Illustrative Small Company Accounts

Smallco Limited

Illustrative small company accounts

FRS 102 Section 1A –
Illustrative accounts
©Telford Financial Training Ltd 2015

Introduction

These illustrative financial statements have been prepared to illustrate the key presentational and transitional disclosure issues on moving from existing FRSSE to FRS 102 applicable to small entities, as outlined in FRS 102 Section 1A small entities, and incorporating the revisions to the Small Companies and Groups (Accounts and Directors’ Report) Regulations 2008 implementing the EU Accounting Directive.

Notes to the accounts

One of the key features of the Regulations is a reduction in the number of notes which are required for small companies. This is coupled with a general prohibition on national governments and standard setters imposing additional disclosure requirements.Therefore FRS 102 for small entities does not have as many disclosures as did its predecessor, FRSSE.

True and fair view

Unlike micro-company accounts which are presumed to be true and fair, CA 2006 require the accounts to be true and fair and FRS 102 Section 1A suggests that additional disclosures may be necessary to give a true and fair view. It also includes a number of recommendations of items which should be included. These are as follows and they are highlighted in the body of the financial statements:

(a)The FRS states that “A small entity may need to provide disclosures in addition to those set out in order to enable the financial statements to give a true and fair view” (1A.6);

(b)A small entity is encouraged but not required to include:

(i)A STRGL (Statement of other comprehensive income) where there are gains or losses not recognised in the profit and loss account (1A.9(a));

(ii)A Statement of changes in equity, or a Statement of income and retained earnings ((1A.9(b));

(c)Where relevant to the transactions, other events and conditions, a small entity is encouraged to provide the following disclosures:

(i)A statement of compliance with this FRS adapted to refer to Section 1A;

(ii)A statement that it is a public-benefit entity as set out in PBE 3.3A;

(iii)The disclosures relating to going concern set out in paragraph 3.9.This would require it to disclose material uncertainties that cast doubt on its ability to continue as a going concern, and where relevant, the fact that the going concern basis has not been used, together with a note of the basis adopted;

(iv)Dividends declared and paid or payable during the period (for example as set out in paragraph 6.5(b));

(v)On first-time adoption of this FRS an explanation of how the transaction has affected its financial position and financial performance as set out in paragraph 35.13 (1AD.1).

Abridged accounts

These regulations permit a small company to prepare abridged accounts, if all the shareholders agree on an annual basis.

Abridgement is not to be confused with the general reductions in note disclosures applicable to small companies and which do not require shareholder approval which derive from the maximum disclosure requirements introduced by the Accounting Directive. Nor is it to be confused with abbreviated accounts under which two sets of accounts were produced, one for the shareholders the other for filing at Companies House.

In an abridged balance sheet, a small company is required to present only those items with alphabetic or roman designations. It is not required to include items prefixed by an Arabic numeral. In practice this means that most of the notes to the balance sheet are no longer required. An abridged profit and loss account may start with gross profit (see page 3).

In these illustrative accounts where the requirement for a note has been removed for all small companies, it is shown by use of the strike through font, like this. Where information is not required because abridged accounts are being prepared, this is illustrated by highlighting the text like this

Titles for financial statements and individual items

FRS 102 permits the use of titles for the financial statements themselves other than those used in the standard provided they are not misleading.

BIS stated in their follow up to their discussion document that they would legislate to simplify the presentation of individual items within the financial statements and the revisions to FRS 102 appear to allow entities to use terms other than those used in some items which in the formats included an alphabetic or roman numeral prefix.

We have used FRS 102 terminology throughout for the financial statements, and predominantly for items within the financial statements. For example, we refer to income statement and statement of other comprehensive income rather than profit and loss account and statement of total recognised gains and losses. We refer to inventories and property, plant and equipment rather than stocks and work in progress and tangible fixed assets.

New requirements

New items are included in this font. Note that notes 35 -37 included under this category are only required in the year of transition under FRS 102, are only recommended for small companies under FRS 102 Section 1A small entities and are neither required not recommended under FRS 105

Guidance and limitations

Guidance notes are included within text boxes or as narrative notes in this font.

Note that these are not intended to be comprehensive or model accounts. In particular

(a)Not all items which could be included are covered. The financial statements do not include a defined benefit pension scheme nor share-based payments.

(b)Nor are all detailed disclosures, whether required by the Act or FRS 102 necessarily disclosed. In particular the disclosures relating to financial instruments are not dealt with.

Effective date

Both FRS 102 for small companies and the company law changes are mandatory for periods commencing on or after 1 January 2016 (one year later than for FRS 102 itself).

They may, however, be adopted for periods commencing on or after 1 January 2015. FRS 102:

(a)Permits early adoption of FRS 102, provided that the revised regulations are also early adopted; and

(b)Requires early adoption of FRS 102 where the regulations are to be early adopted.

An entity which chooses not to early adopt, has one more year to get to grips with the recognition and measurement issues.) Note however that they would have to change to FRSSE 2015 for the year ended 31 December 2015 and then to draft FRS 102 for small entities for subsequent periods. For many entities making the first transition will have few, if any, accounting entries since the only changes are:

(a)Amended definition of related parties to be consistent with FRS 8 and IAS 24;

(b)Requirement that if it cannot be measured reliably the useful life of goodwill and intangibles may not exceed five years (to be changed to ten years if cannot be measured reliably in exceptional circumstances in line with the changes in the accounting regulations.

(c)A requirement for an annual assessment as to whether an impairment review is required.

Early adoption

There are two issues to consider before making the decision whether to early adopt, or wait until the last possible date:

(a)Does transition to FRS 102 introduce any major changes which would suggest making the transition at the last possible date?

(b)Does client wish to take advantage of the simplified disclosures including the ability to prepare abridged accounts?

This can be illustrated as follows:

If the client considers that the burden imposed by FRS 102 is greater than the advantages under the revised regulations it will not early adopt.

On the other hand it may well find there are advantages to early adoption.

Early adopt?

For many companies, therefore, the decision should be to early adopt FRS 102 for small entities because the accounting will be very similar to FRSSE, and some of the required changes are tax advantageous. If for example a small company has a material holiday pay accrual or lease incentive, early adoption of the new treatment accelerates tax relief.

The reduced disclosures, including those related to related parties, and the option to prepare abridged accounts for shareholders mean that clients may wish to early adopt the company law changes.

As noted above an entity cannot adopt the company law changes unless it also adopts FRS 102 Section 1A. Having noted that there are no disadvantages of early adopting FRS 102, the company law changes can be adopted.

Wait until the last minute?

This will usually only be appropriate if there are complications in adopting FRS 102 for example the need to fair value financial instruments such as interest rate swaps or where FRS 102 results in a higher taxable profit than FRSSE.

Micro-companies

Within the illustrative accounts we have included guidance on the key differences between Draft FRS 102 for small entities and FRS 105 using the following font like this.

Other comments

It is recommended that the first actual FRS 102 accounts are prepared using proprietary model accounts and accounts disclosure checklists.

The original accounting formats are prepared under FRSSE 2008 and are for the year ended 31 December 2016 but in practice you could use earlier accounts on which to base your planning.

Cash flow statement

A small company is not required to produce a cash flow statement. If it chooses to prepare one, it would be required to follow the provisions of FRS 102 chapter 7 in relation to form and content. In order to illustrate the significant changes within the cash flow statement we have included an example as an appendix to these illustrative financial statement. In practice, of course, it would probably appear immediately before the accounting policies note.

Smallco Limited

Income statementProfit and loss account for the year ended 31 December 2016

Statement of income and retained earnings for the year ended 31 December 2016 (see below)

Note / 2015
£ / 2014
£
TURNOVER
Cost of sales(including value adjustments) / 2
GROSS PROFIT

Distribution costs(including value adjustments)
Administrative expenses (including value adjustments)
Other operating income
Value adjustments on fixed assets and current asset investments
OPERATING PROFIT (LOSS) / 3
Exceptional items:
Profit (loss) on sale of fixed assets
Cost of fundamental reorganisation/restructuring
Profit (loss) on sale or termination of an operation
Bad debts
Profit (loss) on ordinary activities before interest
Other interest receivable and similar income
Value adjustments on fixed assets and current asset investments
Interest payable and similar charges
PROFIT (LOSS) ON ORDINARY ACTIVITIES BEFORE TAXATION
Tax on profit on ordinary activities / 4
PROFIT (LOSS) FOR THE FINANCIAL YEAR/PERIOD
RETAINED EARNINGS AT 1 JANUARY 2016
Restatement of retained earnings for changes in accounting policy
Restatements of retained earnings for corrections of prior period errors
Dividends declared and payable for the period
RETAINED EARNINGS AT 31 DECEMBER 2016

The annexed notes form part of these financial statements.

Smallco Limited

Statement of comprehensive income Statement of total recognised profits and losses for the year ended 31 December 2015

FRS 102 section 1A small entities states that a small company does not requires a statement of other comprehensive income. This is a change from the requirement in FRSSE 2008 where a STRGL was required if there were other gains and losses e.g. revaluation of freehold property. It does however encourage the inclusion of such a statement.
A statement of other comprehensive income is not required by FRS 105, nor is one encouraged.
/ Note / 2016
£ / 2015
£
Profit (loss) for the financial year
Unrealised surplus (deficit) on revaluation of freehold properties

Unrealised gain (loss) on investment properties
Taxation
Total recognised gains and losses relating to the year/period
Prior year adjustment (as explained in note _____)
Total gains and losses recognised since last financial statements

Smallco Limited

Statement of financial positionBalance sheet at 31 December 2016

2016 / 2015
Company registration number: 122345527 / Note / £ / £ / £
FIXED ASSETS
Intangible assets / 11
Tangible assetsProperty, plant and equipment / 12
Investment property / 13
InvestmentsFinancial assets / 14
CURRENT ASSETS
StocksInventories / 15
Debtors / 16
(including £ due in more than 1 year, 2014 £ ) /
InvestmentsFinancial assets / 17
Cash at bank and in hand
CREDITORS: Amounts falling due within one year / 18
NET CURRENT ASSETS (LIABILITIES)
TOTAL ASSETS LESS CURRENT LIABILITIES
CREDITORS: Amounts falling due after more than one year / 19
PROVISIONS FOR LIABILITIES / 21
NET ASSETS
CAPITAL AND RESERVES
Called up share capital / 22
Share premium account / 23
Revaluation reserve / 24
Fair value reserve
Profit and loss account / 25
SHAREHOLDERS’ FUNDS / 26

These accounts have been prepared in accordance with the provisionsapplicable to companies subject to the small companies’ regime and in accordance withthe provisionsofFRSSE 2008FRS 102 Section 1A – small entities.

These financial statements were approved and authorised for issue by the Board on

Signed on behalf of the board of directors

[SIGNATURE]- Director

[NAME]

DATE

The notes on pages to form part of these accounts.

Smallco Limited

Statement of changes in equity for the year ended 31 December 2015

/ Share Capital / Share Premium / Revaluation Reserve / Fair value
Reserve / Retained earnings / Total
Balance at 1 January 2015
As previously reported /
Prior period adjustments
Change in accounting policy /
Prior period adjustment Correction of material error
As restated /
Share issue during the year
Profit for the year
Other comprehensive income for the year /
Transfers
Dividends
Balance at 31 December 2015
Share issue during the year /
Profit for the year
Other comprehensive income for the year
Transfers /
Dividends
Balance at 31 December 2016

Included in retained earnings is £x (2015 - £X) of profits which are not available for distribution as they are unrealised

Smallco Limited

Notes to the financial statements for the year ended 31 December 2016

In the notes to the financial statements which follow we include only items which are specifically referred to in the formats within the Regulations, and which regularly appear in small company accounts. This is on the assumption that an entity wishes to disclose the minimum information. These headings may, of course, be adapted to provide more information for the shareholders. For example within tangible fixed assets many entities choose to add motor vehicles and computer equipment. Also it is interesting to note that there is no requirement to disclose items such as prepayments and accrued income or accruals and deferred income separately, although most people do. They can be included within debtors or creditors respectively.
The only notes required by the micro-regulations and FRS 105 are advances to directors (note 27) and guarantees and commitments (note 31).
In the notes which follow we include commentary on the differences in accounting treatment i.e. recognition and measurement between FRS 102 and FRS 105.

1STATUTORY INFORMATION

Smallco Limited is a private company, limited by shares, domiciled in England and Wales, registration number 122345577. The registered office is Hogwarts Castle, Somewhere, County, HW1 1GF.

S 396 A1 CA 2006 requires disclosure of:
(a)Country of registration specifically part of UK,
(b)Registered number,
(c)Whether private or public,
(d)Whether limited by shares or guarantee
(e)Where appropriate if being wound up
FRS 102 3.24 requires disclosure of the legal form of the entity, its country of incorporation and the address of its registered offices (or principal place of business if different from the registered office). A small company is not required to include the principal place of business by FRS 102 Section 1A small entities.
FRS 102 3.24(b) also requires disclosure of the nature of the operations and its principal activities unless disclosed in a business review or similar document. Companies were required to include such disclosure in the directors’ report until the requirement was removed for periods ending on or after 30 September 2014. As this is not a mandatory note under the Accounting Directive it is not included within FRS 102 Section 1A.

2COMPLIANCE WITH ACCOUNTING STANDARDS

The accounts have been prepared in accordance with the Financial Reporting Standard for Small Entities effective April 2008the provisions of FRS 102 Section 1A small entities. There were no material departures from thatstandard.

FRS 102 3.4 requires an unreserved statement of compliance with the standard in the notes. This could be incorporated within the accounting policies note, or as here as a separate note.
As noted on the balance sheet,FRS 102 for small entities encouragesthe inclusion of a statement of disclosure of compliance with FRS 102 adapted to refer to Section 1A. This could be on the balance sheet, in the accounting policies or both.

3ACCOUNTING POLICIES

The principal accounting policies adopted in the preparation of the financial statements are set out below and have remained unchanged from the previous year/period, and also have been consistently applied within the same accounts.

Accounting policies is one of the mandatory notes in the revised Regulations. FRS 102 Section 1A requires disclosure of changes in accounting policies as one of the factors required to be disclosed by the regulations when previously reported figures are revised.
The accounting policy notes which follow are those included under previous FRSSE adapted for FRS 102. The annotations in this section illustrate areas where change may be necessary. This is not an exhaustive list of accounting policies or potential changes but for illustration purposes only.
In the year of transition, FRS 102 encourages entities to include the explanation of transition required by FRS 102 section 356. There is no equivalent guidance in FRS 105.
If a small company does include an explanation of transition, it will be on the following lines. The underlined text is based on the illustration in Staff Education Note 13, although the third paragraph is not included in the Staff Education Note it would seem sensible to include such wording.

These financial statements for the year ended 31 December 2016 are the first financial statements that comply with FRS 102 Section 1A small entities. The date of transition is 1 January 2014.