BIS: Simpler financial reporting for micro-entities: the UK’s proposal to implement the ‘micros directive’

Comments from ACCA to the Department for Business Innovation & Skills, March 2013.


The proposals fail to address a number of significant issues which need to be resolved before any new regime for micro companies can be introduced. Most notably, the document does not consider the future information demands of HMRC vis a vis micro companies and fails to give any convincing account of how the proposed regime would fit in with the Companies Act rules on distributable profits.

This consultation includes no impact assessment even though the matters being addressed are however very important. The annual accounts are a significant requirement for the 1.2 million companies that might be affected by this proposal. 


There is little in the questions asked or in the proposed consultations which focus on the needs of the users of micro company accounts such as creditors or employees. The whole thrust of the proposals is to reduce the costs of preparation for micros and does not consider the benefits to others of financial information available on the public record. The balance sheet items envisaged and the lack of notes to the accounts will represent a further significant reduction of the financial information available, albeit from an existing low base.


Even accepting the premise of cost reduction, the consultation says nothing about how HMRC will approach the issue of information they need which is currently provided in the statutory financial statements. If such information is removed by the Companies Act but still required by HMRC there will be no saving for micros. For example if related party disclosures are deleted from the accounts but comparable requirements for close companies are still needed for the CT600.


We are sceptical that there will be significant savings in preparation costs given the general need for accounts to be kept by limited companies. The proposals therefore risk falling into the unfortunate position of reducing the benefit to users, yet failing to deliver cost savings to preparers.


All that would be required by company legislation is essentially set out on page 16. The only notes to the accounts might be of

  • Any commitments, guarantees etc.
  • Loans to directors
  • Acquisition of own shares.

There must be a significant question-mark over whether such accounts could be said to have been prepared on the basis of accounting standards. This issue is not addressed in the consultation.


The law would nevertheless state that such accounts would be “regarded as giving a true and fair view”. This risks undermining the authority of accounting standards generally, not just for micros. The law does not mandate accounting standards but requires a true and fair view and it has been assumed that accounting standards are needed for that true and fair view.


Given the issues about accounting standards would it not make more sense to implement the new accounting directive and the micro regime at the same time? There may be changes needed for the FRSSE for all small companies as a result of the new accounting directive. 

In addition to a lack of impact assessment the consultation period has been only four weeks. This is in our view inadequate given the potential impact of this change. Such a short period has restricted our ability to properly consult our members on the issues raised. Despite the deadline for comments having now been reached, we intend to continue that process and send further issues to BIS nonetheless. 





Q1.   Do you consider that the government should implement all parts of the micros-exemption?   If not, which of the parts do you see as providing the most benefit to micro-companies and why? (para 4.1)



In our summary above we have referred to a lack of an impact assessment and an inadequate consultation period. It is not clear that this will be cost-saving for micros and the loss of benefit to users of micro company accounts has not been assessed.


Creating another reporting regime may not always help. ACCA’s field testing of the IFRS for SMEs indicated no significant issue for micro companies in applying that regime. We notice that the IASB’s approach has been that a single regime for non-publicly accountable entities will work and guidance material is all that is needed to produce suitable documentation for the micro entities among them to work with.

The new regime as a whole, of significantly reduced information seems to be based on the idea that micro companies have common owners and managers. This may be true in many cases, but not in all. We think it would be reasonable to require approval by all shareholders of a company before it could be taken up, as a means of avoiding the oppression of minority shareholders.




Q2. Are there any costs or savings associated with the implementation of the micros -exemption that should be considered?  Please provide examples, where possible. (para 4.1)

Yes. See above, the costs to users of micro financial statements need to be considered.


Any change, even one which may mean simpler on-going requirements, has a one-off cost in terms of micro companies assessing the new requirements and implementing the changes.



Q3.  Do you agree that removing the requirement to present prepayments and accrued income, and accruals and deferred income will reduce burdens in the preparation of the accounts for micro-entities? Please give reasons. (para 4.2.2)

See Q4 below.





Q4.  Do you agree that removing the requirement to recognise charges other than the cost of raw materials and consumables, value adjustments, staff costs and tax will reduce burdens in the preparation of accounts for micro-entities? Please give reasons. (para 4.2.2)



We are particularly unconvinced by the partial exemption from accruals accounting for certain overhead costs. If accrual accounting has to be done then there seems little or no burden reduction in removing the requirement to accrue/prepay some overhead costs. While these items may not be material in many cases, in some instances the exemption may create more issues with distributable profits, accounting standards and tax requirements. While we remain unconvinced of the benefits of this proposal as a whole, if it goes ahead it would be better if this requirement were omitted from the UK implementation – as we understand Germany has done.


The wording of the directive is not very clear in regard to whether the accrual/prepayment is still required to be estimated but just need not be disclosed in the accounts.



Q5.  Would this approach have any implications in relation to micro-entities access to credit? (para 4.2.3)

Users’ needs (for example creditors granting credit) have been little considered in this consultation. The removal of the notes to the accounts and the much reduced detail in the balance sheet and P&L will make these accounts much less credible and useful, in turn making access to credit by the micro companies more problematic.


We have written to BIS concerning the new accounting directive for small companies and pointed out that without for example disclosures of post balance sheet events and related party transactions, the financial statements might be in some cases misleading. Those considerations will apply to micros as well of course.


Q6.   Should any of the existing notes on the accounts be retained in addition to the minimum set out in the micros directive?  If so, which notes are required as an absolute minimum, and why? Would the benefits outweigh the costs associated with this?  Please provide evidence. (para 4.2.3)

See above.


There may also be some notes to the accounts which might specifically required to allow these accounts to be used as the basis for the legal distribution of dividends.


Q7.  If the notes identified in response to question 6 will no longer be required of small companies on the implementation of the new accounting directive, should they be retained in the period between implementation of the micros directive and implementation of the new accounting directive and, if so, why? Would the benefits outweigh the costs? (para 4.2.3)

We agree there would be little point in requiring further notes for micros at this stage if these would have to be reversed once the new accounting directive is applicable. We have noted above that there are arguments to implement the two directives at the same point in a new comprehensive and coherent regime for all small companies.


Q8.   Do you agree that this is appropriate?  Would the benefits outweigh the costs?  Please provide evidence. (para 4.2.4)

No. If a directors’ report might no longer have to be filed, but one still has to be prepared for members there will be no saving of costs for micros. There may however be a loss of information for other users for instance about the activities of the company, which might make very difficult any interpretation of the, albeit limited, financial information.


Q9. What do you consider to be the advantages and disadvantages of this approach? What are the potential cost savings this offers?  Please provide evidence. (para 4.2.5)

There is clearly no loss of information content by requiring the few numbers to be filed in place of those numbers arranged and presented in the form of a balance sheet. However equally there can be little savings in terms of time and effort. There may be less easy understanding by users of the information without the normal presentation.


Q10.  If the above information is required in electronic format only, what do you consider to be the advantages and disadvantages to this approach?  Would the benefits outweigh the costs? Please provide evidence (para 4.2.5)

Electronic filing will clearly make sense whatever format is required.


Q11.  What do you consider to be the cost savings associated with producing an abridged balance sheet and profit and loss account compared with the existing small company option to file an abbreviated balance sheet and profit and loss account?  Please provide evidence.  (para 4.2.6)

We find this question confusing. It is comparing a future preparation requirement with a current filing requirement. The current small company option is to file just an abbreviated balance sheet and no P&L.


However in the great majority of cases there will be little change in the costs of preparation as proposed compared to the current position.


Wider comments are welcomed on the proposed options.  In particular, any unintended consequences or other implications that may arise from the proposals, with supporting evidence and any further recommendations for change.

It is vital that the implications of this regime for the definition of distributable profits and capital maintenance need to be set out clearly for micro companies. It may well be that if the micro company accounts are deemed to show a true and fair view then they can legally be the basis for determining profits available for dividend and indeed for capital maintenance. In some circumstances there might need to be further disclosures made to ensure this. However we have some doubts that the true and fair view can always be met simply by compliance with some few legal rules. Nor may micro company accounts providing the minimum proposed necessarily comply with accounting standards (anyway in their current form) and so meet the realised profit test. Given that the payment of dividends from many micro companies is commonplace, clarity on the issue is very important.


The consultation does not refer to groups at all and whether there might be any restriction on the use of this micro regime for companies that individually meet the thresholds but are parts of larger groups. Equally restrictions on certain micro companies involving more public interest seem not to have been considered.






The Government should not proceed to implement the micro directive on this basis. There needs to be a credible impact assessment and a longer period needs to be allowed for consultation.