Why Size Matters!

As we receive the final pieces of the Financial Reporting jigsaw (inclusive of FRS 102, the new Financial Reporting standard to replace all existing ones), changes to UK and EU company size thresholds have created additional layers of complexity, combined with one-off opportunities for companies to reduce their reporting burden. By making wise decisions now you could streamline your year end process, making significant cost savings in the process.

 

As it stands, the headlines are as follows:

  • Small and Micro-entities may continue to prepare under existing Financial Reporting Standard for Smaller Entity (“FRSSE”) rules for periods ending on or before 31 December 2015;
  • The FRSSE is to be replaced in its entirety from 1 January 2016
    • for Micro entities there will be an option to adopt the much simplified reporting framework of FRS 105 for accounting periods beginning on or after 1 January 2016;
    • Entities qualifying as small or Micro entities not adopting FRS 105 will move to FRS 102 with Reduced Disclosures for accounting periods beginning on or after 1 January 2016;
  • Medium and large companies, and those opting not to apply small and micro options, must apply FRS 102 to their accounts for accounting periods beginning on or after 1 January 2015 (i.e. typically December 2015 year ends);
  • There are further rules around ineligible groups (such as groups involving a listed parent or certain types of FCA-regulated entities).

Old and new company size thresholds are shown below, although it should be noted that determination of a company’s size is not always a clear cut situation – even more so where there are shorter or longer accounting periods.

 

So, why does size matter?

Clearly in the above, there is a one-year delay for small entities before they are to apply FRS 102; in practice this could mean a discrepancy between existing valuation techniques, and the new ones prescribed by FRS 102 (which focuses on fair values). However, the new standards do permit early adoption of FRS 102 with Reduced Disclosures – but this is an all or nothing opportunity. So the benefits are:

  • Alignment with larger companies – particularly important in a Group situation;
  • For companies which lie between the old and new thresholds (i.e. would be medium but for the new size limits), the opportunity to escape one year of full FRS 102 disclosure – significantly simplifying your financial statements.

Of course, there are downsides too:

  • The transitional date is likely to have passed, leading to difficulty in collating backdated information;
  • The “all-in” approach, meaning that full or new ‘abridged’ accounts must be filed on public record;
  • The one exception to the “all-in” approach is audit thresholds – unfortunately early adoption of the new small companies regime doesn’t permit exemption from audit for that year.

For a large number of companies, typically in the £6.5-£10million turnover region, the above is likely to permit significantly reduced disclosure to be filed at Companies House – this is likely to be an attractive proposition for many, but is by no means a “one size fits all” solution for all companies.

Unsurprisingly, the reporting landscape is very complex, so please contact Alex Hird if you would like to discuss your options in greater detail, or enquiry@garbutt-elliott.co.uk – 01904 464100

 

Company Size Limits – Summary of Primary Limits

 

Old Limits

(mandatory for earlier periods)

New Limits

(mandatory for periods beginning on or after 1 January 2016, optional early adoption)

Micro
Turnover not more than £632,000 £632,000
Gross assets not more than £316,000 £316,000
Employees not more than 10 10
Small
Turnover not more than £6.5m £10.2m
Gross assets not more than £3.26m £5.1m
Employees not more than 50 50

 

Summary of Reporting Hierarchy

 

Company Size
Micro
Small
Medium & Large
Listed (including listed in group)
Reporting Standard – What’s Gone Before FRSSE with Reduced Disclosure FRSSE FRS’s, SSAP’s, UITF’s etc; or FRS 102 (early adopted) International Financial Reporting Standards (“IFRS”)
Periods Beginning during 2015 Year FRSSE with Reduced Disclosure FRSSE (mandatory), optional FRS 102 with Reduced Disclosure FRS 102 IFRS, or for qualifying subsidiaries FRS 101; optional FRS 102 with Reduced Disclosures by early adoption
Periods Beginning on or after 1 January 2016 FRS 105 FRS 102 with Reduced Disclosure FRS 102 IFRS, or for qualifying subsidiaries FRS 101 or FRS 102 with Reduced Disclosures