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EU Accounting Directive in the UK: between a fine tuning and a revolution

The UK Financial Reporting Council (FRC) has proposed amendments to the UK and Irish accounting standards in the lead up to the implementation of the EU Accounting Directive (the Directive), a move welcomed by accounting business leaders.

Published in June 2013, the Directive introduced minimum legal requirements for statutory accounts in the EU, including a range of thresholds for small companies. The Directive also requires the simplification of accounting requirements for the very smallest businesses in a bid to drive growth across the EU.

The FRC's proposals, which are out for consultation until 30 April 2015, are intended to be effective for accounting periods beginning on or after 1 January 2016 with early application permitted.

The most striking change under the proposals is the introduction of a new category for the UK's smallest companies under the "micro-entities" label.

The proposals also include the phasing out of the Financial Reporting Standard for Smaller Entities (FRSSE), a new accounting standard for micro-entities, new recognition and measurement requirements for other small companies, and the introduction of greater flexibility in profit and loss accounting under FRS 101, permitting the use of IFRS-based presentation requirements such as those employed for group accounts.

FRC executive director of codes and standards Melanie McLaren said the proposals supported the implementation of the new accounting Directive in the UK and the republic of Ireland. "They simplify reporting for some entities and are intended to assist the directors of small entities in applying their judgement to the new presentation and disclosure requirements of the Accounting Directive," she explained.

The FRC proposals provide a consistent framework for reporting by all entities in the UK and the Republic of Ireland, McLaren continued: "Building on the legal framework and proportionately tailored to the size of the entity and users' information needs."

Baker Tilly head of financial reporting Danielle Stewart described the proposed changes as "quite revolutionary" and added they "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."

Industry comment
Speaking to IAB, Grant Thornton UK head of UK GAAP reporting Robert Carroll countered: "I think revolutionary is a bit of a strong word, the FRC has gone back to the idea that the FRSSE started off with: the same accounting as big companies, but with reduced disclosures. So, actually, in a way for small companies that are not micros it's almost a full circle back to how the FRSSE started."

Echoing McLaren's comments, Carroll acknowledged the FRC's efforts to develop a proportionate regime. "It's the simplest things for micros, then you have a bit more for non-micros, then more for large companies and, if you've got publicly traded companies, they will do IFRS; that is all very much proportionate to the size and complexity of the business and also the readership of its accounts," he said.

All in all, he concluded: "It's in-between a fine tuning and a revolution."

For PwC senior technical partner Peter Hogarth, depending on who you are, the changes could well be seen as revolutionary, as they see the creation of a whole new category of company, the so called micro-entity.

At the same time, however, Hogarth remained slightly sceptical.

"These micro companies can produce sets of accounts that are very, very simple indeed," he explained to IAB. "If you are a person in charge of such a company you might think that it is very helpful to you, it reduces the regulatory burden, it makes life easier and that's a good thing, but if you are someone reading those accounts and relying on the information therein, they're pretty much useless."

There is very little in them in terms of information, he argued. "It is quite an abridged set of accounts."

For those businesses which fall under the category of small, but are too big to be considered micro-entities, Hogarth said the proposed changes also bear important consequences.

"The FRSSE is going to be abolished and replaced by a new chapter of IFRS 102," he said. "It might appear more burdensome for companies, but on the other hand their accounts will reflect the economic reality they are dealing with."

In fact, Carroll suggested such changes might actually prompt business-owners to think twice about dabbling in complex financial instruments.

"I actually think it will make those companies think about what they are doing by actually engaging with these instruments," he said. "It may make the directors think a bit more about the consequences of what they're doing."

For small companies, the directors still have to apply some thought and determine whether enough information has been given for the accounts to show a true and fair view, Hogarth continued.

In micro companies, conversely, for the preparers of accounts the regime is reasonably simple.

"The worry is if you happen to grow, so you're not a micro anymore, you've got to learn a whole new regime," Hogarth explained. "You might need to speak several different accounting languages, the analogy would be that it's all English, but there are quite a few different accents out there."

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