Changes and choices for micro entities accounts

27th November 2015

Changes and choices for micro entities accounts.

Over the next year or so the statutory accounts that small companies have to prepare and send to Companies House are changing because of revisions to the Companies Act and some connected changes to UK Accounting Standards. The combined rules are often referred to as UK GAAP – Generally Accepted Accounting Principles. Smaller limited companies (known as ‘micro-entities’) will often be able to choose between two versions of UK GAAP, one of which is considerably simpler than the other. However, companies which are ‘small’ but not small enough to be micro-entities will not be able to take advantage of this option.

What are the changes?

For periods beginning on or after 1 January 2016, the contents of small UK companies’ published accounts change. The contents of the actual profit and loss account and balance sheet are virtually unchanged but the number of notes to the accounts will generally be reduced, and all the notes, including related party transactions, will be filed at Companies House. Currently a filing option known as abbreviated accounts is available. This involves filing only a balance sheet and most of the notes to the accounts. Abbreviated accounts are abolished in the new framework but as company law still requires only a balance sheet and notes to be filed, this abolition will not have much effect in most cases!

Many more companies will qualify for the small company GAAP regime as the small company limits have increased substantially. The size limits to qualify as a small company increase to not more than:

  • Turnover £10.2m (previously £6.5m)
  • Balance sheet total £5.1m (previously £3.26m)
  • Average number of employees 50 (unchanged).

A company needs to meet two out of three of the above criteria for two consecutive years to qualify as a small company, unless it is the first year of the company’s existence, in which case only that year has to be considered.

If you are a small company and not a micro-entity you will need to prepare your accounts on the new basis.

What is a Micro- Entity?

A micro-entity is defined as meeting the following criteria – in each case not more than:

  • Turnover – £632,000
  • Balance sheet total – £316,000
  • Average number of employees – 10

A similar approach to the criteria applies as for the small company regime. A company needs to meet two out of three of the above criteria for two consecutive years to qualify as a micro-entity.

What are the options for micro- entities?

They can either:

1.       Follow the standards for small companies; or

2.       Adopt a new standard called FRS 105 (The Financial Reporting Standard applicable to the micro-entities regime).

The standard refers to the option being available from periods beginning 1 January 2016 but it is possible to adopt this new standard immediately, if it is in the company’s interest to do so.

What are the contents of micro-entity accounts?

The accounts of a micro-entity are considerably shorter and simpler than those otherwise required by UK GAAP for a small company.

The profit and loss account and balance sheet include less detail. For example current assets are shown in aggregated total on the balance sheet rather than being analysed into stocks, debtors and cash. There are less notes than those required for a small company.

These notes will be filed at Companies House together with the balance sheet. The profit and loss account does not need to be filed.

The micro entity accounts regime may reduce the cost of preparing the accounts as certain  assets and liabilities we will need to be revalued every year by new UK GAAP will not be required by a micro company, such as:

  • Investment properties have to be revalued every year to what they are worth at the balance sheet These are properties held for their investment potential rather than being used in the business.
  • Forward foreign currency contracts require restatement to their value at the balance sheet This value may depend upon changes in exchange rates.
  • Loans payable or receivable (for example to or from a director) more than one year after the balance sheet date. If, as is frequently the case, such loans are not using a market rate of interest, their value has to be established at every balance sheet

In addition a company using the micro- entity regime is not allowed to provide for deferred tax. Deferred tax is tax probably payable at a future date but which has been deferred by, for example, tax benefits resulting from investing in fixed assets.

Many entities currently derive significant tax cash flow benefits from the acceleration of capital allowances such as the Annual Investment Allowance. Of course, the non- inclusion of deferred tax in the financial accounts does not mean the likelihood of this tax being payable at a future date should be ignored.

Is the micro-entity option suitable for all qualifying companies?

The option will not be appropriate for every company which qualifies to use it and we can advise you on whether it is an option you should consider.  The contents of mico-entity accounts are almost certainly to limited use for any decision making purpose and we would be happy to discuss how we can provide more suitable information to help you run your business more effectively.

If you need any further information or advice on whether micro-entity accounts are suitable please contact us.

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