The end of abbreviated accounts – but hello to micro accounts!

• Abbreviated accounts are currently prepared and filed with Companies House by the majority of small companies.
• Micro accounts (FRS 105 accounting standard) replace abbreviated and full disclosure accounts for companies for accounting periods beginning 1 January 2016. This applies as long as they satisfy 2 out of 3 conditions for 2 years (1) Turnover < £632K, (2) Gross assets < £316K, (3) No more than 10 employees.
• HMRC has however allowed the filing of micro accounts alongside corporation tax returns since 30 September 2013.
• Although there is considerably less to disclose in micro accounts, there are practical drawbacks, for example no possibility of revaluing assets. This may make micro accounts less desirable for companies with bank debt.
• For these companies, the alternative to micro accounts will be to follow the new FRS 102 accounting standard (which replaces the FRSSE) for accounting periods beginning 1 January 2016.

Abbreviated accounts and full set of accounts

You may be aware that your accountant gets you to sign two sets of accounts each year for your company.

Abbreviated accounts are the accounts filed with Companies House as these accounts go on public record and most directors/owners  prefer to minimise the information shown to the public.

The majority of companies which qualify as small (2 of the 3 criteria for current and prior year (1) turnover <= £6.5m, (2) <= 50 employees, (3) balance sheet net assets <= £3.26m) can prepare abbreviated accounts.

Abbreviated accounts include a balance sheet but not a profit and loss account so it is more difficult for a non-accountant looking at them to work out how well your business has done during the year. They also contain certain note disclosures as set out by the Companies Act 2006.

The full set of accounts are for the directors and shareholders of the company as well as HMRC and include the profit and loss account, balance sheet and note disclosures as set out by both the Companies Act and the FRSSE – the Financial Reporting Standard for Smaller entities (2015 revised version for accounting periods beginning 1 January 2015) .  Accountants also usually include a detailed profit and loss account at the back of the accounts to help the users of the accounts understand the different types of expenditure.

Funnily enough, micro-companies with accounting years ending on or after 30 September 2013 have been able to produce for shareholders a simplified balance sheet and profit and loss account with two notes – advances to directors and commitments and guarantees not on the balance sheet but there has not been a lot of uptake in the accounting profession.  HMRC also adapted into own free software to allow filing of micro accounts from October 2014.

The delay in uptake has largely been due to:

• the lack of a published accounting standard (FRS 105) until now.
• a number of statutory accounting software providers not supporting micro accounts preparation.
• perhaps a concern by accountants that micro accounts are so limited in terms of the information provided that HMRC is bound to look more closely at a company supplying them.

So what are micro accounts?

They will allow small companies to file accounts following the requirements set out in FRS 105 – the new Financial Reporting standard that comes into effect for accounting periods beginning 1 January 2016, although early adoption is possible.

The advantage of using FRS 105 is that there is significantly less disclosure in the accounts. The notes required (if relevant) will just be shown under the balance sheet and are limited to:

• director loans and guarantees and
• financial commitments, guarantees and contingencies (plus any security) which are not recognised in the balance sheet e.g. pension commitments from a defined benefit scheme or an unconditional commitment to purchase new machinery.

The accounting policies are simplified but there are no choices about which policy to use.

For example there is no need to adjust for deferred tax which is a complicated accounting principle to explain to the non-accountant.  On the other hand there is no revaluation of assets which could be an issue for businesses that wish to strengthen their balance sheet.

You only need to send your balance sheet (“ statement of financial position”) to Companies House and the balance sheet, profit and loss account and directors’ report to HMRC.

The profit and loss account (“income statement”) is very simple but there is no flexibility to change it – a heading can however be excluded if there is no information to present.  Below is a table showing the profit and loss account under FRS 105:

Turnover	X
Other income	X
Cost of raw materials and consumables	(x)
Staff costs	(x)
Depreciation and other amounts written off assets	(x)
Other charges	(x)
Tax	(x)
	__
Profit or Loss	X

 

So can you apply for the micro entities regime?

Yes, if you meet 2 out of the 3 conditions for 2 years:

• Turnover < £632K
• Gross Assets < £316K
• No more than 10 employees.

There will no doubt be a large number of companies who make the switch. A lot of small businesses manage their growth using key performance indicators or management accounts produced by their own internal software so the preparation of full accounts is a formal, costly and unnecessary exercise for business purposes.

But for businesses with external debt such as bank loans, a switch to micro accounts may not be advisable.  This is because any assets that have been revalued in the balance sheet will have to be shown at cost  – there are no accounting policy choices within FRS 105. This will reduce the strength of the balance sheet and may be of concern to banks and other lenders.

In practical terms, businesses moving to micro accounts may still produce a detailed profit and loss account for submission to HMRC along with their set of micro accounts

If you would like to talk more about how the change in accounting standards might affect your company, please call or drop me an email.