Transition to FRS 102 – An Opportunity for Revaluation

We have finally made it to the last in our series of blogs on accounting standards changes.  As mentioned in our previous blog, transition for a small company from FRSSE to FRS 102 gives rise to an opportunity! (We like them!).  On moving over to the new standard, there is a one-off chance to revalue fixed assets to their fair value (generally market value), freeze this and take it as the deemed cost into the new regime.  You may already be aware that revaluation, as opposed to cost less depreciation, has been an option for small companies in the past but there is a difference…. If your accounting policy is to hold assets at valuation then you have to regularly revalue and this is what puts people off – there is a trade off between wanting a strong balance sheet which is more representative of the true value of the assets of the company, and the added work of regularly having to revalue all the assets in question.  Equally, all assets of a certain class need to be treated the same way currently (i.e. held at valuation). 

This is where the opportunity to revalue on transition gets a little more interesting……  Firstly, revaluing on transition does not affect the accounting policy of the company, it is a one-off – therefore there is no need for revaluations going forward, and depreciation will be charged in the future on the  “deemed cost”.  Secondly, this can be applied to a single asset, cherry-picked single assets, a whole class, or all assets – it’s entirely flexible!  So in reality you could have one large piece of machinery that has a real value in excess of that shown in the accounts, and you can simply revalue that one asset on transition.  The value of plant and equipment should be the market value determined by appraisal; the accounting standard does not dictate that this needs to be a professionally qualified valuer, and therefore could be undertaken by the director.  However, the standard does say that the value of land and buildings would normally be determined by a qualified valuer.

So what are the implications of this on the accounts? 

Firstly there will be an up-lift in the balance sheet for the difference between the value in the accounts for the asset now, and the re-valued amount.  This will be shown on the balance sheet as a reserve but it is not distributable, i.e. dividends cannot be paid out of it, as it is not realised profit.  Additionally, there will also be deferred tax that will need to be provided on the revaluation, which will be a reduction in the balance sheet, coming out of the non-distributable revaluation reserve.  The deferred tax will be based on the estimated corporation tax cost if the asset was sold at the re-valued amount, which will take into account the indexation allowance (an allowance given to companies to remove the effect of inflation from the tax charge).

From the date of transition, the depreciation charged will be on the “deemed cost” which is higher than the original cost and as a result, the depreciation charge each year will be higher than it was previously (or if the revaluation had not taken place).  This means the reported profit in the accounts will be lower in the future, which may or may not be an issue, depending on the business.  It will have no effect on taxable profits as depreciation is not included for tax purposes.  Also, it will not affect distributable profits as the additional depreciation charge as a result of the revaluation will be transferred between distributable and non-distributable profits – this means that the amount of profit available for distribution as a dividend will be the same with or without a revaluation.

This is only available for companies preparing small or medium accounts under FRS 102, not micro accounts under FRS 105 as valuation is explicitly not permitted; this could therefore, be one of the deciding factors in the small vs. micro decision.

If you think that this could be of benefit to your company, please contact us!  And start to think now what the value of the assets in question are – this is an adjustment that would be applied retrospectively, and therefore it is the value at 2 years prior to the first year end under the new standard that is key.  For small companies, if you have a December year end, your first year under the new standard would be 31 December 2016, so it’s the valuation at 31 December 2014 that is required.  If you have a June year end, your first year under the new standard would be 30 June 2017, and you would need the valuation of the asset(s) at 30 June 2015.

We have finally made it to the end of our series of blogs on the forthcoming changes in accounting standards and company law.  We will be discussing these changes with our clients over the coming months on a one-to-one basis so that they can all make informed decisions on what is the most appropriate path for their companies, but it you have any questions in the mean time, please do not hesitate to get in touch on 0116 242 3400.

Katie Kettle, Technical Manager 

Micro or Small… What’s the Difference?

Welcome to our fourth blog in this series.  In our previous blogs, we have highlighted that there are different accounting standards for different size companies, so the accounts will look different.  But what does this actually mean for your accounts?  Remember, companies that qualify as micro have the option of preparing micro accounts, but they don’t have to! There are a number of reasons why it might be more appropriate for a micro company to prepare small accounts.  The key differences between a set of micro and small accounts are explained below.

What the accounts look like

In a set of micro accounts there will be a simplified Profit or Loss Account, a slightly more detailed Balance Sheet and only two notes: Directors’ benefits, advances and guarantees (basically loans to Directors and guarantees on their behalf) and guarantees and other financial commitments.  There are no other reports, such as the Directors’ Report, and there are no other notes (e.g. related parties, splits of debtors and creditors, fixed assets).  Therefore the accounts look a lot smaller than you may be used to.  While it could appear that less work goes in to preparing these accounts, due to them being smaller, the vast majority of time that is spent working on the accounts is actually spent collating the information and coming up with the figures themselves, rather than putting the notes together – so don’t get too excited that having micro accounts prepared will save you a fortune!

How the figures are calculated

The major difference between accounting treatment for micro and small company accounts is the concept of fair value.  What this means in practice is that micro companies do not have the option of recognising their assets at valuation, for example plant and machinery, or more likely, investment property.  The only option for micro companies is to include these assets at cost, less depreciation.  While most companies use cost less depreciation for all of their main fixed assets – motor vehicles, computer equipment etc, it is common for freehold properties and investment properties to be held at valuation (it is actually mandatory for investment properties to be held at valuation in small companies) – this simply is not an option for micro company accounts.

Another difference is that in micro company accounts there is no provision for deferred tax.  This might ring some bells as what we describe as a potential future tax that we have to put in the accounts, but you don’t have to pay it now… Remember? Well in micro accounts, all the confusion with this is gone, as you don’t include deferred tax in the accounts.

So which one is right for my company?

 If your company qualifies as micro, it is likely that micro accounts will be the right thing for you.  However, if you have any assets held at investment currently, when moving over to the new micro standard you would need to remove any revaluation amounts from these assets and bring them back in at cost – this would have the impact of reducing the balance sheet significantly, which is generally not a good idea!

Equally if you have any assets that are on the balance sheet at a value which is significantly less than the market value, if you continue to prepare small accounts there will be an opportunity on transition to FRS 102 to revalue them to fair value and this becomes “deemed cost” – this is not available when preparing micro accounts.  This will be explained in our next blog.

One other thing to bear in mind is that financial institutions (banks and building societies) are accustomed to accounts looking a certain way, and it is not yet clear how they will cope with a reduced set of figures when it comes to finance applications.  Generally, when clients apply for a mortgage we will have to fill out a reference for the lender, detailing figures from the accounts in their prescribed format, but sometimes they do ask for copies of the accounts themselves.  Therefore if you have significant borrowings that may require restructuring or renegotiating in the future, or are planning on borrowing money (be this company debt or personal mortgages), it may be prudent to prepare the fuller set of accounts, being small company accounts, rather than micro accounts.

If you would like to discuss any of the above, please get in touch on 0116 242 3400.

Coming soon….. “Transition to FRS 102 – An Opportunity for Revaluation”

Katie Kettle, Technical Manager

Flat rate VAT explained

Flat rate VAT is an optional scheme available to VAT registered businesses through HMRC.

The Flat Rate scheme is where VAT is charged to customers at the full 20% rate, but, is only paid over to HMRC at a reduced rate.   No input VAT can be claimed back on expenses, unless the expenditure is a capital item costing over £2,000.  The difference between what is charged to customers and what is paid over to HMRC is retained by the business.

The actual rates at which the VAT is paid to HMRC depends on the nature of the trade of the business; these can be found here.  The percentage rate will be agreed upon application to HMRC to join the scheme.

The scheme is predominantly used by the service industry as they tend to be the businesses that have fewer expenses with VAT charged.  This is typically where the largest benefit will be noticed.

In order to join the scheme, your turnover cannot be more than £150,000 (excluding VAT).

Once the Flat Rate Scheme has been successfully applied for, and the fixed rate agreed, there is a 1% discount available if it is the first year of being VAT registered.

Example

If a financial consultant applied for the Flat Rate Scheme, their relevant percentage would be 14.0%.  If this was during the first year of their VAT registration they would benefit from a 1% discount, giving a rate of 13.0% to be applied to the gross sale.

For an invoice issued for £1,000.00 + £200.00 VAT (20%), the amount payable to HMRC would be only £156.00; this would give a £44.00 gain to the business.

If you would like to know more about Flat Rate VAT, and feel your business could potentially benefit from being on the scheme, then please contact us and we will be happy to discuss your options with you.

Brook Lucas

Accounts & Tax

What’s Changing for Small and Medium Companies?

The third in our series of accounting changes blogs focuses on small and medium companies. 

A new financial reporting standard has been introduced, called FRS 102, which replaces all the previous UK standards in issue that were applicable to medium sized companies.  The standard takes effect for accounting periods starting from 1 January 2015.

The main changes relate to the treatment of certain items in the accounts, rather than disclosure.  A set of FRS 102 accounts for a medium company will look very similar to how they look now.

Major changes are ahead for small companies…. from 1 January 2016 small companies will be brought within the scope of FRS 102.  There will be less disclosure by way of notes than for medium companies, and no requirement for a cash flow statement, but the accounts will likely have more disclosure than currently required under FRSSE 2008/2015 (the financial reporting standard for small entities).  For example, the accounts will need to disclose the average number of employees during the year – this has only been mandatory for medium companies previously.  Also there will be a note for remuneration and dividends paid to Directors, and the major thing here is that if there’s a note, it gets filed at Companies House. 

So far (see our blog on Abbreviated Accounts) we have been able to file a set of accounts on to public record that only had a few notes…. when abbreviated accounts disappear, if it’s in a note, it’s going on public record!  There are no two ways about it… this is more disclosure than previously has been required.  Keep your eyes open for our next blog, which will explore the alternative options that might be available, and what might be the right thing for your company.

There are also changes coming in how we treat certain items in the accounts, under FRS 102.  In the coming months we will be asking our clients about their holiday year end.  Inevitably they are going to think that’s a little odd, but there is method behind our seeming madness!  Going forward (where the figures justify) an adjustment will be required in the accounts for holiday pay – either if staff have not taken the holiday entitlement they are allowed to, on a pro rata at the accounts year end, or it falls the other way.

Other changes are that deferred tax will be required on revaluations, both of investment properties and property, plant and equipment.  This has never been required before, unless there was a binding agreement to sell the asset in question.  For some companies, this could have a significant impact on the balance sheet.  We will be talking to clients who this may affect when preparing their accounts over the next few months, but if this is something that concerns you, please do get in touch.

Those that qualify as a micro company will have the option of preparing micro accounts (under a different accounting standard, called FRS 105).  Keep your eyes peeled for our next blog, which will compare the accounting standards for micro and small companies!

If you have any questions on the above, please contact us on 0116 242 3400.

Coming soon….. “Micro or Small… What’s the Difference?”

Katie Kettle, Technical Manager