By Steve Collings Financial accounting and reporting Financial reporting changes for 2017 – what you need to know 19 Jan 2017 As we approach the end of January, it seems that there is a lot going on in the world of accountancy which practitioners and AAT members need to get to grips with. Some of the changes may be quite daunting for some, especially the changes in financial reporting. This article looks at some of the more fundamental changes that are going to affect AAT Licensed Accountants and small companies in general. New UK GAAP As all accountants will now be aware, companies that are small or micro will be reporting under a new regime in 2017 (if they have not already transitioned to the new standards). The Financial Reporting Standard for Smaller Entities (the FRSSE) is being withdrawn in its entirety for accounting periods that start on or after 1 January 2016 (i.e. December 2016 year-ends). Companies that could have reported under the FRSSE are moved under the scope of FRS 102 (September 2015) The Financial Reporting Standard applicable in the UK and Republic of Ireland by virtue of Section 1A Small Entities in the standard. Where a company has chosen not to early-adopt FRS 102, then it will be required to mandatorily transition to the new framework if its accounting period starts on or after 1 January 2016 and hence it is likely that the majority of small companies will be moving to the new regime in 2017. In broad terms, the new regime must be applied retrospectively to the entity’s date of transition. The date of transition is the start date of the earliest period reported in the accounts; so, for a 31 December 2016 year-end, the date of transition will be 1 January 2015. This is because the comparative year-end is 31 December 2015 and this comparative year starts on 1 January 2015. The entity making the transition to FRS 102 will have to carefully consider its accounting policies to ensure that they are compliant with the standard. For example, if the holiday year is not sequential to the financial year, or if the entity allows staff to carry forward holidays, and the entity has not previously made accruals (or prepayments) for holiday pay accrued by employees, but not paid at the balance sheet date, then this will have to change on transition. Adjustments will have to be made to the balance sheet position at the date of transition (with the corresponding entry being taken to retained earnings (profit and loss account reserves)) and also in the comparative year. This is because under FRS 102, holiday pay accruals are specifically required. Transitioning across to the new framework for small companies is expected to be fairly straightforward in the majority of cases; however, a programme of adequate planning is strongly advisable because it may be the case that the transition is inherently complex. Micro-entities The very smallest of companies in the UK can adopt the micro-entities’ standard if they wish, being that of FRS 105 The Financial Reporting Standard applicable to the Micro-entities Regime. Again, micro-entities that were previously reporting under the FRSSE and have chosen not to early-adopt the new regime will be transitioning to the new framework next year as this is also mandatory for accounting periods starting on or after 1 January 2016. A micro-entity does not necessarily have to report under FRS 105 if it does not wish to because reporting entities are afforded flexibility in choosing the framework they think is more suited to their needs. While FRS 105 may be appropriate for the majority of micro-entities, it will not necessarily be appropriate for them all and hence the application of FRS 105 should be considered on a case-by-case basis. Some of the most notable features of FRS 105 which will influence the decision-making process as to whether, or not, to apply the standard include: prohibiting micro-entities from using revaluation accounting (e.g. revaluing a fixed asset) or fair value accounting; all revalued and fair value amounts must be removed on transition and assets carried under the historic cost model only; strict formats of the financial statements and no option to change the names of any of the line items in the accounts. In addition, there is no possibility of preparing a Format 1 profit and loss account (expenses by function); only a Format 2 (expenses by nature) profit and loss account is permissible; significantly reduced disclosure requirements with any disclosures being placed at the foot of the balance sheet (and hence filed at Companies House) as opposed to a separate ‘Notes to the financial statements’ section as is the case under the FRSSE; prohibition of recognising deferred tax; no accounting policy options permitted (except for some transitional options); and simpler accounting treatments, particularly for financial instruments. Companies Act changes The Companies Act 2006 (the Act) was revised in 2015 to reflect the provisions in the EU Accounting Directive. The changes to the Act apply mandatorily for accounting periods starting on or after 1 January 2016 and primarily affect small companies and micro-entities. Small company size thresholds have been increased significantly in the revised Act as follows: Criteria New thresholds Old thresholds Turnover £10.2 million £6.5 million Balance sheet total £5.1 million £3.26 million Employee headcount 50 50 These thresholds can be early-adopted if the directors of a company so wish. An early-adoption clause was built into the revised Act because the government expect some 11,000 businesses that would have been classed as medium-sized under the old thresholds, to be reclassified to small under the new thresholds. The revised Act can be applied to an accounting period starting on or after 1 January 2015, but before 1 January 2016 if the directors so wish. Therefore, a business preparing 31 December 2015 year-end accounts that now qualifies as small under the new thresholds, but was medium-sized under the old thresholds, could now report under the small companies’ regime. However, that business must not adopt the FRSSE (effective January 2015); instead where an entity applies the revised Act early, it must apply the new suite of standards, hence FRS 102, Section 1A. In addition, if the entity were required to have an audit under the old thresholds then it will still need an audit under the new thresholds where the entity early-adopts the revised Act. This is because, whilst the audit exemption thresholds have been increased to match the new small companies’ thresholds, early-adoption of the revised audit exemption thresholds is not permitted (they can only be applied to accounting periods starting on or after 1 January 2016). Abbreviated accounts The vast majority of small companies in the UK took advantage of the option afforded to such companies to file abbreviated financial statements with Companies House. This allowed small companies to file condensed financial information, usually only an abbreviated balance sheet with Companies Act disclosures. The revisions to the Companies Act have abolished the concept of abbreviated accounts being filed with Companies House and therefore many accountants preparing 2016 year-end accounts next year will find that they will not be able to submit abbreviated accounts. However, all is not quite lost. A small company can file the full accounts if it so wishes; however, very few small companies opt for this because they want as little as possible being put on the public record. Instead of filing full accounts (the accounts prepared for the shareholders), a small company can choose to file ‘filleted’ accounts. The term ‘filleted’ is not an official term used by the Companies Act or the Financial Reporting Council, but is a term used to describe the accounts that will more than likely be filed at Companies House under the new regime for small companies. In a set of filleted accounts, the full accounts are taken but the directors’ report, profit and loss account and any profit and loss account related notes (such as exceptional items) are removed (i.e. filleted). The rest is then filed at Companies House. Therefore, the registrar of companies receives the balance sheet, as prepared for the shareholders, together with the notes to the balance sheet. Some confusion surrounds the disclosure of the average number of employees. This is a new disclosure requirement borne out of the revised Companies Act 2006 and applies to small companies. Many accountants view the average number of employees to be related to payroll, hence a profit and loss account item and therefore would not need to be filed in a filleted set of accounts. However, this is not the case and guidance issued by the Department for Business, Energy and Industrial Strategy (previously BIS), requires the average number of employees to be filed along with the balance sheet notes. This is because the employees are viewed as the business as a whole and hence related to the balance sheet. It is to be emphasised that while the filing requirements have changed, the filing deadlines and associated penalties have not. Conclusion 2017 is likely to be a turbulent year for many practitioners dealing with small company clients (and, indeed, small companies themselves). The move across to a new financial reporting framework, understanding the impact of the revised Companies Act 2006 and getting to grips with the new filing regime will cause upheaval in many firms. Steve Collings is the audit and technical partner at Leavitt Walmsley Associates Ltd.