UK GAAP frequently asked questions (part 2) – disclosures
One of the key simplifications for small entities reporting under section 1A of FRS 102 is the reduced number of disclosures required, compared to both full FRS 102 and the old FRSSE.
However, there is still judgement required in the extent and nature of disclosures made – in this article we look at some of the disclosures that are causing difficulties in practice.
Should directors’ remuneration and dividends be disclosed as related party transactions under FRS 102 section 1A?
Under FRS 102 section 1AC.35, the following disclosures are required:
'Particulars must be given of material transactions the small entity has entered into that have not been concluded under normal market conditions with:
(a) owners holding a participating interest in the small entity;
(b) companies in which the small entity itself has a participating interest; and
(c) the small entity’s directors [or members of its governing body].'
The standard goes on to state:
'Although disclosure is only required of material transactions with the specified related parties that have not been concluded under normal market conditions, small entities disclosing all transactions with such related parties would still be compliant with company law.'
'Transactions with directors, or members of an entity’s governing body, include directors’ remuneration and dividends paid to directors.'
This is an area that has caused much debate because related party disclosures must now be filed at Companies House (this was previously not required under the abbreviated accounts formats).
The issue comes down to how to define ‘normal market conditions’ for a small entity. In some cases, it may be relatively easy to conclude that the transactions have taken place under normal market conditions – for example, if a director undertakes a functional role within the business and is paid a salary commensurate with what would be paid if an external individual were to take on the role.
However, it is more likely that the split between amounts paid as directors’ remuneration and dividends is driven by other factors such as the tax impact. It may be possible to argue that this is standard practice in small owner-managed businesses, therefore as long as the amounts are within a normal range for this type of entity, it could be argued that the transactions are ‘under normal market conditions’.
As there is no definitive position as yet, this remains a matter of judgment, it is important that transactions with directors are assessed on a case-by-case basis, and that any unusual circumstances are taken into consideration e.g. large pension contributions, significant variations year-on-year.
It is worth noting also that the intention of the legislation that introduced the new small company accounting requirements was to deregulate, therefore it seems unlikely that it would require small companies to file more information than previously.
What accounting policy disclosures should be made under FRS 102 section 1A?
Under paragraph 1AC.3 of FRS 102, the following is required to be disclosed:
'The accounting policies adopted by the small entity in determining the amounts to be included in respect of items shown in the statement of financial position and in determining the profit or loss of the small entity must be stated (including such policies with respect to the depreciation and impairment of assets).'
Accounting policy disclosures are covered by section 8.5 of FRS 102, which refers to a ‘summary of significant accounting policies.’ The key is therefore to focus on the principal, or significant accounting policies, and not necessarily to reproduce all of the policy disclosures produced by your accounting software.
Disclosures are only required in relation to significant transactions/balances – for example, if the only financial instruments a company has are straightforward debtors, creditors and cash at bank and in hand, it is unlikely that a long and detailed financial instruments note is required.
Significant accounting policies should be tailored to the specific circumstances of the company – this provides more useful information than simply using the wording from the standard or accounting software. Revenue recognition is almost always a key accounting policy and should be tailored so that it provides company-specific information.
Section 8 of FRS 102 also refers to the disclosure of significant judgements and estimation uncertainty – these should also be disclosed by small entities reporting under section 1A where they are necessary to provide a true and fair view, and can be included in the summary of accounting policies or in the relevant note disclosure.
Should the encouraged disclosures under Appendix D of FRS 102 section 1A be included as standard?
Appendix D includes the following:
'Where relevant to its transactions, other events and conditions, a small entity is encouraged to provide the following disclosures:
(a) a statement of compliance with this FRS as set out in paragraph 3.3, adapted to refer to Section 1A;
(b) a statement that it is a public benefit entity as set out in paragraph PBE3.3A;
(c) the disclosures relating to going concern set out in paragraph 3.9;
(d) dividends declared and paid or payable during the period (for example, as set out in paragraph 6.5(b)); and
(e) 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 35.13.'
FRS 102 was amended in December 2017 as a result of the FRC’s triennial review process, with the resulting changes effective for accounting periods beginning on or after 1 January 2019 (early adoption is permitted). As a result of the amendments, Appendix D will be re-named as Appendix E (a new appendix is added for small entities in the Republic of Ireland).
The new Appendix E amends part (c) above as follows:
'the disclosures relating to material uncertainties related to events or conditions that cast significant doubt upon the small entity’s ability to continue as a going concern as set out in paragraph 3.9'.
These encouraged disclosures should be assessed on a case by case basis and included where it is judged necessary in order to give a true and fair view.