Questions:
What is the difference between FRS 105, the Financial Reporting Standard applicable to the Micro-entities Regime and FRS 102, The Financial Reporting Standard applicable in the England and Ireland?

You advise a client who is in the process of incorporating a fast growing UK-based technology company. The company has the choice of qualifying as a micro-entity and, as such, could apply either FRS 105 or FRS 102.

Which FRS should the company follow?

Reference answers:
FRS 105, is a simplified version of FRS 102 that's specifically designed for micro-entities. These are the smallest businesses, with relatively low turnover and limited financial complexity. FRS 105 allows them to prepare their accounts in a less time-consuming and burdensome way while still meeting the basic legal requirements. FRS 105 requires fewer disclosures than FRS 102. FRS 105 does not permit property, plant and equipment, intangible assets, or investment properties to be held at fair value. 

Accounting policy choices allowed in FRS 102 have been removed in FRS 105. For instance, borrowing costs and development costs must be expensed. Profits reported under FRS 105 may be lower than if FRS 102 was applied.

The company should apply FRS 102 as it is a fast growing company.

If competitors prepare financial statements in accordance with FRS 105 then it will be easier to compare and benchmark performance against them.  If the company is expected to grow quickly, it might be easier to simply apply FRS 102 from the outset. That way, it will avoid the burden of transitioning from FRS 105 to FRS 102 later.

FRS 105 will reduce the time and cost burden of producing financial statements. However, consideration should be given to whether the users of the financial statements will find this lack of disclosure a hindrance to making economic decisions. This is unlikely in the case of such a small company. FRS 105 will also have an impact on perception of the company's financial position, particularly if carrying amounts of assets are materially lower than other companies as a result.