In a blog in March, I discussed some of the disclosure issues that small companies face in respect of directors’ remuneration when applying FRS 102 Section 1A. Here are 10 more common questions about Section 1A disclosures:
1. Why do Section 1A disclosures prompt much more discussion than FRSSE ones did?
Many feel that straightforward compliance with FRSSE disclosure rules ensured that a true and fair view normally prevailed. The new EU Accounting Directive dumbs down the disclosures legally required of small companies. However the overarching need for a true and fair view has not changed. This has prompted the UK’s Financial Reporting Council (FRC) and other regulators to remind companies of the need to consider additional disclosures no longer technically required by company law.
2. What additional disclosures, not technically required by company law, should be included in Section 1A accounts?
Appendix C of Section 1A lists the mandatory disclosures. Appendix D lists five additional disclosures strongly recommended by the FRC. A failure to include these, where relevant, will almost certainly impair the truth and fairness of the accounts. They are:
• A statement of compliance with FRS 102, adapted to refer to Section 1A
• A statement that an entity is a public benefit entity
• Disclosures relating to material uncertainty regarding going concern
• Details of dividends declared and paid or payable
• On first-time adoption, an explanation of how transition has affected position and performance
3. Are there any more?
Appendix C of Section 1A requires the disclosure of ‘commitments, contingencies and guarantees’. In its most basic format this might be an aggregation of operating lease (rent) commitments, capital commitments, guarantees and contingent liabilities – all lumped together. Be willing to list the different elements of the total liability and to provide an ageing analysis of any operating lease commitments therein, as required by ‘full’ FRS 102 for medium-sized and large entities.
4. What do the professional accountancy bodies say?
The professional bodies encourage ‘over-disclosure’ as appropriate. Two ‘FRSSE notes’ that are no longer legally required which keep cropping up as potentially important to include, all subject to materiality of course, are a note analysing movements in provisions for liabilities and a note listing the components of the P&L tax charge.
5. It’s been suggested that a small company needs to disclose it registered office address and its principal place of business if different. Is this true?
The way that section 1A is drafted you would be forgiven for thinking that this is the case and it certainly is for medium-sized and large companies. However, for a small company, legally only the registered office address need be disclosed.
6. Do I need a sentence in the accounts explaining what the small company’s presentation currency is?
Disclosure is required of the presentation currency – but £ signs above the P&L and balance sheet columns make this clear, such that a separate sentence isn’t really needed.
7. It’s been mentioned to me that my client needs to separately disclose its corporation tax creditor. Is this true and if so might it not provide a strong indication of reported profit, even though a small company’s P&L account need not be filed at Companies House?
It would indeed provide a strong indication of reported profit – but rest assured that separate disclosure of the corporation tax creditor is not required in the notes to the accounts. Disclosure is only required, within the creditor’s note, of the total amount due in respect of tax and social security (corporation tax, VAT, PAYE and national insurance) and, if the entity chooses to abridge its balance sheet, not even that will get disclosed.
8. How can a small company avoid putting details of directors’ remuneration on the public record at Companies House?
If the directors conclude that directors’ remuneration is a transaction ‘concluded under normal market conditions’ it need not be disclosed in the shareholder accounts under Section 1A. Under the new regime what goes in the shareholder accounts drives what is filed – so if directors’ remuneration is excluded from the shareholder accounts, it won’t be in the filed accounts either.
We’ve come across some companies that have chosen to disclose directors’ remuneration – but in an ‘old style’ separate directors’ remuneration note. The companies concerned have then concluded that this is definitely a P&L note and ‘filleted it out’ for filing. This isn’t considered best practice but is, arguably, acceptable.
9. What disclosures are required in respect of employee numbers when an owner managed company has no employees and directors who do not have a formal contract of employment?
Arguably none! However, indications are that the professional accountancy bodies are telling small companies and their accountants that directors of owner-managed companies should always be construed as employees and thus that any such company will always have at least one employee.
10. It’s been suggested that many small companies are over-disclosing in respect of the controlling party. How can this be so?
Technically paragraph 33.5 of FRS 102 only requires controlling party disclosures in the context of a group (i.e. where the entity has a parent company). Any further disclosures (e.g. details of the proprietor(s) of an owner managed company) are not strictly necessary.
The introduction in the UK of the PSC (Persons with Significant Control) register means that it’s always possible to get an understanding from Companies House of who exercises significant influence or control over a private company without needing further disclosure in the notes to the financial statements.