How micro entities account for investments

A micro entity using FRS 105 must carry shares and other equity investments, including investments in subsidiaries and associates, at cost less impairment. Company law bars micro entities from fair value and revaluation accounting, so a rise in market value is never recognised, and on moving from FRS 102 any previous fair value uplift must be reversed back to historical cost through reserves.

What does FRS 105 require for shares and other investments?

Investments are financial instruments within Section 9 of FRS 105 (paragraph 9.2(f)). At each reporting date, investments in preference shares or ordinary shares, and investments in subsidiaries, associates and jointly controlled entities, are measured at cost less impairment (paragraph 9.8(a), repeated in paragraph 2.37(a)). Section 7 confirms that a micro entity accounts for subsidiaries, associates and interests in jointly controlled entities under Section 9 (paragraph 7.2), so there is no equity method and no share of the investee’s profits.

Cost means the transaction price, which for an investment is the consideration given, such as the cash paid (paragraph 9.5). Material transaction costs such as legal fees are added to the cost; immaterial costs are expensed (paragraph 9.7). The FRS 105 example shows shares bought for 1,000 with 100 of material legal and other costs recorded at a total cost of 1,100.

Loans made to other entities are also financial instruments, but they follow the cost plus interest rules described in loans and financial instruments under FRS 105.

Why can a micro entity not show investments at market value?

The restriction comes from the law, not just the standard. Regulation 3(1A) of the Small Companies and Groups (Accounts and Directors’ Report) Regulations 2008 provides that Sections C (alternative accounting rules) and D (fair value accounting) of Part 2 of Schedule 1 do not apply to a company that qualifies as a micro entity and prepares its accounts using the micro entity provisions. FRS 105 Appendix III explains that micro entities are therefore only permitted to apply the historical cost accounting rules (paragraph A3.8), and the Basis for Conclusions records that FRS 105 does not allow any asset or liability to be measured at fair value after initial recognition, which affects financial instruments in particular (paragraph 15).

That is a sharp contrast with FRS 102, where investments in shares outside the group that are publicly traded, or whose fair value can otherwise be measured reliably, are carried at fair value through profit or loss (FRS 102 paragraph 11.14(d)(iv)). See listed share investments held by a company and measuring unquoted equity investments. The same restriction stops a micro entity revaluing investment property, which is carried at depreciated cost; see can micro entities revalue property.

When must an investment be written down?

All financial assets must be assessed for impairment at each reporting date (paragraphs 9.8 and 9.16). Evidence includes significant financial difficulty of the investee, probable insolvency, declining market values of the asset or similar assets, and significant adverse changes in the technological, market, economic or legal environment (paragraph 9.17). For shares and investments in subsidiaries, associates and jointly controlled entities, an impairment loss is recognised if the carrying amount exceeds the best estimate of the asset’s selling price at the reporting date (paragraph 9.18(a)). The loss goes straight to profit or loss.

A previous impairment is reversed if the loss later decreases and the decrease can be related to an event after the impairment was recognised (paragraph 9.19). Because the measurement basis is cost less impairment, a reversal restores value only up to original cost; the standard describes writing assets below historical cost as a way of ensuring an asset is not measured at more than the entity expects to recover (paragraph 2.40).

Worked example

Illustration only. A micro entity buys listed shares for £10,000 in year 1.

Year end	Market value	Carrying amount under FRS 105
Year 1	£14,000	£10,000, no gain recognised
Year 2, after a sustained fall and evidence of impairment	£7,000	£7,000, impairment of £3,000 in profit or loss
Year 3, recovery linked to a later event	£12,000	£10,000, reversal of £3,000 capped at cost

How are dividends from investments recognised?

A dividend receivable is recognised in profit or loss only when the right to receive payment is established, it is probable the economic benefits will flow to the micro entity and the amount can be measured reliably (paragraph 9.8A). A dividend declared by an investee after the year end is therefore not income of the earlier year.

Can a holding company or investment company use FRS 105?

Several exclusions apply before the measurement question arises. A micro entity that is required or chooses to prepare consolidated accounts is excluded from the regime (FRS 105 paragraph 7.3). Under section 384A(8) of the Companies Act 2006 a parent company qualifies as a micro entity only if it qualifies on its own figures and the group it heads qualifies as a small group. Section 384B(2) also excludes a parent that prepares group accounts voluntarily and a company whose accounts are included in consolidated group accounts.

Section 384B(1) excludes a company that would have been an investment undertaking or a financial holding undertaking under Article 2(14) or 2(15) of Directive 2013/34/EU. Those are, broadly, undertakings whose sole object is to invest their funds in securities, property and other assets to spread risk for their shareholders, or to acquire and manage holdings in other undertakings without involving themselves in their management. A company that exists only to hold a portfolio of shares should check this point before choosing FRS 105. The full list is in micro entity exclusions.

Where do investments appear in micro entity accounts?

The micro entity balance sheet formats in Section 4 have no separate investments line. Investments are included in Fixed assets or Current assets according to their nature. Schedule 8 to the 2008 Regulations defines fixed assets as assets intended for use on a continuing basis in the company’s activities and current assets as assets not intended for such use, so a long term strategic holding is usually fixed and shares held to sell in the short term are current. See investments as fixed or current assets.

What happens to fair value balances on transition from FRS 102?

In its opening balance sheet at the date of transition, a first time adopter must apply FRS 105 in measuring all recognised assets (paragraph 28.7(d)), and the resulting adjustments are taken directly to equity reserves at that date (paragraph 28.8). The FRC considered and rejected a transition exemption to carry forward fair value as deemed cost, stating that it would be inconsistent with the legal framework to allow previous fair values of investments in shares to be carried forward (Basis for Conclusions paragraph 23). A company that wants to keep fair values can apply the small companies regime instead (paragraph 25).

Illustration only. Shares that cost £20,000 were carried at fair value of £35,000 under FRS 102 at the date of transition. They are restated to £20,000, less any impairment, and £15,000 is removed from reserves. Any fair value movement included in the comparative year’s profit is reversed when the comparatives are restated. Moving back later is covered in moving from FRS 105 to FRS 102.

Common mistakes

• Revaluing listed shares to market value at the year end, which company law prohibits for micro entities.
• Equity accounting an associate or including a share of a subsidiary’s profit.
• Carrying forward an FRS 102 fair value as deemed cost on transition.
• Reversing an impairment above original cost.
• Using FRS 105 for a pure investment holding company without checking the section 384B exclusions.

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Related Accountapedia entries

• How micro entities account for leases
• FRS 105 and micro entity accounts
• Goodwill in micro entity accounts
• Can an LLP use FRS 105 micro entity accounts
• Can micro entities revalue property

Sources

• Financial Reporting Council: FRS 105 September 2024
• legislation.gov.uk: SI 2008/409, regulation 3
• Financial Reporting Council: FRS 102 September 2024 tmKYWO6
• legislation.gov.uk: Act 2006 c. 46, section 384A
• legislation.gov.uk: Act 2006 c. 46, section 384B
• legislation.gov.uk: 2
• legislation.gov.uk: SI 2008/409, schedule 8

Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 24 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.