Overview

FRS 105 “The Financial Reporting Standard applicable to the Micro-entities Regime” (link to FRC website) 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 The Financial Reporting Standard applicable in the UK and Republic of Ireland but the Financial Reporting Council has adapted it significantly to satisfy the legal requirements and to reflect the simpler nature and smaller size of micro-entities.

The application of the micro-entities regime is optional; however, a micro-entity that chooses to prepare its financial statements in accordance with the micro-entities regime is required to apply FRS 105. A company that qualifies for this regime, but chooses not to apply it, is required to apply another accounting standard. The possible options are set out in FRS 100 Application of Financial Reporting Requirements.

FRS 105 is structured on a section-by-section basis consistent with FRS 102 but there are considerable simplifications to the accounting treatments and disclosure requirements for entities reporting under FRS 105. The main simplifications available under FRS 105 are:

• to remove all disclosure requirements other than those required by law, although a micro-entity is not prohibited from providing additional voluntary disclosures and is encouraged to give consideration to these;
• to remove all choices of accounting treatment because no disclosure is required of accounting policies so, if choices were available, it would not be clear from the accounts which options had been selected; and
• to exempt micro-entities from having to account for some complex transactions, e.g. equity-settled share-based payments and deferred tax.

Micro-entities are not permitted to use fair value accounting for either investment properties, which under FRS 105 must be measured at cost subject to depreciation or impairment, or financial instruments, which must be measured at cost less impairment or amortised cost.

History of FRS 105

Scope

FRS 105 may be applied by entities that satisfy at least two of the following three requirements in relation to a financial year: 

• Turnover: Not more than £632,000 (pro-rated appropriately where an entity's year is shorter or longer than a calendar year);
• Balance sheet total (i.e. gross assets): Not more than £316,000; and
• Average number of employees: Not more than 10. 

An entity must meet at least two of these limits in two consecutive years to qualify as a micro-entity and, once qualified, must exceed at least two of these limits for two consecutive years to cease to qualify.  

Certain types of entity, such as charitable companies and parent companies that are required or choose to prepare consolidated financial statements, are excluded from the micro-entity regime and therefore cannot apply FRS 105.

Amendments to FRS 105 were made in May 2016 to extend its scope to include eligible limited liability partnerships (LLPs) and qualifying partnerships, following a change in legislation.  In December 2017 as part of the triennial review of FRS 102 the FRC made amendments to incorporate FRS 105 in the Republic of Ireland.  FRS 105 was most recently amended in October 2020 to introduce explicit requirements for accounting for temporary rent concessions for operating leases occurring as a direct consequence of the COVID-19 pandemic.  The amendments require entities to recognise changes in operating lease payments that arise from COVID-19-related rent concessions over the periods that the change in lease payments is intended to compensate.  The requirements only apply to temporary rent concessions occurring as a direct consequence of the COVID-19 pandemic, when any reduction in lease payments affects only payments originally due on or before 30 June 2021.  In June 2021, the FRC issued Amendments to FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland and FRS 105 The Financial Reporting Standard applicable to the Micro-entities Regime - COVID-19-related rent concessions beyond 30 June 2021.  The June Amendments extend the requirements, introduced in October 2020, to apply to rent concessions that reduce only lease payments originally due on or before 30 June 2022 provided the other conditions for applying the requirements are met.  

Summary

The standard comprises 28 sections, each of which addresses a specific area of accounting, including transitional provisions and specific requirements for specialised entities.  The sections are as follows:

1. Scope
2. Concepts and Pervasive Principles
3. Financial Statement Presentation
4. Statement of Financial Position
5. Income Statement
6. Notes to the Financial Statements
7. Subsidiaries, Associates, Jointly Controlled Entities and Intermediate Payment Arrangements
8. Accounting Policies, Estimates and Errors
9. Financial Instruments
10. Inventories
11. Investments in Joint Ventures
12. Property, Plant and Equipment and Investment Property
13. Intangible Assets other than Goodwill
14. Business Combinations and Goodwill
15. Leases
16. Provisions and Contingencies
17. Liabilities and Equity
18. Revenue
19. Government Grants
20. Borrowing Costs
21. Share-based Payment
22. Impairment of Assets
23. Employee Benefits
24. Income Tax
25. Foreign Currency Translation
26. Events after the End of the Reporting Period
27. Specialised Activities
28. Transition to this FRS

Effective date

FRS 105 is effective for periods beginning on or after 1 January 2016. Early adoption is permitted.  See above for the effective dates of other amendments to FRS 105.