Small companies using the micro-entities regime in the UK often choose FRS 105 because it offers a streamlined accounting framework with reduced disclosure requirements. Yet, although it simplifies reporting, there are still certain mandatory notes that must appear with the annual accounts. Understanding these obligations is crucial for statutory compliance and for giving users of the accounts clarity. For many micro-businesses, the most effective way to stay compliant is to rely on expert guidance such as Insights UK FRS 105 services, which help ensure that compulsory notes are presented accurately and consistently.
What Is FRS 105?
FRS 105 is the Financial Reporting Standard applicable to micro-entities in the UK. It is designed for the smallest businesses that meet specific thresholds relating to turnover, balance sheet total, and number of employees.
It is based on simplified measurement and disclosure rules. The standard removes several complex accounting treatments found in FRS 102, which makes it easier for micro-entities to prepare statutory accounts.
However, “micro” does not mean “no disclosure.” Certain basic notes still need to accompany the financial statements. These notes help external stakeholders confirm how the figures were prepared and ensure transparency where required by law.
Who Can Use FRS 105?
To qualify as a micro-entity, a business must meet at least two of the following criteria:
- Turnover of £632,000 or less
- Balance sheet total of £316,000 or less
- 10 employees or fewer
Entities within regulated sectors, such as banks and insurance companies, cannot apply the micro-entities framework.
When a business falls within scope, the director is permitted to prepare simplified accounts with restricted notes. Many practitioners offering Insights UK FRS 105 services emphasise that even minor omissions can lead to Companies House rejections or auditor queries, which is why accuracy matters.
Mandatory Notes Under FRS 105
Although disclosures are minimal, the standard prescribes specific notes to accompany the balance sheet. These are statutory and cannot be removed.
Key disclosures include:
- Directors’ statements and responsibilities
The balance sheet must be signed by a director and must contain a statement confirming that the accounts have been prepared in accordance with micro-entity provisions. - Accounting policies
A short policy note is required. This sets out the basis of preparation, describing that the accounts are prepared in compliance with FRS 105 and the micro-entities regime. It may also summarise measurement principles such as historical cost. - Guarantees and off-balance sheet arrangements
If the micro-entity has provided guarantees, commitments, or security on behalf of third parties, it must disclose these. Even if the amounts are small, the nature of the guarantee must still be noted. - Financial commitments and contingencies
Disclosure is necessary if the company has lease commitments, contingent liabilities, or other contractual obligations not captured on the balance sheet. - Average number of employees
The legislation requires disclosure of the average number of employees during the financial year. - Advances, credits, and guarantees to directors
Loans, credit facilities, or guarantees provided to directors must be disclosed with details such as amounts and repayment conditions.
Accounting Policies Note
The policy note does not need to be lengthy. Under FRS 105, a simple statement that the accounts are prepared on a historical cost basis and in compliance with the micro-entity provisions of the Companies Act is often sufficient.
Where applicable, the company must briefly explain policy choices on revenue recognition, tangible assets, depreciation, and any exceptional circumstances.
Micro-entities do not need to disclose detailed fair value measurement policies, revaluation bases, or complex estimates unless required by another statutory rule.
Directors’ Advances and Related Party Disclosures
Unlike FRS 102, FRS 105 removes the detailed related party disclosure regime. However, any loans or guarantees to directors remain compulsory disclosures due to statutory law, not accounting rules.
This reflects transparency requirements for corporate governance and accountability. Even if repayment is immediate and interest-free, the transaction must still be disclosed.
Guarantees and Off-Balance Sheet Arrangements
Micro-entities might not always record contingent liabilities on the balance sheet, but they must reference them in the notes when material. Typical examples include:
- Bank guarantees
- Lease commitments
- Pledges of security
- Letters of comfort
This ensures external readers are aware of obligations that may not appear in the primary figures.
Employee Numbers
The Companies Act requires that micro-entity accounts state the average number of employees. This can be a straightforward figure covering all categories of staff.
Even if the company uses primarily contractors, the statutory figure must cover employees on payroll.
Presentation of FRS 105 Notes
Unlike FRS 102, there is no requirement for a separate notes section. Many preparers choose to present mandatory statements on the face of the balance sheet and add short supplementary text immediately below.
The requirement is simplicity rather than lengthy commentaries. Directors should ensure that the layout remains clear and readable.
Why Notes Still Matter Even Under a Simplified Regime
Some companies assume that FRS 105 eliminates notes altogether, but this is a misconception.
Micro-entities face legal disclosure duties under the Companies Act, and Companies House may reject non-compliant filings.
Potential lenders, credit reference agencies, or HMRC reviewers may still rely on these disclosures when assessing the business.
A professionally prepared set of notes signals that the company adheres to good governance standards.
Risks of Missing or Incorrect Disclosures
Missing notes are a common reason for accounts to be rejected during filing. Typical errors include:
- Forgetting to include the directors’ statement
- Not disclosing average employees
- Omitting commitments or guarantees
- Inconsistent accounting policy wording
Incorrect notes can also create tax or compliance risks, including queries during HMRC reviews.
This is one reason many micro-entities obtain specialist guidance through Insights UK FRS 105 services to help maintain statutory accuracy with minimal administration.
Tailoring Notes for Different Business Types
Although disclosures are minimal, wording can be tailored to the company’s trading structure. For example:
- A landlord business might outline its lease commitments.
- A holding company might need to clarify guarantees made in relation to group finance.
- A service company with no employees might still confirm that the average number of employees is zero.
