A look at the most common errors and misunderstandings.
Accounts prepared under FRS 105 are now an accepted and popular option for micro-entities. However, there are a number of important points about their preparation and how the information is filed at Companies House that accountants and directors can easily miss.
This guidance gives a recap on some of the problem areas and how to address them.
1 Accounts for the members
Considerations to remember
The ‘full’ accounts have a different format to the information filed at Companies House
The ‘full’ accounts are for the members and these have to comply with the ‘complete accounts’ format as laid out in FRS 105. This may be in a different format to the information filed at Companies House due to the option of filleting.
Do I need to prepare both accounts for the members and accounts for filing?
A company cannot save time and merely prepare the filleted information for Companies House without first preparing the ‘full’ accounts
What is a ‘full’ set of accounts?
A complete set of financial statements of a micro-entity shall include the following:
(a) a statement of financial position as at the reporting date with notes included at the foot of the statement; and
(b) an income statement for the reporting period.
In accordance with section 414(3) of the Act, financial statements prepared in accordance with the micro-entity provisions shall on the statement of financial position, in a prominent position above the signature, contain a statement that the financial statements are prepared in accordance with the micro-entity provisions.
Note therefore that the major difference to the information filed at Companies House is that an income statement is needed in the correct format
Is a Directors report needed?
For accounting periods beginning on or after 1 January 2016, there is no statutory requirement to prepare a Directors report for the ‘full’ accounts or for filing
This FRS permits, but does not require, a micro-entity to include information additional to the micro-entity minimum accounting items in its financial statements
A common misconception is that FRS 105 accounts for the members are restricted to only containing the few statutory notes. The directors can in fact put in additional information if they want to. The only stipulation is that if additional information is included then the company needs to refer to any requirement of section 1A Small Entities of FRS 102 that relates to that information.
Accounts preparation software often includes ‘traditional’ notes such as a breakdown of debtors and creditors – are these needed?
As above the accounts can include additional disclosures if required. However, the disclosures actually required by the Companies Act and Small Companies Accounting Registration Regulation (Reg) which should be included at the foot of the balance sheet rather than a note are:
Details of any advances, credit and guarantees with directors (s413 CA2006)
Particulars of any charge of the assets to secure a liability (Reg Sch 1.57(1))
Information about contingent liability not provided for (Reg Sch 1.57(2))
The aggregate amount of contracts for capital expenditure not provided (Reg Sch 1.57(3))
Pension commitments (Reg Sch 1.57(4))
Any other financial commitment (Reg Sch 1.57(5))
The financial statements of a micro-entity that comply with FRS 105 are presumed in law to give a true and fair view of the financial position and profit or loss of the micro-entity in accordance with the micro-entities regime.
So what about going concern issues?
The concept is that, if the laid down format is followed and the statutory notes are included, the accounts automatically give a true and fair view.
However, many members have raised the issue of going concern and how this should be treated. Remember FRS 105 does not include accounting policies.
The standard answers the going concern issues by stating the following simple treatment:
When preparing financial statements using this FRS, the management of a micro-entity shall make an assessment of whether the going concern basis of accounting is appropriate. The going concern basis of accounting is appropriate unless management either intends to liquidate the micro-entity or to cease trading, or has no realistic alternative but to do so. In assessing whether the going concern basis of accounting is appropriate, management takes into account all available information about the future, which is at least, but is not limited to, 12 months from the date when the financial statements are authorised for issue
FRS 105 does not require the accounts to show the accounting policies used. Therefore the effects of changes in accounting policies can be ignored
The FRS does require a specific treatment for prior year adjustments. Section 8 states the following:
A micro-entity shall account for all other changes in accounting policy retrospectively (see paragraph 8.10).
8.10 When a change in accounting policy is applied retrospectively in accordance with paragraph 8.9, the micro-entity shall apply the new accounting policy to comparative information for prior periods to the earliest date for which it is practicable, as if the new accounting policy had always been applied.
Note that a similar treatment to the above also applies to correction of fundamental errors
2 Information for filing
The main issue that has been raised with ACCA's Technical Advisory team concerns the completion of the template on Companies House for micro-entities.
The first issue is that the balance sheet is laid out in the required format but also includes certain questions which cause confusion. These relate to whether further analysis is needed. For instance examples are:
do you want to provide a fixed assets breakdown?
do you want to provide a current assets breakdown?
Care needs to be taken when giving further analysis as this information will be on public record and would not normally be needed under FRS 105.
The second issue is that at the foot of the balance sheet template there is the following question:
do you want to provide any footnotes to the balance sheet?
This question (in contrast to the above) may need completing as it relates to the statutory notes which are required at the foot of the balance sheet (referred to above). If this question is selected the template links to a further page which allows the proper disclosures to be made.
So it is very important that where statutory notes relating to guarantees, commitments etc are needed, these are properly disclosed using the tabs on the template.
The fact that the template contains links to a mixture of non-mandatory and possibly mandatory notes can cause a lot of confusion and lead to important information being omitted or in fact over-disclosure of other information.
Please follow the links below for more articles on FRS 105 from ACCA: