Micro Entity Accounts

Following on from my colleague’s blog ‘The end of FRSSE’ which stated that for accounting periods beginning on or after 1 January 2016, the latest incarnation of FRSSE (2015), will no longer be available and companies will need to choose between FRS102 and FRS105 (Micro Entities), we will look at the options available for clients that may be eligible to prepare accounts under FRS 105.

FRS 105 ‘The Financial Reporting Standard Applicable to Micro-entities Regime’ is a financial reporting standard for entities eligible to apply the Micro-entities Regime set out in UK Company Law.  It is based on FRS 102 and adapted significantly to ensure that the legal requirements are satisfied and reflect the simpler nature and smaller size of micro entities.  It replaces the FRSSE regime as applicable to micro-entities.

FRS 105 can only be applied for companies that fall within the following limits;

  • Turnover < £632,000
  • Gross assets < £316,000
  • Employees – not more than 10 on average

This may not apply to many of our clients but in the cases it does it may be worthwhile considering using FRS 105 rather than applying section 1A of FRS 102.

I have made a note of the most significant differences between FRS 105 and FRS102, which are as follows;

  • A simpler balance sheet and profit and loss account. There are two formats for the balance sheet and one format for the profit and loss account.  There is no need for any of the other primary statements required for larger companies.
  • There is no requirement to prepare a directors report.
  • No notes to the accounts are required. Instead where applicable, details of any advances, credit and guarantees with directors, and details of any financial commitments, guarantees and contingencies should be disclosed at the foot of the balance sheet.  This reduced information is referred to as the ‘minimum accounting items’.
  • Only the balance sheet, including information disclosed at the foot, needs to be filed at Companies House.
  • Assets cannot be be measured at fair value or a revalued amount. This means that no revaluation or subsequent measurement at fair value is permitted under the micro-entities regime.  An example of this would be if the micro-entity had an investment property or revalued fixed assets, they would be reported at cost and not fair value.
  • Borrowing costs and development costs must be written off to the profit and loss account in the period in which they are incurred, and government grants must be recognised on the accruals basis.

Entities excluded from being treated as micro-entities

If an entity is excluded from the small company regime it cannot qualify as a micro-entity, which is expected.  In addition to this, investment undertakings, financial holding and insurance undertakings, credit institutions, overseas companies, unregistered companies and companies authorised to register pursuant to s1040 of the Companies Act 2006 are also excluded.

Companies within a group

A subsidiary included in consolidated group accounts cannot qualify as a micro-entity.

A parent company can only qualify for the purpose of its individual accounts if it qualifies as a micro-entity individually and the group headed by it qualifies as small.  Also, a parent entity that prepares group accounts cannot qualify as a micro-entity for the purposes of its individual accounts.

Adoption of Micro-entities Regime

The adoption of the scheme is optional for eligible entities.  A micro-entity has the option to choose to prepare accounts under the financial reporting regime that is applicable to larger entities.

On review of the individual circumstances a decision can be taken as to whether or not to apply the micro-entity exemptions.  It will be important to understand who the users of the accounts will be, an example being that potential creditors and lenders to a business may require more information than what is shown in micro-entity accounts.  In favour of changing over to the micro-entity regime a company with an investment property and little or no borrowings may be attracted to the fact that, under the micro-entity regime, investment properties will not need to be revalued each year.

The final decision

In choosing to adopt the micro-entity regime it is important to consider carefully the various implications before a decision is taken to take advantage of the exemptions available.  In choosing to adopt the micro-entity regime, the prior year balance sheet and profit and loss account will need to be restated, and an opening balance sheet at the date of transition is required in accordance with FRS 105 (although this balance sheet will not need to be presented).

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