Can Property Investors adopt micro entity accounting standards, FRS 105?

04 September 2017

Imagine you own a property investment company, which owns several properties at £6 million cost; generates rental income of £600,000 p.a; and employs fewer than 4 people. 

From 1 January 2016, a new accounting framework known as FRS 105 is available for use, for ‘micro-entities’ and contains a reduced level of disclosure, which includes less detail than the abbreviated accounts of old UK GAAP.

What is a micro-entity?

Broadly speaking, an entity meets the size criteria for a micro-entity if it does not exceed at least two of the following three thresholds in relation to a financial year:

  • Turnover less than £632,000 (adjusted for periods longer or shorter than 12 months).
  • Balance sheet gross assets less than £316,000.
  • Average number of employees less than 10.

Therefore, you are thinking that FRS 105 would fit your property investment business.

The advantages of using FRS105

By adopting FRS 105, companies are able to file and prepare abridged accounts and simplify the company’s financial reporting obligations in the following ways:

  • Prepare a simple Balance Sheet and Profit and Loss Account.
  • No accounting notes are required.
  • Only the Balance Sheet, and its disclosure of the minimum accounting items, needs to be filed at Companies House.
  • No obligation to prepare a directors’ report. 
  • No revaluation at fair value is permitted under FRS 105 meaning investment property could not be revalued to fair value at the end of each financial period.

The disadvantages of using FRS 105

Simplifying the accounts can make it difficult to understand events during the year without explanation, FRS 105 also removes a certain degree of flexibility when preparing accounts, for example:

  • No accounting policy options are available under FRS 105, so borrowing costs and development costs must be expensed to the profit and loss account in the period in which they are incurred, and grants must be recognised on an accruals basis.
  • No revaluation of assets at fair value is permitted.
  • Businesses adopting FRS 105 must use a specific format.
  • FRS 105 doesn’t allow for deferred tax or equity-settled share-based payments prior to the issue of shares.

The reduced disclosure of FRS 105 can be a draw back in some situations. If financing is needed, it may be more appropriate to prepare accounts using FRS 102. This would be an important consideration if the company relies upon a mortgage and it has restricted covenants surrounding the loan to asset ratios.

So can property investment companies actually use FRS 105?

In addition to the size criteria mentioned above, the company must not be a charity, partnership or credit institution, and must not be undertaking investment, financial holding or insurance business. This definition could be subject to a degree of interpretation, however, if a property investment company is owned by a number of shareholders, it would be difficult to argue that the definition of investment entity is not met and therefore we take the view that FRS 105 is unlikely to apply to some but not all property investment companies.

It is important that specific advice and guidance is obtained in each situation, as there is no one size fits all answer and the decision whether to adopt FRS 105 as an accounting framework for a property investment company needs to be considered carefully.

We work with directors of property investment companies in assessing their needs, along with those of any third parties and the funding requirements of a property portfolio, before making a recommendation for the best option.

Contact us

If you would like to discuss this further, please get in touch with Andrew Moyser or send us an online enquiry.