Section 1 – Section 1A Small Entities – Detailed Guide

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Section 1A: Small Entities

Scope of this section

Extract from FRS102: Section 1A.1-1A.4

 1A.1 This section sets out the information that shall be presented and disclosed in the financial statements of a small entity that chooses to apply the small entities regime. Unless excluded below, all of the requirements of this FRS apply to a small entity, including the recognition and measurement requirements.

 1A.2 Unless a small entity chooses to apply EU-adopted IFRS, or if eligible, FRS 101, a small    entity that chooses not to apply the small entities regime shall apply FRS 102 excluding Section 1A.

 1A.3 References to a small entity in paragraphs 1A.4 to 1A.22 and the Appendices to Section 1A are to a small entity that chooses to apply the small entities regime.

 1A.4 This section applies to all small entities applying the small entities regime, whether or not they report under the Act. Small entities that do not report under the Act shall comply with the requirements of this section, and with the Small Companies Regulations (or, where applicable, the Small LLP Regulations) where referred to in this section, except to the extent that these requirements are not permitted by any statutory framework under which such entities report.

OmniPro comment

Section 1A – As applicable to the republic of Ireland

 At the moment Section 1A of FRS 102 has not been updated for the Companies (Accounting) Bill 2016. Once the Bill is enacted Section 1A of FRS 102 will be updated. Any references to Appendix A to Appendix C is in relation to the UK. NOTE SECTION 1A OF FRS 102 CANNOT BE APPLIED BY ROI ENTITIES UNTIL THE COMPANIES (ACCOUNITNIG) ACT 2016 IS ENACTED WHICH INTRODUCES THE SMALL COMPANIES REGIME WHICH ALLOWS SECTION 1A TO BE ADOPTED. THIS IS EXPECTED TO BE ENACTED IN EARLY 2017.

Given that Section 1A of FRS 102 is not updated this Section of the guide goes through the requirements which are general to all entities and then details the company law requirements as detailed in the Companies (Accounting) Bill which is to be enacted.

Overview

The Companies (Accounting) Bill 2016 when enacted will introduce the concept of the Small Companies Regime which is contained in Section 280A-280C of the Companies Act 2014. This will allow companies to prepare financial statements under Section 1A of FRS 102 by applying the requirements of the small company’s regime in the Companies Act. Section 1A will be updated for the new legislation once enacted.

Which companies can avail of Section 1A/Small Company’s regime?

A company qualifies for the small company’s regime if it fulfils at least two of the three qualifying conditions listed below:

 

 

Small Co

Holding company for Small Group

Turnover

≤€12 million

≤€12 million-net

≤€14.4 million-gross

Balance Sheet Total

≤€6 million

≤€6 million net

≤€7.2 million-gross

Employees

≤50

≤50

Note 1: Exception even where the above thresholds are met:

S.280A(4) and S.280B(5) of CA 2014 excludes the following companies from applying the SCR and hence Section 1A:

  1. a company falling within any provision of Schedule 5 of the Act (e.g. authorised investment firm, insurance intermediary of any other company carrying on of business by which is required to be authorised by the Central Bank); or
  2. a company that is a credit institution or insurance undertaking; or
  3. a company with securities regulated on a regulated market; or
  4. a holding company of a small group even where the group meets the thresholds where any of the entities in the group come within points 1, 2 and 3 above (this only effects the holding company and not the other companies within the group (other than a company that comes within the remit of points 1-3 above)).

 What remains the same?

 Companies will continue to apply all the measurement and recognition criteria under FRS 102 Sections 2 to 35 of FRS 102. Section 1A only provides disclosure exemptions.

Companies will be able to prepare Section 1A consolidated financial statements for a small group.

What is different?

 Companies will be able to prepare consolidated financial statements in line with Section 1A, the small company’s regime and Schedule 3A and 4A of Companies Act 2014.

There is no need to disclose wage costs or split of employee by function in the notes

 What is new?

Provide exemptions from disclosures within each of the 35 Sections of FRS 102. Instead disclosures follow the requirements of Section 1A of FRS 102 which replicate the requirements of the disclosures for small company’s regime in the amended 2014 Companies Act.

The disclosure requirement in Section 1A are the minimum required. Directors are still required to consider if additional disclosures are required in order to show a true and fair view (Section 289 CA 2014).

For companies transitioning to FRS 102 for periods beginning before 1 January 2017 there is an ability to claim;

No requirement to prepare a cash flow statement.

Reduced related party transaction disclosures.

Appendix A-D discusses the requirements in further details. Also see the detailed disclosure checklist for ROI entities in the disclosures checklist section of the website.

Section 1A and UK Companies

Section 382 and 383 of the Companies Act 2006 (UK Companies Act) defines a company as a small company if it meets two out of the three of the following criteria:

Turnover- not more than                                                 £10.2 million

Balance sheet total – not more than                                 £5.1 million Average number of employees – not more than                             50

(note these thresholds take effect from 1 January 2016 however early adoption is possible under FRS 102)

NOTE: THIS CANNOT BE CHOSEN BY REPUBLIC OF IRELAND COMPANIES AT THIS TIME AS THE EU DIRECTIVE 2013/34 HAS NOT BEEN ENACTED AND THEREFORE THE SMALL COMPANY THRESHOLDS HAVE NOT BEEN SET.

NOTE:    CERTAIN    COMPANIES  UNDER  SECTION  384 OF COMPANIES ACT 2006 ARE  EXCLUDED  FROM  USING  THE SMALL  ENTITIES REGIME.

Section 364 of Companies Act 2006 states that the small-entity provisions do not apply in relation to a company’s accounts for a particular financial year if the company was at any time within that year (even where the thresholds are met) the company was—

(a) a public company,

(b) a company that—

(i) is an authorised insurance company, a banking company, an e-money issuer, a MiFID investment firm or a UCITS management company, or

(ii) carries on insurance market activity, or

(c) a member of an ineligible group. A group is ineligible if any of its members is—

(a) a traded company,

(b) a body corporate (other than a company) whose shares are admitted to trading on a regulated market in an EEA State,

(c) a person (other than a small company) who has permission under Part 4 of the Financial Services and Markets Act 2000 (c. 8) to carry on a regulated activity,

(ca) an e-money issuer,

(d) a small company that is an authorised insurance company, a banking company, a MiFID investment firm or a UCITS management company, or

(e) a person who carries on insurance market activity.

A company is a small company for the purposes of the above if it qualified as small in relation to its last financial year ending on or before the end of the financial year to which the accounts relate.

A company that meets the small company definition does not have to apply Section 1A however they can choose to do so.

True and fair view

Extract from FRS102: Section 1A.5-.1A.6

 1A.5 The financial statements of a small entity shall give a true and fair view  of  the  assets, liabilities, financial position and profit or loss of the small entity for the reporting period  (Section 393 of the Act).

 1A.6  A small entity may need to provide disclosures in addition to those set out in this section in   order to comply with the requirement of paragraph 1A.5 (see also paragraphs 1A.16 and 1A.17).

 OmniPro comment

 Careful judgement will have to be applied when determining whether additional disclosures are required and should be determined on a case by case basis. Consideration should be given to the readers of the financial statements and an assessment given as to whether additional disclosures are required to give a better understanding.

Complete set of financial statements of a small entity

Extract from FRS102: Section 1A.7-1A.11, Section 1AD.1 and Section  1A.16-1A.20

1A.7   A small entity is not required to comply with the requirements of paragraphs 3.3, PBE3.3A,    3.9, 3.17, 3.18, 3.19 and 3.24(b) which relate to presentation and disclosure requirements that are not required of small companies in company law, Section 4 Statement of Financial Position, Section 5 Statement of Comprehensive Income and Income Statement, Section 6 Statement of Changes in Equity and Statement of Income and Retained Earnings and Section 7 Statement of Cash Flows.

1A.8 Instead a complete set of financial statements of a small entity  shall  include  all  of  the following:

  1. a statement of financial position as at the reporting date in accordance with paragraph 1A.12;
  2. an income statement for the reporting period in accordance with paragraph 1A.14; and
  3. notes in accordance with paragraphs 1A.16 to 20.

1A.9     In addition to the statements required by company law and set out in paragraph 1A.8:

  1. when a small entity recognises gains or losses in other comprehensive income it is encouraged to present a statement of total comprehensive income (see Section 5); and
  2. when a small entity has transactions with equity holders it is encouraged to present a statement of changes in equity, or a statement of income and retained earnings, (see Section 6), in order to meet the requirements of paragraph 5.

1A.10 In accordance with paragraph 3.14 a small entity shall present comparative information in respect of the preceding period for all amounts presented in the current period’s financial statements, except when this FRS permits or requires otherwise.

1A.11 In accordance with paragraph 3.22 a small entity may use titles for the financial statements other than those used in this FRS as long as they are not misleading.

Notes to the financial statements

1A.16 A small entity shall present sufficient information in the notes to the financial statements to  meet the requirement for the financial statements to give a true and fair view of the assets, liabilities, financial position and profit or loss of the small entity for the reporting period.

1A.17 A small entity is not required to comply with the disclosure requirements of Section 3 (to the extent set out in paragraph 1A.7) and Sections 8 to 35 of this FRS. However, because those disclosures are usually considered relevant to giving a true and fair view, a small entity is encouraged to consider and provide any of those disclosures that are relevant to material transactions, other events or conditions of the small entity in order to meet the requirement  set out in paragraphs 1A.5 and 1A.16. In accordance with paragraph 3.16A a small entity need not provide a specific disclosure (including those set out in paragraph 1A.18 and Appendix C to this section) if the information is not material.

1A.18 As a minimum, where relevant to its transactions, other events and conditions, a small entity shall provide the disclosures set out in Appendix C to this section.

1A.19 The paragraphs of this FRS that are cross-referenced in Appendix C are also highlighted in those sections by including an * in the left-hand margin.

1A.20 In addition, a small entity is encouraged to make the disclosures set out in 1AD.1 to this section, which may nevertheless be necessary to give a true and fair view.

Optional

1AD.1   Where relevant to its transactions, other events and conditions, a small entity is encouraged to provide the following disclosures:

  1. a statement of compliance with this FRS as set out in paragraph 3.3, adapted to refer to Section 1A;
  2. a statement that it is a public benefit entity as set out in paragraph 3A;
  3. the disclosures relating to going concern set out in paragraph 9;
  4. dividends declared and paid or payable during the period (for example, as set out in paragraph 6.5(b)); and
  5. on first-time adoption of this FRS an explanation of how the transition has affected its financial position and financial performance as set out in paragraph 13.

OmniPro comment

The small entity regime merely provides disclosure exemptions to entities, all 35 Sections of the standard with regard to recognition and measurement must be complied with.

For entities that meet the small company criteria the following must be included in the financial statements at a minimum and additional items should be provided where it is necessary to show a true and fair view (note these are as per the Companies (Accounting) Act 2016):

Accounting policies (the same as full FRS 102) including the basis of

Registered office address, number, status i.e. limited public or private company limited by shares or guarantee, and disclosure if it is being wound up where appropriate

Details of true and fair overrides invoked

Details of prior period adjustments as a result of prior period errors or changes in accounting policies or classifications from the prior year (disclosed on the face of the profit and loss where considered material). For ROI entities a prior year adjustment due to a change of accounting policies must be shown in the accounting policy section.

Tangible fixed assets detailing movements, depreciation, impairments, transfers etc. including details of revaluations where applicable specifying the basis of the revaluation, the year it was performed, and the qualification of the persons that valued it (note name and qualification of valuer is not required for ROI entities). Provide historical cost profit note.

Intangibles and goodwill detailing movements, amortisation, impairments, and details of useful economic life (stating if a default rate was used)

Investment in subsidiaries, associates and joint ventures in individual financial statements detailing additions, impairments, provisions. Where revaluations (where fair value through OCI used) performed state the basis of the valuation, the year it was performed, and the qualification of the persons that valued it and the  assumptions

Any restrictions placed on assets

Investment property detailing movements, fair value movement, transfers etc. including details specifying the basis of the valuation, the year it was performed, and the qualification of the persons that valued Disclosure of valuation method.

Investment in other financial assets carried at cost (i.e. investments of less than 20% which cannot be valued reliably)

Heritage assets detailing movements, amortisation, impairments etc

Disclosure of NBV of fixed assets revalued detailing the historical cost and NBV for both periods (for intangibles and tangible fixed assets)

Amounts of borrowing costs capitalised in an asset where a policy of capitalisaton is applied

Fair value movements posted to the profit and loss

Show impairment separately from cost (applicable for ROI entities).

Treatment for taxation purposes of amounts posted to the revaluation reserve

Intangible assets detailing movements, amortisation, impairments

Financial instruments and other assets measured at fair value detailing the terms and conditions that may affect timing, the extent and nature of the instrument and timing of cashflows etc. – e.g. investments which have less than a significant influence, forward contracts, interest rate swaps Detail significant assumptions underlying valuation models and techniques.

Cash flow hedge/fair value hedge reserve detailing amounts at the beginning and end of the period and the taxation effect of the postings (movement into and out of the reserve in the period)

Financial commitments, guarantees and contingencies

Advance, credits and guarantees to directors including the amount, conditions, amounts written off, waived and repaid, % of loan to net assets

Related party transactions (other than those with 100% companies in the group)

Disclosure of holding of own shares or shares in holding company (applicable to ROI entities only)

Disclosure above signature of directors stating they show a true and fair view

Disclosure on acquisition of own shares (applicable to ROI entities only)

Details of indebtness disclosing the amounts which are repayable after 5 years of period end and amount in total included in creditors where security is held detailing the type and nature of security.

Directors remuneration disclosure

Transactions with directors and connected persons

Name and registered office of the undertaking drawing up the lowest level of consolidated financial statements in which the entity is included if applicable including the place of business

Disclosure of exceptional items in line with Section 5 (See section 5 for further details).

Identity of ultimate controlling party inc. registered office and where consolidated financial statements can be obtained if applicable.

Off balance sheet arrangements

Post balance sheet events (Section 32 disclosures)

Accrual for pension liabilities (ROI only)

Impairment of all types of fixed assets or any reversals

Average number of employees employed during the year

Disclosure of a change in estimate – reason for same and the impact (applicable to ROI only)

Auditors remuneration for audit of company only (UK only)

In appendix C, OmniPro has provided examples of disclosures which will meet the above requirements.

NOTE: THE ABOVE ARE THE MINIMUM REQUIREMENTS. A small entity is encouraged to provide the disclosures stated in Section 1AD.1 as detailed above in order to allow financial statements to show a true and fair view, these are:

 

Information to be presented in the statement of financial position

Extract from FRS102: Section 1A.12-1A.13

 1A.12 A small entity shall present a statement of financial position in accordance with the requirements for a balance sheet set out in either Part 1 General Rules and Formats of Schedule 1 to the Small Companies Regulations or Part 1 General Rules and Formats of Schedule 1 to the Small LLP Regulations.

 1A.13 Guidance on applying these requirements is set out in Appendix A to this section, which shall be applied by a small entity.

 OmniPro comment

 See appendix A for our comments in relation to same. See example of the formats below on the face of the balance sheet. Note a small company can continue to apply the rules for medium and large entities in CA 2006 (for UK entities) or CA 2014 (for ROI entities) if it wishes.

 

Extract from the Balance Sheet At 31 December 2015

 

Extract from FRS102: Section 1A.14-1A.15

 1A.14 A small entity shall present its profit or loss for a period in an income statement in accordance with the requirements for a profit and loss account set out in either Part 1 General Rules and Formats of Schedule 1 to the Small Companies Regulations or Part 1 General Rules and Formats of Schedule 1 to the Small LLP Regulations.

 1A.15 Guidance on applying these requirements is set out in in Appendix B to this section, which shall be applied by a small entity.

 OmniPro comment

The FRC amendments in July 2015 allows entities to layout the income statement in line with IFRS’s format. Entities can choose whichever layout it likes.

Voluntary preparation of consolidated financial statements

Extract from FRS102: Section 1A.21-1A.22

 1A.21 A small entity that is a parent entity is not required to prepare consolidated financial statements.

 1A.22 If a small entity that is a parent voluntarily chooses to prepare consolidated financial statements it:

  1. shall apply the consolidation procedures set out in Section 9 Consolidated and Separate Financial Statements;
  2. is encouraged to provide the disclosures set out in paragraph 23;
  3. shall comply so far as practicable with the requirements of Section 1A as if it were a single entity (Schedule 6 of the Small Companies Regulations, paragraph 1(1)), subject to any restrictions or exemptions set out in legislation; and
  4. shall provide any disclosures required by Schedule 6 of the Small Companies

OmniPro comment

 It is clear the consolidated financial statements can be prepared where the group meets the threshold requirements for a small company. The accounting to be adopted is that stated in Section 9-Individual and Separate Financial Statements which would also incorporate Section 19-Business combinations and Goodwill, Section 14-Investment in Associates and Section 15-Investment in Joint Ventures. In the Republic of Ireland Schedule 4A of the Companies (Accounting) Act 2016 should be applied when it is enacted.

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