FRS 102 v/s FRS 105


Starting FY2016 (1 January 2016), small companies which meet the criteria of a 'micro-entities' must opt between:

  • Using Financial Reporting Standard (FRS) 102 (this standard is similar for larger UK companies, however, it is used in as a reduced disclosure regime (section 1A)
  • Apply for Financial Reporting Standard (FRS) 105, a new alternative standard

The Financial Reporting Standard (FRS) 105 is applicable to Micro-entities and the new standard was issued in July 2015 by the Financial Reporting Council (FRC). The scope of the standard is very restricted and is only applicable for incorporated entities (i.e. limited liability partnerships (LLP) and limited companies). The Financial Reporting Standard FRS 105 is based in the order of the legal framework on which FRS 102 Financial Reporting Standard is based (FRS 102 is applicable in the UK and Republic of Ireland). However, as compared to the FRS 102 framework, FRS 102 is significantly simple with reduced disclosures. Starting 1 January 2016, FRS 105 is mandatory for accounting periods. Also, it is imperative to check if the standard is applicable for a specific micro-entity or not. As per the guidelines, the standard may be suitable for some micro-entities, it will not be suitable for all. One of the most noteworthy features of Financial Reporting Standard 105 is the 'deeming provisions'. Under the 'deeming provisions' if a micro-entity prepares its financial statements in agreement with the legal requirements, then the prepared financial statements are considered by the law to give a true and fair view

Hence, the directors of a micro-entity don’t have to consider any supplementary disclosures that may be required in order to attain a true and fair view, which was not the similar move a micro-entity could take under the FRS for Smaller Entities (the FRSSE). However, this does not imply that a micro-entity cannot make additional disclosures if it wishes too; additional voluntary disclosures must be made in accordance with FRS 102, Section 1A Small Entities

For a micro-entity using FRS 105, accounts prepared need to only consist of easy Profit & Loss (P&L) statement, a Balance Sheet and along with two notes to the accounts. It must be noted that accounts filed at Companies House do not need to include the P&L account

FRS 102 v/s FRS 105

Eligibility criteria

Under Financial Reporting Standard FRS 105, a micro-entity is stated as 'subset of the small company regime'. Apart for 'micro-entities' only incorporated entities can use FRS 105 (i.e. it is only obtainable to limited liability partnerships and limited companies). If a micro-entity's financial statements are consolidated with its parent, that micro-entity cannot apply for FRS 105. The below mentioned entities are not eligible to use FRS 105:

  • any companies excluded from the small companies’ regime
  • charities
  • credit institutions
  • financial institutions
  • insurance institutions
  • small parent companies that choose to prepare group accounts
  • public companies

Apart from meeting the criteria of the FRS, the micro-entity (which is eligible to use the standard) must also consider the size thresholds. For a micro-entity to qualify under FRS 105 it should not exceed two, or more, of the following criteria:

  • Revenue / turnover of not more than £632,00
  • Balance sheet total of not more than £316,00 (both current assets plus fixed assets)
  • Not more than an average number of employees within a industry

Difference between FRS 102 and FRS 105

Below mentioned are the key differences between FRS 102 and FRS 105:

Topic FRS 102 FRS 105
Borrowing costs and development costs Both borrowing costs and development costs can be capitalised subject to certain conditions Under FRS 105, there is no option to capitalise both borrowing costs and development costs; these must be treated as an expense in the profit and loss account in the period in which they are incurred
Defined benefit pension plans For defined benefit pension plans, under FRS 102, net interest charged on the defined benefit asset or liability is treated under the profit and loss account, and is computed with regards to premium corporate bonds i.e., this means a similar rate applies to both assets and liabilities Under FRS 105, acknowledgment of excess or insufficiency of the plan on the balance sheet is not acceptable. However, agreed funding of deficit must be treated as liability. Contributions allocated to the plan are considered as an expense
Deferred tax Deferred tax is based on the difference of timing No deferred taxes are recorded
Equity-settled share based payments This is considered at the fair value of the goods or services when they are received. For provision with employees, fair value is calculated at the grant date and the expense measured over the vesting period Under FRS 105, equity-settled share based payments are not recognised in the accounts till the shares are issued
Equipment, plant, and Property Under the FRS 102, assets such as equipment, plant, and property are measured at cost subtracted by depreciation and impairment, but can be opted to a revaluation accounting strategy for fixed assets of the same class Under FRS 105, this is measured at cost less depreciation and impairment
Intangible assets Under FRS 102, intangible assets are measured at cost subtracted by depreciation and impairment; however, these intangibles can be selected to take on a revaluation accounting policy for intangible assets of the same class Under FRS 105, this is measured at cost less depreciation and impairment
Financial instruments Financial instruments are divided into 'basic' and 'other' instruments. The basic instruments are mostly measured at a mortised cost, whereas, the 'other' category instruments are measured mostly at fair value with movements usually recognised in profit or loss; businesses can, however, opt to submit an application by recognition and measurement requirements of IAS 39 and/or IFRS 9 Under FRS 105, there is no difference between 'basic' or 'other' financial instruments; all financial instruments originally are recognised at cost, which is actually the transaction price; Following this, revaluation or measurement of financial instruments at fair value is not permitted In case of lending arrangements, simplifications are made with regards to the allotment of interest and transaction costs, and there is no need to compute an effective interest rate. Additionally, there is no need to attribute a market-rate of interest in arrangements conducted at non-market rates
Government grants Government grants can be considered either through the accrual model or performance model Under FRS 105, government grants are considered under the accruals method
Foreign exchange forward contract These are considered as a financial instrument at fair value on the balance sheet and the related debtor or creditor re-translated at the year-end rate. In certain circumstances, hedge accounting can be applied In case a trading transaction is covered by a related or matching forward contract, it is imperative to use the rate specified in the contract
Investment in properties In most cases revaluation each year is required but with changes recognised in profit or loss Investment is properties is measured at cost (post subtraction of depreciation and impairment)
Asset and Trade acquisition An intangible asset purchased with a business is in general recognised as an asset since its fair value can normally be measured with adequate reliability Under FRS 105, an intangible asset purchased with a business must not be recognised independently from goodwill

Also See: Complete guide on Directors Loans Accounts

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About the author
Blog Author

Sumit Agarwal
Sumit Agarwal (ACMA ACA India), the Managing partner of dns accountants is a highly respected accountant with expertise in helping owner-managed businesses.

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About the author
Blog Author

Sumit Agarwal
Sumit Agarwal (ACMA ACA India), the Managing partner of dns accountants is a highly respected accountant with expertise in helping owner-managed businesses.


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