FRS 105 provides a simplified framework for small company reporting. A micro entity is a company which meets two of the following criteria: turnover less than £632,000, balance sheet total less than £316,000 and less than 10 employees. The advantage of adopting FRS 105, which is optional, is a reduction in disclosure, aiming the ease the burden of accounts preparation.
Implementation of FRS 105 however may not be straightforward, largely due to the lack of choice of accounting policy imposed by the standard. For instance, revaluations are not permitted, so companies holding assets at a revalued amount, such as investment properties, will need to change their accounting treatment. There may be changes in the timing of recognition of income and expenses, for example, those relating to government grants, having a direct impact on profit.
Another key issue is that the recognition of deferred tax is prohibited. Some commentators have suggested that that makes the future tax consequence of transactions impossible to detect from small company accounts.
On the plus side, the disclosure requirements are extremely limited, and there is no requirement for related party disclosures, which will please many preparers of financial statements.
It is important to carefully plan any transition to a new accounting regime, even if the accounts are straightforward and the move is to a less complex reporting framework. Existing accounting policies need to be reviewed on a line by line basis and checked for compliance with FRS 105. Accounting systems may need amending to ensure that transactions are correctly recognised in accordance with new accounting policies.
Finally, it is important to remember that FRS 105 is optional. Many accountants feel uncomfortable with the limited disclosures and the fact that the accounts are "deemed" to show a true and fair view – there is no requirement for the directors to assert that this is the case or consider if any additional disclosures are necessary. FRS 102 is the alternative accounting framework open to small companies, and ex-FRSSE adopters should carefully consider whether a move to FRS 102 1A – the section applicable to smaller entities would better suit their accounting requirements.