What Is The FRS 105?
What is the FRS 105, and who does it apply to? Why was it introduced, what are its key provisions, and what do you need to know about transitioning to this particular standard?
For a full FRS 105 explanation, read on…
Overview of FRS 105
FRS 105 was introduced in 2015, and came into force the following year. It came about for two reasons: to amend existing UK GAAP standards so that they came in line with international reporting standards and to make reporting far easier for businesses classed as “micro-entities”.
To be classed as a “micro-entity”, a business must meet at least two of the following requirements:
- 10 employees or fewer
- £316,000 or under on the balance sheet
- A turnover of £632,000 or under
If a micro-entity has third parties interested in its annual accounts and general financial affairs, though, FRS 105 may not be appropriate as it may not include the level of detail they require. In this case, the business would need to use FRS 102 instead.
Importance of FRS 105 for Micro-Entities and Accountants
The FRS 105 has implications for financial reporting. If you have a client who is in the process of setting up a business or has taken on a new client whose business is classed as a micro-entity, it’s important to understand which reporting standard best fits their needs.
If a client is currently using FRS 102 but FRS 105 better suits their needs, their accounting responsibilities will be significantly reduced when they make this transition. If they are a brand new business, they need to decide whether they are likely to be eligible for FRS 105 reporting at the start of trading, as well as how long they expect to be operating under micro-entity thresholds.
Key Provisions of FRS 105
Every year, micro-entities following FRS 105 must file the following with HMRC:
- An Income Statement (profit and loss account
- A Balance Sheet (Statement of Financial Position)
- Footnotes that explain any Director transactions.
A similar filing is required by Companies House.
There is no requirement for a director’s report, and unlike FRS 102, there is no requirement to revalue investments and other assets at fair value; only a cost valuation is required. By company law, any accounts that are prepared in accordance with FRS 105 are deemed to give a true and fair view of their financial position.
However, there are some downsides. There is a specific format – Format 1 – that must be used to compile an FRS 105 profit and loss account, which could be a big change from previous years. Revaluation of fair assets is not permitted, and there are no accounting policy options. This means that any borrowing and development costs that are incurred must be expensed to the P&L account in the period in which they were incurred. Furthermore, any grants must be recognised on an accrual basis.
Transitioning to FRS 105: What You Need to Know
When making the transition to FRS 105, businesses must follow a four-stage process:
- Recognising the liabilities and assets that are required to be recognised by FRS 105.
- Derecognising liabilities and assets if FRS 105 forbids them from being recognised.
- Reclassify any liabilities or assets that were classified in one way under UK GAAP but should be classified differently under FRS 105.
- Applying all FRS 105 provisions from the date of transition onwards.
The biggest challenge when transitioning to FRS 105 is establishing whether this is indeed the right reporting standard to use. This decision will be based on the size of the company and how soon it is likely to grow, understanding the standard’s provisions and exemptions, and determining whether FRS 105 gives a high enough level of reporting detail for all parties related to the company.
This requires a high level of understanding of FRS 105 as well as FRS 102. In some cases, external support may be required.
Why Join the ICPA for FRS 105 Compliance Guidance
While the FRS 105 is simpler – and therefore easier to navigate – than the FRS 102, it’s not without its complexities. If you’re unfamiliar with this reporting standard, it’s natural that you may be looking for additional advice or support in this area.
That’s where ICPA membership comes in. Our technical support team is one of the many benefits you can access as a member. It may be that you’re looking for more information about how to apply a particular element of the FRS 105, or perhaps you’re simply looking for confirmation that you’re doing something the right way. Whatever your FRS 105 compliance guidance requirements, our experienced team is always on hand to help.
To access this support – plus plenty more support and advice tailored specifically to accountants – join the ICPA today.
FAQs on FRS 105
See below for answers to some of the most commonly asked questions about the FRS 105. For more specific questions or technical support, ICPA members can contact our support team.
What is FRS 105 and who is it for?
The FRS 105 is a financial reporting standard that applies to micro-entities: a definition based on their employee numbers, turnover and balance sheet. It simplifies reporting for these smaller businesses, but may not be suitable for every business that qualifies.
How does FRS 105 differ from FRS 102?
FRS 105 and FRS 102 are both reporting standards, but FRS 105 is significantly simplified. FRS 105 is based on FRS 102 but is adapted to meet the lower reporting requirements of smaller businesses.
What are the key provisions of FRS 105?
The key provisions of FRS 105 are explained above.
How does FRS 105 impact financial reporting for micro-entities?
FRS 105 makes financial reporting far easier than before for micro-entities, simplifying reporting requirements. However, FRS 105 may not be right for every micro-entity, and reporting requirements will change when they grow beyond this size.
Is adopting FRS 105 a legal requirement for micro-entities?
The disclosures contained within FRS 105 are required by law. Furthermore, accountancy firms that do not prepare client accounts in line with reporting standards may be referred to disciplinary committees and even fined or have their audit registration removed.
What are the benefits of adopting FRS 105 for my accounting practice?
If you or your clients meet FRS 105 requirements, reporting based on this standard can significantly reduce your reporting burden.
How frequently is FRS 105 updated and how can I stay updated?
The FRS 105 is subject to periodic reviews, at least every five years. We will always keep ICPA members informed of any changes that may affect them and their clients.
How does FRS 105 impact tax computations for micro-entities?
FRS 105 impacts tax computations in two ways: a change in the recognition and measurement of assets and liabilities, and potential differences in the way profits and losses are measured and reported.
How can FRS 105 aid in simplifying the financial reporting process?
FRS 105 aids in simplifying the financial reporting process for micro-entities by reducing their reporting burden. Businesses that qualify for reporting under FRS 105 need to report less information than FRS 102 businesses.
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