After the seismic change to medium sized company’s financial statements with the move to FRS 102, the next change is the end of the road for FRSSE (Financial Reporting Standard for Smaller Entities).  For accounting periods beginning on or after 1 January 2016, the latest incarnation of FRSSE (2015), will no longer be available and companies will need to choose between FRS102 and FRS105 (Micro Entities).  As a side point, please note that this will also apply to companies which shorten their period – so a six month period from 1 April 16 to 30 September 16 will also need to be prepared under the new rules(the start date of the period not the end date is important).

In reality, for most of our clients, this will not be a choice at all, as FRS105 can only be applied by companies within the following limits:

• Turnover < £632,000
• Gross assets < £316,000
• Employees – not more than 10 on average

I have therefore set out the following main changes for a company currently applying FRSSE and moving to FRS102:

Share based payments:

• Under FRSSE, a company could simply disclose the existence of a share based payment in the notes to the accounts (e.g. a share option scheme)
• Under FRS102, the company will need to record share options at fair value at the date of issue, which will mean undertaking a valuation exercise.

Basic Loans:

• Under FRSSE, most companies will reflect the loans at original cost with interest reflected on an accrued / payable basis.
• Under FRS102, basic loans will need to be measured at amortised cost using the effective interest rate method i.e. taking into account arrangement fees and related costs that may be written off to the P&L currently at inception; for financing arrangements e.g. inter-company loans in a group which are due in more than one year and interest free, amortised cost is approximating the initial amount of the loan by a market rate of interest.

Holiday pay:

• Under FRSSE, there was no mention of this and thus was generally not accounted for by companies.
• Under FRS 102, companies must make a provision where the cost of any untaken holiday entitlement at the year end if material.

Deferred tax:

• Under FRSSE, deferred tax was only provided on timing differences.
• Under FRS 102, deferred tax is required to be provided on revaluations and rolled over gains and on differences between fair and tax written down values on the acquisition of a business.

Investment properties:

• Under FRSSE, these properties had to be revalued to market value through the revaluation reserve.
• Under FRS102, these will be carried at fair value (broadly equivalent to market value), with the adjustment through the profit and loss account.  It will therefore form part of the accumulated profit and loss reserves, but will be non-distributable.

Any company adopting FRS102 for the first time will be required to retrospectively restate its accounts as if the new rules had always applied (with fsome exceptions).  This means restating:

• The opening balance sheet at the start of the first year in which FRS102 applied;
• The profit and loss account for the comparative period;
• The opening balance sheet at the start of the comparative period (known as the transition date).

As you can see, the above is going to present plenty of challenges for small business owners and their accountants.  But, rest assured we are ready and looking forward to the challenge!