Micro accounting entity

What it means

A micro accounting entity is the lowest size class, and unlike the others it is optional: a company that meets the size criteria may decide to treat itself as one. The decision takes effect from the first day of an accounting period.

It is more than a shorter form. A micro entity does not measure assets at fair value and does not account for deferred tax, so it arrives at profit by a different route than larger companies and its statements are harder to compare with theirs.

A micro accounting entity is often confused with single-entry bookkeeping, but it is a different regime. A micro entity keeps double-entry books and a general ledger and prepares both a balance sheet and a profit and loss account, only in less detail. Single-entry bookkeeping is reserved for certain individuals and non-profit bodies, and a trading company cannot use it.

How it works in practice

The statements go on the shortened micro form and the notes take a tabular shape. They are filed in the register of financial statements like any others, together with the record of approval by the general meeting.

The status is lost only after two consecutive periods in which the criteria are not met; from the start of the next period the company moves into the small entity class. Banks, insurers and the other entities the Act lists cannot use the micro class at all.

We advise recording the decision to use the micro class in writing, for example in an internal policy as of the first day of the period. Before the year starts we ask the client whether a loan, an investor or a sale of shares is planned, because then it is worth considering the small-entity scope before anyone asks for it.

What to watch out for

The micro class gets picked for simplicity, and a year later a bank or an investor asks for statements with deferred tax and fair value. The class cannot be changed retrospectively, only from the first day of a period, so the company either pays for a second set of statements or waits a full year.

A company that has failed the criteria two years running sometimes keeps filing on the micro form out of habit. The statements are then prepared in the wrong scope, they lack information a small entity has to disclose, and putting it right means preparing them again and refiling them in the register of financial statements.