A summary of the main arguments for/against FRS 105.
The deadline for filing accounts with a 31 March 2016 year-end has passed and for those with 31 March 2016 year ends it also sees the demise of the FRSSE. Its last version (effective 2015) can no longer be used for accounting periods commencing on or after 1 January 2016. So for many practitioners all of their clients with that popular March 2017 accounting reference date will now come under ‘new’ GAAP.
Although there are a number of options for UK limited companies, for most small entities the choice of accounting standard will boil down to two options:
FRS 102 section 1a – the ‘small entity’ section of the full FRS 102. ACCA has produced a full guide and model accounts. If you would like to request a copy please email firstname.lastname@example.org
FRS 105 – a specific standard for ‘micro’ entities.
A company is a micro-entity if it does not exceed at least two of the following three thresholds in relation to a financial year:
turnover does not exceed £632,000 (adjusted for periods longer or shorter than 12 months)
the balance sheet total does not exceed £316,000
the average number of employees does not exceed ten.
FRS 105 – for and against? There are many arguments for/against each option but FRS 105 may well be side-lined by practitioners as it does not follow some of the broad principles of FRS 102 and so might be seen as a ‘slow lane’ option. But FRS 105 can provide a simple and effective method of accounting for micro-entities. This article focuses on the major advantages/disadvantages of FRS 105 to help members give the correct advice to their clients.
Decision on which option to take
The decision to apply the micro-company provision is for the directors to make, and does not require shareholders’ approval or other formalities
Shareholders have to authorise the preparation of abridged accounts under FRS 102 section 1a so it is possible (if the shareholders are not directors) that disagreement on accounts option may arise
Format of accounts
Both the statement of financial position and the income statement format are clearly laid out in the standard and easy to follow. This lends itself to software very well, making accounts preparation much easier
Micro company formats are highly prescriptive. You cannot use a different description or change the order of the items; however, the addition of further lines is permitted
There are no ‘notes to the accounts’ required apart from certain information required by legislation rather than FRS 105 (see below for a list of these). This saves time and could be seen to disclose less information
Possibly third party users of the accounts might want to see further information
True and fair view
The financial statements of a micro-entity that comply with this FRS are presumed in law to give a true and fair view of the financial position and profit or loss of the micro-entity in accordance with the micro-entities regime. Therefore if the format is followed nothing else is required. Note also that a micro-entity is permitted, but not required, to present information additional to that required
Allows very small entities to ignore FRS 102
The ‘learning curve’ and different accounting treatment required by FRS 102 may only be delayed if the entity breaches the limits in subsequent years
A micro-entity is required to prepare an income statement (profit and loss account) to its members but there is no requirement to file it at Companies House
This is the same option as available to small entities using abridged accounts
A micro company is not required to prepare a director’s report. Many clients have always questioned the point of this report
Revaluations are not allowed under FRS 105 as only the historic cost convention is allowed. This makes reporting very simple with no need for costly valuations
Potentially has a huge effect on the net assets of a company and therefore the view of lenders and credit rating agencies might be adversely affected
Loans received at below market value
The complicated treatment in FRS 102 with regard to loans such as from a director or connected party at zero or low interest with no fixed repayment date is ignored. The treatment is very similar to the existing one under FRSSE
FRS 105 does not require a provision for deferred tax and any existing balances would be reversed
Other information required by FRS 105 The disclosures required by CA and Small Accounting Registration Regulation (Reg) should be included at the foot of the balance sheet rather than a note. These are:
Details of any advances, credit and guarantees with directors (s413 CA2006)
Particulars of any charge of the assets to secure a liability (Reg Sch 1.57(1))
Information about contingent liability not provided for (Reg Sch 1.57(2))
The aggregate amount of contracts for capital expenditure not provided (Reg Sch 1.57(3))
Pension commitments (Reg Sch 1.57(4))
Any other financial commitment (Reg Sch 1.57(5)).
Summary There are advantages and disadvantages to using FRS 105 and now is an ideal opportunity to discuss the options with your clients. Whichever one is chosen, they need to be aware of a new format and some new terminology which will be used.