ACCA’s Richard Martin looks at how the EU accounting directive and new UK GAAP will interact and investigates the effect the two might have on the future of the FRSSE.
Previous articles here and elsewhere have pointed out the development of the new UK GAAP of FRS 100 to 103 and what changes are likely as a result. Last month the article ‘Rules with wriggle room’ looked at the implications of the new EU accounting directive. There are interactions between the two that are worth exploring.
The new UK GAAP consists of four new standards. FRS 100 sets out the overall framework; FRS 101 sets out disclosure reductions available to group companies otherwise using full International Financial Reporting Standards (IFRS); FRS 102 is the new main standard; and FRS 103 is for insurance companies. These standards will replace all the existing Financial Reporting Standards and Statements of Standard Accounting Practice (SSAPs) with which we will be familiar, with the exception of the Financial Reporting Standard for Smaller Entities (FRSSE) which will continue essentially unchanged.
FRS 102 is available to all, but compulsory for medium- sized and large companies after 1 January 2015. This is a new standard much shorter than all the existing UK standards it replaces and is based primarily on the international IFRS for SMEs. It is a new, briefer text, but will also bring in some new disclosures and some new accounting treatments – for example, in financial instruments, hedge accounting and business combinations.
It is worth noting that there are still amendments to come through during this year to hedge accounting in particular, which is making the transition more difficult. There are also new Statements of Recommended Practice (SORPs) that are being finalised to go with FRS 102. All of these should be finalised before the end of 2014 ready for implementation in 2015.
The new directive is far reaching and provides the legal framework for company and consolidated accounts in the European Union (EU). It will have an important effect on large mining, oil and gas companies with the ‘country- by-country reporting’ of payments to governments. These will be in separate reports and not part of the audited financial statements.
Small companies make up the other major group affected by the directive and there will be even more of them than previously – the UK government is likely to use the maximum threshold allowed which will increase the critical turnover limit to about £10m from £6.5m.
The other principal change will be a reduction in the disclosure requirements in small company accounts. While the format requirements for balance sheets and P&L accounts will continue for them, the EU will specify the maximum that can be asked for in terms of note disclosures; whether by way of the law or accounting standards, which is the so-called maximum harmonisation approach.
This means that many other disclosures currently in the FRSSE will have to be removed – for example, those analysing expenses such as interest, staff costs or tax, analyses of share capital and movements on reserves.
This has led to the Financial Reporting Council (FRC) reconsidering the future of the FRSSE as a whole. It is likely to propose that in future small companies will follow a version of FRS 102 which would include all of the accounting treatments but reflect the reduced disclosure requirements.
While the new UK GAAP takes effect from 2015, these changes for small companies must be effective a year later in 2016. So the choice for small companies to continue with the FRSSE may not be for all that long.
Within small companies there is a new category of micro companies. These are companies which meet two out of three of the following criteria: a turnover of less than £632,000; assets of less than £316,000; and 10 employees.
For these companies the formats are reduced and essentially no note disclosures are required. This is already available. It derives from an earlier amendment to the directives and in the UK can be used for accounting periods ending September 2013. A revised version of the FRSSE has already been produced; however, it appears that not many of the thousands of eligible companies have yet made the change. When the FRSSE is replaced, an even ‘lighter’ version of FRS 102 for micros may be prepared.
In all of these disclosure reductions for small and micro companies, what is the impact on the true and fair view requirement in the Companies Act and UK accounting standards? For small companies that remains the overriding requirement. Directors have to provide the information required by the law and standards, but if more disclosures are needed to meet that true and fair requirement then they must provide them.
The position is different for directors of micros. If the reduced requirements are complied with, then the law states the accounts ‘are presumed to give the true and fair view’ with no overriding requirement.
If your company is currently treated as medium sized but with the coming increase in thresholds would become small, then it appears that you will have to apply FRS 102 for your 2015 accounts but will probably be switched to the ‘FRS 102 light’ regime a year later. It is possible that FRC may delay the application of FRS 102 for this group. At worst this would mean for one year making extra disclosures and providing a cashflow statement.
If your company is small, using full UK standards and you are pondering whether to switch in 2015 to FRS 102 or the FRSSE, then the short shelf life of the latter may be an influencing factor.
Richard Martin is ACCA’s head of corporate reporting.