With the FRS 102 periodic review looming large, this has been a big area of focus during courses in 2024/25. Here are some of the most common questions we’ve been asked recently – with some suggested answers.
Might the new rules on leasing push a company over the audit limit?
Because entity size is based on gross assets not net assets (along with turnover and net assets) this might be the case. However, don’t forget that size thresholds change for accounting periods beginning on or after 6 April 2025 based on the Companies (Accounts and Reports) (Amendments and Transitional Provision) Regulations 2024, so this will need to be looked at carefully.
When working out whether a company is eligible for FRS 105 do we have to take account of right of use assets?
This is a very common question. The current balance sheet total threshold for micro-entities is £316K. Might a right of use asset push an entity over that limit and require it to apply FRS 102?
The answer is no. Footnote 2 to FRS 100 states that ‘the eligibility criteria for applying FRS 105 are set out in legislation and FRS 105. In establishing whether the eligibility criteria have been met, turnover and balance sheet total shall be measured in accordance with FRS 105; the measurement of turnover and balance sheet total in accordance with … FRS 102 need not be considered’.
If there was a break clause after 1 year, would that mean that a lease can be considered short term?
Probably – though careful consideration needs to be given to the definition of ‘lease term’ here. It’s defined as the aggregate of: (a) the non-cancellable period of a lease; (b) periods covered by an option to extend the lease if the lessee is reasonably certain to exercise that option; and (c) periods covered by an option to terminate the lease if the lessee is reasonably certain not to exercise that option.
Do the new rules have to be applied in management accounts as well as in financial statements?
Financial reporting standards only apply to statutory accounts – so technically the answer is no. However, we would encourage entities to embrace the new requirement in their internal accounting records. For example, it would be odd to continue to differentiate between operating and finance leases from a management accounting point of view – and then to make restatements in the statutory accounts.
Do the new requirements in respect of small company disclosures mean that FRS 105 will be used more?
Potentially, though of course application of FRS 105 is optional. Don’t forget that application of FRS 105 will also make lease accounting easier – and that for accounting periods beginning on or after 6 April 2025 more entities will be eligible for FRS 105, based on the the Companies (Accounts and Reports) (Amendments and Transitional Provision) Regulations 2024.
Peter Herbert, March 2025
