Editor | 18 September 2018
Should I use FRS 105 for my small business?

Should I use FRS 105 for my small business?

Financial Reporting Standards (FRS) 105 is a format that micro-entities can use to set out their financial statements.

It was introduced as an optional alternative for some of the smallest businesses that have no reason to use special accounting practices. But the simplified standards may not be suitable for all businesses.

An updated version of FRS 105 will take effect from January 2019, so now is a good opportunity for small businesses to review the policies and consult with their accountant about whether they should subscribe to the standard.

Who qualifies for FRS 105?

Financial Reporting Standards are created by the Financial Reporting Council (FRC) to make financial accounts understandable, reliable and comparable.

FRS 105 is the simplest standard and it can be used by businesses that qualify as ‘micro-entities’.

A business qualifies as a micro entity if it does not exceed at least two of the following annual thresholds.

  • Turnover - £632,000 (adjusted for periods longer or shorter than 12 months)
  • Balance sheet - £316,000
  • Average number of employees - 10

After the first financial year, the criteria must be met in two consecutive years if a business is to qualify. If two or more of the criteria are exceeded for two consecutive years, a business will cease to qualify as a micro-entity.

It is a voluntary scheme, so if you meet the criteria, you don’t necessarily have to subscribe to the standard. Although, in most circumstances, we expect FRS 105 to be the most effective choice.

What is different with FRS 105?

FRS 105 is the least complex Generally Accepted Accounting Practice (GAAP) published by the FRC. Micro businesses that don’t use FRS 105 will generally use FRS 102, which is adopted more widely.

There are a number of simplifications with FRS 105 compared with FRS 102. Primarily, these relate to complicated accounting procedures that small businesses are unlikely to use in practice.

Some of the most significant changes are:

  •  Micro-entities are only required to prepare a balance sheet and profit and loss account. They do not need to prepare other primary statements that are required of larger companies.
  • Micro-entities are only required to submit a balance sheet and the notes with Companies House. They are not required to file a profit and loss account or a director’s report.
  • No assets can be measured at fair value or a revalued amount - processes used to alter the value of assets.
  • No deferred tax or equity-settled share-based payments are recognised.
  • There are no accounting policy choices, as prescribed in FRS 102.
  • Micro-entity accounts are required to make four key disclosures, significantly down on the number of disclosures required under FRS 102.

Jennifer Leah, Head Accountant, said "FRS 105 allows micro-entities to prepare a much simpler set of accounts, which may well be preferable to many directors of such companies, particularly due to the reduction in details required in relation to transactions with directors. However there are occasions where it would not be suitable. We would be happy to discuss the options with you"

Not sure if FRS 105 is right for your business? Our accountants can help you understand how the standard will affect your company. Speak to a member of the CloudAccountant.co.uk team today. Call: 0808 281 0303.