As businesses start to prepare their first sets of accounts under the new UK GAAP for small and micro-entities we summarise our views on some of the common disclosure questions that arise. We will keep this post updated as we receive further enquires through our technical support service.
Section 1A - Hot topics
Source of disclosure requirements
Whilst the questions below are headed up as FRS 102 Section 1A disclosure issues, in truth, most of them look at the interaction between the requirements of company law and the wording used in the accounting standard. Both are relevant in defining accounts disclosures and so have to be looked at as one. You cannot, for example, just look at Section 1A in isolation when preparing accounts for a company or ascertaining what information needs to be filed.
What is the difference between abridged accounts and 'filleted' accounts?
A set of abridged accounts is a set of accounts for the members that shows less information than that required by the normal statutory formats. To prepare an abridged profit and loss account and/or an abridged balance sheet, 100% member approval must be gained. See more on this in our free one minute guide, available here.
'Filleted accounts' is the phrase being used to describe the process of a small (or micro) company (or LLP) removing the profit and loss account and/or directors' report (as applicable) prior to filing as permitted by CA 2006 section 444. This is the filing option that will replace the filing of abbreviated accounts for many small companies. Again, we have a one minute guide on this filing process, here.
If we include a statement of changes in equity in the accounts, does this have to be filed?
Section 1A of FRS 102 encourages the inclusion of a statement of changes in equity, where there are transactions with equity holders (like dividends), to show a true and fair view.
ICAEW has published a view on the question of filing additional primary statements in its FAQ on Filing Options under the New Small Companies Regime. In their opinion, there is no need to file, for example, the statement of changes in equity.
Our view in this area differs as it is our understanding that the 'filleting' option derives from a small companies' relaxation in article 31 of the updated EU Accounting Directive. This relaxation noted that member States may exempt small undertakings from the obligation to publish their profit and loss accounts and management reports. Following the way that this relaxation has been transposed into UK law, our interpretation is that the requirement to file copies of the annual accounts would lead to filing a statement of changes in equity when the accounts are 'filleted' for filing purposes.
In any case, we would advise that you should think carefully about whether the statement of changes in equity is needed in the members' accounts to show a true and fair view.
Do 'filleted' accounts have to include a dividends note if we put one in the members' accounts?
Again, this note is 'encouraged' by Section 1A and you should consider whether it is needed to show a true and fair view of the financial position and performance of a small business in the current de-regulatory environment.
A note added into the accounts to show a true and fair view in this context would be a note to the annual (or individual) accounts of a company. The revised section 444 of the Companies Act 2006 states that the copies of accounts and reports delivered to the registrar must be copies of the company's annual accounts and reports. Whilst the process of 'filleting' provides an option over whether the profit and loss account (and notes to it) and the directors' report are filed, notes that are not a note to the profit and loss account stay in the filed accounts. So, yes. If if this note goes into the shareholders' accounts, it gets filed. A similar view is also expressed in the aforementioned ICAEW FAQ.
How long should the accounting policies note be?
At least 4 pages... only joking! There are relatively few accounting policy disclosures that are explicitly required for a small company, for example. Consider the following:
- Is the disclosure a 'policy'? This would infer that you have made a choice in the way you have accounted for something rather doing what FRS 102 says you have to do. If you have taken up the encouraged statement of compliance with section 1A of FRS 102, there is normally little to gain from copying large sections of FRS 102 into your accounts - you didn't do that with the FRSSE, did you?
- Do you need to explain or emphasise something to provide a proper understanding of the financial statements? You may feel you need to explain more when you first adopt FRS 102 because things are different to what was done before. Maybe for a first-time adopter, your accounting policy note is a bit longer.
- Is it required by law? There are certain things (as highlighted on our disclosure checklists) required by the law including depreciation policies or valuation models and significant assumptions when holding investments and investment properties at fair value. The relatively vague small entity requirements when it comes to accounting policies otherwise offer licence to make the note relevant and cut clutter from the accounts.
Do we need to disclose dividends paid to directors as a related party transaction?
The critical assessment here is whether the dividend is concluded under normal market conditions. The issue is in how you define the words 'normal' and 'market conditions'. For example, there is an argument that, for owner managed businesses, profit extraction via a salary / dividend split is normal in that market and a high dividend, low salary scenario may be regarded as perfectly normal and outside the scope of disclosure.
We are expecting to see fewer instances where disclosure of directors' dividends will be included in the related parties note. However, we acknowledge that there are counter-arguments and hence, where advancing the above argument would encourage that justifications are documented, for example by reference to profitability, availability of distributable profits and underlying tax considerations.
If directors' dividends are disclosed as a related party transaction, you should also think very hard about disclosing the remuneration of the directors, as this is not scoped out by the law, or Section 1A of FRS 102, when it is also not concluded under normal market conditions.
The related party transactions note would be a note to the accounts and hence cannot be removed prior to filing.
Do I need a share capital note?
The statutory formats for the balance sheet in Schedule 1 of SI 2008/409 (as amended) require that the amount of allotted share capital and the amount of called up share capital which has been paid up must be shown separately.
Where these two amounts are the same and that fact is otherwise clear from the accounts, you could get away without a note. However, we think the tidiest way of complying with this requirement is within a note, though this is just personal preference. Where the amounts are different, and this is not disclosed on the face of the balance sheet in some way, a note will be needed.
Do we need to disclose the place of business where different to the registered office?
This is an area where the law does not require a disclosure, however its interaction with Section 1A of FRS 102 is a little awkward and Section 1A does not clearly disapply a requirement that exists for non-small FRS 102 adopters. We have taken a straight-down-the-line interpretation on this within our products and so, for example, we have this as a requirement on our accounts disclosure checklists.
FRS 105 - Hot topics
Do we need to disclose statutory information in the accounts?
When the micros' regime first came into play, there were parts of the Companies Act that drove small company disclosure that were clearly disapplied for micro-entities. However, when SI 2015/980 came into force certain new disclosures for small companies, such as the requirements to disclose the legal form, part of the UK in which the company is registered, registration number and registered office - within the amended CA 2006 section 396(A1) - were required of companies (generally) with no evident carve-out for micros. So, yes, we think this requirement applies to micros and would recommend that the information is included on the balance sheet.
Can we provide more information than is required by the statutory micro-entity formats?
Yes. It is possible to 'explode' line items on the micro profit and loss account and balance sheet. Where additional information is provided, the accounts preparer must have regard to the requirements of Section 1A of FRS 102.
Whilst there is often little to gain from including additional profit and loss account information, as this can be done through non-statutory management information, some businesses have included more detail on the balance sheet. For example, some have disaggregated the current assets line. This has meant that, once filleted, the balance sheet information filed would be broadly equivalent to that filed under the old small, abbreviated accounts filing regime.
In general, however, many accountants preparing FRS 105 accounts for their clients are simply ensuring that the management information provided alongside the statutory accounts is sufficient to satisfy their clients' needs.