Many micro-entities in the UK are considering whether to switch from FRS 102 reporting to FRS 105 to simplify their financial statements. The move can reduce disclosure requirements, streamline preparation, and lower compliance costs. However, the transition needs to be managed correctly to ensure eligibility, technical accuracy, and alignment with business strategy. For this reason, many small businesses look for professional FRS 105 services to guide them through the process from start to finish.
FRS 105 is specifically designed for micro-entities and offers a simplified accounting framework. It removes several complex accounting treatments required under FRS 102, making it attractive for very small companies that do not require extensive reporting.
Understanding the Purpose of FRS 105
The micro-entity regime was introduced to ease the administrative burden on the smallest UK companies. FRS 105 supports this aim by significantly reducing disclosures and cutting back fair value and revaluation options.
Under FRS 102, entities benefit from more flexibility in measurement. However, the increased complexity is often unnecessary for micro-entities. This makes FRS 105 a better fit for the simplest business structures, particularly when supported by tailored FRS 105 services to manage technical adjustments.
Deciding Whether the Transition Is Right for Your Business
Before beginning the transition, directors must assess eligibility. Not all small companies qualify as micro-entities.
The Companies Act 2006 sets out the size thresholds. To qualify, a company must meet at least two of the following:
- turnover not more than £632,000
- balance sheet total not more than £316,000
- no more than 10 employees
The company must also not fall into an excluded category, such as group undertakings, financial institutions, or certain charitable companies.
Directors should also consider stakeholder expectations. Some lenders, suppliers, or investors prefer fuller reporting. If external users rely on fair value, detailed narrative disclosures, or segment information, the transition might not be suitable.
Key Differences Between FRS 102 and FRS 105
The technical differences between the two frameworks are important when planning the switch.
FRS 102:
- Allows upward revaluations of property and some intangible assets
- Contains fair value rules for investment properties
- Requires deferred tax
- Applies broader disclosure obligations
- Suits growth-orientated and externally funded entities
FRS 105:
- Prohibits revaluation – cost model only
- Requires investment properties to be measured at cost
- Does not include deferred tax
- Significantly reduces disclosure requirements
- Intended solely for micro-entities
These differences often change the reported financial position. For example, removing revaluation gains can lower balance sheet totals.
Preparing for the Transition
A key step is assessing how existing accounting policies will change on the first application of FRS 105. Businesses should review:
- depreciation policies on fixed assets
- recognition of intangible assets
- treatment of investment properties
- previous revaluations
- deferred tax entries
- disclosures that will no longer be required
An opening balance sheet under the new framework is needed. This means management must restate comparative figures to align with FRS 105 from the beginning of the transition period.
Where valuations were previously recorded, they must be replaced with historic cost or deemed cost. This may affect retained earnings and require directors to explain the change internally.
Practical Steps in Implementing the Change
The transition generally follows a structured process:
- Eligibility review
Confirm micro-entity status and ensure no disqualifying factors exist. - Policy review
Identify where FRS 105 differs from existing practices and whether adjustments are needed. - Restatement of opening balances
Convert the prior year figures to FRS 105 format. - Documentation
Keep records of policy changes and reasons for adopting FRS 105. - Stakeholder communication
Inform advisers, lenders, and relevant parties of the change. - File and publish under new regime
Ensure the statutory accounts submitted align with FRS 105 requirements.
Accountants supporting this process often incorporate specialist FRS 105 services to minimise disruption and ensure consistency.
Common Challenges During Transition
Some businesses underestimate the technical consequences of removing fair values or deferred tax. These adjustments can lower net asset values, which may influence covenant calculations or director dividend decisions.
Another challenge is the loss of narrative commentary. FRS 105 financial statements are highly condensed. If directors rely on disclosures to showcase financial health or company strategy, they may feel the statements appear incomplete. Additional voluntary commentary, although not mandatory, can be used if required.
IT system configuration is also an issue for some micro-entities. When accounting software is set up for FRS 102, adjustments must be made to apply FRS 105 measurement rules correctly.
Reporting Format Under FRS 105
Micro-entity accounts under FRS 105 are shorter and more prescriptive. The format is driven by legislation rather than choice.
The profit and loss account includes fewer line items and limited breakdowns. The balance sheet is also simplified, with certain headings no longer required. Notes to the accounts are minimal.
There is no requirement to present a directors’ report if the company files as a micro-entity. This reduces the administrative workload.
The Role of Professional Support
While the regime is simpler in theory, the initial transition can be technical. This is why many directors use advisory support or structured FRS 105 services to oversee the conversion and ensure full compliance.
Professional advisers will:
- verify eligibility
- assess the benefits and drawbacks of the change
- prepare the opening balance sheet under FRS 105
- restate comparatives
- ensure statutory formats are applied correctly
- provide year-end support going forward
This allows directors to maintain confidence in compliance while benefiting from the simplified regime.
When It May Not Be Appropriate to Transition
Micro-entities that rely on asset revaluation, particularly property-heavy businesses, may find the transition problematic. Moving to a cost model could materially change their net asset value.
Likewise, if a company expects to grow beyond micro-entity thresholds soon, switching may not be worthwhile. Transitioning back to FRS 102 later could create additional complexity.
Lenders and investors also influence the decision. Some prefer the transparency of FRS 102 disclosures.
A forward-looking view is essential before finalising the transition.
Ensuring a Smooth Changeover
To ensure a smooth changeover, directors should take a phased approach. Documenting reasons for the transition and maintaining clear audit trails helps demonstrate compliance if questioned in the future.
Accurate restatement of opening balances is critical. Many errors occur because valuation adjustments are not removed correctly. A structured plan supported by external FRS 105 services can manage this risk.
Timeline planning is equally important. The transition should be aligned with year-end schedules to avoid unnecessary disruption.
Also Read: FRS 105 Compliance Checklist: Essential Steps for UK Micro-Entities