When Should I Be Using FRS 105 or FRS 102 1A?
When it comes to deciding which financial reporting standard to use to prepare accounts, micro-entities can choose between FRS 102, including section 1A, and the new FRS 105.
What are the differences between FRS 102 1A and FRS 105?
FRS 102 1A is part of FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland.
FRS 102 1A is for small entities. One of the main features of FRS 102 1A is that fewer disclosures and primary statements are required compared to FRS 102, as only an income statement, balance sheet, and notes to the accounts should be reported.
FRS 105, on the other hand, is exclusively for the use of entities that qualify as a micro-entity and decide to apply the micro-entities regime. It’s a much simpler standard than FRS 102 (for example, there are no accounting choices in FRS 105) and entities are only required to prepare an income statement and balance sheet, alongside limited disclosures.
An entity is a micro-entity if it meets at least two of the three following criteria:
- Turnover of £632,000 or less (adjusted for periods longer or shorter than 12 months)
- A balance sheet of £316,000 or less
- 10 employees or fewer
As a result, only the smallest of entities can qualify for the micro-entities regime.
FRS 102 1A and FRS 105 have been in effect in respect of accounting periods beginning on or after 1 January 2016, although further amendments as a result of the triennial review are effective for accounting periods beginning on or after 1 January 2019.
You can view the March 2018 editions of the accounting standards, which incorporate the triennial review amendments, on the Financial Reporting Council’s website.
Which is better – FRS 105 or FRS 102 1A?
In short, there is no “better” reporting standard for a micro-entity.
Instead, the choice of whether to use FRS 105 or FRS 102 1A will depend on several factors, including, but not limited to, the following:
Whether detailed notes to financial statements are required
Under FRS 105, far fewer disclosures are required in the financial statements than under FRS 102 1A.
Broadly, under FRS 105, the only disclosures that need be made are in relation to:
- Advances, credit and guarantees granted to directors
- Financial commitments, guarantees and contingencies
- Off-balance sheet arrangements
- The average number of employees
If a micro-entity reporting under FRS 105 wishes, additional disclosures can be made, but they are not necessary.
As a result, if a micro-entity would benefit from having additional disclosures in its accounts, perhaps due to unusual or complex accounting treatments that could be better understood through the presence of a disclosure note, FRS 102 1A may be a better choice of reporting standard.
Whether an entity relies on external financing
Accounts prepared under FRS 105 may not provide sufficient information for certain lenders. In such cases, it’s not uncommon for the lender to request additional information to support any application for finance.
As such, if an entity is likely to apply for financing from a third-party, it may be easier to prepare financial statements under FRS 102 1A, which requires fuller disclosures.
Whether an entity is expected to remain “micro”
As FRS 105 is only available to micro-entities, it may be easier for an entity to start with FRS 102 1A if it is only likely to fall within the definition of a micro-entity for a short time.
Whether simplicity is a priority
FRS 105 is far less complex than FRS 102 1A. For example, deferred tax is not even accounted for under FRS 105, and there are also simpler accounting treatments for items such as financial instruments.
If an entity doesn’t need to make use of more complex accounting treatments, such as a revaluation reserve, then it can save a lot of difficulty by keeping things simple and opting for FRS 105.
Ultimately, the decision of whether an entity should adopt FRS 102 1A or FRS 105 is best decided on a case by case basis, taking into consideration both the current requirements of the entity as well as future growth and lending prospects.
Taxfiler can help with accounts preparation from trial balance stage to the final accounts, with templates in line with FRS 102 1A, and FRS 105. To find out more, speak to a member of the team on 0330 2233 406 or email [email protected].