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