FRS 105: what does it mean for small businesses?9 May 2016
We live in interesting times for financial reporting standards...OK, maybe that's a bit of a stretch, but 2016 certainly is all change in the FRS world.
From 1st January 2016 the Financial Reporting Standard for Smaller Entities (FRSSE) has been replaced by a number of new UK GAAP alternatives, with FRS 102 likely to be the most appropriate alternative for many small businesses.
However, very small businesses (known as “micro-entities”) can choose to adopt FRS 105, which is a simpler version of FRS 102 specifically designed for the Micro-entities Regime that was introduced in 2013.
To qualify for FRS 105, a small business must be classified as a micro-entity by satisfying two of the following three eligibility criteria:
- Turnover of £632,000 or less
- A balance sheet total of £316,000 or less
- No more than 10 employees.
The small business must also not be a charity, partnership or credit institution, and must not be undertaking investment, financial holding or insurance business.
What are the benefits of adopting FRS 105?
By adopting FRS 105 very small businesses are able to file and prepare abridged accounts and simplify the company’s financial reporting obligations in the following ways:
- Compile a simpler balance sheet and profit and loss account
- No accounting notes are required (although Minimum Accounting Items should be declared at the foot of the balance sheet)
- Only the balance sheet, and its disclosure of the Minimum Accounting Items, needs to be filed at Companies House
- No obligation to prepare or file a directors’ report
- No revaluation at fair value is permitted under FRS 105. For example, a small business with an investment property would be required to value the property at cost and not fair value if it chose to adopt FRS 105
- Accounts prepared in accordance with FRS 105 are automatically presumed by law to give a true and fair view.
Are there any drawbacks?
Yes: by simplifying the reporting obligations for small businesses, FRS 105 also removes a certain degree of flexibility when compiling and filing a company’s statutory accounts. For example:
- No accounting policy options are available under FRS 105, so borrowing costs and development costs must be expensed to the profit and loss account in the period in which they are incurred, and grants must be recognised on an accruals basis
- As already mentioned, no revaluation of assets at fair value is permitted under FRS 105
- Businesses adopting FRS 105 must use a specific format when compiling a profit and loss account (known as Format 1)
- FRS 105 doesn’t allow for deferred tax or equity-settled share-based payments prior to the issue of shares.
We’re here to help
If you’re feeling turned around by the changes to financial reporting standards, and would like an expert to help keep on you on the right track, Accounts and Legal is here to help.
Our team of small business accountants are experts when it comes to financial reporting, and we offer a full range of fixed-price tax, accounting and business planning services tailored to the needs of small businesses.
Get in touch with Accounts and Legal to discuss your requirements, or get an online quote now using our instant accounting quote tool.