Two people working in an office | FRS 105: A Guide for Small Businesses

Contents

  1. 1. What is FRS 105?
  2. 2. What makes FRS 105 different from other financial reporting standards?
  3. 3. What is as a micro-entity?
  4. 4. How to prepare and file accounts under FRS 105
  5. 5. Pros of using FRS 105 as a small business owner
  6. 6. Drawbacks of FRS 105

FRS 105: A Guide for Small Businesses

February 28, 2023
When it comes to preparing and filing accounts, UK companies have to follow specific financial reporting standards. For small businesses, there are 2 types of reporting standards: FRS 102 and FRS 105.However, for small entities known as micro-entities, FRS 105 can be followed. Introduced in 2016, it was designed to simplify the reporting process for small businesses, enabling them to file a shortened version of their accounts with HM Revenue & Customs (HMRC) and Companies House.In this article, we’ll look at what FRS 105 is, what it means for micro-entities, and the pros and cons of small businesses using this reporting standard.

What is FRS 105?

FRS 105 is the Financial Reporting Standard applicable to micro-entities in the UK, as issued by the Financial Reporting Council (FRC).This accounting standard is applicable to small limited companies who choose to apply the micro-entities regime.Based on the FRS 102 Financial Reporting Standard applicable in both the UK and Republic of Ireland, FRS 105 has been simplified to reflect both the size and nature of micro-entities.Under UK GAAP (UK Generally Accepted Accounting Practice), most micro-entities have the option of reporting under FRS 105 or FRS 102.

What makes FRS 105 different from other financial reporting standards?

FRS 105 has been designed to ease the burden of financial reporting for small companies by simplifying the reporting process for filing accounts to HMRC and Companies House.While it shares some similarities with FRS 102 – the financial reporting standard for small businesses — it has been designed to make filing accounts as straightforward as possible for the smallest of businesses.

Requirements of FRS 102

For FRS 102, you need to include the following documents as part of your statutory accounts:
    Balance sheet Profit and loss account Notes about the accounts Director’s report Name and signature of the company director
Small companies can benefit from following the FRS 102 financial reporting standard as it reduces the amount of information they have to prepare when filing accounts, while still being a recognised UK accounting standard.To qualify as a small company, you’ll need to meet at least 2 of the following criteria:
    Your annual turnover is £10.2 million or lessYour balance sheet total is £5.1 million or lessYou have no more than 50 employees

Requirements of FRS 105

Unlike FRS 102, FRS 105 requires the following documents to be submitted when filing micro-entity accounts:
    Statement of financial position, or a balance sheetIncome statement, instead of a profit and loss account
There is no requirement for micro-entities to submit a directors’ report, nor any notes to the account. Any information relating to financial commitments and guarantees are included as footnotes on the income statement.

What is as a micro-entity?

Your small business to classifies as a micro-entity, if it meets 2 or more of the qualifying criteria in a single financial year:
    Turnover no more than £632,000 – this is adjusted if the financial year is longer or shorter than 12 monthsBalance sheet total of less than £316,000 (fixed assets + current assets)Average number of employees no more than 10
Unless your business is a newly formed small company, you’ll need to have met these conditions for 2 consecutive years. If you meet more than 2 of these criteria, then you’ll no longer be considered as a micro-entity.However, there are a number of company entities that are not eligible to qualify as micro-entities and therefore cannot make use of the FRS 105 reporting standard. These include:
    Public limited companies (PLCs)Charitable companiesInvestment undertakingsFinancial institutionsLimited partnershipsLLPsOverseas companiesUnregistered companiesA company authorised to register under section 1040 Companies Act 2006Companies excluded from the small companies’ regime under section 384 Companies Act 2006Parent companies who prepare consolidated accounts when there is no legal requirement to do soCompanies included in consolidated group accounts for that year

How to prepare and file accounts under FRS 105

As a micro-entity, you’ll need to submit your FRS 105 accounts to HMRC and Companies House as part of the filing of your annual accounts for your company year end.When filing your FRS 105 account to HMRC, you’ll need to submit the following documents:
    Statement of Financial PositionIncome statementFootnotes
Similarly, when filing your FRS 105 account to Companies House, you’ll need to submit:
    Statement of Financial PositionFootnotes
These documents will be published by Companies House on its website, and as a result can be viewed publicly.

Statement of financial position

A statement of financial position is another name for a balance sheet. It provides an overview of the financial position of a business at a given point in time, outlining details of assets, liabilities and equities.

Income statement

Your income statement is a financial report that shows how much your business has spent and earned over a specified period of time.
As your income statement also shows whether you’ve made a profit or loss, it’s often referred to as a profit and loss statement, or P&L.

Footnotes

Footnotes to the financial statements – or directors’ footnotes — include extra information to explain the figures and accounts provided in the company’s financial statements.

Pros of using FRS 105 as a small business owner

By choosing to adopt FRS 105, very small businesses or micro companies can file and prepare abridged accounts.As a result, small business owners can both save time and simplify the way they complete their company’s financial reporting obligations.Other advantages include:
    Simplified balance sheets and profit and loss accountsNo accounting notes are required, apart from Minimum Accounting Items included as footnotes on the balance sheetOnly the balance sheet needs to be filed with Companies HouseNo requirement to prepare or file a director’s reportNo revaluation at fair value is required for FRS 105, meaning if your small business has an investment property, it would only be required to value it at costAccounts prepared in accordance with FRS 105 are automatically presumed by company law to give a true and fair view

Drawbacks of FRS 105

One of the main disadvantages of FRS 105 is that it removes some of the flexibility that comes with compiling and filing company accounts.Examples of this include:
    FRS 105 does not provide any accounting policy options, so borrowing and development costs must be expensed to the profit and loss account in the period during which they incurred and grants must be recognised on an accruals basisNo revaluation of fair assets is permittedWhen compiling a profit and loss account, a specific format must be used, known as Format 1FRS 105 doesn’t allow for deferred tax or equity-settled share-based payments prior to the issue of shares
Caroline Wire
Caroline WireFreelance Copywriter

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