This FRS 105 Update looks at the micro-entities regime and FRS 105 The Financial Reporting Standard applicable to the Micro-entities Regime.
The micro-entity regulations
1. What are the micro-entity regulations?
The Small Companies (Micro-Entities’ Accounts) Regulations 2013 (the ‘micro-entity regulations’) provide a simpler reporting regime for a sub-category of small company: the micro-entity.
The Limited Liability Partnerships, Partnerships and Groups (Accounts and Audit) Regulations 2016 (the ‘revised LLP regulations’), extend the micro-entities regime to LLPs and Qualifying Partnerships. Unless otherwise stated, references to the small companies regime on this page also relate to the small LLPs regime.
2. Will a very small entity always be entitled to the micro-entities regime?
No, determining whether an entity is entitled to the micro-entities regime is more complex. Aside from the size criteria (see question 5), a number of entities are ineligible and therefore specifically excluded from the micro-entities regime (see question 3). There are also special considerations (see question 4) for entities which form part of a group.
3. Which entities are excluded from being treated as micro-entities?
An entity that is excluded from the small companies regime is not entitled to the micro-entities regime. However, the micro-entities regime goes further by excluding additional types of entity, most notably charities.
Other entities excluded from the micro-entities regime include investment undertakings, financial holding and insurance undertakings and credit institutions.
4. What are the special considerations for companies which form part of a group?
A subsidiary included in consolidated group accounts by the method of full (as opposed to proportional) consolidation is not entitled to apply the micro-entities regime to its accounts.
A parent entity is only entitled to the micro-entities regime for the purposes of its individual accounts if it meets the criteria individually and the group headed by it qualifies as small. Also, a parent entity that prepares group accounts is excluded from the micro-entities regime for the purposes of its individual accounts.
5. What are the size criteria for a micro-entity?
The size limits are met for a financial year if at least two out of three of the following thresholds are met:
|Turnover not more than
|Balance sheet total not more than
|Average number of employees not more than
The turnover limit is adjusted proportionately if the financial year is longer or shorter than twelve months. Balance sheet total means the aggregate of the amounts shown as assets in the company’s balance sheet.
In its first financial year a company qualifies as a micro-entity if it meets the size limits in that financial year.
In any subsequent year, it will qualify on what is sometimes called the two-year rolling basis. This requires the company to meet the size limits for two consecutive years to qualify as a micro-entity. If the company fails to meet the size limits for two consecutive years, it will not qualify as a micro-entity in the second year.
6. My organisation is entitled to the micro-entities regime. Is it required to adopt the regime?
No, the regime is optional for entities entitled to the micro-entities regime. A micro-entity may therefore choose to prepare accounts under a financial reporting regime applicable to larger sized entities.
The decision to apply the micro-entity exemptions will depend on the individual circumstances of the reporting entity. For example, current and potential creditors and lenders to a business may require more information than micro-entity accounts provide. On the other hand, a micro-entity with an investment property and little or no borrowings may be attracted for example by the fact that, under the micro-entities regime (see question 7), investment properties will not need to be revalued each year.
Entities should consider carefully the various implications before deciding whether or not to take advantage of the micro-entity exemptions.
Features of the micro-entities regime
7. What are the main features of the micro-entities regime?
- A simpler balance sheet and profit and loss account. There are two formats for the balance sheet and one format for the profit and loss account.
- A micro-entity is not required to prepare a directors’ report.
- No notes to the accounts are required. Instead, details of the following should be disclosed at the foot of the balance sheet:
- any advances, credit and guarantees with directors (companies only);
- any financial commitments, guarantees and contingencies;
- any off-balance sheet arrangements; and
- the average employee numbers.
This reduced information is referred to as the ‘minimum accounting items’.
- Micro-entity accounts must also provide details of:
- the part of the United Kingdom in which the company is registered;
- its registered number;
- whether it is a public or private company and whether limited by shares or by guarantee (companies only);
- the registered office address; and
- when appropriate, the fact that it is being wound up.
- If a micro-entity chooses to disclose information in addition to the minimum accounting items it must, in respect of that item, follow the disclosure requirements of the relevant accounting standard (see question 8).
- The fair value accounting and alternative accounting rules cannot be applied in micro-entity accounts. This means that no revaluations or subsequent measurements at fair value are permitted under the micro-entities regime. For example, a micro-entity with an investment property, choosing to adopt the micro-entities regime, would be required to measure the property at cost and not fair value.
- Accounts prepared in accordance with the micro-entity regulations are presumed by law to give a true and fair view.
- Only the balance sheet, including the information disclosed at the foot, needs to be filed at Companies House. It is not currently necessary to file the profit and loss account. However, the government plans to introduce legislation to remove this exemption and require all micro-entities to file a profit and loss account. Further details on the filing requirements for micro-entities including the planned changes can be found in the Filing options for micro-entities FAQs.
8. Which accounting standard is applicable to reporting entities adopting the micro-entities regime?
FRS 105 The Financial Reporting Standard applicable to the Micro-entities Regime is applicable to entities that are entitled and choose to apply the micro-entities regime. In January 2022, the FRC issued an updated version of the standard applicable for periods beginning on or after 1 January 2021.
9. Can unincorporated businesses apply FRS 105?
The FRC has not explicitly permitted or prohibited use of FRS 105 by unincorporated businesses or individuals (which, if set up as companies, would be eligible for the micro-entities regime) for the purpose of calculating trading profits for submission to the tax authorities. Instead, the FRC note that this is a matter for the tax authorities. HMRC has confirmed to ICAEW that it will accept calculations of trading profits for income tax purposes prepared under FRS 105 if the size criteria have been met.
10. What are the requirements of FRS 105?
FRS 105 is based on FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland, although it has been adapted significantly to accommodate the legal requirements of the micro-entities regime (see question 7). In addition, further simplifications, over and above those required by law, have been made in order to reflect the smaller size and simpler nature of micro-entities.
Micro-entities will need to consider carefully the requirements of FRS 105, including any relevant exemptions or exemptions available on transition (see question 11).
Key simplifications include:
- No accounting policy options are available. Borrowing costs and development costs must be expensed to the profit and loss account in the period in which they are incurred, and government grants must be recognised on the accruals basis.
- No accounting for deferred tax or equity-settled share-based payments prior to the issue of the shares.
- Further simplifications to the recognition and measurement requirements, including the accounting for post-employment benefit plans, financial instruments, and foreign currency transactions.
The overall impact of taking advantage of the exemptions will depend very much on the individual circumstances of the reporting entity.
11. Will FRS 105 need to be applied retrospectively?
Yes. When preparing the first set of FRS 105 financial statements, the comparative balance sheet and profit and loss account will need to be restated, and an opening balance sheet at the date of transition prepared in accordance with FRS 105 (although this balance sheet will not need to be presented). There are some limited exceptions from retrospective application and some exemptions, which can be selected on an individual basis. These exemptions are designed to make the transition to FRS 105 easier.
Small and micro-entity reporting compared
12. How do micro-entity accounts compare to those prepared under the small companies regime?
The amount of information included in the micro-entity accounts is significantly less than that included in small company accounts. There is also less flexibility. For example, the line items within the profit and loss account cannot be combined or renamed, whereas they can under the small companies regime. However, a line item should not be included in the accounts when there is nothing to include for that item in both the current and comparative periods. In addition, micro-entities are not permitted to adapt their balance sheet and profit and loss account formats in order to adopt an IFRS layout and IFRS terminology.
13. How do I show that the accounts have been prepared in accordance with the micro-entities regime?
There should be a statement on the balance sheet, in a prominent place above the director’s printed name and signature, to the effect that the accounts have been prepared in accordance with the micro-entity provisions.
14. Are there any special considerations that auditors should be aware of?
In practice, it is unlikely that many micro-entities will choose to have an audit. However, should this situation arise, there are special considerations for auditors set out in the micro-entity regulations.
ICAEW members may wish to consider contacting the ICAEW Technical Enquiry Service on +44(0)1908 248 250 should they encounter any technical and/or ethical issues regarding acceptance of a micro-entity engagement.
15. Will HMRC accept micro-entity accounts as part of a company’s annual self assessment?
Yes, micro-entity accounts prepared in accordance with the micro-entities regime will represent accounts prepared under GAAP and therefore can be submitted to HMRC as part of a company’s annual self-assessment.
There is no change in the requirement to keep and retain adequate business and accounting records.
16. Where can I get further information about the micro-entities regime?
Further information on FRS 105, including links to further resources, can be found on the faculty’s FRS 105 hub page.