FRS 105: Micro-entities in the UK
FRS 105 is a single accounting standard for use by businesses that are entitled for, and follow the accounting rules applicable to micro-entities. It is based on ‘FRS 102 The Financial Reporting Standard followed in the UK and Republic of Ireland’, but tweaked to help micro-entities with the statutory accounting requirements and suited to their easier working styles. For example, no deferred tax or equity-settled share-based payment amounts are accepted and other accounting alternatives laid out in FRS 102 have been withdrawn. This standard applies to accounting periods starting from or after 1 January 2016.
It consists of 28 sections, each dealing with different areas of accounting. FRS 105 requires that micro-entities prepare only an income and financial statement. The standard requires only declarations of a particular nature.
The implementation of this standard by businesses is voluntary. A business can meet the requirements but choose not to apply this and opt for other optional standards applicable to its functioning.
What is a micro-entity?
A business fulfils the certified conditions for a micro-entity if it meets at least two out of three of the following criteria:
- Turnover to not exceed £632,000 (adjusted for periods longer or shorter than 12 months)
- Balance sheet total should not be more than £316,000
- Average number of staff to be less than or equal to 10
These criteria must be met in two consecutive years after the first financial year for a business to be certified as a micro-entity. Further, this certification will automatically stop if any two conditions are surpassed.
Any business that is removed from the list of small companies or LLPs need not follow FRS 105 standards. In addition, the following types of businesses are not included as micro-entities:
- Philanthropic businesses, funding ventures;
- Finance companies;
- Ancillary businesses holding companies responsible for group accounts.
All small businesses are required to publish their:
- Income Statement ( as a substitute for the Profit and Loss Account)
- Statement of Financial Position (alternative for the Balance Sheet)
Exhaustive notes are not required with these statements. Only general data is to be submitted about the owner’s financial transactions
FRS 105 accounts are needed to be submitted to HMRC and Companies House every year as a requirement of every company’s annual accounts filing. While statements of income and financial position and general data about owner transactions are to be given to HMRC, Companies House only requires the documents of financial position and general data pertaining to transactions.
FRS 105 is not applicable for a small business if a third person or other institutions are involved in the company’s financials and preparing the annual statements of accounts as they require greater level of details. These companies may choose FRS 102 to prepare accounts under a different Financial Reporting Standard which requires more exhaustive details and data to be shown in the accounts and to apply specific accounting principles that aren’t required under FRS 105.
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