FRS 105 vs FRS 102: The Reporting Standard Decision

1. The UK GAAP Landscape

UK Generally Accepted Accounting Practice, UK GAAP, offers small companies two realistic paths: FRS 105 for micro-entities and FRS 102 (Section 1A) for small entities. A third route, full FRS 102, is mandatory for medium-sized entities. IFRS remains an option for any company but is practically only used by listed or internationally-oriented groups.

The choice between FRS 105 and FRS 102 Section 1A is not simply "small company vs tiny company". It is a choice about how much of the company's financial position to show the world, and therefore about how creditworthy the company appears, how painful future due diligence becomes, and how flexible the accounting policies can be.

2. FRS 105, The Micro-Entity Standard

FRS 105 is the simplest UK GAAP standard. A company qualifies as a micro-entity if it meets two of three thresholds: turnover <= £1m, balance sheet total <= £500k, and average employees <= 10. The vast majority of one-director limited companies comfortably qualify.

The standard sacrifices disclosure for simplicity. Filed accounts need only a balance sheet with minimal notes, no profit and loss filing requirement, no directors' report, no cashflow statement, and no requirement to revalue assets at fair value. The accounts presented to HMRC (with the CT600) must include a profit and loss account, but the version filed at Companies House does not.

FRS 105 also restricts accounting policy choice. Revaluation of fixed assets to fair value is prohibited, everything must be held at historical cost less depreciation. Development costs cannot be capitalised. Deferred tax is not recognised. These are simplifications, but they can understate the company's economic reality.

3. FRS 102 Section 1A, Small Entities

FRS 102 is the main body of UK GAAP for small, medium, and large entities not using IFRS. Section 1A is a reduced-disclosure regime for entities that qualify as small: two of (a) turnover <= £15m, (b) balance sheet <= £7.5m, (c) employees <= 50.

Section 1A permits substantially richer accounting policies than FRS 105. Investment property can be fair-valued through profit and loss. Development expenditure can be capitalised. Deferred tax is recognised. Financial instruments can be measured at fair value. These policy choices produce accounts that more accurately reflect the underlying economics of a trading business.

The trade-off is disclosure. Section 1A accounts include a profit and loss account, directors' report, and a more detailed notes section covering related-party transactions, financial commitments, employee numbers, director remuneration, and accounting policies. The accounts run longer, take longer to prepare, and reveal more.

4. Side-by-Side Comparison

• Turnover limit: FRS 105 £1m vs FRS 102 Section 1A £15m.
• Profit and loss filed publicly: Both can currently omit the profit and loss account from the Companies House copy where the filing exemption applies.
• Fair value accounting: FRS 105 no; Section 1A yes.
• Deferred tax: FRS 105 no; Section 1A yes.
• Development cost capitalisation: FRS 105 no; Section 1A yes.
• Director remuneration disclosure: FRS 105 minimal; Section 1A more detailed.
• Preparation cost: FRS 105 lower; Section 1A higher.

5. Creditworthiness and Lender Perception

A lender may need more information than appears in either permitted filing copy. The reporting standard and the documents made public are separate questions: Section 1A does not automatically make profit and loss public. Provide the full accounts and current management figures requested by the lender.

Discuss the information needed for trade credit, mortgages, invoice finance or asset finance before choosing a reporting framework. Avoid assuming that a change of standard by itself changes a credit score or guarantees access to finance.

6. Investor and Acquirer Readiness

For an investment or sale, keep consistent records and reconciliations between statutory accounts and management reports. A history of micro-entity filings does not prevent the business from providing fuller underlying information.

Choose the framework after considering eligibility, disclosure needs, accounting policies and the work required on transition. Agree what information prospective investors need before preparing the next accounts.

7. Switching Between Standards

A company can move from FRS 105 to FRS 102 Section 1A whenever the directors choose, no approval is required, and no "minimum period" applies. The transition requires restatement of opening balances under the new standard, which usually surfaces small adjustments for deferred tax and, if relevant, fair-value movements.

Moving from Section 1A back to FRS 105 is permitted but unusual. More common is a forced move: once a company exceeds micro-entity thresholds (turnover £1m, balance sheet £500k, 10 employees) for two consecutive years, FRS 105 is no longer available and the company must file under Section 1A or higher. Growing businesses should plan the transition proactively rather than discovering it at year-end.

We prepare accounts under both FRS 105 and FRS 102 Section 1A, see our year-end accounts service for a structured reporting-standard conversation.

Changes for periods beginning in 2026

For periods beginning on or after 1 January 2026, revised FRS 102 brings most lessee leases onto the balance sheet as a right-of-use asset and liability, with short-term and low-value exemptions. Revenue follows a five-step approach based on transfer of control. Check transition choices, disclosures and loan covenants. FRS 105 retains its simpler lease approach; its revenue requirements also change. See the FRC explanation of FRS 102 changes.

From 1 April 2028, small companies and micro-entities must file profit and loss accounts but may opt out of publication. This filing reform is separate from the accounting standard. See the filing timetable.

The size limits above apply to financial years beginning on or after 6 April 2025. Apply at least two limits, the subsequent-year rules, group rules and eligibility exclusions; do not decide from turnover alone.