This brief article will take a look at ten of the key points relating to the new UK GAAP which AAT students and members need to know in order to apply the rules correctly.
As always, the key advice is to understand the detail of the new accounting regime because whilst, on the face of it, many transactions and events are accounted for in a similar way to outgoing UK GAAP, there are considerable differences between the old and the new regime.
Ten things you should know:
1. The small companies’ regime has been split into two distinct components following the publication of the EU Accounting Directive: ‘small companies’ and ‘micro-entities’.
2. The Financial Reporting Standard for Smaller Entities (the FRSSE) will be withdrawn in its entirety for accounting periods commencing on or after 1 January 2016.
3. Companies that qualify as a ‘micro-entity’ can report under FRS 105 The Financial Reporting Standard applicable to the Micro-entities Regime for accounting periods commencing on or after 1 January 2016 (earlier adoption is permissible). FRS 105 is optional and a micro-entity can report under a more comprehensive framework if it so wishes (e.g. FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland with reduced disclosures).
4. Small companies, or micro-entities that choose not to apply FRS 105, will report under FRS 102 with reduced disclosures for accounting periods commencing on or after 1 January 2016 (earlier adoption is permissible). Small and micro-entities can also choose to follow full FRS 102 if deemed appropriate, although it is likely that many small and micro-entities will stick to either FRS 102 with reduced disclosures or FRS 105 as appropriate.
5. Charities, Limited Liability Partnerships, financial and credit institutions, companies in the Republic of Ireland and small companies whose accounts are consolidated with the parent’s accounts cannot apply FRS 105 (eligibility criteria for FRS 105 is very restrictive).
6. It is important that clients’ are advised with care as to what financial reporting regime is appropriate in their individual circumstances (i.e. on a case-by-case basis). A company may qualify as a micro-entity and hence be eligible to use FRS 105, but it may not be an appropriate standard to follow for the entity concerned.
7. FRS 105 does not permit fair value accounting or revaluation amounts in the financial statements (hence assets such as investment property are carried at cost less depreciation less impairment).
8. There are fewer disclosures needed in a small company’s financial statements under the revised Companies Act 2006 due to the transposition of the EU Accounting Directive. However, small company directors may have to make additional disclosures if so doing will enable the accounts to give a true and fair view in order to fulfil their legal obligations.
9. Under FRS 105, micro-entities are prohibited from recognising deferred tax.
10. FRS 102 with reduced disclosures includes an Appendix D in Section 1A Additional disclosures encouraged for small entities which must be considered by reporting entities.
Members of AAT have access to several articles on CPD interactive which outline the technical differences; in particular the article written in July 2015 which examines the new accounting standards for small and micro-entities and the article published in August 2015 which examines the disclosure issues.
The new small and micro-entities’ regime comes into mandatory effect for accounting periods commencing on or after 1 January 2016 (so not long to plan for this major change!)
For more articles on financial accounting, reporting and more, visit our CPD resources by clicking the image below
Steve Collings is the audit and technical partner at Leavitt Walmsley Associates Ltd.