Professional Landlords: Everything You Need To Know To Choose Between FRS 102 and FRS 105

Professional Landlords: Everything You Need To Know To Choose Between FRS 102 and FRS 105

When it comes to financial reporting for limited companies, choosing the right framework is crucial. In the UK, companies often decide between FRS 102 Section 1A and FRS 105. Understanding the differences and implications of each standard can help you make the right decision. 

FRS 102 Section 1A or FRS 105?

FRS 102 Section 1A is designed for small entities and is a simplified version of the full FRS 102 standard. It offers reduced disclosure requirements while ensuring that the financial statements still provide a true and fair view. 

FRS 105 is tailored for micro-entities. It simplifies accounting even further, offering a streamlined reporting framework with significant reductions in both disclosure and recognition requirements.

Key Differences and Implications 

  1. Complexity and Compliance Burden: FRS 102 Section 1A requires more detailed disclosures than FRS 105. You need to provide additional notes on accounting policies, key balance sheet items, and comprehensive narrative descriptions. In contrast, FRS 105 is designed for smaller entities, resulting in less administrative burden but potentially insufficient detail for some stakeholders.
  2. Investment Property Valuation: FRS 102 Section 1A allows investment properties to be measured at fair value with changes recognised in profit or loss. This offers a more accurate reflection of current market values for stakeholders. In contrast, FRS 105 measures investment properties at cost less accumulated depreciation and impairment, disallowing fair value measurement, which may result in financial statements that are less useful for decision-making.
  3. Financial Statement Presentation: FRS 102 Section 1A mandates comprehensive financial statements. You would need to include a statement of financial position, a statement of comprehensive income, a statement of changes in equity, and detailed notes in order to offer a clearer picture of the company’s financial health. In contrast, FRS 105 features more condensed financial statements, typically just a balance sheet and a profit and loss account with minimal notes, which, while simpler for very small companies, may not suffice for more complex analysis.
  4. Stakeholder Needs: FRS 102 Section 1A is preferred by companies with a broader range of stakeholders. These are companies with investors, creditors, and regulators who need detailed financial information for informed decision-making. In contrast, FRS 105 is suited for micro-entities, typically owner-managed businesses, where reduced disclosures suffice for internal purposes.

Which Framework to Choose?

When advising our limited company clients holding investment properties, we consider the following: 

  1. Size and Complexity: If the company is very small and the owners are the primary users of the financial statements, FRS 105 could be appropriate due to its simplicity and reduced administrative burden. 
  2. Stakeholder Requirements: For companies with external investors, creditors, or other stakeholders who need more detailed information, FRS 102 Section 1A might be the better choice to provide a fuller picture of the company’s financial position. 
  3. Investment Property Valuation Needs: If fair value measurement of investment properties is important for the company’s reporting objectives, FRS 102 Section 1A is a suitable option as it allows fair value accounting. 

Choosing between FRS 102 Section 1A and FRS 105 involves balancing simplicity against the requirement for detailed financial information. Thus, it is essential that you understand the specific needs of your limited company clients and the expectations of their stakeholders. As always, seek professional advice tailored to the unique circumstances of your business to ensure compliance and optimal financial reporting.

Reach out to LoftyAccounting today to speak to one of our experts.