FRS 102 Section 1A & FRS 105: Small and Micro-Entity Exemptions

The small and micro-entity regimes are the most-used corner of UK GAAP: the overwhelming majority of the 5.5 million companies on the register file under FRS 102 Section 1A or FRS 105. On 6 April 2025 the ground shifted. The Companies (Accounts and Reports) (Amendment and Transitional Provision) Regulations 2024 (SI 2024/1303) lifted the monetary size thresholds by roughly 50% to catch up with inflation since 2013, pulling tens of thousands of companies down a size band. A company that was medium last year may be small this year; a small company may now qualify as a micro-entity. This guide explains the current thresholds, exactly what Section 1A and FRS 105 exempt you from, where the true and fair view still bites, and the audit points that matter when almost none of these entities are audited.

What are the small and micro thresholds from April 2025?

For financial years beginning on or after 6 April 2025, a company is small if it meets two of three conditions: turnover not more than £15m, balance sheet total not more than £7.5m, and not more than 50 employees. It is a micro-entity if turnover is not more than £1m, the balance sheet total is not more than £500,000, and it has not more than 10 employees. The employee limits (10 and 50) did not change; only the money figures were uplifted.

These limits are set by the Companies Act 2006, not by the accounting standard. The small-company conditions sit in s382–s384 and the qualifying-company gateway in s384, while the micro-entity conditions sit in s384A–s384B. The parallel definitions for the audit exemption use the same numbers in s477 and s465. The table below shows the change SI 2024/1303 introduced.

Balance sheet total means gross assets, not net. A common error is to net off liabilities. The "balance sheet total" in the Act is total assets before deducting any liabilities, so a company with modest net assets but a large gross balance sheet (heavy trade debtors, stock or fixed assets financed by debt) can breach the assets test even when it looks small on a net-asset basis.

How does the two-of-three size test work?

A company qualifies for a size band by meeting at least two of the three conditions, and after its first year it must meet them (or exceed them) for two consecutive years before it changes band. This "consistency" rule in s382(2) and s465(3) stops companies flipping regime every year on a small fluctuation. In the very first financial year, meeting two of three in that single year is enough.

The trap is the transitional provision in SI 2024/1303. When you test a financial year beginning on or after 6 April 2025, you apply the new thresholds to the prior year as well — the law tells you to treat the uplifted figures as if they had always applied. This means a company that was "medium" in the year to 31 March 2025 on the old numbers is re-tested against the new £15m/£7.5m limits for its comparative, so many entities drop to small immediately rather than after a two-year wait.

Worked example: threshold test

What does Section 1A actually exempt you from?

Section 1A cuts disclosure, not recognition or measurement. A small company still measures everything using the full FRS 102 rulebook — amortised cost for basic financial instruments, fair value for investment property where reliably measurable, the same deferred tax and lease models — but presents a legally defined minimum set of notes instead of the full Section 3–35 disclosure load. The disclosure requirements are set out in paragraphs 1A.4 to 1A.22, which cross-refer to the encouraged disclosures in Appendices C and D.

Appendix C lists the disclosures a small company must give to comply with company law (Schedule 1 to the Small Companies Regulations 2008). Appendix D lists further disclosures the FRC encourages because they are often needed for a true and fair view — going concern, dividends, off-balance-sheet arrangements, and post-balance-sheet events among them. The single biggest reliefs against full FRS 102 are the removal of the mandatory cash flow statement (Section 7) and the statement of changes in equity, plus vastly reduced financial-instrument, related-party and deferred-tax note requirements.

Section 1A vs full FRS 102 disclosure delta

Note the related-party point carefully. Section 1A does not delete related-party disclosure; it narrows it. Small entities must still disclose the total of advances, credits and guarantees to directors under s413 of the Act, and must disclose material related-party transactions that were not concluded under normal market conditions. Intra-group balances on arm's-length terms can be omitted, but a director's loan or a below-market shareholder transaction cannot.

The true and fair view override

This is the point most preparers underweight. Section 1A does not switch off the overriding requirement, in s393 of the Companies Act and paragraph 1A.5 of FRS 102, that the accounts give a true and fair view. The legal minimum disclosures are a floor, not a ceiling. Where they are insufficient — for example a material uncertainty over going concern, a significant post-year-end event, or a material contingent liability — the encouraged Appendix D disclosures become effectively mandatory to avoid the accounts being misleading. A common failing is a Section 1A set that omits any going-concern narrative in a year of clear financial stress.

When should you use FRS 105 instead?

FRS 105 is a separate, deliberately simpler standard for micro-entities, and it removes measurement options as well as disclosures. Use it only where the client is genuinely micro (below £1m turnover / £500k assets / 10 employees), is eligible (not an LLP-excluded, financial or investment entity, and not a member of certain groups), and wants the absolute minimum compliance burden.

The key differences from Section 1A are that FRS 105 prohibits several treatments that FRS 102 permits or requires: no fair value or revaluation (all investment property and financial instruments at cost less impairment), no deferred tax at all, no capitalisation of development costs or borrowing costs, and no separate intangibles on a business combination. Micro accounts contain only a very short balance sheet, a simple profit and loss account, and a handful of footnote disclosures on the face of the balance sheet. Under s384A and s393, accounts drawn up to the micro minimum are presumed by law to give a true and fair view, so there is no Appendix-D-style top-up obligation. The trade-off is loss of information: fair-value gains disappear from the balance sheet, which can materially understate a property-rich company's net worth and distort distributable reserves.

When micro is the wrong answer. A company holding investment property it wants to carry at market value, a company that needs deferred tax recognised (for example to support a distributable-reserves position), or one that expects to seek external finance where lenders want richer disclosure, should stay on FRS 102 Section 1A even if it is technically micro-eligible. Micro is about minimising cost, not maximising information.

Transition, eligibility and filing exemptions

Moving between regimes is a change of framework, applied retrospectively with a transition date. Adopting Section 1A for the first time (from full FRS 102, or on incorporation) uses the Section 35 transition rules if measurement bases change; because Section 1A keeps full FRS 102 measurement, the transition is usually presentation-only and comparatives simply lose disclosures. Moving from FRS 102 to FRS 105, or the reverse, does change measurement (fair values and deferred tax appear or disappear), so prior-year figures are restated and the effect is taken to opening reserves at the transition date.

Eligibility exclusions matter. A company cannot use the small-company regime, however small, if at any time in the year it was a public company, an authorised insurance/banking/e-money/investment entity, or a member of an ineligible group — broadly a group containing a listed or regulated entity (s384). The micro regime has a longer exclusion list in s384B, which also rules out LLPs that are not qualifying partnerships, charities, and members of groups preparing consolidated accounts.

On filing, a small company may prepare abridged accounts (a condensed balance sheet and profit and loss account) with the unanimous consent of members, and may file filleted accounts at Companies House — omitting the profit and loss account and the directors' report so only the balance sheet and notes are public. Micro-entities file only the balance sheet with its footnotes. Be aware this is changing: the Economic Crime and Corporate Transparency Act 2023 will require small and micro companies to file a profit and loss account (and small companies a directors' report), removing filleting over a transitional period as Companies House implements the reforms.

Auditor red flags

Most small and micro companies are audit-exempt under s477, and that is precisely why these files carry elevated risk: there is no independent assurance, related-party terms are lightly disclosed, and the person preparing the accounts often also runs the company. Where an audit is required — ineligible group membership, a 10%-shareholder demand under s476, or a parent providing a s479A guarantee — the following recur.

Red flag 1 — size band claimed but never evidenced. The file asserts "small" or "micro" with no threshold calculation, no gross-assets working, and no consideration of the two-year consistency rule. Under ISA (UK) 315 (Revised) the auditor must understand the entity and the framework it is entitled to use; an unevidenced size assertion is a control and eligibility risk. Recompute turnover, gross (not net) assets and average monthly employees, and confirm the group is not ineligible.

Red flag 2 — related-party and director transactions suppressed. Section 1A's narrower disclosure is often mis-read as "no related-party disclosure at all." Directors' advances, credits and guarantees (s413) and non-arm's-length related-party transactions must still appear. This is a fraud-risk indicator under ISA (UK) 240: undisclosed director loans and off-market intra-group pricing are classic management-override vectors, so design procedures under ISA (UK) 330 to test completeness of related-party disclosure, including a review of the loan accounts and board minutes.

Red flag 3 — going concern silence in a stressed year. A Section 1A set with deteriorating results, tight covenants or net current liabilities that carries no going-concern note breaches the true and fair view obligation despite meeting the legal minimum. This engages ISA (UK) 570: challenge the directors' assessment, obtain the cash-flow forecast, and if a material uncertainty exists, insist on the Appendix D disclosure and reflect it in the auditor's report.

Illustrative case study: Meridian Joinery Ltd

Frequently asked questions

What are the small company thresholds from April 2025?

For financial years beginning on or after 6 April 2025, a company is small if it meets two of: turnover ≤ £15m, balance sheet total ≤ £7.5m, and ≤ 50 employees. These replaced the old £10.2m and £5.1m limits under SI 2024/1303. The employee limit is unchanged.

What is the difference between FRS 102 Section 1A and FRS 105?

Section 1A keeps full FRS 102 recognition and measurement but reduces disclosures for small companies. FRS 105 is a separate standard for micro-entities that also removes measurement options — no fair value, no revaluation, no deferred tax, no capitalised development or borrowing costs.

Does Section 1A remove the true and fair view requirement?

No. Under s393 and paragraph 1A.5, a Section 1A company must still give a true and fair view. Where the legal minimum notes are not enough, the encouraged disclosures in Appendix D (going concern, dividends, post-balance-sheet events) must be added.

Do small and micro entities still need an audit?

Usually not. A company meeting the small thresholds is exempt under s477 unless it is a public company, a regulated entity, part of an ineligible group, or 10% of members demand an audit under s476. Audit thresholds tracked the small-company uplift from 6 April 2025.

Can a small company still file abridged and filleted accounts?

Yes, for now. With member consent it can abridge the primary statements and file filleted accounts (no profit and loss account or directors' report) at Companies House. The Economic Crime and Corporate Transparency Act 2023 will eventually require the profit and loss account to be filed, ending filleting.

How are employees counted for the size test?

Use the average monthly number of persons employed under contracts of service during the year, per s382(6). Add up the monthly figures and divide by the number of months in the period; part-time staff count as whole persons, not full-time equivalents.

What if a company crosses a threshold for one year only?

Nothing changes. Because of the two-consecutive-year rule in s382(2), a single year over the limits does not move a company out of the small regime; it must exceed two of three limits for two years running before it becomes medium-sized (and vice versa to become small).

About the author

Usman Qureshi is a Chartered Certified Accountant (ACCA) working in audit and advisory. He writes the IFRS, FRS 102 and US GAAP guides published on this site. Membership is listed on the ACCA public register.