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The future of small entity reporting

Small Limited company accounts were previously prepared using the Financial Reporting Standard for Small Entities (FRSSE). However, the FRSSE is withdrawn for Accounting Periods Commencing 1 January 2016 (therefore usually year-ends of 31 December 2016 onwards) and replaced by either:

  • FRS 105 The Financial Reporting Standard for the Micro-Entities Regime, or
  • Section 1A of FRS 102 The Financial Reporting Standard.

In order to determine the accounting standard applicable to an entity previously within the scope of the FRSSE, eligibility criteria must be referred to with the size thresholds given as follows:

Micro entity Small entity
Turnover £632,000 £10,200,000
Balance sheet total £316,000 £5,100,000
No of employees 10 50

FRS 105 The Financial Reporting Standard applicable to the Micro-Entities Regime is based on FRS 102, but adapted to reflect the simpler nature and smaller size of micro-entities and the legal requirements applying to them.

Key differences between FRS 105 and FRS 102

FRS 105 is based on FRS 102 but with significant simplifications to accommodate the legal requirements for micro-entities. For example, the micro-entities regime prohibits revaluations or subsequent measurement of assets or liabilities at fair value. Further simplifications have been made to reflect the smaller size and nature of such entities.

The table below summarises some (but not all) of the key accounting differences between FRS 105 and FRS 102:

Topic FRS 102 FRS 105

Investment properties

In most cases revaluation each year is required but with changes recognised in profit or loss. However, if fair value cannot be measured reliably without undue cost or effort, the cost less depreciation model is used.

Measured at cost less depreciation and impairment.

Property, plant and equipment

Measured at cost less depreciation and impairment, but can choose to adopt a revaluation accounting policy for fixed assets of the same class.

Measured at cost less depreciation and impairment.

Intangible assets

Measured at cost less depreciation and impairment, but can choose to adopt a revaluation accounting policy for intangible assets of the same class.

Measured at cost less depreciation and impairment.

Development costs and borrowing costs

These costs can, subject to certain conditions, be capitalised.

No option to capitalise. Must be expensed to the profit and loss account in the period in which they are incurred.

Trade and asset acquisition

An intangible asset purchased with a business is normally recognised as an asset because its fair value can generally be measured with sufficient reliability.

An intangible asset purchased with a business must not be recognised separately from goodwill.

Financial instruments

Divides financial instruments into 'basic' and 'other' instruments. The former are mostly measured at amortised cost, the latter mostly at fair value with movements generally recognised in profit or loss.

Entities can instead choose to apply the recognition and measurement requirements of IAS 39 and/or IFRS 9.

No distinction between 'basic' or 'other' with all financial instruments initially recognised at cost, which will be the transaction price.

Subsequent revaluation or measurement of financial instruments at fair value not permitted.

For lending arrangements, simplifications made in relation to the allocation of interest and transaction costs, and no requirement to calculate an effective interest rate. Also, no requirement to impute a market-rate of interest in arrangements conducted at non-market rates.

Equity-settled share based payments

Recognised at the fair value of the goods or services when received. For arrangements with employees, fair value is measured at the grant date and the expense recognised over the vesting period.

Not recognised in the accounts until the shares are issued.

Foreign exchange forward contract

Recognised on the balance sheet as a financial instrument at fair value and the associated debtor or creditor retranslated at the year-end rate. Hedge accounting can be applied in certain circumstances.

When a trading transaction is covered by a related or matching forward contract, requirement to use the rate specified in the contract.

Deferred tax

Based on a timing differences.

No deferred tax.

Defined benefit pension plans

Net interest on the net defined benefit asset or liability is recognised in the profit and loss account, and is calculated with reference to high quality corporate bonds ie, the same rate is applied to both the plan assets and liabilities.

Recognition of the surplus or deficit of the plan on the balance sheet not permitted. Agreed funding of deficit must, however, be recognised as liability. Contributions payable to the plan accounted for as an expense.

Government grants

Government grants can be accounted for using either the performance model or the accrual model.

Requirement to use the accruals method.

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