Companies choosing to prepare micro-entity accounts must apply FRS 105 The Financial Reporting Standard applicable to the Micro-entities Regime.

FRS 105 is based on FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland but has been amended to comply with the legal requirements of the micro-entities regime and to implement a whole array of simplifications that are suited to the smaller size and more straightforward nature of micro-entities.

In order to provide a much simpler basis upon which to prepare accounts many accounting policies have been removed from FRS 105. This means that micro-entity accounts, whilst being simpler to put together, do not work for all small companies if they do not provide enough flexibility to properly reflect the true nature of the company. For example, 

• Assets must be reflected at cost and they cannot be reflected at fair value or revalued. All depreciation since the date of acquisition must be expensed to the profit and loss account. This can make FRS 105 and therefore micro-entity accounts unsuitable for property investment companies.
• No recognition in the accounts of deferred tax.
• Development and borrowing costs cannot be capitalised but must be put through the profit and loss account.

Similarly, whilst no detailed notes to the accounts are required, only details of certain ‘minimum accounting items’ to be disclosed beneath the balance sheet, the lack of explanatory notes to the accounts can again present problems for some companies. 

A company that has previously filed total exemption or small company accounts is not prevented from filing more simple micro-entity accounts in future. To do so, it must ensure that it can meet both of the following criteria:

1. It is a company type that is not excluded from filing micro-entity accounts. Refer to our guide entitled: What types of company are excluded from micro-entity accounts provisions?

2. The company meets the appropriate size criteria to qualify as a micro-entity. Refer to our guide entitled: What are the size criteria for a micro-entity?

The company should also ensure that when preparing micro-entity accounts it applies FRS 105 The Financial Reporting Standard applicable to the Micro-entities Regime. Doing this should be considered very carefully, as many of the accounting policies allowed when preparing small company accounts (under FRS 102) are not allowed under FRS 105. In order to file micro-entity accounts therefore, the company may need to change some accounting policies and must remember that both the current year figures in the accounts and the prior year comparatives must reflect the adoption of FRS 105 accounting policies. If preparing micro-entity accounts for the first time therefore, (when in earlier years small company accounts have been filed), it is possible that the prior year comparatives will require restatement (adjustment to reflect the adoption of FRS 105 accounting policies).