Choosing the correct Financial Reporting Standard (FRS) is a key decision for UK limited companies. For small and micro-entities, the main choices are FRS 105 and FRS 102 Section 1A.
FRS 105 is designed for the smallest companies, known as Micro-entities. Its primary objective is to significantly reduce the administrative and compliance burden by offering the most simplified set of accounting rules and minimal disclosure requirements.
FRS 102 is the main UK accounting standard (UK GAAP), and Section 1A provides the disclosure and presentation framework for companies that qualify as Small Entities.
| Accounting Item | FRS 105 (Micro-Entities Regime) | FRS 102 Section 1A (Small Entities Regime) |
|---|---|---|
| Goodwill | Must be capitalised and amortised over its useful life (often presumed 10 years if not determinable). | Must be capitalised and amortised over its useful life (often presumed up to 10 years if not reliably estimated). Subject to annual impairment review. |
| Research & Development / Computer Software / Website Cost (Internally Generated) | Must be expensed immediately to P&L. No capitalisation allowed. | Research costs are expensed. Development, Computer Software, and qualifying Website costs may be capitalised as intangible assets (a choice). |
| Investment Property | Must be measured at cost less depreciation and impairment. Fair value measurement is prohibited. | Choice between Fair Value model (changes go to P&L) or Cost model. |
| Leasing | Only simple classification permitted: Finance Leases on Balance Sheet; Operating Leases off Balance Sheet. | Full FRS 102 rules apply. Finance Leases on B/S. Operating Leases off B/S. |
| Investments in Shares / Financial Instruments | Measured at Cost less impairment. Complex financial instruments are effectively prohibited. | Measured at Cost or Fair Value. Allows for more complex financial instruments. |
| RELATED PARTY TRANSACTIONS | Minimal disclosure required: only director loans/guarantees and amounts due to/from connected undertakings. | Substantially more disclosure required, including the nature of the relationship and the amount/details of the transaction for all related parties. |
| Director/Connected Co. Loans & Capitalisation of Borrowing Costs | Loans measured at Cost. Borrowing costs (interest) must be expensed immediately. No capitalisation allowed. | Loans may need to be measured at Amortised Cost. Borrowing costs may be capitalised (added to asset cost) if they relate to qualifying assets (a choice). |
| Deferred Tax | Prohibited. Deferred tax asset/liability must not be recognised. | Mandatory. Deferred tax asset/liability must be recognised on timing differences. |
| Grants | Must use the Accrual Model (matched to costs incurred or asset depreciation). Performance Model prohibited. | Choice between Accrual Model and Performance Model. |
| Equipment, Plant, and Property (PPE) / Freehold Property | Measured at Cost less Depreciation and Impairment. Revaluation to fair value is prohibited. | Choice between Cost Model and Revaluation Model (Fair Value). |
| Intangible Assets | Very restrictive. Only purchased intangibles can be capitalised at cost. No internally generated intangibles. | Less restrictive. Allows capitalisation of purchased intangibles and internally generated development costs/software/brands (if criteria met). |
| Employee Benefits (e.g., Holiday Pay Accrual) | No recognition is required for short-term employee benefits such as accrued holiday pay, unless an employee has left and is owed the money. This simplifies the Balance Sheet. | Mandatory recognition of short-term compensated absences (e.g., accrued but untaken holiday entitlement) as a liability at the balance sheet date. |
| Provisions & Contingencies | Provisions (e.g., for warranties or legal claims) are recognised only if they arise from a legal or contractual obligation (very limited). | Provisions must be recognised if there is a present obligation (legal or constructive) that is probable to require an outflow of resources and can be reliably estimated. (More scope for provisions). |
The differences illustrate that FRS 105 prioritises simplification and historical cost, offering virtually no accounting policy choices, whereas FRS 102 Section 1A is the default standard for growth, allowing choices, fuller disclosure, and more comprehensive recognition methods.