FRS 105 for Micro Entities

(3 min read)

Take a look at the FRS changes for Micro Entities and how best to advise your clients.

While FRS 105 certainly offers simpler reporting requirements, it’s essential that accounting professionals understand the intricacies of these two standards in order to better advise their clients

As part of the new UK’s Generally Accepted Accounting Principles (GAAP) that came out in August 2015, the Financial Reporting Standard for Small Entities (FRSSE) has been completely withdrawn for accounting periods starting on or after 1 January 2016. While the Financial Reporting Council (FRC) have amended Financial Reporting Standard (FRS) 102 to include Section 1A for small entities, there’s also the option for many smaller companies to report under the optional FRS 105 for micro entities.

While FRS 105 certainly offers simpler reporting requirements, it’s essential that accounting professionals understand the intricacies of these two standards in order to better advise their clients. Micro entities have the choice between reporting under FRS 102 Section 1A or FRS 105, but you’ll need to look at each client on an individual basis to advise which option best suits their circumstances.

Which to choose: FRS 105 or FRS 102?

First off, it’s crucial that any small business meets the requirements for micro entities if they choose to go down the FRS 105 route. The thresholds for each regime are as follows:

Micro entity

  • Turnover - £632,000

  • Balance sheet total - £316,000

  • Employees - 10

Small entity

  • Turnover - £10.2 million

  • Balance sheet total - £5.1 million

  • Employees - 50

As long as a company is under the thresholds for a micro entity, they have the option to choose either FRS 102 Section 1A or FRS 105, unless they’re a charity, Limited Liability Partnership, financial or credit institution, company in the Republic of Ireland or small company with a parent company that prepares consolidated financial statements – these cannot report under FRS 105.

Not all micro entities will want to report under FRS 105, because there are a number of factors that might make FRS 102 Section 1A a more attractive prospect to them. For a start, under FRS 105 companies aren’t able to use revaluation amounts or fair value accounting for assets. Instead, they’ll be held at cost less depreciation less impairments, and this could potentially have an impact on their balance sheet if they have assets (such as investment properties) that are carried at revaluation. All accounting policy options have been removed, and accounts prepared under the micro entities regime are limited, meaning possible issues with external lenders.

There are of course many positives to FRS 105 – the need to only prepare a profit and loss account and a balance sheet, not being required to account for deferred tax and less expense involved are just a few. There’s also no need to make additional disclosures under the standard, although companies can make them voluntarily if they wish to.

Many companies that fall under the requirements of micro entities will benefit from the simpler standards, with less reporting and measurement involved, but it’s always important to look at all the details before making that recommendation.