not paid
B Fixed assets
C Current assets
D Prepayments and accrued income
E Creditors: amounts falling due within one year
F Net current assets (liabilities)
G Total assets less current liabilities
H Creditors: amounts falling due after more than one year
I Provisions for liabilities
J Accruals and deferred income
K Capital and reserves

Balance sheet format – option 2
ASSETS

A Called up share capital not paid
B Fixed assets
C Current Assets
D Prepayments and accrued income

LIABILITIES

A Capital and reserves
B Provision for liabilities
C Creditors*
D Accruals and deferred income
*Aggregate amounts falling due within one year and after one year must be shown separately.

Profit and loss account format

A Turnover
B Other income
C Cost of raw materials and consumables
D Staff costs
E Depreciation and other amounts written off assets
F Other charges
G Tax
H Profit or loss

Tax Accountants