FRS 102 v FRS 105: Making the Right Choice

If you run a small food, drink or FMCG business, at some point your accountant will ask which financial reporting standard you should be using. The two most common options for smaller UK companies are FRS 102 and FRS 105, and the choice is not always as obvious as it first looks. Get it right and your accounts stay simple and proportionate to your business. Get it wrong and you either produce more paperwork than you need to, or you miss disclosures that lenders, investors or Companies House expect to see.

This article sets out what each standard is, who qualifies for it, the practical differences that matter, and what changes are coming into effect that could affect your decision.

What is FRS 102?

FRS 102 is the main financial reporting standard used by UK companies that are not required, or do not choose, to apply full International Financial Reporting Standards. Most small and medium sized businesses use a simplified version of FRS 102 known as Section 1A, which cuts down the disclosure requirements while keeping the same underlying accounting principles. It allows a reasonable amount of flexibility, including the use of fair value accounting for certain assets such as investment property, and generally gives a fuller picture of a company's financial position than the micro entity regime.

What is FRS 105?

FRS 105 is the stripped back standard designed specifically for micro entities, the smallest category of UK company. It asks for far fewer disclosures than FRS 102 and does not permit fair value accounting, deferred tax or several other more technical adjustments. The result is a set of accounts that takes less time and cost to prepare, but that also tells a much thinner story to anyone reading them.

Who Qualifies for Each Standard

Company size thresholds increased for financial years starting on or after 6 April 2025, so it is worth checking you are using the current figures. A company must meet at least two of the three conditions below to qualify for each regime.

Micro entity, eligible for FRS 105:

●      Turnover of £1 million or less

●      Balance sheet total of £500,000 or less

●      10 employees or fewer on average

Small company, eligible for FRS 102 Section 1A:

●      Turnover of £15 million or less

●      Balance sheet total of £7.5 million or less

●      50 employees or fewer on average

If you meet the micro entity conditions you have a choice. You are not obliged to use FRS 105 simply because you are small enough to qualify. Many businesses that could use FRS 105 choose FRS 102 instead, for reasons set out below.

The Differences That Actually Matter

Fair value accounting. FRS 102 allows certain assets, such as investment property or some financial instruments, to be shown at current market value. FRS 105 does not allow this at all, so those assets stay at cost, which can understate the true financial position of the company.

Deferred tax. FRS 102 requires deferred tax to be recognised, giving a more complete view of future tax liabilities. FRS 105 does not permit deferred tax to be recognised at all.

Disclosure and detail. FRS 105 accounts are genuinely minimal, a balance sheet, a simplified profit and loss account and a short set of notes. FRS 102 accounts give lenders, suppliers, investors and grant bodies a much fuller picture, including notes on related party transactions, judgements and estimates.

Perception. Some banks, landlords and investors view micro entity accounts as a sign that a business has not yet built up much of a track record, purely because so little information is disclosed. That perception is not always fair, but it is worth factoring in if you are seeking finance, a lease or investment in the near future.

Group structures and consolidation. If you are part of a group, or plan to be, FRS 105 is generally not suitable, since it does not support consolidated accounts and several group related exemptions do not apply in the same way.

What Is Changing From 2026

The Financial Reporting Council carried out a periodic review of UK accounting standards in 2024, and the resulting amendments to FRS 102 apply to accounting periods beginning on or after 1 January 2026. The two biggest practical changes are new revenue recognition rules, based on a five step model for identifying and valuing performance obligations in a contract, and new lease accounting rules, which bring most leases onto the balance sheet as a right of use asset with a matching lease liability, rather than simply expensing rent as it is paid.

FRS 105 has also been updated as part of the same review, but the changes are much lighter touch, and micro entities are not required to bring leases onto the balance sheet in the same way. This is worth knowing if your business has several leased vehicles, premises or equipment, since it could be one of the more significant reasons a company that is eligible for FRS 105 chooses to stay there for a while longer, or conversely, a reason a growing business wants full visibility of its lease commitments through FRS 102 rather than waiting to be forced onto it later.

Questions Worth Asking Before You Decide

●      Do you plan to raise finance, take on investment or apply for grants in the next two to three years?

●      Do you hold property, investments or other assets where current value matters to how the business is judged?

●      Do you have, or plan to have, a group structure?

●      How many leases do you hold, and would bringing them onto the balance sheet change how your business looks to a bank or supplier?

●      Would slightly more disclosure now save you the cost and disruption of a bigger change in a year or two, once you outgrow the micro entity thresholds anyway?

Making the Right Choice

There is no single right answer for every business. A small, steady, owner run company with no plans to borrow or bring in investors may be perfectly well served by FRS 105 and its lighter reporting burden. A growing food or drink brand that is talking to lenders, applying for retail listings, or building toward a future sale is often better served by FRS 102 from an earlier stage, even if it is not yet required to move up. The right choice depends on where your business is heading, not just where it sits today.

At Kubed Solutions we work with food, drink and FMCG businesses across the UK, and part of our role is helping owners choose the reporting standard that fits their plans, not just their current size. If you are weighing up FRS 102 against FRS 105, or want to understand how the 2026 changes affect your business specifically, get in touch and we will talk it through with you.