FRS 105 for Micro-Entities
A guide to FRS 105, the simplified financial reporting standard for UK micro-entities, covering eligibility thresholds, reduced disclosure requirements and key restrictions.
FRS 105, formally titled The Financial Reporting Standard applicable to the Micro-entities Regime, is the most simplified accounting standard available to UK companies. It allows the smallest businesses to prepare financial statements with minimal disclosures and a highly streamlined format, reducing both the cost and complexity of statutory reporting.
The standard was introduced alongside the micro-entities regime created by the Companies Act 2006 (as amended) and SI 2013/3008. It took effect for accounting periods beginning on or after 1 January 2016.
Qualifying as a micro-entity
A company qualifies as a micro-entity if it meets at least two of the following three criteria in both the current and preceding financial year:
| Criterion | Threshold |
|---|---|
| Turnover | Not more than £632,000 |
| Balance sheet total | Not more than £316,000 |
| Average number of employees | Not more than 10 |
These thresholds are deliberately set at the lower end of the small company range. For details on how micro-entity status fits within the broader standards framework, see our guide to UK accounting standards .
Entities that cannot use FRS 105
Even if the size thresholds are met, certain types of entity are excluded from the micro-entities regime:
- Public companies (PLCs)
- Companies that are part of a group required to prepare group accounts
- Charities
- Financial institutions (banks, insurance companies, MiFID investment firms)
- Companies whose securities are admitted to trading on a regulated market
These exclusions exist because the simplified reporting under FRS 105 would not provide sufficient information for the users of these entities’ accounts.
What FRS 105 requires
Financial statements
A micro-entity preparing accounts under FRS 105 must produce only:
- A balance sheet in a prescribed simplified format
- A profit and loss account (which does not need to be filed at Companies House)
- Limited notes to the accounts
There is no requirement to prepare a cash flow statement, a statement of changes in equity, or a directors’ report (though directors may choose to prepare one voluntarily).
Balance sheet format
The prescribed balance sheet format under FRS 105 is significantly condensed compared to the formats available under FRS 102:
| Line item | Description |
|---|---|
| Called up share capital not paid | Amounts owed by shareholders on issued shares |
| Fixed assets | Tangible and intangible assets |
| Current assets | Stocks, debtors, cash |
| Creditors: amounts falling due within one year | Short-term liabilities |
| Net current assets / (liabilities) | Current assets less current creditors |
| Total assets less current liabilities | Subtotal |
| Creditors: amounts falling due after more than one year | Long-term liabilities |
| Provisions for liabilities | Estimated future obligations |
| Capital and reserves | Share capital, retained earnings |
The balance sheet must include a statement confirming that the accounts have been prepared in accordance with the micro-entities provisions.
Notes to the accounts
FRS 105 requires only two mandatory notes:
- Advances and credits granted to directors (including guarantees) – required by the Companies Act 2006
- Financial commitments, guarantees and contingencies not recognised in the balance sheet
This is a dramatic reduction from the extensive disclosure requirements of full FRS 102.
Key accounting restrictions
FRS 105 achieves its simplicity partly by prohibiting certain accounting treatments that are available under FRS 102 or IFRS. These restrictions include:
No revaluation of assets
All assets must be measured at historical cost less depreciation or amortisation and impairment. The revaluation model is not permitted for property, plant and equipment, investment property or intangible assets.
No fair value measurement
Financial instruments must be measured at cost or amortised cost. Fair value accounting is not available, even for derivatives or investments that would normally be measured at fair value under FRS 102.
No deferred tax
FRS 105 does not require (or permit) the recognition of deferred tax assets or liabilities, except in very limited circumstances. This simplifies tax accounting but means the accounts may not fully reflect the entity’s future tax position.
No capitalisation of development costs
All development expenditure must be expensed as incurred. Under FRS 102, qualifying development costs can be capitalised as an intangible asset and amortised over their useful life.
No equity method
Investments in associates and joint ventures are measured at cost less impairment. The equity method, which adjusts the carrying amount for the investor’s share of the investee’s profit or loss, is not available.
FRS 105 vs FRS 102 Section 1A
Small companies that do not qualify as micro-entities, or that choose not to use FRS 105, can apply Section 1A of FRS 102. The differences are material:
| Feature | FRS 105 | FRS 102 Section 1A |
|---|---|---|
| Size threshold (turnover) | £632,000 | £10.2 million |
| Revaluation permitted | No | Yes |
| Fair value accounting | No | Yes (certain instruments) |
| Deferred tax | Generally not recognised | Recognised |
| Development costs | Expensed | Can be capitalised |
| Cash flow statement | Not required | Not required |
| Directors’ report | Not required | Required (but need not be filed) |
| Notes to accounts | 2 mandatory | More extensive |
For a detailed look at micro-entity accounts specifically, see our guide to micro-entity accounts .
Advantages of using FRS 105
Reduced preparation costs
The simplified format and minimal disclosures mean that accounts can be prepared more quickly and at lower cost. For the smallest businesses, this can represent a meaningful saving on accountancy fees.
Reduced public disclosure
Because the profit and loss account does not need to be filed at Companies House, competitors, suppliers and customers cannot see the company’s revenue or profit figures. Only the condensed balance sheet and limited notes are on public record.
Simplified accounting judgements
The prohibition on revaluation, fair value and deferred tax removes several areas that require complex professional judgement and estimation. The accounts are more straightforward to prepare and audit.
Disadvantages and limitations
Less useful information
The heavily condensed accounts may not provide sufficient detail for banks, investors or other stakeholders who need to assess the company’s financial health. A lender may request full FRS 102 accounts before agreeing a loan facility.
Restricted accounting policies
The prohibition on revaluation means that a company with a property that has increased substantially in value cannot reflect this in its balance sheet. This can make the company appear weaker financially than it actually is.
Growth implications
A company approaching the micro-entity thresholds should plan for the transition to FRS 102 Section 1A. The switch requires restating the opening balance sheet under the new standard, which may uncover issues that need professional attention.
Practical considerations
The decision between FRS 105 and FRS 102 is not purely about eligibility. Directors should consider whether banks or investors will accept micro-entity accounts, whether the company holds assets that benefit from revaluation, and whether it is likely to exceed the thresholds soon.
Micro-entity accounts must be filed at Companies House within nine months of the financial year end. Most micro-entities will also qualify for audit exemption under the Companies Act 2006, provided they are not part of a group and do not fall into a category requiring mandatory audit.