Micro or Small? A Guide to Adjusting Your Company’s Size

Managing a business requires compliance with various rules and regulations. Understanding the classification of a company’s size is important to determining the financial reporting standards to be followed. The following blog explores the classification of a company into a micro-entity or a small company and the key differences between the different financial reporting standards.

What Qualifies as a Micro-Entity and a Small Company?

Micro-Entity : This is a company’s smallest categorisation, and it is allowed to report significantly less information than the larger entities. It must file reports under the Financial Reporting Standard (FRS) 105, applicable in the UK and the Republic of Ireland. A company must meet any two of the following conditions to be classified as a micro-entity:

1. A turnover of up to £632,000
2. £316,000 or less on the balance sheet
3. Ten employees or less

Small Company: A small company must report under FRS 102 if it satisfies any two of the following conditions:

1. A turnover of up to £10.2 million
2. £5.1 million or less on the balance sheet
3. 50 employees or less

FRS 105 vs. FRS 102: Key Differences

FRS 105 and FRS 102 are financial reporting standards used to report company accounts. FRS 105 allows the preparation of simplified financial statements for micro-entities in order to save time and effort.

FRS 102 applies to companies that require more comprehensive financial disclosures. These statements include other information that may be useful in formulating decisions by investors, creditors, and stakeholders.

Who Cannot File as a Micro-Entity?

Not all firms qualify to file as micro-entity under the FRS 105. The following types of companies are excluded:

1. Limited partnerships
2. Public limited companies
3. Overseas companies
4. Unregistered companies
5. Charitable companies
6. Qualifying partnerships

What are Statutory Accounts?

Statutory accounts, also known as annual accounts, are compulsory legal documents to be prepared and submitted at the end of every financial year. Companies can file full accounts (which are detailed) or abridged accounts (simplified versions).

• Abridged accounts enable companies to report the value at the end of the period without the obligation to publish the full year-end data. For example, they do not need to segregate the company’s debtors, creditors, and fixed assets.
• Filleted accounts allow further simplification by eliminating the profit and loss account when submitting reports to Companies House.

The requirements of statutory accounts under FRS 105 (micro-entities) are:

1. Profit and loss statement
2. Balance sheet
3. No requirement for a director’s report or an audit

The requirements of statutory accounts under FRS 102 (small companies) are:

1. Profit and loss statement
2. A balance sheet with notes to the accounts
3. Director’s report
4. Auditor’s report (unless exempt from audit)

Choosing the Right Reporting Standard

A company that qualifies as a micro-entity can file under FRS 105 or FRS 102. However, if the business is required to report some accounting treatments, including revaluation of key assets such as property, the only available framework is FRS 102 since FRS 105 does not allow it.

If a company that was previously a micro-entity now qualifies as a small company, it may file reports as a micro-entity for that period. However, if it remains a small company in the following years, it will be required to adopt FRS 102. These changes should be carefully implemented to respond to the relevant financial reporting requirements.

What If Companies File Under the Wrong Reporting Standard?

If companies file under an incorrect financial reporting standard, they will have to file an amendment. This includes furnishing corrected statutory accounts and returns. Amendments have to be submitted to the relevant entities as changes made in the financial reporting standard cannot be submitted digitally. Issuers can download and print the relevant documents to ensure that all amendments are verified and submitted correctly.

Conclusion

Conducting regular reviews and selecting the right reporting standards can prevent potential problems and get the business back on track. You can visit the HMRC website for more details regarding your company’s size and the different financial reporting standards. 

Leveraging iXBRL services can be an ideal solution for those looking to streamline their financial reporting. Get in touch with a DataTracks expert at +44 (0) 203 608 8035 or enquiry@datatracks.co.uk for error-free, compliance reporting.