Amendments to FRS 105

The Financial Reporting Council (FRC) issued revised Financial Reporting Standards (FRSs) in March 2018 which incorporate the amendments made from the first triennial review of UK GAAP.

It is likely that further comprehensive reviews of the FRSs will be carried out every four or five years.  However, where there is an emerging issue (or multiple issues) which the FRC view as being of an urgent nature, it is likely to be dealt with outside the review cycle as a separate project.

Why have there been significant amendments ?

The majority of the amendments arising from the triennial review are mandatorily effective for accounting periods starting on or after 1 January 2019 and such amendments mainly affect FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland.  However, FRS 105 The Financial Reporting Standard applicable to the Micro-entities Regime has seen some quite significant amendments as a result of the triennial review.  This is due, in large part, to the fact that micro-entities in the Republic of Ireland can now use the standard for accounting periods starting on or after 1 January 2017 following amendments made to the Companies Act 2014 by virtue of the Companies (Accounting) Act 2017.  Early adoption of FRS 105 is permissible for Irish micro-entities, provided that the Companies (Accounting) Act 2017 is applied from the same date.

It should be noted that Irish micro-entities are required to make far more comprehensive disclosures in their financial statements than UK micro-entities.  To that end, Irish micro-entities must have regard to Appendix B Company law disclosure requirements for micro-entities in the Republic of Ireland to Section 6 Notes to the Financial Statements of FRS 105 which sets out the legally required disclosures.  It should be noted that Appendix B to Section 6 is an integral part of the standard.

UK micro-entities are required to follow the disclosure requirements in Section 6, Appendix A Company law requirements for micro-entities in the UK.  Again, Appendix A is an integral part of Section 6.

Effect of the amendments on UK-based micro-entities

For micro-entities based in the UK, there is less in the way of ‘significant’ change.  However, there are additional disclosure requirements that have been brought into FRS 105 (March 2018) and which apply to accounting periods commencing on or after 1 January 2017 (i.e. from 31 December 2017 year-ends onwards).  The importance of complying with these additional disclosure requirements cannot be over-emphasised because failure to do so will mean the micro-entity’s financial statements do not give a true and fair view.

For UK micro-entities, there are two additional disclosure requirements which must be made at the foot of the micro-entity’s balance sheet as follows (references to ‘the Act’ mean the Companies Act 2006):

• information about off-balance sheet arrangements as required by section 410A of the Act; and
• information about employee numbers as required by section 411 of the Act.

The additional disclosures are a legal requirement and hence should have been included in financial statements for periods starting on or after 1 January 2016.  However, they were omitted from the July 2015 edition of FRS 105 and hence, technically, all micro-entities should have been making the above disclosures for periods commencing on or after 1 January 2016, but the majority have not been doing so.

The disclosures in respect of off-balance sheet arrangements and employee numbers were included as a result of the amendments by The Companies, Partnerships and Groups (Accounts and Reports) Regulations 2015 (SI 2015/980).  SI 2015/980 made amendments to sections 410A and 411 of the Companies Act 2006 by removing reference to the phrase ‘In the case of a company that is not subject to the small companies regime’.  The removal of this phrase meant that all companies must disclose off-balance sheet arrangements and employee numbers.

The two additional disclosures are in addition to disclosures required in respect of:

• advances, credit and guarantees granted to directors as required by section 413 of the Act; and
• financial commitments, guarantees and contingencies as required by regulation 5A of, and paragraph 57 of Part 3 of Schedule 1 to, the Small Companies Regulations.

Section 396 Companies Act individual accounts of the Companies Act 2006 requires additional information to be disclosed in the financial statements by virtue of sub-section A1 which requires the micro-entity’s financial statements to state:

1. the part of the UK in which the company is registered;
2. the company’s registered number;
3. whether the company is a public or a private entity and whether it is limited by shares or by guarantee;
4. the address of the company’s registered office; and
5. where appropriate, the fact that the company is being wound up.

In respect of point c) above, Section 396(A1) makes reference as to whether the company is a public or a private entity.  Micro-entities can never be public entities (public companies are beyond the scope of FRS 105) and hence they will always be referred to as a private entity.

Make sure you understand the full impact of the amendments

It is important that AAT Licensed Accountants fully understand the amendments to FRS 105 and the fact that they are effective for periods starting on or after 1 January 2017 (i.e. from 31 December 2017 year-ends onwards).  Please check that financial statements produced using accounts production software programs have correctly included the disclosures where the year-end is 31 December 2017 onwards.  If you are required to update your software to cater for these changes, then you are strongly advised to do so.  Out of date software programs will invariably mean the financial statements they produce will be technically out of date.

It must be borne in mind that if the micro-entity does not prepare its financial statements in accordance with the requirements of company law applicable to the micro-entities’ regime, the presumption that the financial statements give a true and fair view will not apply.  The presumption that the financial statements give a true and fair view will only apply where the micro-entity prepares its financial statements in accordance with the legal requirements.   Hence, to avoid any mistakes being made in clients’ financial statements, it is important to understand the impact that the amendments will have on the financial statements.

Steve Collings is the audit and technical partner at Leavitt Walmsley Associates Ltd.