Much of the discussion around the latest changes to FRS 102 has centred on areas like lease accounting and revenue recognition. However, there is another development that small entities should not overlook: updates to the disclosure requirements within Section 1A.
For accounting periods starting on or after 1 January 2026, businesses applying Section 1A will need to revisit what they include in their financial statements to ensure they still present a true and fair view.
So, what’s changing – and how could it affect your reporting?
A shift in disclosure expectations
Section 1A has always been built around a principles-based approach: rather than prescribing every disclosure, it sets minimum requirements and relies on businesses to include any additional information needed for clarity.
The revised standard retains some flexibility but increases expectations by making certain previously encouraged disclosures mandatory and introducing additional required disclosures. In particular, it aligns small entity reporting more closely with full FRS 102, so additional disclosures will be required where they are material to understanding the accounts.
In practice, this could lead to more detail being included in areas such as:
- going concern considerations
- provisions and contingent liabilities
- tax (both current and deferred)
- lease arrangements
- revenue streams and customer contracts
- share-based payments
The underlying message is simple: if something matters to a reader’s understanding of the financial position, it should be disclosed. However, the principle of materiality still applies, so immaterial information does not need to be included.
Related party disclosures: a key change
One of the most notable updates relates to related party transactions.
Up to now, small entities have not needed to disclose transactions with related parties if they were carried out on normal commercial terms. This exemption has been removed.
As a result, businesses will now need to disclose all material related party transactions, regardless of whether they were conducted at market value.
What needs to be disclosed?
For relevant transactions, financial statements should now include details such as:
- the nature of the relationship
- the value of transactions during the period
- any outstanding balances at the year-end
- key terms, including security or guarantees
- provisions for bad debts or amounts written off
This represents a move towards greater transparency, although the overall disclosure burden still remains lighter than under full FRS 102.
What about director-related transactions?
Certain director-related disclosures continue to apply, particularly around loans and guarantees. This includes reporting:
- balances outstanding
- repayment terms and interest
- any amounts written off
- the maximum exposure during the year
There is still no explicit requirement in Section 1A to disclose directors’ remuneration. However, if omitting this information would make the accounts misleading, additional disclosure may still be necessary.
It’s also worth noting that not all transactions involving directors are remuneration. Property leases, service arrangements or financing transactions involving directors must now be considered under the related party rules.
Greater visibility of internal arrangements
With the removal of the exemption and the broadened scope of disclosures, financial statements may now reveal information that previously stayed behind the scenes. This could include:
- loans between shareholders and the business
- transactions within groups
- dealings with connected individuals or entities
This increased visibility may influence how stakeholders, such as lenders or investors, interpret the accounts and assess risk.
Dividends: now explicitly disclosed
Another important update is the requirement to disclose dividends paid or declared during the year.
Where a company prepares a statement of changes in equity, dividends should be clearly shown, and where relevant, broken down by share class.
Rethinking profit extraction strategies
For owner-managed businesses, this change could have a practical impact. Many have historically opted to extract profits through dividends rather than salary.
With dividend payments now clearly visible in the accounts, some businesses may wish to review how they structure remuneration, balancing:
- salaries and bonuses
- pension contributions
- dividend payments
Any changes should take into account tax efficiency, cash flow requirements and the overall commercial position.
Other considerations
A few additional points are worth keeping in mind:
- Section 1A is not available to certain entities, including public interest entities and regulated financial businesses
- Companies can still apply Section 1A if they meet the small company thresholds, even as part of a wider group (subject to eligibility rules)
Consistency of reporting approach should also be considered before making any changes.
Preparing for the changes
Although the updates may appear modest, their practical impact can be significant. Taking early action will make the transition smoother.
Steps to consider include:
- reviewing current financial statements to identify potential gaps
- considering whether prior year comparatives will need additional disclosure to meet the new requirements
- expecting more information to be publicly visible
- mapping out related party relationships and transactions in advance
- considering how these changes interact with other FRS 102 updates
- speaking to your adviser ahead of the year-end
Summary
These changes are intended to improve the usefulness and transparency of small entity accounts, while still keeping reporting proportionate.
Even so, the increased focus on related parties and dividend disclosure means many businesses will need to be more deliberate in how they prepare and present their financial information.
If you would like support in understanding how these changes apply to your business, or help preparing for the transition, it’s worth seeking advice early to avoid last-minute challenges. Get in touch with us today using the button below.
