Preparing Financial Statements Under FRS 105 and the Micro Companies Regime
Overview
The Companies (Accounting) Act 2017 commenced on 9th June 2017. It introduced the concept of the Micro Companies Regime which is contained in Section 280D-280E of the Companies Act 2014.
This allows companies to prepare financial statements under FRS 105 by applying the requirements of the micro companies regime in the Companies Act.
Which companies can avail of FRS 105 and the micro companies regime?
A company qualifies for the micro companies regime if it fulfils at least two of the three qualifying conditions listed below:
- In relation to its first financial year; or
- In relation to its current financial year and the preceding financial year; or
- In relation to its current financial year and it qualified as a small/medium company in the preceding financial year; or
- In relation to the preceding financial year and it qualified as a small/medium company in the preceding financial year
| Small Co | |
| Turnover | ≤ €700,000 |
| Balance Sheet Total | ≤ €350,000 |
| Employees | ≤10 |
Note 1: Exception even where the above thresholds are met:
S.280D(4) of CA 2014 excludes the following companies from applying the MCR and hence FRS 105:
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)); or
5. an investment undertaking; or
6. a financial holding undertaking; or
7. a holding company that prepares consolidated financial statements; or
8. a subsidiary that is included in the consolidated financial statements of a parent for that year; or
9. any company excluded from the small companies regime; or
10. a charity (Note not excluded from micro entities regime under company law however not encouraged under FRS 105); or
11. a company that prepares financial statements under FRS 102/IFRS
What are the key points?
If the company’s results are included in the parent’s consolidated financial statements FRS 105/MCR cannot be availed of.
Where consolidated financial statements are prepared, FRS 105/MCR cannot be availed of.
Once requirements of MCR are met and the disclosures required under the MCR are met the financial statements are presumed to show a true and fair view. No further disclosures need to be considered.
A holding company that does not meet the conditions of a small group as stated in Section 280B of CA 2014 cannot apply the micro entities regime.
Company has the choice to apply the micro entity regime, the company does not have to apply it.
Where the micro entity regime is applied the company must prepare the financial statements in accordance with FRS 105 ‘The Financial Reporting Standard Applicable to the Micro-entities Regime.
No requirement for a disclosure in the financial statements detailing any transition adjustments from a previous GAAP to FRS 105.
The disclosures under the MCR are the minimum disclosures. Additional disclosures can be provided but if they are provided they must be in line with the requirements of the small companies regime.
No requirement for a directors report.
No requirement to disclose directors remuneration (under Section 305-S306 CA 2014) or transactions entered into with directors (S.309 CA 2014) other than for loans/quasi loans given by the company to the directors, credit transactions or guarantees entered into for the benefit of directors (as required under S.307-308 CA 2014).
No requirement to disclose total wages and salaries or average number of employees as previously required under Section 317 CA 2014.
No requirement to disclose details of investments held where a significant interest is held as previously required under company law.
The transition date to FRS 105 is the beginning of the comparative period presented in the first set of FRS 105 financial statements.
Under FRS 105:
- assets are not permitted to be carried at fair value or revalued amounts;
- all amounts on the balance sheet must be recognised at historic cost;
- development expenditure must be expensed;
- investment property must be held at cost and depreciated;
- no deferred tax is permitted to be recognised.
- Requirement to accrue for holiday pay
- Borrowing costs to be expensed
- Default useful life of no more than 10 years where a life cannot be determined
- Lease incentives to be released over the full life of the lease
- Equity settled share based payments not recognised until issued
- Goodwill impairments cannot be reversed
What do accountants need to do?
Review their client listing to assess which companies can apply FRS 105 and plan the practice schedule accordingly. When reviewing the list assess whether companies which have assets held at fair value/revaluation will meet the requirements of a micro company once these revaluations/fair values have been stripped out.
Advise clients of the additional choices available with regard to accounting standards (FRS 105/Section 1A FRS 102) and the benefits this will provide with regard to the reduced disclosure requirements.
Accountants that have prepared financial statements in accordance with the FRSSE ‘effective 1 January 2015’, FRS 102 or old GAAP if still applicable for the previous period end will need to assess the transition adjustments required on transition to FRS 105 to derecognise certain assets and liabilities due to the simplistic nature of this standard.
Advise clients of the benefits and drawbacks of adopting the micro companies regime so that directors of companies really appreciate the implications of choosing FRS 105 and the micro companies regime.
Some of the implications are:
– If the company increases in size the company will then no longer meet the requirements of the micro companies regime and as a result will have to go through the pain of transitioning to a new accounting standard all over again;
– Given the simplicity of the financial statements, for an external party reviewing these financial statements, they may not provide enough detail e.g. banks, potential customers.
– The company’s balance sheet only shows cost and does not allow entities to show fair values.
– Does the company wish to capitalise development costs (some companies do)?
– If the results are included in the parent company consolidated financial statements FRS 105 financial statements cannot be prepared.
– The balance sheet of the company may be significantly impacted as a result of a revaluation policy not being permitted. Possibility it could impact banking covenants.
Be aware of the proposed exemptions from the disclosure of directors remuneration under S.305, 305A, 306 and transactions and arrangements with directors under S.309 (other than amounts owed by directors to the company as this will still require disclosure under S.307 & S.308) for companies that qualify for the micro companies regime therefore reducing the amount of information visible to the public.