By Lee Facey, Partner
Changes to UK company law have resulted in an increase in the small and medium sized company thresholds. The new thresholds are for accounting periods commencing on or after 1 January 2016 and can be summarised as follows:
Changes to company size and audit thresholds
|No. of employees
An entity needs to breach two of the three thresholds for two consecutive periods.
In most cases, companies that qualify as small are exempt from audit. The increase in the small company criteria (previously turnover £6.5m, gross assets £3.26m and 50 employees) has therefore also led to a raising of the audit threshold.
"Whilst the increase in the small company and consequentially the audit threshold appear to be substantial, the number of entities affected by this change will be relatively small" comments Lubbock Fine partner, Lee Facey.
Changes to small company accounting
"In contrast to the effect of change in size thresholds" continues Lee, "the change to the small company accounting regime will be significant and impact on a much larger number of companies."
For accounting periods commencing on or after 1 January 2016 all small entities will need to follow the same financial reporting framework as non-small entities, namely FRS102, and the Financial Reporting Standard for Smaller Entities (FRSSE) will be withdrawn.
There are a number of differences between underlying accounting treatment under FRS102 in comparison to the FRSSE.
Lee continues: "The profitability of some companies and the impact on the net asset position could be substantial. This could therefore potentially cause problems with existing loan covenants, an example being the requirement to account for the deferred tax liabilities on revalued properties."
FRS102 has however been modified by the introduction of FRS102A to allow for reduced disclosures for smaller entities and in some instances these are less arduous than the previous regime. For example the related party disclosures are not as extensive or detailed.
Transitional adjustments and disclosures
In the first year of adoption of FRS102 the company will need to restate the comparative results and net assets at the date of transition, the date of transition being the opening comparative balance sheet. For example the transition date for a company adopting FRS102 for their accounts for the year ending 31 December 2016, would be 1 January 2015.
No more abbreviated accounts
The option available to small companies of filing "abbreviated accounts" has been removed. However, company law will continue to permit a small company to remove the directors' report and profit and loss account from the accounts filed at Companies House.
There is the option of preparing and filing "abridged accounts", which permit the profit and loss account to start at gross profit and reduces the balance sheet analysis. This preparation requires the approval of all shareholders.
Companies qualifying as micro-entities can adopt the financial reporting framework of FRS105, which includes significantly reduced disclosures and simplification in a number of accounting areas.
Accounts prepared under FRS105 only include a profit and loss account, balance sheet and two supporting notes.
"With the introduction of FRS102 for small entities and the removal of the ability to file abbreviated accounts, the adoption of FRS105 is now an attractive alternative from micro-sized entities that would previously have not seen any benefit from changing from preparing accounts under the FRSSE" adds Lee.
If you require further information on the changes or would like to discuss the likely impact on your company, please speak to your contact partner or call Lee Facey firstname.lastname@example.org.