A company that stops qualifying as a micro entity, or chooses to leave FRS 105, prepares its next accounts under FRS 102, usually with the Section 1A small entity regime. It restates its comparative year as though FRS 102 had always applied, which typically means bringing in deferred tax, putting investment property at fair value, recognising leases on the balance sheet and adding notes. The adjustments go to retained earnings at the date of transition and are explained in a reconciliation.

When does a company have to leave FRS 105?

Micro entity status depends on section 384A of the Companies Act 2006: at least two of turnover not more than £1 million, balance sheet total not more than £500,000 and not more than 10 employees. After the first year, a company only stops being a micro entity when it fails the conditions in two consecutive financial years (section 384A(3)). A growing business therefore usually gets a year’s warning.

Size is not the only trigger. Section 384B takes away the micro entity provisions from a company that becomes, for example, a parent preparing group accounts or a subsidiary included in consolidated accounts, and that applies for the year in which the change happens. A company can also leave voluntarily: FRS 100 paragraph 4(b) requires FRS 102, FRS 101 (for a qualifying group member) or IFRS for an eligible entity that chooses not to use FRS 105. Most former micro entities are still small under section 382 and can use Section 1A, which changes the disclosures but not the recognition and measurement rules.

Which rules govern the move?

Section 35 of FRS 102 applies to a first time adopter whatever its previous framework, and paragraph 35.4(e) names FRS 105 specifically. Its general mechanics, including mandatory exceptions and the full menu of optional exemptions, are in transition to FRS 102. This page concentrates on what usually changes for a company coming from FRS 105.

The key steps are:

  1. Fix the date of transition: the start of the earliest period with full comparatives in the first FRS 102 accounts (paragraph 35.6).
  2. Prepare an opening balance sheet at that date that recognises every asset and liability FRS 102 requires, removes items it does not permit, reclassifies where needed and measures everything under FRS 102 (paragraph 35.7). It does not have to be published.
  3. Take the differences to retained earnings, or another component of equity if appropriate, at the date of transition (paragraph 35.8).
  4. Restate the comparative year and prepare the reconciliations.

Which balances usually change?

Area Under FRS 105 Under FRS 102 What to do on transition
Deferred tax Prohibited (paragraph 24.7) Recognised on timing differences (paragraph 29.6) Calculate on capital allowances, revaluations and other timing differences at the transition date
Investment property Cost less depreciation (paragraph 2.38) Fair value through profit or loss (paragraph 16.7) Obtain a fair value at the transition date and at each later reporting date
Other property, plant and equipment Cost only Cost or revaluation (paragraph 17.15) Optionally use fair value at the transition date as deemed cost (paragraph 35.10(c))
Leases as lessee Finance or operating classification (Section 15) Right of use asset and lease liability (paragraph 20.45), with short term and low value exemptions (paragraph 20.5) Recognise existing leases using the transition option in paragraph 35.10(x)
Derivatives Cost spread over the contract (paragraph 9.10) Fair value through profit or loss (paragraph 12.8) Bring forward currency contracts and swaps in at fair value
Equity settled share options Nothing until shares issued (paragraph 21.2) Charge as services are received over the vesting period (paragraph 26.6) Options granted before transition can be left out (paragraph 35.10(b))
Intangibles in past acquisitions Kept within goodwill (FRS 105 paragraph 14.1) Separate recognition rules in Section 19 Past combinations need not be restated (paragraph 35.10(a))

Two policy choices open up. A company may capitalise development costs that meet the criteria in paragraph 18.8H and may capitalise borrowing costs on qualifying assets under paragraph 25.2. Neither is compulsory, and paragraph 35.9 prevents accounting estimates from being revised with hindsight. Loans from directors also need attention: FRS 105 records them at the transaction price, but under FRS 102 the relief from discounting in paragraph 11.13A depends on the lender being a director or close family member and a shareholder being in that family group. See directors’ loans under FRS 102.

What does the restatement look like?

Illustration only. A company with a 31 March year end exceeds the micro limits in the years to 31 March 2026 and 31 March 2027, so its accounts for the year to 31 March 2027 are its first under FRS 102 Section 1A. Its comparative year runs from 1 April 2025, which is the date of transition.

  • It owns a warehouse that it lets to a third party. Under FRS 105 it stood at £280,000, cost less depreciation. A valuer puts its fair value at £360,000 on 1 April 2025. Retained earnings increase by £80,000, and the depreciation charged in the year to 31 March 2026 is reversed and replaced by the fair value movement for that year.
  • It rents its office on a five year lease. It recognises a lease liability equal to the present value of the remaining payments at 1 April 2025, say £45,000, and a right of use asset of the same amount adjusted for any prepaid or accrued rent.
  • Deferred tax is then calculated on the warehouse revaluation and on the difference between the tax written down value and carrying amount of its plant, and recognised in retained earnings at the transition date.

The figures for the year to 31 March 2026 that were filed under FRS 105 are restated in the comparative column, and a reconciliation shows how equity and profit moved from one basis to the other.

What new disclosures are needed?

Paragraph 35.13 requires a description of each change in accounting policy, reconciliations of equity at the date of transition and at the end of the latest period under the old framework, and a reconciliation of the last reported profit. Small entities are not excused: Appendix C paragraph 1AC.41 requires a small entity to explain how the transition has affected its financial position and performance as set out in paragraph 35.13. Paragraph 35.12A also requires a statement of which transitional exemptions were used.

Beyond transition, the notes grow from the four FRS 105 items to the Appendix C disclosures, such as accounting policies, fixed asset movements, and the basis of fair values. The statement above the directors’ signature changes from the micro entity provisions (FRS 105 paragraph 3.14) to the small companies regime (FRS 102 paragraph 1A.6A). A directors’ report becomes compulsory again, because the exemption in section 415(1A) only covers micro entities. See FRS 102 Section 1A.

Does the change affect corporation tax?

Deferred tax is an accounting entry only. Changes that alter how taxable trading profits are computed can be different. HMRC’s Business Income Manual at BIM34095 explains that, under section 181 of the Corporation Tax Act 2009, a positive adjustment arising from a change of basis is treated as a receipt of the trade on the first day of the first period of account on the new basis, and a negative adjustment as an expense. Each transition adjustment should be reviewed to see whether it falls within these rules, and the deferred tax workings should reflect the result. For the wider picture see deferred tax under FRS 102.

What mistakes come up most often?

  • Leaving FRS 105 a year too early, after one year over the limits, or a year too late, after missing the second consecutive year.
  • Restating only the current year and not the comparative, so the opening balance sheet is never prepared.
  • Forgetting that a new group structure, not just growth, can end micro status.
  • Omitting the transition reconciliation because the company uses Section 1A.
  • Carrying investment property at depreciated cost after the move, when paragraph 16.7 requires fair value.
  • Leaving leased offices and vehicles off the balance sheet. Under the post 2026 Section 20, only short term and low value leases can stay off.

For the choice itself, and why some micro entities move before they have to, see choosing between FRS 105 and FRS 102 Section 1A.

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Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 8 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.