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A micro-entity is a sub-classification of a ‘Small Company’. Legislation came into force on 1 December 2013 and is effective for financial years ending on or after 30 September 2013, where the company’s Financial Statements are filed at Companies House on or after 1 December 2013. Limited Liability Partnerships (LLPs) are excluded from the legislation.
How does a company qualify as a micro-entity?
A micro-entity company must meet at least two of the three following conditions:
- Less than £632,000 in revenue
- A Balance Sheet total of no more than £316,000
- Under 10 employees (on average)
Note: The revenue figure should be adjusted proportionately if the accounting period is not a year.
Which companies will qualify?
A company will qualify as a micro-entity if the qualifying conditions are met in that year.
A company only ceases to qualify where at its Balance Sheet date it no longer meets the qualifying conditions in two consecutive financial years.
In the case of a company which is a parent company, the company qualifies as a micro-entity in relation to a financial year only if:
- the company qualifies as a micro-entity in relation to that year;
- the group headed by the company qualifies as a ‘Small Group’
- the company has not voluntarily elected to prepare Group Accounts.
Which companies are excluded from the micro-entity regime?
A micro-entity must first qualify as small which means that any company that doesn't qualify as small is automatically excluded. Examples of excluded companies are a Public Limited Company, a company carrying on insurance market activity, an ineligible financial services company or a member of an ineligible group.
Companies that are part of a group will also need to take care when assessing micro-entity status. In addition to a Parent Company preparing group accounts, the exemptions are also unavailable for non-parent companies that are included in consolidated group accounts for that year.
Investment companies, financial holding undertakings, credit institutions, insurance undertakings and charities are also ineligible for micro-entity exemptions.
What do a full set of micro-entity accounts consist of?
- A Directors’ Report is required (although Small Company Exemptions can be claimed in preparing this).
- An abridged Balance Sheet and Profit and Loss Account.
- The usual company law and accounting standard notes to the accounts are not required. The micro-entity regulations state that the required notes to the Accounts must appear at the foot of the Balance Sheet. These notes consist of the information about Directors’ benefits: advances, credit, guarantees and other financial commitments.
Note: General rules and accounting principles of the Small Company regulations must be applied unless these are amended as otherwise by the micro-entity regulations.
The figures within the Financial Statements must still be prepared in accordance with Generally Accepted Accounting Principles (GAAP).
What are the filing requirements for a micro-entity?
Abbreviated accounts do not apply to micro-entities. The ‘full’ Micro-entity Financial Statements can be filed at Companies House. Alternatively, (as with Small Company Exemptions) there is an option to omit the Directors’ Report and/or Profit and Loss Account. The Balance Sheet filed, however, must include the notes at the foot of the Balance Sheet.
What are the benefits?
Choice. Simplification of Financial Statements and reduced disclosures. There will be limited benefits in terms of time savings, since a large amount of time is spent in the aggregation and preparation of the information following generally accepted accounting principles.
What are the drawbacks?
There is a potential loss of transparency. Credit rating agencies and banks, for example, may require provision of additional information that could hold up credit decisions. Micro-entities need to be aware of the options available to them for financial reporting, which may include taking advantage of exemptions, but also enhancing them with additional financial information suited to the business needs or continuing with existing formatsF&L