Small companies wishing to prepare and file micro-entity accounts are required to apply FRS 105 - The Financial Reporting Standard applicable to the Micro-Entities Regime. Whilst FRS 105 is based on the provisions of FRS 102, many accounting policies available under FRS 102 have been removed or significantly simplified. For example, the micro-entities regime requires assets to be valued at cost less depreciation or any impairment, and removes more complicated valuation approaches such as measurement at fair value or revaluation. Similarly, FRS 105 does not permit the recognition of deferred tax or allow the capitalisation of development costs.
This stripped down approach allows the aims of the micro-entity regime to be achieved. It introduces highly simplified statutory accounts prepared using simplified accounting standards that don't require specialist knowledge to be understood. The flip side to this is that micro-entity accounts may not always provide enough detail and the removal of a raft of accounting treatments may present problems for some companies. Companies must weigh up the lack of accounting policy options against the savings to be made in both time and money, together with the benefit of filing the minimum amount of information on the public record.
To help you decide whether switching to micro-entity accounts is the best decision for your company, the table below summarises some of the key accounting differences that arise between FRS 105 and FRS 102:
ACCOUNT AREA |
FRS 102 |
FRS 105 |
Investment properties |
These may be revalued each year (at fair value) with any changes to the valuation recognised as a profit or loss. |
FRS 105 does not allow valuation at fair value or for properties to be revalued. Instead investment properties must be measured at cost less depreciation and any impairment. |
Other fixed assets |
Whilst usually valued at cost less depreciation and impairment, FRS 102 does allow a revaluation accounting policy to be adopted for fixed assets of the same class. |
FRS 105 does not allow any class of fixed assets to be revalued and they must be measured at cost less depreciation and any impairment (if applicable). |
Intangible assets |
Whilst usually valued at cost less depreciation and impairment, FRS 102 does allow a revaluation accounting policy to be adopted for intangible assets of the same class. |
FRS 105 does not allow intangible assets to be revalued and they must be measured at cost less depreciation and any impairment (if applicable). |
Development costs |
Subject to certain conditions being met, FRS 102 may allow these costs to be capitalised (that is put on the balance sheet rather than treated as an expense). |
FRS 105 does not allow the capitalisation of development costs. Instead, they must always be treated as an expense in the profit and loss account in the period to which they relate. |
Borrowing costs |
Subject to certain conditions being met, FRS 102 may allow these costs to be capitalised (that is put on the balance sheet rather than treated as an expense). |
FRS 105 does not allow the capitalisation of any borrowing costs. Instead, they must always be treated as an expense in the profit and loss account in the period to which they relate. |
Financial instruments |
FRS 102 allows 'basic' financial instruments to be measured at cost less amortisation, and for 'other' financial instruments to be recognised at fair value with any change recognised as a profit or loss in the period. |
FRS 105 makes no distinction between 'basic' and 'other' financial instruments - which must all be recognised at cost (usually the transaction price). The subsequent revaluation of financial instruments at fair value is not permitted. |
Foreign exchange forward contracts |
These can be recognised on the balance sheet as a financial instrument and measured at fair value, with the associated debtor or creditor retranslated at the year-end exchange rate.Hedge accounting may be applied in some circumstances. |
FRS 105 requires that when a trading transaction is covered by a foreign exchange forward contract, this must be measured at the rate specified in the contract. Retranslation is not permitted. |
Deferred tax |
A deferred tax asset or liability may be recorded on the balance sheet to reflect tax owed by or owed to the company based on temporary timing differences. |
FRS 105 does not permit the recognition of deferred tax. |
Government grants |
The company can choose to recognise the grant using either the performance model or the accruals model. Provided certain conditions are met, the performance model allows the company to recognise the grant immediately in the profit and loss account. |
FRS 105 requires that any government grant be accounted for using the accruals method. |
How to transition from small company accounts to micro-entity accounts
So, preparing micro-entity accounts may require the adoption of different accounting treatments to those allowed for small companies using FRS 102. For a company wishing to prepare accounts under FRS 105 for the first time, the process of transitioning from small company to micro-entity accounts is covered in section 28 of the FRS 105 regulations.
The most important point to note is that if the company has previously adopted a different accounting standard, such as FRS 102, transitional adjustments may be required when preparing the first set of micro-entity accounts. For example, accounting for deferred tax is not allowed under FRS 105, so if the company has previously included deferred tax in its accounts, then the comparative figures in the first set of micro-entity accounts will need to be restated to remove the provision for deferred tax.
Section 28.7 of the FRS 105 regulations states that when switching to micro-entity accounts the comparatives must:
- recognise all the assets and liabilities required by FRS 105;
- not recognise as assets or liabilities, items that FRS 105 does not permit (such as deferred tax for example);
- reclassify items as different types of assets or liabilities if so required under the reporting framework of FRS 105; and
- apply the approach of FRS 105 when measuring all assets and liabilities (thereby removing the ability to measure at fair value or to revalue assets).
FRS 105 does not require an opening statement of financial position to be presented or any explanation showing the adjustments that have been made to comparatives when transitioning from small company accounts to micro-entity accounts.
For companies considering the adoption of micro-entity accounts for the first time and with accounting policies that include any of the items listed below, special rules or exemptions may apply and these are detailed in sections 28.9-28.11 of the FRS 105 regulations:
- Derecognition of financial assets and liabilities;
- Accounting estimates;
- Business combinations and goodwill;
- Share-based payment transactions;
- Investment properties;
- Compound financial instruments;
- Arrangements containing a lease;
- Decommissioning liabilities included in the cost of property, plant and equipment or investment property;
- Dormant companies;
- Lease incentives;
Remember that before preparing micro-entity accounts for the first time, you should also check that the company meets all the other eligibility criteria. You may wish to read our guide on the types of company that are excluded from preparing micro-entity accounts and consider the size thresholds that apply to companies preparing micro-entity accounts.
Upload and submit an iXBRL company accounts file
If you are a Subscriber using your own presenter code, you can upload an iXBRL company accounts file to Inform Direct and authorise us to electronically file this with Companies House on your behalf. This service allows you to file small company accounts as well as a range of other company accounts types, including micro-entity, medium, full and group accounts. It also provides Limited Liability Partnerships with the opportunity to file accounts using Inform Direct. See: How do I upload and file IXBRL company accounts?