FRS 105 The micro-entities regime 18 April 2019

© ICAEW 2019

FRS 105 The micro-entities regime – all you need to know

18 April 2019

Introduction

Sarah Dunn

Technical Manager

ICAEW

Peter Herbert

Director

Insight Training

Today’s presenter

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Recap on eligibility

Transition to/from FRS 105

Primary statements/disclosure notes

Frequently asked questions

Auditing micros

Questions

Contents

Small/Micro limits

Micro Small

Turnover £632K £10.2M

Gross assets £316K £5.1M

Employee numbers 10 50

‘Deemed true

and fair’

True and fair

Barrow Limited

Barrow Limited is a family owned property company which has been

applying FRS 102 Section 1A.

It wants to transition to FRS 105 from p/c 1 July 2018.

Poll – Have you done an FRS 102 to FRS 105 transition?

Key considerations

‘Ineligible’?

Charities

Group companies

Investment undertakings

Thresholds breached?

2 out of 3

Determining turnover

Determining total assets

Determining employee numbers

‘Two year rule’?

Works in your favour on the

way up!

Works against you on the way down!

Applying thresholds

• ‘Amounts derived from provision of goods or services falling within … ordinary activities’

Turnover

• Number of persons employed under contracts of employment

• Monthly average (not FTE basis)

Employee numbers

Investment undertakings

(a) Undertakings the sole object of which is to invest their funds in various securities, real property and

other assets, with the sole aim of spreading investment risks and giving their shareholders the benefit of the results of the management of their

assets

(b) Undertakings associated with investment undertakings with fixed capital, if the sole object of

those associated undertakings is to acquire fully paid shares issued by those investment undertakings without prejudice to point (h) of Article 22(1) of

Directive 2012/30/EU

Scenario

‘I act for a charity which has a very small trading subsidiary. Subject to

size criteria, can the subsidiary apply FRS 105?’





Auditing micros

Questions

Contents

Transition timeline

1.07.17 30.06.18 30.06.19

Transition

date

Comparative

balance sheetFirst balance

sheet

Restate BS only

under FRS 105

Restate P&L &

BS

under FRS 105

Prepare P&L &

BS under FRS

105

Barrow Ltd Balance Sheet – 1 July 2017Fixed assets FRS 102

Tangible assets 246

Investment properties 8,500

8,746

Current assets

Stocks 980

Debtors 132

Cash at bank & in hand 1,240

2,352

Creditors due < 1 year 983

Net current assets 1,369

Creditors due > 1 year 5,400

Deferred tax provision (investment property) 110

Deferred tax provision (accelerated capital allowances) 30

Net assets 4,575

Capital & reserves

Called up share capital 50

Profit & loss - distributable 2,135

Profit & loss - non distributable 2,390

Equity shareholders' funds 4,575

Background information

The company has two investment properties. Both were purchased

on 1 July 2011. One of the properties was sold in 2017/18.

£000

Valuation 30.6.17 8,500

Cost 6,000

Land element 1,500

Residual value -

Net depreciable amount 4,500

Total life 50 years

Annual depreciation 90

Depreciation to transition date 540

Net book value at transition

(£6,000K - £540K)

5,460

FRS 105 transition journals

Transfer of investment property

• Dr PPE £6M

• Dr P&L £2.5M

• Cr IP £8.5M

Remove deferred tax

• Dr DT provision £140K

• Cr P&L £140K

Depreciation• Dr P&L £540K

• Cr Acc Depreciation £540K

Barrow Ltd Balance Sheet – 1 July 2017Fixed assets FRS 102 Adjustments FRS 105

Tangible assets 246 +6,000-540 5,706

Investment properties 8,500 -8,500 -

8,746 5,706

Current assets

Stocks 980 - 980

Debtors 132 - 132

Cash at bank & in hand 1,240 - 1,240

2,352 2,352

Creditors due < 1 year 983 - 983

Net current assets 1,369 1,369

Creditors due > 1 year 5,400 - 5,400

Deferred tax provision (investment property) 110 -110 -

Deferred tax provision (accelerated capital allowances) 30 -30 -

Net assets 4,575 2,900 1,675

Capital & reserves

Called up share capital 50 50

Profit & loss - distributable 2,135 +30-540 1,625

Profit & loss - non distributable 2,390 +110-2,500 -

Equity shareholders' funds 4,575 2,900 1,675

Residual value

‘The estimated amount that an entity would currently obtain from disposal of an asset, after deducting the estimated

costs of disposal, if the asset were already of the age and in the condition expected at the end of its useful life.’

FRS 105 Glossary of Terms

Investment property at transition (para 28.10 c)

i)• Reverse gains/losses previously recorded in equity to determine

original cost

ii)• Separate cost of land from buildings

iii)• Estimate depreciated cost at transition by recognising acc’d dep’n

based on UEL of most significant component

iv)• Allocate depreciated cost in iii) to other major components … on a

reasonable and consistent basis

v)

• Amount of depreciated cost unallocated should be allocated to the most significant component


‘A possible basis of allocation is to multiply the current cost to replace the component by

the ratio of its remaining useful life to the expected useful life of a replacement

component.’ (Para 28.10c iv)


Barrow will replace internal fittings in 2 years’

time at a cost of £100K. The fittings will have

a five year life.

£000 2018

depreciation(restated

comparative)

Carrying value of fittings (£100K x 2/5) 40 20K

Carrying value of land 1,500 -

Carrying value of buildings 3,920 89K

Total carrying value 5,460 109K

Transition timeline

1.07.17 30.06.18 30.06.19

Transition

date

Comparative

balance sheetFirst balance

sheet

Restate BS only

under FRS 105

Restate P&L &

BS

under FRS 105

Prepare P&L &

BS under FRS

105





Auditing micros

Questions

Contents

Example FRS 105 P&L account

£

Turnover 490,766

Other income 257

Cost of raw materials and consumables (328,205)

Staff costs (136,392)

Depreciation and other amounts written off assets (4,435)

Other charges (1,700)

Tax (213)

Profit or loss 20,078

The profit and loss account does not have to be filed at

Companies House – only the balance sheet and additional

information

Example FRS 105 Balance sheet

£

Fixed assets 115,082

Current assets 8,178

Prepayments and accrued income 830

Creditors: amounts falling due within one year (54,033)

Net current (liabilities) (45,025)

Total assets less current liabilities 70,057

Creditors: amounts falling due after one year (40,740)

Provision for liabilities -

Accruals and deferred income (1,528)

27,789

Capital and reserves 27,789

Additional disclosures

1. Directors’ benefits: advances, credits & guarantees

During the period a director received an interest free loan of £5,000. The amount

outstanding at the year-end, which is repayable on demand and classified in debtors, was

£5,000 (2017: £NIL)

2. Guarantees and other financial commitments

The company had guarantees and other financial commitments of £5,000 at 31 December

2018 (2017: £NIL).

3. Average number of employees (including directors)

During the year the average number of employees was 6 (2017: 6).

4. Off balance sheet arrangements

At 31 December 2018 the company had total commitments under non cancellable

operating leases over the remaining life of those leases of £7,500 (2017: £10,000)

Additional disclosures

5. Company information

The company is registered in England and its registered number is 5675678. The company

is a private company limited by shares. Its registered office is at 76 Newton Road,

Stockport, Cheshire, SK2 4RT.

These accounts have been prepared in accordance with the micro-entity provisions as set

out in Part 15 of the Companies Act 2006.

For the year ended 31 December 2018 the company was entitled to audit exemption under

s477 Companies Act 2006 and no notice has been deposited under s476 Companies Act

2006. The directors acknowledge their responsibilities for complying with the requirements

of the Companies Act 2006 with respect to accounting records and the preparation of

accounts.

Signed on behalf of the board of directors

Mrs C Jackson

Director

Approved by the Board: 1 June 2019

Filing micro-entity accounts

Option to ‘fillet’ available to micro-entities

All FRS 105 notes will get filed

No requirement in law for formal approval

Care re balance sheet statements (‘delivered’)

Poll – Which of the following statements is true about FRS 105 compared to FRS 102?





Auditing micros

Questions

Contents


1. Should I be encouraging clients to ‘overdisclose’ to

inform a true and fair view?

FRS 105 accounts are ‘deemed true

and fair’

Over-disclosure is fine – disclose

everything required at the next level up

2. Is there such a thing as abridged micro-entity

accounts?

No!


3. There are material errors in the accounts of a new client I’ve picked up.

What do I do?

PPA for material (not fundamental)

errors

Additional disclosure needed?

4. Can we ignore all the ‘financial instruments’ stuff

under FRS 105

Concept exists but accounting is more like FRSSE

e.g. non interest bearing loans

and derivatives

Key differences (105 v 1A)

Deferred tax Not recognised Fully recognised

Tangible assets No revaluations Cost or valuation

Accounting policies No options Areas of choice

Investments Cost (less impairment) FVTPL

Non-market rate loans Transaction price Amortised cost

Derivatives Cost (often zero) FVTPL

Share-based payments When shares issued‘Proper’ share option accounting

FX denominated transactions Use forward contract rate Use spot rate

Intangibles on combination Wrap up with goodwill Recognise separately

DB pension schemesAccount for contributions paid in P&L

‘Proper’ DB accounting

34

FRS 105 FRS 102 (1A)


5. FRS 105 is rubbish. I’m not even having the

conversation with clients. Is that ok?

Maybe – but do you owe it to them?

FRS 102 Section 1A ‘file what you

prepare’ regime can be sensitive

6. Can micro sized LLPs apply FRS 105?

Yes – since p/c 1 January 2016

FRS 105 update reflects relevant statutory formats

Limited Liability Partnerships

Published July 2015

Adapted for LLPs in May 2016

Effective for p/c 1 January 2016

Applies to entities that qualify as micro-entities, and choose to apply the micro-entities regime

Micro-sized LLPs

My client is a micro LLP applying FRS 105 in its

31 December 2018 year-end accounts. It has

three corporate members. One corporate

member (Member A) made a market rate loan to

the LLP during the current year. The others

(Members B and C) made non-market rate loans.

What are the accounting and disclosure

implications?

Are HMRC accepting of micro-entity accounts?

ICAEW micro-entities factsheet:

“HMRC has confirmed to ICAEW that it will accept

calculations of trading profits for income tax purposes prepared

under FRS 105 if the size criteria have been

met.”

HMRC November 2018 webinar

Large numbers of entities

clearly exceed micro limits ….

…but still submit FRS 105 accounts

(as many as 3,000!)





Auditing micros

Questions

Contents

FRS 105 accounts can be audited –though consider

motivation

Audit report adaptation needed as not ‘fair presentation framework’ (revised

ISA 210)

Agree additional accounting

disclosures? Going concern?

Also consider tailoring of letter of

engagement and letter of

representation

Editing needed –‘other information’;

reports by exception

No audit paragraph where filleted!

Auditing FRS 105 accounts

Example from ICAEW helpsheetO

pin

ion

para

gra

ph

In our opinion, the financial statements are in all material respects:

- properly prepared in accordance with United Kingdom Generally Accepted Accounting Practice, specifically FRS 105; and

- prepared in accordance with the requirements of the Companies Act 2006 as applied to micro-entities.

Therefore under section 495(3A) of the Companies Act 2006, in our opinion the financial statements give a true and fair view of the state of the company’s affairs as at [date] and of its [profit / loss] for the [year / period] then ended.

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VAT Changes in 2015

Audio problems?

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Download resources here

FRS 105 resourcesicaew.com/frs105

• FRS 105 updated: Mirco-entities’ Accounts FAQ

• Micro-entities filing option – FAQ

• Micro-entities accounts: Moving to FRS 105

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FRS 105 The micro-entities regime 18 April 2019