by John McCarthy Consulting Ltd. | Jul 15, 2024 | Blog, News
Below we compare the differences between FRS 102 (focusing on ‘small’ entities) and FRS 105 (‘micro’ entities) along with some other factors to consider when deciding whether to prepare accounts using the ‘small’ or ‘micro’-entities regime. The ‘small’ and ‘micro’ entities regime thresholds have changed recently. See our separate blog here about these changes.
An entity entitled to and choosing to apply the ‘micro-entities’ regime must apply FRS 105 The Financial Reporting Standard applicable to the Micro-entities Regime. The micro-entities regime is optional and therefore, when preparing their financial statements, entities may wish to consider the differences between applying FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland and FRS 105 when deciding on the most suitable regime. The links given here are to the January 2022 versions of FRS 102/105.
New editions of both standards are expected to be published in the summer of 2024, effective for accounting periods commencing on/after 1 January 2026.
Users of the accounts
The most important aspect to consider is the needs of users. Different stakeholders will have different expectations. For example:
- Suppliers/trade creditors
- Banks and
- Credit rating agencies may require more information than is provided by micro-entity accounts.
The level of information required by FRS 105 is very limited when compared to other standards, so be careful to advise your client about the implications for making a good impression on such stakeholders where that might be important.
Future growth plans
An entity that is entitled to either the ‘small’ or ‘micro-entities’ regime but is close to the size limits should consider carefully any decision on which regime to adopt. This is particularly relevant for a micro-entity if the business is expected to grow to the extent that it will be necessary to switch to the small entities’ regime in the near future. Transition from FRS 105 to FRS 102 Section 1A will involve significant changes to the presentation of the accounts and the accounting policies applied (see below).
Accounting Differences Between FRS 102 and FRS 105
Outlined below are eleven of the key accounting differences between FRS 102 and FRS 102:
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TOPIC
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FRS 102
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FRS 105
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| Revenue Recognition |
Section 23 completely revised (in the changes published in March 2024) to include a simplified version of the IFRS 15 Five Step Model effective for accounting periods starting 1 January 2026 with early adoption allowed from 1 January 2024.
See our July 2024 webinar on these changes called ‘The Main Changes in Irish GAAP’. |
Section 20 revised in a similar fashion to FRS 102 (in the changes published in March 2024) with the simplified version of the IFRS 15 Five Step Model introduced effective for accounting periods starting 1 January 2026 with early adoption allowed from 1 January 2024. |
| Leasing |
Section 20 is completely revised with the introduction of rules similar to those in IFRS 16, where almost all leases will go on balance sheet, and only certain types of operating lease will remain off balance sheet.
These changes are effective for accounting periods starting 1 January 2026 with early adoption allowed from 1 January 2024. |
No change to the previous regime of only capitalizing finance leases. All operating leases remain as they were before.
See our July 2024 webinar on these changes called ‘The Main Changes in Irish GAAP’. |
| Investment properties |
With the exception of investment property rented to another group entity, a revaluation each year is required, with changes recognised in profit or loss. |
Measured at cost less depreciation and impairment. |
| Property plant and equipment |
Measured at cost less depreciation and impairment but can choose to adopt a revaluation accounting policy for fixed assets of the same class |
Measured at cost less depreciation and impairment. |
| Intangible assets |
Measured at cost less amortisation and impairment but can choose in limited circumstances to adopt a revaluation accounting policy for intangible assets of the same class |
Measured at cost less amortisation and impairment. |
| Development costs and borrowing costs |
These costs can, subject to certain conditions, be capitalised. |
No option to capitalise. Must be expensed to the profit and loss account in the period in which they are incurred. |
| Trade and asset acquisition |
An intangible asset purchased with a business is normally recognised as an asset when separable and arises from a contractual or other legal basis |
An intangible asset purchased with a business must not be recognised separately from goodwill. |
| Financial instruments |
Financial instruments are divided into ‘basic’ and ‘other’ instruments.
The former are mostly measured at amortised cost, the latter mostly at fair value with movements generally recognised in profit or loss.
Entities can instead choose to apply the recognition and measurement requirements of IAS 39 Financial Instruments: Recognition and Measurement and/or IFRS 9.
The exception is directors’ loans which may be measured initially at transaction price. |
No distinction between ‘basic’ and ‘other’ with all financial instruments initially recognised at cost, which will be the transaction price. Subsequent revaluation or measurement of financial instruments at fair value not permitted.
For lending arrangements, simplifications are made in relation to the allocation of interest and transaction costs, and no requirement to calculate an effective interest rate.
Also, there is no requirement to impute a market rate of interest in arrangements conducted at non-market rates. |
| Equity-settled share-based payments |
Recognised at the fair value of the goods or services when received. For arrangements with employees, fair value is measured at the grant date and the expense recognised over the vesting period. |
Not recognised in the accounts until the shares are issued.
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| Foreign exchange forward contract |
Recognised on the balance sheet as a financial instrument at fair value and the associated debtor or creditor retranslated at the year-end rate. Hedge accounting can be applied in certain circumstances. |
When a trading transaction is covered by a related or matching forward contract, the requirement is to use the rate specified in the contract.
If not matched to a trading transaction the cost of the foreign exchange forward contract will be recognised as a financial asset, unless it is not material in which case it will be recognised immediately as an expense in profit or loss. |
| Defined benefit pension plans |
Net interest on the net defined benefit asset or liability is recognised in the profit and loss account, and is calculated with reference to high quality corporate bonds i.e., the same rate is applied to both the plan assets and liabilities. |
Recognition of the surplus or deficit of the plan on the balance sheet not permitted. Agreed funding of deficit must, however, be recognised as a liability. Contributions payable to the plan accounted for as an expense. |
| Government grants |
Government grants can be accounted for using either the performance model or the accruals model. |
Requirement to use the accruals model.
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| Deferred tax |
Based on timing differences |
No deferred tax |
Please see our latest CPD Webinar on The Main Changes in Irish GAAP (recorded July 2024).
See our webinar entitled ‘The Main Changes in Irish GAAP’ on the latest changes to FRS 102 here.
For more on the whole ISQM process for audit firms, please see our ISQM 1 Toolkit on our website here.
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- Letters of engagement and similar templates—Please visit our website here where immediate downloads are available in Word format. A bulk discount is available for orders of five or more items bought together.
- ISQM TOOLKIT, or if you prefer to chat through the different audit risks and potential appropriate responses presented by this new standard, please contact John McCarthy FCA by email at john@jmcc.ie.
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by John McCarthy Consulting Ltd. | Jul 27, 2017 | News
The Companies (Accounting) Act, 2017 came into effect from 9 June 2017. It applies for accounting periods commencing on/after 1 January 2017 but early adoption of certain parts is allowed in Section 14 for accounting periods starting on/after 1 January 2015.
Early adoption of the relevant parts of the Companies (Accounting) Act, 2017 may look attractive, but there are several accounting and company law disadvantages also. Here we look at the pros and cons of adopting this legislation for the financial year commencing 1 January 2016, compared to postponing implementation to a financial year commencing 1 January 2017.
Illustrated below are some of the implications of early versus delayed adoption, for a ‘micro’, ‘small’ and ‘medium’ size company:
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Adopt new rules for accounting period commencing from
1 January 2016
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Keep old rules for accounting period commencing
1 January 2016
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Disclosure
- As best practice, include a note saying that the provisions of the Companies (Accounting) Act, 2017 have been early adopted.
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Disclosure
- Notes to the financial statements would remain silent about the Companies (Accounting) Act, 2017.
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Size thresholds
- Avail of the new ‘micro’ and ‘small’ company thresholds for audit exemption, abridged financial statements filing at the CRO and group consolidation exemption.
- The number of ‘small groups’ that don’t need to have an audit nor consolidate will grow under the new provisions.
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Size thresholds
- Cannot prepare ‘Micro’ company accounts and must follow the old thresholds for ‘small company’ abridged financial statements and the old consolidated financial statements exemption.
- See below for other positive impacts on ‘small’ entities.
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Adopt new rules for accounting period commencing from
1 January 2016
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Keep old rules for accounting period commencing
1 January 2016
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Micro company accounting
- Because the provisions of the Companies (Accounting) Act, 2017 have been early adopted, the Micro Entities Regime under FRS 105 is available to the company (provided it fulfils the ‘micro company’ size criteria) for the YE 31/12/2016, along with the rules in Schedule 3B of the amended Companies Act, 2014 which include:
- Exemption from disclosing in the shareholders’ and abridged financial statements the directors remuneration and directors’ debit and credit loans as set out in Sections 305-309 of the CA 2014.
- Exemption from producing a Directors Report and Statement of Cash Flows in both the shareholders’ and abridged financial statements
- File an abridged balance sheet with the notes only being required if the company has borrowings or guarantees.
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Micro company accounting
- FRS 105 and Micro Companies Regime in Schedule 3B of the Companies (Accounting) Act, 2017 is not available for the YE 31/12/2016.
- Must disclose in the shareholders’ and abridged financial statements the directors remuneration and debit and credit loans as set out in Sections 305-309 of the CA 2014.
- Exempt from producing a Directors Report but must produce a Statement of Cash Flows in both the shareholders’ and abridged financial statements.
- File the abridged financial statements under the unamended CA 2014 which requires more extensive notes than under FRS 105.
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‘Small’ entity Abridged financial statements
- Include all the notes from the Shareholders’ Accounts plus the ‘Statement of Changes in Equity’, and including P&L notes, even though the P&L itself does not get published.
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‘Small’ entity Abridged financial statements
- Retain the old rules for one last financial year so that you don’t have to include all the notes including the P&L notes in the abridged accounts.
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Employee numbers
- There is no longer any need to include the note about employee numbers broken into appropriate categories – this is a new exemption for ‘small’ entities introduced by the Companies (Accounting) Act, 2017.
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Employee numbers
- Need to include the note about employee numbers broken into appropriate categories.
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Adopt new rules for accounting period commencing from
1 January 2016
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Keep old rules for accounting period commencing
1 January 2016
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Fixed assets and reserves
- Drop the comparative expanded note for fixed assets and reserves and similar items in the shareholders’ and abridged accounts.
Statement of Cash Flows
- May exclude the Statement of Cash Flows under Section 1A of FRS 102 due to early adopting the Companies (Accounting) Act, 2017 and use Section 1A of FRS 102.
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Fixed assets and reserves
- Repeat the comparative expanded note for fixed assets, reserves and similar items in the shareholders’ and abridged accounts.
Statement of Cash Flows
- Include the Statement of Cash Flows under FRS 102 (excluding Section 1A) due to not early adopting the Companies (Accounting) Act, 2017.
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Medium companies
- Medium sized companies that early adopt the provisions of the Companies (Accounting) Act, 2017 will no longer be able to abridge their financial statements nor avail of audit exemption. They will also have to disclose their full profit and loss account with profit margins and turnover.
- Medium companies will now also be required to prepare group accounts as the exemption from preparing consolidated financial statements on the basis of size for Irish parent companies has been restricted to the ‘small’ company threshold.
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Medium companies
- Medium companies will retain the old size thresholds.
- Medium sized companies that do not early adopt the provisions of the Companies (Accounting) Act, 2017 will continue to abridge their financial statements and avail of audit exemption for the 2016 financial year.
- This may be of little benefit as when they file their financial statements for the YE 31/12/2017, the 2016 comparative numbers will get disclosed under the new rules.
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For a more detailed analysis of the effects, please call us for a specific consultation.
To hear more about the latest Company Law developments, come to our next CPD course on the topic on Wednesday 29 November 2017.
We also have other CPD courses in November 2017.
Click here for details and booking on all courses.
by John McCarthy Consulting Ltd. | Jul 26, 2017 | News
The Companies (Accounting) Act, 2017 (CAA 2017) came into effect from 9 June 2017. Among other matters, it allows certain types of company called ‘micro companies’ use FRS 105, the Financial Reporting Standard applicable to the Micro-Entities Regime as well as allowing use of Section 1A of FRS 102 for certain types of ‘small’ entity. Similar legislation was adopted in the UK in July 2015.
The new law will have a significant impact for many private Irish companies in relation to audit exemption, financial reporting and disclosure of financial information. The new law may be early adopted by companies for accounting periods commencing from 1 January 2017 but may also be back-dated to accounting periods commencing as early as 1 January 2015. In a later post, we will look at some of the advantages and pitfalls of early adopting certain provisions in the CAA 2017.
Implementation of FRS 105 will mean that certain qualifying micro companies will not have to disclose details of directors’ remuneration, profit and loss account or include a director’s report in their filed financial accounts. Importantly the standard is not available to charities and not for profit entities, regulated entities and groups. It could be used by a ‘micro’ subsidiary within a group, that was being consolidated under FRS 102.
The new company size criteria under the Companies (Accounting) Act, 2017 are:
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‘Micro’
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‘Small’
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‘Medium’
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‘Large’
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Turnover
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Less than €700,000
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Less than €12m
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Less than €40m
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€40m or greater
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Balance sheet total (total assets, ignore liabilities)
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Less than €350,000
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Less than €6m
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Less than €20m
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€20m or greater
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Number of employees
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Less than 10
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Less than 50
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Less than 250
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250 or greater
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To file accounts under FRS 105 companies must satisfy two out of three criteria in the table above for two consecutive years, unless it is the first financial year of the entity.
Meanwhile in the UK, the HMRC have just published a paper on the tax impact of FRS 105. The document confirms that although FRS 105 itself is intended for companies and certain other entities, HMRC (and no doubt likewise the Irish Revenue) will generally accept calculations of profit for unincorporated businesses prepared under FRS 105, if they meet the size criteria to apply FRS 105.
To hear more about FRS 105, come to our next CPD course on the topic as part of the Update for the Busy Accountant on Monday 27 November 2017.
We also have other CPD courses in November 2017. Click here for details and booking on all courses.
by John McCarthy Consulting Ltd. | May 22, 2017 | News
Commencement date
The Companies (Accounting) Act, 2017 was signed into law by the President on Wednesday 17 May 2017 as No 9 of 2017, but as of today Tuesday 23 May 2017, is not yet published as an Act on the Irish Statute Book website – operated by the Attorney General at http://www.irishstatutebook.ie/eli/acts.html. During the Dáil debates on the Bill it was mentioned that the commencement of certain sections of the legislation would be back-dated to periods commencing 1 January 2016 and 1 January 2015 in some cases.
Periods commencing 1 January 2015 is of little use to companies at this stage as most, if not all, have filed their financial statements for the year ended 31 December 2015. Hopefully it will be back-dated at least to 1 January 2016 to allow companies that qualify avail of the new audit exemption and ‘small’ company thresholds as well as the new Micro Entities regime (essentially operated by the use of the FRS 105 accounting standard).
Care is needed when availing of the Micro Entities regime as it cannot be used by:
- Charities;
- Regulated entities such as financial institutions and insurance intermediaries and
- Entities that prepare consolidated financial statements (see page 100 of FRS 105).
Additional care is also required as financial statements prepared under FRS 105 are deemed to give a true and fair view. Therefore, adding any additional notes beyond what’s required in the standard may be a risky approach and could jeopardise the true and fair concept.
In recommending FRS 105 to clients, accountants should caution them that while directors’ salaries no longer need disclosed under the Micro Entities regime, the financial statements need few notes (except in certain limited circumstances)! It may take some convincing for third parties like lending institutions and suppliers, upon which the business depends for credit, that FRS 105 is a credible regime, if one is looking for credit.
FRS 102 (Section 1A) may be a more suitable standard to apply for ‘small’ entities as it comes with a ready-made suite of notes and accounting policies that explain the financial statements better and most critically of all, add significant credibility to the accounts.
Name of new legislation
Section 1 of the new Act states: ‘This Act may be cited as the Companies (Accounting) Act, 2017’. Presumably together with the earlier legislation that it partly amends, both pieces of company law may be cited as the ‘Companies Acts 2014 to 2017’.
For more on this and other courses see our next company law event on 29 November 2017 here
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