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Technical factsheet

FRS 102 – transition issues for small companies



Contents Page


Introduction 2

Standards in issue and withdrawal of the FRSSE 3

Amendments to the Companies Act 2006 (SI 2015/980) 3

Reduced disclosure requirements and the true and fair concept 5

Transition to FRS 102 7

Transition to FRS 102: worked example 21

Disclosure requirements 34

This factsheet has been produced in partnership with Steve Collings FMAAT FCCA,

director of Leavitt Walmsley Associates Ltd Chartered certified Accountants, lecturer and author of financial reporting publications. You can find the latest publications at stevecollings.co.uk.





INTRODUCTION


FRS 102, The Financial Reporting Standard applicable in the UK and Republic of Ireland, has been in issuance since March 2013 and applies mandatorily for companies not eligible to apply the small companies regime in the preparation of their financial statements for accounting periods starting on or after 1 January 2015, with earlier adoption permissible. Small companies will be moved under the scope of FRS 102 mandatorily for accounting periods starting on or after 1 January 2016.
FRS 102 is based on the principles found in International Financial Reporting Standards (IFRSs), specifically IFRS for SMEs. IFRS for SMEs is intended to apply to general-purpose financial statements by entities which are classed as ‘small and medium-sized’ or ‘private’ and ‘non-publicly accountable’. The term ‘publicly accountable’ was difficult to define in the context of legislation and hence is not a recognised concept in UK GAAP.
While FRS 102 is based on the principles found in IFRS for SMEs, the Financial Reporting Council (FRC) has modified the requirements significantly, both in terms of the scope of entities eligible to apply the standard and the accounting treatments provided. A notable area where the FRC has substantially modified the content of IFRS for SMEs to arrive at FRS 102 is in relation to section 29, ‘Income Tax’; which is significantly different from the equivalent section 29 in IFRS for SMEs.
At the time of writing, the latest edition of FRS 102 is the September 2015 edition, which superseded the August 2014 edition in respect of the following:
a. an editorial amendment to section 12, ‘Other Financial Instruments Issues’, in relation to the examples on hedge accounting, which were issued in September 2014

b. Amendments to FRS 102 – Pension obligations, which was issued in February 2015

c. consequential amendments to FRS 102 that were included in FRS 104, Interim Financial Reporting, issued in March 2015

d. inclusion of section 1A, ‘Small Entities’, and other minor amendments



e. some minor typographical or presentational corrections.
FRS 102 is divided into sections, and each section is organised by topic area. Cross-references to paragraphs within the standard are identified by section followed by paragraph number. Paragraph numbers are in the form of ‘xx.yy’, where ‘xx’ is the relevant section number and ‘yy’ is the sequential paragraph number within that section. Paragraphs which apply only to ‘public benefit entities’ are preceded by ‘PBE’. Where FRS 102 provides examples of how certain principles are applied in the context of the standard which include monetary amounts, the measuring unit is the ‘currency unit’ (CU).


Standards in issue and withdrawal of the FRSSE


FRS 102 is part of a suite of standards that form ‘new UK GAAP’. The standards are listed below, together with the dates of the latest editions in issue at the time of writing this Technical Factsheet:
FRS 100, Application of Financial Reporting Requirements (September 2015)

FRS 101, Reduced Disclosure Framework (September 2015)

FRS 102, The Financial Reporting Standard applicable in the UK and Republic of Ireland (September 2015)

FRS 103, Insurance Contracts (March 2014)

Amendments to FRS 103, Insurance Contracts – Solvency II (May 2016)

FRS 104, Interim Financial Reporting (March 2015)

FRS 105, The Financial Reporting Standard applicable to the Micro-entities Regime (July 2015)

Amendments to FRS 105, Limited Liability Partnerships and Qualifying Partnerships (May 2016)
The FRSSE (effective January 2015) is withdrawn in its entirety for accounting periods starting on or after 1 January 2016. The FRC came to the conclusion that the FRSSE is unsustainable in its current form because it requires more disclosures than is permitted by the EU Accounting Directive (‘the directive’). As noted above, small companies will be moved under the scope of FRS 102 but with reduced disclosure requirements.


Amendments to the Companies Act 2006 (SI 2015/980)


On 26 March 2015, Statutory Instrument (SI) 2015/980 received Royal Assent and became effective on 6 April 2015. It will apply to accounting periods starting on or after 1 January 2016 (with early adoption permitted – see below). SI 2015/980 implements the provisions of the EU Accounting Directive (the directive) into company law. The directive was issued in June 2013 and member states were given until July 2015 in which to transpose the provisions of the directive into legislation.
The overarching objective of the directive is to seek to reduce the burdens placed on small companies in terms of the disclosures that they are legally required to make in their financial statements. In addition to the reduced disclosure requirements, another notable feature of the revised Companies Act 2006 is the increase in the size thresholds which determine the size of a company. The revised thresholds are set out in the table below:





Turnover

Balance sheet total

Average number of employees

Micro-entity

Not more than £632,000

Not more than £316,000

Not more than 10

Small company

Not more than £10.2m

Not more than £5.1m

Not more than 50

Small group

Not more than £10.2m net or not more than £12.2m gross

Not more than £5.1m net or not more than £6.1m gross

Not more than 50

Medium-sized company

Not more than £36m

Not more than £18m

Not more than 250

Medium-sized group

Not more than £36m net or not more than £43.2m gross

Not more than £18m net or not more than £21.6m gross

Not more than 250

Large company

More than £36m

More than £18m

250 or more

Large group

More than £36m net or more than £43.2m gross

More than £18m net or more than £21.6m gross

250 or more

The qualifying conditions above are met by a company, or a group, in a year in which it satisfies two, or more, of the turnover, balance sheet total and employee headcount criteria. Section 382(4) of the Companies Act 2006 says that if a company has a short accounting period, the turnover figure must be proportionately adjusted.


SI 2015/980 contains an early adoption clause which allows an entity to early adopt the provisions of the revised Companies Act 2006 for accounting periods starting on or after 1 January 2015, but before 1 January 2016, if the directors so wish. Where an entity early adopts the new legislation, it must ensure that it also:


  • applies the provisions in new UK GAAP. A company that was previously medium-sized but is now small under the revised size thresholds must not use the FRSSE (effective January 2015) in the preparation of, say, the 31 December 2015 financial statements; if the entity early adopts the revised legislation, it must early adopt the new suite of standards

  • does not early adopt the revised audit exemption thresholds as there is no option to early adopt the increased audit exemption thresholds (which have been aligned to the small company size thresholds noted in the table above)

  • does not prepare abbreviated financial statements as the concept of such accounts has been abolished in SI 2015/980.

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