FRS 105 Financial Reporting Standard
FRS 105, introduced by the Financial Reporting Council (FRC), serves to simplify financial reporting for smaller businesses operating in the UK, specifically targeting micro-entities and small companies. This framework offers a streamlined approach to preparing financial statements, encompassing the income statement, balance sheet, and cash flow statement.
Measurement and Recognition
One notable feature of FRS 105 is its simplified method of measurement and recognition for assets, liabilities, income, and expenses. The standard predominantly employs historical cost accounting, signifying the original nominal monetary value of an asset or liability at the time of acquisition or incurrence. This approach provides a straightforward and objective foundation for recording transactions, eliminating the need for complex fair value measurements.
By adopting historical cost accounting and avoiding intricate fair value measurements, FRS 105 aims to make the accounting process more practical for small entities. Small businesses benefit from the simplicity of determining the original cost of their assets and liabilities, leading to a reduction in administrative burdens and costs.
Benefits of FRS 105
The standard outlines a straightforward format for financial statements, designed to enhance user comprehension. Although it incorporates disclosure requirements, they are more concise when compared to the standards imposed on larger entities. FRS 105 offers a simplified framework for crafting financial statements, encompassing the income statement, balance sheet, and cash flow statement. Its primary goal is to alleviate the reporting workload for small entities by presenting a streamlined set of accounting requirements.
FRS 105 is structured on a section-by-section basis consistent with FRS 102 but there are considerable simplifications to the accounting treatments and disclosure requirements for entities reporting under FRS 105. The main simplifications available under FRS 105 are:
To remove all disclosure requirements other than those required by law, although a micro-entity is not prohibited from providing additional voluntary disclosures and is encouraged to give consideration to these. To remove all choices of accounting treatment because no disclosure is required of accounting policies so, if choices were available, it would not be clear from the accounts which options had been selected; and to exempt micro-entities from having to account for some complex transactions, e.g. equity-settled share-based payments and deferred tax.