FRC proposals to replace FRSSE with FRS 105 too complex

The latest proposals from the Financial Reporting Council (FRC) to amend the new UK GAAP, FRS 102, to meet the new rules set down by the EU Accounting Directive have been described as ‘revolutionary’ by Baker Tilly, which says some three million small firms will see an impact from the changes which are now subject to consultation, although some commentators have warned that the document is 'impenetrable' and risks creating more complexity

There are concerns that the tight timeframe to rush through the new standard to comply with the EU Accounting Directive which comes into effect later this year means that there are concerns that business will have little time to prepare for the changes.

The proposals include the withdrawal of the Financial Reporting Standard for Smaller Entities (FRSSE) for accounting periods beginning on or after 1 January 2016; a new accounting standard for micro-entities; new recognition and measurement requirements for other small companies aligned with new UK GAAP, and disclosure requirements based on the new legal framework; and greater flexibility in relation to the format of the profit and loss account and balance sheet in FRS 101, allowing the use of IFRS-based presentation requirements similar to those used for group accounts.

Commenting on the exposure drafts of the Financial Reporting Standard for Micro-Entities, to be called FRS 105 going forward, and amendment to FRS 102 for small businesses, Danielle Stewart, head of financial reporting at Baker Tilly said their significance ‘should not be underestimated’.

‘There will also be changes for a further 1.5m small companies who will be released from certain disclosure requirements,’ Stewart said.

However, Julia Penny, accounting and audit technical lead at Wolters Kluwer warned that the new standard for smaller entitities - the FRS 105 proposal outlined in a 144-page document, introduced more complexity as it relied on exclusions, numerous disclosures and differences between FRS 102 and the 'lite version', rather than setting out a clear, simplified standard which was straightforward to follow.

'There is a lot of cross-referencing, for example,' said Penny. 'Small companies want everything in one place.'

Stewart said Baker Tilly’s analysis suggests many ‘micro-business’ owners and freelance workers operating through ‘lifestyle companies’ with turnovers of less than £632,000 a year will stand to benefit, as they will be released from the most complex aspects of the accounting requirements of the current reporting regime.

‘These changes, which in some senses are quite revolutionary, could herald a much wider reduction in red tape for UK businesses. We expect this trend to continue as more companies with higher turnovers are brought under the umbrella of these new simplified reporting requirements,’ she said.

However, Dr Nigel Sleigh-Johnson, head of ICAEW’s Financial Reporting Faculty, cautioned that the proposed timeframe for the new accounting approach could prove a major stumbling block for some small businesses and their advisers.

Sleigh-Johnson said: ‘It is imperative the FRC remains mindful of the many challenges facing this sector and the need to ensure a smooth and orderly transition. Time is short. Any delay in issuing the final revised standards might make the proposed implementation date of 1 January 2016 untenable.’

The consultation on the proposals closes on 30 April 2015 and the FRC says it expects to issue final standards and amendments in July 2015.

This is the second time that the FRC has consulted on this matter. In 2014, the FRC outlined its high-level plans for bringing small entities within the scope of FRS 102, withdrawing the FRSSE and issuing a brand new accounting standard for micro-entities.

The three new consultations are more comprehensive, setting out the detailed amendments required to UK GAAP and offering a first glimpse of the new standard for micro-entities.

The FRC proposals are intended to be effective for accounting periods beginning on or after 1 January 2016, with early application permitted for accounting periods beginning on or after 1 January 2015.

Details of the current consultation are here: https://www.frc.org.uk/News-and-Events/FRC-Press/Press/2015/February/FRC-consults-on-amendments-to-UK-and-Irish-GAAP.aspx

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