Micro-Entity

Definition

A micro-entity is a small company that meets at least two out of the following three criteria for the current and preceding financial year:

Its net worth does not exceed £316,000.
Its turnover does not exceed £632,000.
The average number of employees does not exceed 10.

Under EU regulations adopted into UK law in November 2013, such an entity is exempt from the requirements of the Company Reporting Directive and may present annual accounts with a simplified balance sheet and profit-and-loss format; only the former needs to be filed at Companies House.

A company that opts to be treated as a micro-entity is not permitted to apply fair value accounting methods or the alternative accounting rules. The special rules now applying to micro-entities are set out in the EU’s Accounting Directive (2014) and FRS 105: The Financial Reporting Standard applicable to the Micro-entities Regime, effective from January 2016.

Examples

Example 1: Micro-Entity Qualification

XYZ Ltd. meets all three criteria for being a micro-entity:

Net worth: £280,000
Annual turnover: £500,000
Number of employees: 8

Therefore, XYZ Ltd. can file simplified annual accounts and enjoy the associated benefits under the micro-entity provisions.

Example 2: Non-Qualification

ABC Ltd. has a net worth of £350,000, annual turnover of £600,000, but employs 12 people. Despite meeting two of the criteria, having a higher count of employees disqualifies the company from being treated as a micro-entity.

Frequently Asked Questions

What are the benefits of being classified as a micro-entity?

Micro-entities can present simplified annual accounts which reduce the administrative and financial burden of compliance.

Can a parent company qualify as a micro-entity?

No, a parent company that prepares consolidated financial statements or a subsidiary included in group accounts by full consolidation cannot qualify as a micro-entity.

Is fair value accounting available for micro-entities?

No, micro-entities are not permitted to apply fair value accounting methods.

What regulatory framework governs micro-entities in the UK?

The EU Accounting Directive (2014) and FRS 105: The Financial Reporting Standard applicable to the Micro-entities Regime.

Are there additional exemptions for micro-entities?

Yes, in addition to simplified accounts, micro-entities enjoy reduced disclosure requirements.

Net Worth

Net worth is the total assets of a company minus its total liabilities. For micro-entities, the net worth threshold is £316,000.

Turnover

Turnover is the total sales or revenue generated by a company. For micro-entities, the turnover threshold is £632,000.

Alternative Accounting Rules

Alternative accounting rules are methods that provide different ways of measuring and recognizing income and expenses. These are not available to micro-entities.

Company Reporting Directive

A directive establishing comprehensive regulatory requirements for company reporting within the EU.

Companies House

The UK’s registrar of companies, responsible for incorporating and dissolving limited companies as well as administrating and storing company information submitted under the Companies Act.

Fair Value Accounting

A financial reporting approach in which companies measure and report the fair values of selected assets and liabilities.

Consolidated Financial Statements

Financial statements of a group of entities (affiliated companies) presented as those of a single entity.

Online Resources

Suggested Books for Further Studies

“The Accounting Directive: A Comment on the New EU Bookkeeping and Accounting Rules for Groups of Companies” by Dagmar Schiek
“Interpreting Company Reports and Accounts” by Geoffrey Holmes and Alan Sugden
“Financial Reporting: An Accounting Revolution” by William H. Beaver and Michael C. Duke
“Advanced Financial Accounting” by Richard Lewis and David Pendrill

Accounting Basics: “Micro-Entity” Fundamentals Quiz

### Does a micro-entity need to file both a balance sheet and profit-and-loss statement at Companies House? - [ ] Yes, both documents must be filed. - [x] No, only the balance sheet needs to be filed. - [ ] Only the profit-and-loss statement is required. - [ ] None of these documents need to be filed. > **Explanation:** Under the micro-entity regime, only the balance sheet must be filed at Companies House; the profit-and-loss statement can be simplified and is not required to be filed. ### What is one of the criteria a small company must meet to be classified as a micro-entity? - [ ] Net worth exceeding £1 million - [x] Turnover not exceeding £632,000 - [ ] Average number of employees not exceeding 50 - [ ] Annual profits exceeding £300,000 > **Explanation:** One of the criteria for micro-entity classification is that the company's turnover must not exceed £632,000. ### What happens if the average number of employees exceeds 10? - [ ] The company can still qualify as a micro-entity if it meets other criteria. - [x] The company cannot qualify as a micro-entity. - [ ] Only the turnover and net worth thresholds matter. - [ ] It must apply for a special exemption. > **Explanation:** A company cannot qualify as a micro-entity if the average number of employees exceeds 10, regardless of whether it meets the other criteria. ### Which accounting method is a micro-entity not permitted to use? - [ ] Cash basis accounting - [ ] Accrual accounting - [x] Fair value accounting - [ ] Historical cost accounting > **Explanation:** Micro-entities are not permitted to use fair value accounting methods. ### Can a micro-entity use alternative accounting rules? - [x] No, they are not allowed. - [ ] Yes, but only for specific transactions. - [ ] Yes, if opted for in the financial year. - [ ] Only for international transactions. > **Explanation:** Micro-entities are not allowed to apply alternative accounting rules. ### Does the micro-entity regime exempt a company from disclosing directors' remuneration? - [ ] No, full disclosure is always required. - [ ] It depends on the company’s industry. - [x] Yes, such disclosure is not required under the micro-entity regime. - [ ] Only partially. > **Explanation:** Under the micro-entity regime, disclosure of directors' remuneration is not required. ### When did FRS 105, applicable to micro-entities, come into force? - [ ] January 2013 - [ ] January 2015 - [x] January 2016 - [ ] January 2014 > **Explanation:** FRS 105: The Financial Reporting Standard applicable to the Micro-entities Regime came into force in January 2016. ### Is a micro-entity required to provide a complete set of accounts for internal use? - [x] Yes, but simplified for regulatory purposes. - [ ] No, they can provide partial accounts. - [ ] Only if requested by shareholders. - [ ] They do not need to prepare accounts at all. > **Explanation:** Micro-entities must provide complete accounts internally but are allowed simplified external reporting for regulatory purposes. ### Can a member of a group containing a public company qualify as a micro-entity? - [ ] Yes, if it meets all small company criteria. - [ ] Yes, if located outside the UK. - [x] No, it is not eligible. - [ ] Only if the parent company opts out. > **Explanation:** A member of a group containing a public company cannot qualify as a micro-entity, regardless of its size. ### Which document sets out rules for micro-entities in the EU? - [ ] Companies Act 2006 - [ ] IAS 39 - [ ] FRS 102 - [x] Accounting Directive (2014) > **Explanation:** The Accounting Directive (2014) sets out the rules for micro-entities within the EU.

Thank you for embarking on this journey through our comprehensive accounting lexicon and tackling our sample exam quiz questions. Keep striving for excellence in your financial knowledge!