Micro Entity Accounting

This factsheet outlines the options available to micro entities when preparing their accounts. At AHACCOUNTANTS, we provide guidance on these options and their implications for businesses in the Nottingham area.

Understanding Micro Entities

Small companies that qualify as micro entities have a choice of accounting standards:

1. FRS 102: This is the same accounting standard used by larger UK companies, but micro entities can apply a reduced disclosure regime (section 1A).
2. FRS 105: This is an alternative standard specifically designed for micro entities, allowing for simplified accounting.

While FRS 102 offers a more comprehensive framework, it introduces complexities, including the widespread use of fair value accounting. As a result, some companies may find FRS 105 appealing due to its straightforward approach, but it’s essential to evaluate which option best suits your business needs.

Qualifying as a Micro Entity

To qualify as a micro entity, a company must meet two out of three size limits for two consecutive years:

• Turnover: £632,000
• Total Assets: £316,000
• Employees: 10 or fewer (averaged throughout the year)

Certain financial services firms, such as credit institutions and insurers, as well as charities, are excluded from qualifying as micro entities. Special rules apply for companies that are part of a group.

Simplified Accounts

Accounts prepared under FRS 105 must include:

• A simplified Profit & Loss Account (which is not required to be filed at Companies House)
• A Balance Sheet
• Four notes to the Balance Sheet

Under company law, micro-entity accounts prepared in this manner are presumed to give a true and fair view, meaning no additional disclosures are required. However, if the company opts for the reduced disclosure regime under FRS 102, additional disclosures may be necessary to ensure compliance.

Key Differences Between FRS 102 and FRS 105

FRS 105 provides simpler accounting treatment compared to FRS 102. Here are three significant differences:

1. Revaluation/Fair Value of Assets:

1. • FRS 105 does not allow the revaluation of assets. In contrast, FRS 102 permits (and, in some cases, requires) annual fair value measurements of certain assets.
   • For businesses currently revaluing properties, switching to FRS 105 may necessitate re-measuring properties at depreciated cost, potentially reducing their balance sheet value significantly.

2. Recognition of Intangible Assets:

1. • FRS 105 recognizes fewer intangible assets than FRS 102. For example, when acquiring a business, the purchase price is allocated between tangible assets and liabilities, and goodwill, without needing to identify separate intangible assets like customer lists or brand names. Additionally, internally-generated intangibles, such as development costs, must be expensed as incurred.

3. Deferred Tax:

1. • FRS 105 does not allow the recognition of deferred tax, while FRS 102 frequently includes provisions for deferred tax.

Considerations for Micro Entities

The concise nature of micro-entity accounts means less financial detail is available to the public through filed accounts at Companies House. While this can benefit directors by providing a competitive advantage, it may also affect the company’s credit rating due to the lack of transparency. Shareholders will also receive limited information in their member accounts.

Directors have the option to include more information than the statutory minimum if they choose. At AHACCOUNTANTS, we can supplement the minimum statutory information with additional analysis to ensure directors have sufficient financial details to make informed business decisions.

Conclusion

At AHACCOUNTANTS, we are dedicated to ensuring that directors are well-prepared and informed about the accounting choices available for their companies. If you have questions or need assistance navigating your options, please do not hesitate to get in touch.