Financial reporting standard 105 (FRS 105) was devised for micro entities to enable them to simplify their accounts. Companies were able to prepare accounts under FRS 105 for year ends starting after 1 January 2016.
Some accountants have tried to encourage clients from adopting FRS 105 and have recommended that clients adopt FRS 102 1A. Why is this?
Well there may be a number of reasons, but the main issues are: –
- If the company is looking to expand it may well need at some date in the future to switch to preparing its accounts under FRS 102 1A with all the complications that changing the accounts may bring
- As less information is put on public record, it may be that lenders and banks are less willing to lend to a company adopting FRS 105.
- Revaluations are not permitted under FRS 105 so, if a company has revalued its assets in the past those revaluations will have to be reversed which is likely to weaken the company’s balance sheet.
There is a further issue that is coming to light, namely credit rating. A few accountants who we are connected with have noticed that when a company has filed FRS 105 accounts their credit rating has been downgraded. This problem becomes more apparent if the accountants who prepared the accounts are not named in the set filed at Companies House.
One accountant has told us that upon filing FRS 15 accounts for his client, their credit score was immediately downgraded even though the accounts were stronger than the previous year.
Finally, I am aware of a training company, seeking to test this matter, filed their accounts under FRS 105 and found that, shortly after the accounts were filed, the company was unable to get finance for a car.
With this evidence to hand, we would recommend that all directors think long and hard before deciding to adopt FRS 105