The Financial Reporting Council introduced a new reporting standard for the smallest businesses in July 2015. Named FRS 105, the framework is designed to simplify the reporting process for small businesses.
In May 2016 the government extended the eligibility criteria for FRS 105 to LLPs and qualifying partnerships. What is the FRS 105 and how does it make financial reporting easier for businesses?
The regime is optional for eligible entities. 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.
Making things simpler
FRS 105 was created specifically to ease the burden of financial reporting for micro firms. It does this in a number of key ways:
- Balance sheets and profit and loss accounts are simplified
- Micro entities no longer need to submit a directors’ report
- Businesses are not required to submit notes to the accounts. Instead any information relating to financial commitments and guarantees are included at the foot of the balance sheet
- Businesses do not have to submit the profit and loss account to Companies House, just the balance sheet
- Preparing accounts within the regulations will be assumed by the law to be true and fair
Qualifying for FRS 105
In order to qualify for the new reporting standard, your business has to be a micro-entity. Micro-entities are determined by looking at a business’s turnover, balance sheet and number of employees.
Your business must meet at least 2 of the following to qualify for FRS 105:
- Turnover: £632,000 or less.
- Balance sheet: £316,000 or less.
- Average number of employees: 10 or under.
Please note a number of entities are specifically excluded from the micro-entities regime. And there are also special considerations for entities which form part of a group.
The head of the financial reporting faculty at the ICAEW, Nigel Sleigh-Johnson, said that simplified reporting rules could have a negative impact on the creditworthiness of businesses:
“ICAEW has persistently warned against the potential risk that over-simplifying reporting requirements can have on the ability of small companies to secure credit. Small businesses, their advisers, and lenders need to consider the potential implications of the new legislation.”
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)
LLPs and Qualifying Companies
Since May 2016, eligible LLPs and qualifying partnerships have been legally allowed to report within the FRS 105 framework. Partnerships are subject to the same eligibility criteria as limited companies, and all eligible partnerships can apply FRS 105 for accounting periods beginning on or after 1 January 2016.
We can provide information and advice on financial reporting, whether you’re a micro-business using FRS 105 or a larger business using the standard FRS 102.
Alternatively, why not let us handle your accounts? Our professional team of accountants will ensure your accounts are file accurately and on time, leaving you to concentrate on what matters most: your business.