New regulations are in force which introduce accounting exemptions which ‘micro-entities’ can choose to adopt. The new regulations allow for statutory accounts to be produced which include much reduced disclosure.
In order to qualify as a micro entity two out of three of the following size criteria must be met:
- Turnover: not more than £632,000
- Balance sheet total: not more than £316,000
- Average number of employees: not more than 10
Certain entities are not able to apply the micro entity exemption, most notably charities and LLPs, although a number of other entities are specifically excluded and there are other considerations when a company is a member of a group which need to be taken into account.
The exemptions allow qualifying companies to prepare financial statements which do not include the majority of the notes currently included in a full set of financial statements, along with slightly revised formats for the profit and loss account and balance sheet.
It should be noted, however, that the underlying figures must still be prepared in accordance with underlying accounting standards in full under the new regime, and HM Revenue & Customs will also expect this when calculating taxable profits. As such the new regulations may not have a significant impact on the effort required to prepare a set of financial statements.
There is only one notable change that will affect the figures in a set of financial statements, which is that revaluation of any fixed assets or current asset investments is not allowed. This includes investment properties which existing standards require to be revalued each year. Any companies which currently adopt a policy of revaluation would need to restate these assets to cost less depreciation.
This could cause problems for investment property companies as it could result in a reduction in net assets, possibly a significant one. As many such companies are reliant on external finance it will be crucial to assess the impact on any covenants before choosing to adopt.
Micro-entities need to be aware of the benefits and disadvantages of adoption:
- Choice – the regulations provide a new option when it comes to preparing financial statements which may allow for limited administrative savings.
- Reduced disclosure – however, the regulations do not give any significant benefit compared to abbreviated accounts which are currently prepared for most small companies.
- Reduced transparency – the limited disclosures make the financial statements less informative for both management and third parties (e.g. funders and credit rating agencies). Additional costs may be incurred to produce information in a format to satisfy these requirements.
- There are concerns that the reduced disclosure and potential removal of accounting expertise could lead to a degradation in the accuracy of the underlying financial information which could lead to future problems and costs, for example due to tax inspections.
- Lack of fair value accounting options and potential impact on funding arrangements.