You started out filing simple micro-entity accounts because that is what your accountant set up when the business was small. Now you have taken on a bank loan, brought in an investor, or started trading with a group of companies overseas, and suddenly someone is asking why your accounts do not show a fair value gain, or why there is no deferred tax line, or why your balance sheet looks thinner than it should. The real question underneath all of this is simple: which accounting standard should you actually be using, and what happens to your numbers if you get it wrong? Choosing the wrong standard is not just a technical slip. It can understate your assets to a lender, confuse an investor comparing you to competitors, or force you to restate a full year of accounts later on. This article walks through the three main options — FRS 105, FRS 102 and IFRS — in plain terms, and shows exactly how the same transaction produces different numbers under each one.
The three standards, in plain English
FRS 105 is the standard built for micro-entities — very small companies that want the simplest possible accounts. It strips out most disclosure requirements, does not allow revaluations of property or investments, and ignores deferred tax altogether. It is quick and cheap to prepare, but it also tells a lender or investor very little about the true value of what you own. FRS 102 is UK GAAP for everyone else who is not required to use IFRS — the vast majority of UK private companies, from small trading businesses to sizeable groups. It allows fair value accounting for certain assets, requires deferred tax to be recognised, and demands more disclosure, giving readers a fuller picture. IFRS (International Financial Reporting Standards) is mandatory for UK listed companies and their groups, and is sometimes adopted voluntarily by large private companies that want to look consistent with international competitors or are preparing for a sale to an overseas buyer. It is the most detailed and the most demanding of the three, both to prepare and to understand.
Why the choice matters more than you think
The standard you use is not just a filing formality — it changes the actual figures in your accounts. Under FRS 105 an investment property sits on the balance sheet at cost, even if its market value has doubled. Under FRS 102, that same property must generally be shown at fair value (and can be under IFRS), with the gain flowing through profit. That difference affects your reported profit, your net assets, the covenants a bank measures you against, and the price a buyer might be willing to pay. It also affects your tax position, because a fair value gain that has not been realised through a sale can still trigger a deferred tax liability that needs to be recognised under FRS 102 and IFRS, but is invisible under FRS 105. Lenders and investors know this, which is why many will insist on FRS 102 accounts before they will rely on your figures at all.
| Standard | Typically used by | Turnover threshold | Balance sheet threshold | Key reporting difference |
|---|---|---|---|---|
| FRS 105 | Micro-entities | Up to £1,000,000 (previously £632,000) | Up to £500,000 (previously £316,000) | No revaluations, no deferred tax, minimal disclosure |
| FRS 102 | Small and medium private companies | No fixed ceiling for use, but common up to large company size | No fixed ceiling | Mandatory fair value for investment properties, deferred tax required, fuller disclosure |
| IFRS | Listed groups, and larger private companies by choice | Required for listed groups; optional otherwise | Not threshold-based | Extensive disclosure, detailed rules on revenue, leases and financial instruments |
Worked example: same business, three sets of numbers
Riverside Trading Ltd is a growing SME. Three years ago it bought a small warehouse as an investment property for £200,000. It has just been independently valued at £260,000. Riverside currently prepares FRS 105 micro-entity accounts, but it is applying for a larger bank facility and the bank has asked to see how the figures would look under FRS 102, since that is what it uses to assess security cover.
| Original cost of investment property (shown under FRS 105) | £200,000 |
| Independent fair value of the property today (FRS 102 / IFRS basis) | £260,000 |
| Unrealised revaluation gain not recognised under FRS 105 | £60,000 |
| Estimated deferred tax liability on the gain at 25% | £15,000 |
Under FRS 105, none of this £60,000 gain appears anywhere in the accounts — the property simply stays at £200,000, less any depreciation. Under FRS 102, the gain is recognised directly in the profit and loss account in the year of revaluation, and a deferred tax liability is set up because the gain has not yet been taxed through a sale. The journal entry Riverside’s accountant would post under FRS 102 looks like this.
| Account | Dr | Cr |
|---|---|---|
| Investment property (balance sheet) | £60,000 | |
| Fair value gain on investment property (profit and loss) | £60,000 |
Records the increase in carrying value of the investment property from £200,000 to £260,000 under FRS 102 Section 16.
| Account | Dr | Cr |
|---|---|---|
| Tax expense — deferred tax (profit and loss) | £15,000 | |
| Deferred tax liability (balance sheet) | £15,000 |
Recognises the deferred tax liability arising on the unrealised revaluation gain, calculated at the prevailing corporation tax rate of 25%.
Under IFRS, accounting for this investment property under the fair value model (IAS 40) is very similar to FRS 102 Section 16, though FRS 102 generally mandates fair value measurement whereas IFRS offers an accounting policy choice between cost and fair value. The bigger practical differences between FRS 102 and IFRS usually show up in revenue recognition, leases and financial instruments, rather than straightforward property valuations.
Do not treat the choice of standard as something you can pick to make the numbers look better. Once you exceed at least two of the micro-entity thresholds for two consecutive financial years, you are legally required to move up to FRS 102 (or IFRS). Moving between standards also means restating your prior year comparatives on the new basis, which takes time and typically costs more in accountancy fees than budgeting for the change in advance.
When to move up a standard
There are three common triggers for moving up. The first is simply outgrowing the size thresholds — once a business exceeds at least two of the three micro-entity limits (turnover, balance sheet total, or 10 employees) for two consecutive financial years, FRS 105 is no longer an option. The second is external pressure: a bank, private equity investor or trade buyer wants accounts that show fair values, deferred tax and fuller disclosure, because that is what they need to assess risk properly. The third is structural — if you become part of a group that includes an overseas parent, or you are preparing for a stock market listing, IFRS may become a requirement rather than a choice. In each case, the earlier you plan the move, the smoother the transition. Restating figures under a new standard six weeks before a funding deadline is stressful and expensive; doing it a year ahead, with your accountant’s guidance, is straightforward.
- Check your turnover, balance sheet total and employee headcount against the current FRS 105 thresholds every year — do not wait until your accountant flags it, since exceeding at least two limits for two consecutive years forces a change.
- If you are talking to a bank or investor, ask early which standard they expect to see, so you are not caught restating accounts at the last minute.
- Before revaluing any property or investment, confirm which standard you report under, since FRS 105 does not permit fair value gains to be recognised at all.
- If you expect to join a group, attract external investment, or eventually seek a listing, discuss moving to FRS 102 (or planning for IFRS) with your accountant well before it becomes mandatory.
Not sure which standard fits your business now?
Get a clear, jargon-free assessment of whether FRS 105, FRS 102 or IFRS is right for your growing business, and what it would change in your numbers.
