Following pressure from Europe the Financial Reporting Council (FRC) published a new standard, FRS 105 – The Financial Reporting Standard applicable to the Micro-entities Regime for use by those micro-entities choosing to adopt this simpler regime. This new standard is applicable for companies with accounting periods commencing on or after 1 January 2016 with the option for earlier adoption.
FRS 105 permits UK companies to prepare simplified financial statements in the way than many European companies have done for a number of years.
Certain companies are excluded from being treated as micro-entities as follows:
- Companies that are excluded from the existing small companies regime;
- Currently LLPs and qualifying partnerships;
- Investment undertakings;
- Financial holding and insurance undertakings;
- Credit institutions;
- Overseas companies; and
- Unregistered companies.
In addition, a subsidiary included in consolidated group accounts by the method of full consolidation cannot qualify as a micro-entity.
A parent company can only qualify as a micro-entity for the purposes of its individual accounts if it qualifies as a micro-entity individually and the group headed by it qualifies as small. A parent company that prepares group accounts will not qualify as a micro-entity for the purposes of its individual accounts.
The Basic Size Criteria For Micro-Entities
A company meets the qualifying conditions for a micro-entity if it meets at least two out of three of the following thresholds:
- Turnover: Not more than £632,000
- Balance sheet total: Not more than £316,000
- Average number of employees: Not more than 10
The turnover limit is proportionately adjusted where the financial year is other than twelve months and the rules for qualifying in the first and following financial year are the same as those under the small companies regime.
The micro-entities regime is optional for eligible companies. The directors of a micro-entity may therefore choose to prepare accounts under a financial reporting regime applicable to larger sized companies.
The application of the micro-entity exemptions will depend on the individual circumstances of the reporting entity. Opting not to apply the FRS105 rules would be appropriate where current and potential creditors and lenders to a business may require more information than micro-entity accounts provide. Opting not to apply may be appropriate where there are complex transactions where additional disclosure to HM Revenue & Customs would potentially avert enquiry. In contrast, a micro-entity with an investment property, and little or no borrowings, may be attracted by the fact that, under the micro-entities regime, investment properties will not need to be revalued each year.
Where the micro-entity regime is adopted, a note should be clearly displayed on the balance sheet. Entities adopting this regime are unlikely to choose audit but this can be accommodated.
Micro-Entities Regime – The Main Features
- A simpler balance sheet and profit and loss account.
- No requirement to prepare a directors’ report.
- No notes to the accounts are required. Any required notes being confined to a note at the foot of the balance sheet as the ‘minimum accounting items’.
- Should a micro-entity choose to disclose information in addition to the minimum accounting items, it must do so in accordance with the relevant accounting standard.
- The fair value accounting and alternative accounting rules cannot be applied in micro-entity accounts.
- Accounts prepared in accordance with the regulations are presumed by law to give a true and fair view.
- Only the balance sheet, including the information disclosed at the foot, needs to be filed at Companies House.
Micro-Entity Accounts vs Small Company Regime Accounts
- Disclose significantly less information;
- Less flexibility;
- Not permitted to take advantage of the recent amendment to UK company law (effective from 1 January 2016) which allows companies, in certain circumstances, to adapt their balance sheet and profit and loss account formats to assume IFRS layout and terminology.
HM Revenue & Customs Satisfaction
Micro-entity accounts prepared in accordance with the micro-entities regime will represent accounts prepared under GAAP and therefore can be submitted, along with the directors’ report (where applicable), to HMRC as part of a company’s annual self- assessment.
There is no change in the requirement to keep and retain adequate business and accounting records.
With over 30 years of experience in company formations, compliance and company secretarial services, Pearse Trust is uniquely qualified to assist you in all your corporate governance requirements. Give us a call today to discuss how we may be of service to you. Call Jennifer on (44) 207 421 7733 or email [email protected]