FRS 105 is a simplified and adapted version of the FRS 102 financial reporting standards that takes into account the simpler nature and smaller size of micro-entities. Its simplification of reporting standards proves an attractive option for the smallest of entities that are not keen to apply the more complex accounting variables found in FRS 102.
Among the notable features of FRS 105 are the ‘deeming provisions’ – that is to say that when any micro-entity prepares its financial statements in accordance with the basic legal requirements, then those financial statements are deemed – by law – to give a true and fair view.
Since its implementation, FRS 105 has become the norm for many – if not most – micro-companies. Of course, most does not mean all and in some instances, FRS 105 might not be the best nor most feasible option. While the standard might appear appropriate for most micro-entities, some may need a more comprehensive reporting framework (for example, FRS 102).
How can an entity decide between FRS 102 and FRS 105?
The default position for a micro-company when it comes to FRS 102 or 105 should be to use FRS 105 and the micro-entities regime, unless FRS 102 is a better solution for commercial, business, tax, presentation or other reasons.
For many micro-companies, FRS 105 is more appropriate as it reduces the requirement for disclosures. Guarantees, commitments, advances, credits made to directors – all of this information does not need to be disclosed and many micro-companies might want to keep this information within the firm. In addition, many of the measurement and recognition requirements in FRS 105 are easier to apply than those in FRS 102.
But it’s important to appreciate the fact that while micro-companies using FRS 105 might have minimal disclosures, FRS 105 offers less flexibility. For example, under FRS 105 the use of revaluation amounts or fair values under current market conditions are not permitted. This means that any assets revalued, as permitted under previous reporting standards, will need to be restated to the value under the historical cost accounting rules.
FRS 102 financial reports might be more arduous and complex to complete but do offer more choice and options when it comes to disclosures. If the business is growing, for example, and close to the size limits for a reporting standard (and would therefore cease to qualify as a micro-entity in the future) it would make more sense to prepare FRS 102 accounts. There are also things like external shareholders to consider; shareholders who are also business directors have access to management information and are not required to disclose further information under FRS 105, but external shareholders might want to see full accounts to assess the business’ performance.
FRS 102 or FRS 105?
Reduced disclosures under FRS 105 might be faster and therefore more practical for businesses that are time poor, but FRS 102 – while more time consuming – might provide a better business picture.
In our FRS 105 Handbook for accountants and their clients – written in conjunction with AccountingWEB, we assess whether or not a small company should adopt FRS 102 or 105, providing scenarios where one would be more applicable than the other.
If you would like to download the handbook and find out which reporting standard is right for your business, please click the button below.