FRS105 vs. FRS102: best accounting standard for my business?

Our team of chartered accountants in Mayfair help navigate clients through FRS 105 and FRS 102 and their business impact

Financial Reporting Standards (FRS) play a pivotal role in shaping the accounting landscape, providing a framework for organisations to present their financial information in a clear and consistent manner. In this blog post, we compare FRS 105 and FRS 102, exploring their key differences and considerations for businesses.

FRS stands for the Financial Reporting Standard (i.e., it standardises the way in which accounting information is reported). That information might include things like an income Statement (a company's revenue, expenses, and profits or losses over a period of time) or, in the case of the FRS 105, a Statement of Financial Position (summarises what a company owns, owes and its equity (difference between the two) on a particular date).

These accounting standards are issued by the Financial Reporting Council (FRC) and apply in the UK. The FRC’s purpose is to regulate auditors, accountants and actuaries and it sets the UK’s Corporate Governance and Stewardship Codes.

In terms of the FRS, for our purposes here, there are two types in question, which can cause confusion - that’s why we’ve put together this guide on FRS 105 and FRS 102 for businesses here at Sampson Fielding in Mayfair, London. We are a team of chartered accountants and business advisors (with specialists in tax law) and this overview of accounting standards from the FRC is to help you take steps confidently in your business.

Discussing the implications of the accounting standards for businesses

What is FRS 105 and what does it mean for my business?

FRS 105 - The Micro-Entity Standard: FRS 105, officially titled "The Financial Reporting Standard applicable to the Micro-entities Regime," is tailored for micro-entities. Micro-entities are small, privately held companies (meeting certain criteria) with limited market presence and straightforward financial structures. FRS 105 is designed to simplify financial reporting for these entities, reducing the burden of compliance and administration.

What are the key features of FRS 105?

Simplified Reporting Requirements

FRS 105 allows micro-entities to benefit from reduced disclosure requirements, making financial reporting more straightforward and less time-consuming

Measurement and Recognition

The standard adopts a simplified approach to measurement and recognition, with a focus on cost-based valuation rather than the fair value approach seen in larger frameworks

Reduced Complexity

FRS 105 aims to minimise complexity in financial reporting by providing a streamlined set of accounting policies and disclosure requirements.

What is FRS 102 and what does it mean for my business?

FRS 102 - The General-Purpose Financial Reporting Standard: In contrast, FRS 102, titled "The Financial Reporting Standard applicable in the UK and Republic of Ireland," is a comprehensive general-purpose standard applicable to a broader range of entities, including larger private companies and entities that fall outside the micro-entities regime.

What are the key features of FRS 102?

Comprehensive Reporting Requirements

FRS 102 encompasses a more extensive set of reporting requirements compared to FRS 105. This includes detailed disclosure requirements and a broader scope of financial instruments.

Fair Value Measurement

FRS 102 often requires entities to measure certain assets and liabilities at fair value, providing a more accurate representation of the entity's financial position

Increased Complexity

Due to its applicability to a wider range of entities, FRS 102 is inherently more complex than FRS 105. It addresses the needs of larger and more complex businesses, necessitating a more sophisticated approach to financial reporting.

Small entities (meeting certain criteria) may opt to apply Section 1A of FRS102, which reduces the disclosure requirements.  Recognition and measurement requirements for FRS102 must be applied in full.

A client meeting on accounting standards and financial reporting at our office in Mayfair, London

What is the difference between FRS 105 and FRS 102?

In overview, FRS 105 is a simplified and adapted version of FRS 102, taking into account the simpler nature and smaller size of micro-entities (FRS 105 is applicable to micro-entities in the UK).

How do I choose between FRS 105 and FRS 102?

Here are some of the key considerations when choosing between FRS 105 and FRS 102:

Entity Size and Complexity

The size and complexity of an entity are crucial factors in choosing between FRS 105 and FRS 102. Micro-entities with simpler financial structures may find FRS 105 more suitable, while larger entities with more complex financial instruments may opt for FRS 102

User Requirements

Consider the needs of stakeholders such as investors, creditors, and regulators. Entities with a larger and more diverse user base may find that the comprehensive reporting requirements of FRS 102 better meet these stakeholders' informational needs

Future Growth and Expansion

Organisations should also consider their growth prospects. If there's potential for significant growth and an increase in complexity, choosing a more comprehensive standard like FRS 102 may be a strategic decision.

Anything else I need to know about FRS 105 & FRS 102 for my business?

In conclusion, the choice between FRS 105 and FRS 102 hinges on various factors, including the size, complexity, and growth prospects of the entity. While FRS 105 caters to the simplified needs of micro-entities, FRS 102 provides a more comprehensive framework for general-purpose financial reporting. Understanding the nuances of each standard is crucial for businesses to meet their reporting obligations while providing relevant and reliable financial information to stakeholders. Ultimately, the decision should align with the entity's specific circumstances and future aspirations.

Further reading on FRS 105 & FRS 102 and their impact on your business

From AccountingWeb: FRS 102 vs FRS 105: Which one should I use?

From Croner-i: Measurement differences between FRS 102 and FRS 105

From the Financial Reporting Council: FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland