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FRS 105 - The Pros and Cons for Property Investment Companies

By Wasif Raza

 

FRS 105 is a reduced disclosure accounting standard available for micro entities which meet the qualifying conditions. It is availble for accounting periods on or after 01/01/2016

 

What is a micro entity?

 

A micro entity refers to a standalone limited company that meets 2 of the 3 following conditions

  1. Turnover is less than £632,000
  2. Fixed Assets + Current Assets are less than £316,000
  3. Less than 10 employees working for the company.

 

If the company only meets one of the above conditions and not the other two, then it is categorised as a small to medium sized entity therefore cannot use the FRS 105 reduced reporting standards.

 

The following example may help explain it a little bit better.

A company holds a property worth £6 Million cost,  generates rental income of £350,000 p.a; and employs less than 10 people. This will quality as a micro entity

A company holds a property worth £3 Million cost,  generates rental income of £650,000 p.a; and employs more than 10 people. This will not qualify as a micro entity but as a small to medium sized entity

 

The advantages of using FRS105

 

The main advantage is the reduced disclosures. The only notes in the accounts will be any guarantees, contingencies and commitments which the company is related to with, and any advances, loans or guarantees with the directors, plus the number of employees. It is also worth noting that loans to the company from the directors, or from other related entities, do not require disclosure.

There is also no requirement for the directors to have the property revalued each year as they would have to under FRS 102, as this is prohibited under FRS 105, and this can achieve both a time and cost saving. This will also have the added advantage that it will limit the disclosure of potentially sensitive information in respect of rental yields that the company is achieving.

 

The disadvantages of using FRS105

 

The reduced disclosure of FRS 105 can be a draw back in certain scenarios.

If  a director wants to raise finance, or if investors want to review what has happened over a period, FRS 105 may not be appropriate standard. In these circumstances a company would be better off producing accounts using FRS 102, especially if they use the reduced disclosures under Section 1A for small companies.

When banks and other lenders to the company are relying on loan to asset ratios, or are looking at the net asset values of the company, then the company may want to show the properties that they hold at market value, and therefore FRS 105 would not be the appropriate accounting standard to use.

 

Is it for me?

 

There is no one size fits all to this question and the decision on whether to use FRS105 needs to be considered carefully.

We work with directors of property companies in assessing their requirements, before making a recommendation for the best option.

 

Get in touch with us at M Raza & Co by using the form on our contact page.

 

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The information provided on this web site is of a general nature. It is not a substitute for specific advice in your own circumstances. You are recommended to obtain specific professional advice from a professional accountant before you take any action or refrain from action. Whilst we endeavour to use reasonable efforts to furnish accurate, complete, reliable, error free and up-to-date information, we do not warrant that it is such. We and our associates disclaim all warranties. The information can only provide an overview of the regulations in force at the date of publication, and no action should be taken without consulting the detailed legislation or seeking professional advice.