Small Company Financial Reporting
This is the third edition of Small Company Financial Reporting which has been comprehensively updated to reflect all changes made to UK GAAP since 2018. At the time of writing, the Financial Reporting Council (FRC) were in the early stages of the periodic review of UK and Ireland GAAP. An Exposure Draft of potential amendments from the periodic review is expected in late summer of 2022 and the comment period will not be shorter than three months. The changes arising from the periodic review are not expected to be effective earlier than 1 January 2025.
Feedback on current UK GAAP has been generally positive and small entities appear to have got to grips with the structure and different frameworks that are available to small and micro-entities. For example, micro-entities can choose to prepare their financial statements under FRS 105The Financial Reporting Standard applicable to the Micro-entities Regime or FRS 102The Financial Reporting Standard applicable in the UK and Republic of Ireland. Small entities can choose to apply the presentation and disclosure requirements of FRS 102, Section 1A Small Entities if they wish or they can prepare the financial statements under the full disclosure requirements of FRS 102.
In January 2022, the FRC issued revised editions of UK GAAP (with the exception of FRS 100Application of Financial Reporting Requirements) as this FRS was the subject of an Exposure Draft to change the equivalence requirements. Comments on this Exposure Draft will close in August 2022 and it is expected that FRS 100 will be re-issued following finalisation of the proposals.
The January 2022 editions of UK GAAP essentially consolidate all amendments made to UK GAAP since the March 2018 editions were issued so they do not make wholesale changes to the accounting and disclosure requirements.
At the time of writing, the Companies House reforms were ongoing. Part of these reforms propose to remove the option of small and micro-entities from filing ‘filleted’ or ‘filleted abridged’ financial statements. Hence, all micro-entities and small companies will be required to file a profit and loss account at Companies House. Small entities will also be required to file a directors’ report (although a directors’ report is not required for a micro-entity preparing its financial statements under FRS 105). At the time of writing, there was no implementation date set for this proposal but is something that preparers and management of small and micro-entities need to bear in mind.
Small entities reporting under FRS 102 may apply the provisions in Section 1A. There are five appendices to FRS 102, Section 1A as follows:
- Appendix A: Guidance on adapting the balance sheet formats
- Appendix B: Guidance on adapting the profit and loss account formats
- Appendix C: Disclosure requirements for small entities in the UK
- Appendix D: Disclosure requirements for small entities in the Republic of Ireland
- Appendix E: Additional disclosures encouraged for small entities
Directors of small companies are reminded of the importance of ensuring that the entity’s financial statements give a true and fair view. While a small entity may only be legally obliged to make the disclosures contained in FRS 102, Section 1A, Appendix C or D, potentially anything in FRS 102 is disclosable if doing so enables the financial statements to give a true and fair view. Directors of small companies must also ensure that they consider the encouraged disclosures in Appendix E. For example, if there are material uncertainties related to going concern, they are encouraged to apply the provisions in FRS 102, para 1AE.1(c) in order that the financial statements give a true and fair view. There is more use of professional judgement required under FRS 102 where disclosures for small entities are concerned.
Micro-entities can still choose to report under FRS 105 if they wish to do so, and the uptake of FRS 105 has been extensive. In terms of disclosure requirements, these are much condensed in comparison to FRS 102, Section 1A and micro-entities must keep in mind that there are two appendices to FRS 105, Section 6 Notes to the Financial Statements which are integral parts of Section 6:
- Appendix A: Company law disclosure requirements for micro-entities in the UK
- Appendix B: Company law disclosure requirements for micro-entities in the Republic of Ireland
It is important that the micro-entity’s financial statements comply with the legal requirements in order that the financial statements give a true and fair view. It should also be noted that Irish micro-entities are required to provide more comprehensive disclosures than a UK-based micro-entity.
Key features of this third edition include ‘Signposts’ at the start of each chapter which are designed to highlight, at a glance, important points in each chapter. ‘Focus’ boxes have been included in each chapter with the objective of flagging up important concepts and points which small company directors and their accountants should take on board. This edition also includes a ‘Pitfalls to avoid’ section at the end of each chapter to help reduce the scope for error. Each chapter also contains a ‘Chapter summary’ box at the end which summarises the main content of each chapter as an aide-memoire for readers.
This edition of the book includes several worked examples to help bring the theory within the chapter to life and to aid understanding of the accounting requirements in UK GAAP.
I hope that you find this book useful and we welcome comments or suggestions, via the publisher, for future editions.
I would like to take this opportunity to thank the editors, Dave Wright, Sarah Hastings and Claire Banyard and the rest of the team at Bloomsbury Professional for their help, support and patience during the production of this third edition.
Steve Collings FCCA
Impact of the ‘mini-budget’ on deferred tax
As was widely expected, the headline rate of corporation tax in England was due to increase to 25% on 1 April 2023 for companies which generate taxable profits exceeding £250,000. Companies generating taxable profits of £50,000 or less would have been unaffected by this rate increase as they would have continued to pay corporation tax at 19%.
Chancellor Kwasi Kwarteng announced in his ‘mini-Budget’ on 23 September 2022 that the increase in corporation tax rate to 25% was being reversed, and the headline rate of corporation tax was to remain at 19%. This was, of course, welcome news for companies who do generate large profits because it saves them cash. The reversal was in response to the government’s plans to stimulate economic growth and promote investment.
The reversal of the planned corporation tax increase may not necessarily have an impact for corporation tax calculations (as it did not come into effect); but it will have an impact on deferred tax balances that are recognised in a reporting entity’s financial statements.
Deferred tax impact
Of course, for micro-entities choosing to prepare their financial statements under FRS 105 The Financial Reporting Standard applicable to the Micro-entities Regime, there will be no impact on deferred tax as deferred tax is prohibited under FRS 105.
For companies not reporting under FRS 105, any change in corporation tax rates will have an impact on the calculation of deferred tax in the statutory financial statements. This is because a new rate will generally be applied for deferred tax purposes before the ‘effective’ date of the new rate for corporation tax purposes, due to the ‘substantively enacted’ approach accounting standards take.
The measurement of deferred tax uses the tax rates and laws that have been ‘… enacted or substantively enacted by the reporting date that are expected to apply to the reversal of the timing difference.’ [FRS 102, para 29.12]
The term ‘substantively enacted’ is defined in FRS 102The Financial Reporting Standard applicable in the UK and Republic of Ireland as follows:
Tax rates shall be regarded as substantively enacted when the remaining stages of the enactment process historically have not affected the outcome and are unlikely to do so.
A UK tax rate shall be regarded as having been substantively enacted if it is included in either:
a) a Bill that has been passed by the House of Commons and is awaiting only passage through the House of Lords and Royal Assent; or
b) a resolution having statutory effect that has been passed under the Provisional Collection of Taxes Act 1968. (Such a resolution could be used to collect taxes at a new rate before that rate has been enacted. In practice, corporation tax rates are now set a year ahead to avoid having to invoke the Provisional Collection of Taxes Act for the quarterly payment system.)
A Republic of Ireland tax rate can be regarded as having been substantively enacted if it is included in a Bill that has been passed by the Dáil.
Hence, when a new tax rate is announced prior to the balance sheet date, but the enactment formalities have yet to be completed, the entity will need to assess whether the tax rate has become substantively enacted. This will, of course, depend on the entity’s balance sheet date.
In the UK, Bills are read three times in the House of Commons prior to going to the House of Lords. The House of Lords can debate the future tax rate, but cannot propose changes to it. After the Bill has passed through the House of Lords it is sent for Royal Assent. In light of this procedure, it is reasonable to conclude that a Bill approved in the House of Commons and only awaiting passage through the House of Lords and Royal Assent procedures, is substantively enacted. Parliamentary Bills can be tracked by using this link.
Under the original plans, the 25% rate of corporation tax became substantively enacted on 24 May 2021. Hence, deferred tax balances for balance sheet dates ending on or after 24 May 2021 were remeasured at 25% or at the marginal rate where taxable profits were expected to fall between £50,001 and £250,000. Companies that were expected to generate taxable profits of £50,000 or less continued to measure deferred tax balances at 19% so there was no effect on such entities.
The mini-Budget on 23 September 2022 reverses the planned corporation tax increase but it is important to emphasise that for deferred tax purposes, the enactment process for the reversal does not happen straight away and remeasurement at 19% will only happen once the headline rate of 19% has been substantively enacted. At the time of writing, the timing of the legislation required to reverse the increase was unknown, but the link provided above should allow interested parties to keep a track of the developments in this area.
Companies whose taxable profits are expected to exceed £250,000 will continue to measure deferred tax using the 25% tax rate until the headline rate of 19% becomes substantively enacted. Companies whose taxable profits were not expected to exceed £50,000 will continue measuring deferred tax using 19% and companies whose profits will fall in the mid-range will continue applying the marginal rate until the headline rate is substantively enacted.
Steve Collings FCCA
Steve Collings FCCA is a director at Leavitt Walmsley Associates, Chartered Certified Accountants based in Sale, Cheshire where he trained and qualified. Steve is the author of several titles for Bloomsbury Professional including Group Accounts under UK GAAP, Financial Reporting for Unlisted Companies in the UK and Republic of Ireland and Financial Statements: Presentation and Disclosure Requirements. Steve has close connections with various professional bodies producing authoritative material, articles and courses and represents the Association of Accounting Technicians on the CCAB and Technical Partners Committee at the Financial Reporting Council.