FRS105 Micro-entity Accounts

Do you like to understand the detail behind your annual accounts? At Somers Baker Prince Kurz we like to take the time to explain what we do (we’re accountants after all) to our clients, so that the accounts are meaningful and useful documents rather than an administrative drudge.

The UK government has recently introduced a relaxed accounting standard for “micro entities”. This allows smaller business to produce shorter, more readable accounts without pages of complicated accounting policies and detailed notes on small points.

What is a micro-entity

The three main criteria are: –

  1. Turnover of no more than £632,000
  2. Gross assets (i.e. – without subtracting any liabilities) of no more than £316,000
  3. No more than 10 employees

Two of these three criteria need to be met for two consecutive years (for a newly incorporated company it suffices to meet the criteria in its first year). There are certain companies which cannot qualify as micro-entities regardless of their size: –

  • Members of a group preparing group accounts.
  • Investment undertakings
  • Financial holdings undertakings
  • Credit institutions
  • Insurance undertakings
  • Charities

What is FRS 105?

FRS 105 is the Financial Reporting Standard applicable to the Micro-entities Regime, issued by the Financial Reporting Council (FRC).

How do micro-entity accounts differ from other accounts?

There are two broad categories of difference between micro-entity accounts and other small company accounts:

Valuation differences

The starting point for assets valuation is the original cost , and never at their current market value. This is particularly significant for companies with holdings of publicly traded shares and investment properties.

Where the tax valuation (“tax base”) and the accounts valuation (“net book value”) of an asset differ, there is no need to calculate the “deferred tax” effect of the difference.

For example, if some publicly traded shares purchased by the company have increased in value between the purchase date and the financial year end, there is no need to account for either the increase in value of the shares or the tax that would be payable had the gain in value of the shares been crystallised.

Disclosure differences

The format of micro-entity accounts is quite rigidly set out in law (Section C of Part 1 of Schedule 1 to the Small Companies Regulations) . There are no detailed notes of various items – for example splitting current assets between trade receivables, cash held, and other debtors. The only notes required are for matters specifically required under the Companies Act 2006: –

  • Cash advances, credits or guarantees made by the company in favour of the directors (where the director has lent money to the company, this need not be disclosed). Detailed information must be given on the the
    • Amount.
    • Interest rate.
    • Other main terms of the transaction.
    • Amounts written off, waived or repaid.
  • Other guarantees, contingencies or potential liabilities that the company may be exposed to.

FRS 105 accounts do include a profit and loss (or income) statement, but this can be removed (“filleted”) from the accounts filed publicly at Companies House.

What are the advantages of FRS 105?

FRS 105 accounts are less technical  and easier to prepare and understand.

What other accounting standards apply to UK Companies

Use of FRS 105 for qualifying companies, LLPs, partnerships and sole traders is optional but not compulsory. These entities can optionally choose to adopt FRS 102 section 1A.

  • The accounting standard applicable for small companies is FRS 102 section 1A.
  • Medium or large private companies and groups apply full FRS 102.
  • Publicly trading groups report using “EU adopted IFRS”
  • The subsidiaries of these groups can use FRS 101 or full EU adopted IFRS.