FRS 105: The reporting standard for 'micro entities'

The introduction of the EU Accounting Directive into UK company law has resulted in significant changes for small incorporated businesses, and has provided a couple of options for different accounting standards under which their accounts can be prepared.

One of the options is to use accounting standard FRS 105 for ‘Micro entities’.

 

The following types of entities are not permitted to use FRS 105:

  • Public company                        
  • Authorised insurance company, banking company, an e-money issuer or a UCITS management company
  • Company that carries on insurance market activity
  • Charity
  • Company voluntarily preparing group accounts
  • Company included within group accounts

If the entity is not one of the above, it then has to meet the following criteria:

  1. Turnover not more than £632,000 (adjusted proportionately if the financial year is longer or shorter than 12 months)
  2. Balance sheet total not more than £316,000
  3. Average number of employees not more than 10

Unless in the first year, the criteria must be met for two consecutive years.

 

Below are some of the pros and cons of having your company accounts prepared under the micro-entity accounts regime:

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As a firm of Chartered Accountants, we will be required to undertake the same level of work for our clients when preparing micro entity accounts that we have always done but the reports and the information contained in them will be of a lesser quality. The majority of the missing information will still have to be produced but will not be utilised.

If you are not receiving regular management accounts and rely solely on your year end accounts to assess business performance, this may become more challenging in the future. We would always recommend you have regular up to date management information and more information can be found on our website here.

Whilst micro entity accounts will fully comply with legislation, they are only “deemed” to give a true and fair view and in many cases may not contain sufficient information to give a true and fair view. As a result, it is our opinion that many businesses may suffer if and when they apply for finance and tender for work. In addition, the lack of detail may also prompt more questions from HMRC and we would of course always recommend that all preventable measures are taken to reduce the risk of an enquiry.

Based on the above, whilst it is the least complex option, we would generally recommend that for the majority of businesses micro-entity accounts will not be appropriate, although this should be considered on a case by case basis.