Micro Entity Accounting

Small com­pa­nies, which qual­i­fy as ‘micro-enti­ties’, have a choice of account­ing stan­dards:

• to use the same account­ing stan­dard — FRS 102 — as larg­er UK com­pa­nies but using a reduced dis­clo­sure regime (sec­tion 1A) with­in the stan­dard, or
• to apply an alter­na­tive stan­dard — FRS 105.

FRS 102 intro­duced some sig­nif­i­cant account­ing chal­lenges includ­ing more wide­spread use of ‘fair val­ue’ account­ing so there may be a temp­ta­tion to use FRS 105 as fair val­ue account­ing must not be applied. How­ev­er this may not always be the best choice for the com­pa­ny.

Qualifying as a micro-entity

The main cri­te­ri­on is based on the fol­low­ing size lim­its. The com­pa­ny has to meet two out of three size lim­its, for two con­sec­u­tive years:

• turnover of £1m or low­er
• bal­ance sheet total (gross assets) of £500,000 or low­er, and
• 10 or few­er employ­ees (aver­aged through­out the year)

The thresh­old was increased by the gov­ern­ment for peri­ods com­menc­ing on or after 6 April 2025 from the pre­vi­ous turnover and bal­ance sheet thresh­olds of £632k and £316k respec­tive­ly (require­ments in rela­tion to the aver­age num­ber of employ­ees remain the same).

Cer­tain finan­cial ser­vices firms, such as cred­it insti­tu­tions and insur­ers, and also char­i­ties, are exclud­ed from qual­i­fy­ing and there are spe­cial rules if the com­pa­ny is part of a group.

Simplified accounts

Accounts pre­pared under FRS 105 need con­sist of only a sim­pli­fied Prof­it & Loss Account, a Bal­ance Sheet and four notes to the bal­ance sheet. Cur­rent­ly, the accounts filed with the reg­is­trar at Com­pa­nies House need not include a prof­it and loss account — how­ev­er, this is expect­ed to change as part of Accounts Reform under the Eco­nom­ic Crime and Cor­po­rate Trans­paren­cy Act. The exact time­line on this is not clear but it is antic­i­pat­ed that this will change over the next cou­ple of years.

Com­pa­ny law pre­sumes that micro-enti­ty accounts pre­pared as above are assumed to give a true and fair view. This means that the com­pa­ny is not required to add any fur­ther dis­clo­sure. If instead the com­pa­ny opts for the reduced dis­clo­sure regime under FRS 102, there may be a need for extra dis­clo­sure to ensure that the accounts give a true and fair view.

Simpler accounting

FRS 105 impos­es sim­pler account­ing treat­ment com­pared to FRS 102. There are numer­ous dif­fer­ences between FRSs 102 and 105 but the three most sig­nif­i­cant are like­ly to be:

Revaluation / fair value of assets

This is not per­mit­ted under FRS 105. By con­trast, FRS 102 per­mits (and in some cas­es requires) some assets to be mea­sured at fair val­ue annu­al­ly.

Avoid­ing the need to obtain reg­u­lar fair val­ues may prove more con­ve­nient and less cost­ly for the busi­ness. How­ev­er, if the com­pa­ny is cur­rent­ly revalu­ing prop­er­ties and has sig­nif­i­cant loans and oth­er debts against these prop­er­ties, using FRS 105 would mean re-mea­sur­ing the prop­er­ties at ‘depre­ci­at­ed cost’, which could reduce the bal­ance sheet val­ue con­sid­er­ably.

Fewer intangible assets

Under FRS 105, few­er intan­gi­ble assets are recog­nised than under FRS 102. For instance, if the com­pa­ny were to acquire a busi­ness, the pur­chase price will be divid­ed between tan­gi­ble assets and lia­bil­i­ties and good­will — the com­pa­ny would not need to iden­ti­fy sep­a­rate indi­vid­ual intan­gi­ble assets such as cus­tomer lists and brand names. It also means, how­ev­er, that inter­nal­ly-gen­er­at­ed intan­gi­bles such as devel­op­ment costs can­not be treat­ed as assets; instead, such costs must be expensed through prof­its as incurred.

No more deferred tax

FRS 105 does not allow com­pa­nies to recog­nise deferred tax. By con­trast, FRS 102 includes deferred tax more fre­quent­ly than before.

Periodic Review 2024 amendments

The Peri­od­ic Review 2024 amend­ments which will be applic­a­ble for account­ing peri­ods begin­ning on or after 1 Jan­u­ary 2026 intro­duces a five-step mod­el for rev­enue recog­ni­tion into both FRS 102 and FRS 105 but with sim­pli­fi­ca­tions for those prepar­ing finan­cial state­ments under FRS 105. While changes to lease account­ing require­ments for lessees have been made in FRS 102, lease account­ing remains unchanged under FRS 105.

Other things to consider

The rel­a­tive­ly brief infor­ma­tion pre­sent­ed with­in micro-enti­ty accounts means that less finan­cial detail is avail­able to the pub­lic (via the filed accounts at Com­pa­nies House). Direc­tors may find this an advan­tage; how­ev­er, this lack of infor­ma­tion could impact the com­pa­ny’s cred­it-rat­ing. The share­hold­ers of the com­pa­ny will also receive less infor­ma­tion in their mem­bers’ accounts.

Direc­tors can pro­vide more infor­ma­tion in the accounts than the statu­to­ry min­i­mum, should they pre­fer to do so. We will be hap­py to sup­ple­ment the min­i­mum statu­to­ry infor­ma­tion with extra analy­sis so that direc­tors have enough finan­cial detail to make informed deci­sions in run­ning the busi­ness.

We want to ensure that direc­tors are pre­pared and informed about the account­ing choic­es for the com­pa­ny, which include (but are not lim­it­ed to) the issues we have cov­ered above. Please do get in touch.