What happens when my company starts or stops using the micro-entity rules?

Companies Act 2006, section 384A(4): the qualifying conditions are met in a year in which the company satisfies two or more of: turnover not more than £1 million; balance sheet total not more than £500,000; number of employees not more than 10. Section 384A(5): for a financial year that is not in fact a year, the maximum turnover must be proportionately adjusted. Section 384A(6): the balance sheet total means the aggregate of the amounts shown as assets in the balance sheet. Section 384A(7): the number of employees is the average number employed in the year: for each month, the number of persons employed under contracts of service in that month (whether throughout the month or not), added together and divided by the number of months. Section 384A(8): a parent company qualifies only if its group also qualifies as a small group.

The £1 million and £500,000 figures were substituted from 6 April 2025 by SI 2024/1303. The FRC amended FRS 105 Appendix III paragraph A3.3 to match, replacing £632,000 and £316,000, for financial years beginning on or after 6 April 2025.

FRS 105 defines a micro-entity as a company meeting section 384A and not prevented by section 384B from applying the micro-entity provisions. FRS 100 paragraph 4, footnote 2: in establishing whether the eligibility criteria are met, turnover and balance sheet total are measured in accordance with FRS 105.

SourcesThe law·FRC

Section 384A(1): a company qualifies as a micro-entity for its first financial year if the qualifying conditions are met in that year. Section 384A(2) and (3): for a later year, it qualifies if the conditions are met in that year, but where on its balance sheet date a company meets or ceases to meet the conditions, that affects its qualification only if it occurs in two consecutive financial years. FRS 105 Appendix III paragraph A3.4: a company that qualified in one period but no longer meets the conditions in the next may continue to apply the regime in that next period; if it then meets the conditions again, the regime continues uninterrupted. A company other than a newly incorporated one must meet the conditions for two consecutive years to qualify.

Section 384B(1): the micro-entity provisions do not apply to a company's accounts for a financial year if at any time in that year it was, among others, excluded from the small companies regime by section 384, an investment undertaking, a financial holding undertaking, a credit institution, an insurance undertaking, or a charity. Section 384B(2): nor do they apply if the company is a parent company preparing group accounts as permitted by section 399(4), or is not a parent company but its accounts are included in consolidated group accounts for that year.

SourcesThe law·FRC

FRS 105 paragraph 28.1: Section 28 applies to a first-time adopter, regardless of its previous financial reporting framework. Paragraph 28.3: a first-time adopter applies the section in its first financial statements that conform to FRS 105. Paragraph 28.4: these are the first prepared under FRS 105 if, for example, the micro-entity did not present financial statements for previous periods, or presented its most recent previous financial statements under FRS 102. Paragraph 28.5 points to paragraph 3.9 for a complete set of financial statements. Paragraph 3.7: comparative information is presented for all amounts. Paragraph 28.6: the date of transition is the beginning of the earliest period for which the micro-entity presents full comparative information under FRS 105 in its first financial statements that comply with it.

Paragraph 28.7: in its opening statement of financial position at the date of transition, a micro-entity shall (a) recognise all assets and liabilities whose recognition FRS 105 requires; (b) not recognise items as assets or liabilities if FRS 105 does not permit it; (c) reclassify items recognised under the previous framework as one type of asset, liability or component of equity that are a different type under FRS 105; and (d) apply FRS 105 in measuring all recognised assets and liabilities. The opening statement need not be presented. Paragraph 28.8: the resulting adjustments arise from transactions, events or conditions before the date of transition, so they are recognised directly in equity reserves at that date. Paragraph 28.11: if an adjustment is impracticable at that date, it is made in the earliest period for which it is practicable.

Paragraph 28.9: a first-time adopter shall not retrospectively change its previous accounting for derecognised financial assets and liabilities, accounting estimates, or revenue contracts for which all goods or services were transferred before the date of transition. Paragraph 28.10 offers optional exemptions. Items (a) to (f) cover business combinations and goodwill, share-based payments settled before transition, investment property components, compound financial instruments, arrangements containing a lease, and decommissioning costs. Item (g) is the dormant company exemption. Paragraph 28.12: an exemption applied at the date of transition may continue in later accounts until the related assets and liabilities are derecognised. Paragraph 28.2: a micro-entity that used FRS 105 before, but whose most recent accounts used another framework, must either apply Section 28 again or apply FRS 105 retrospectively as if it had never stopped.

FRS 105 Appendix III paragraph A3.8: micro-entities may only apply the historical cost accounting rules. Paragraph 2.38: property, plant and equipment are measured at cost less accumulated depreciation and impairment. For investment property, the 28.10(c) exemption says cost can be found by reversing revaluation gains or losses previously recognised in equity reserves, where no depreciation had been charged. Paragraph 24.7: a micro-entity shall not recognise deferred tax.

The Periodic Review 2024 amendments, including the February 2026 changes, apply for accounting periods beginning on or after 1 January 2026. Paragraph 1.11: on first applying them, a micro-entity applies the revised revenue section only to contracts that begin after the date it first applies them.

SourcesFRC

FRS 100 paragraph 4: financial statements of an entity eligible for FRS 105 may be prepared under it. Those of an entity not eligible, or eligible but choosing not to apply it, must be prepared under FRS 102, adopted IFRS or, for the individual financial statements of a qualifying entity, FRS 101. FRS 102 paragraph 35.1: Section 35 applies to a first-time adopter of FRS 102, whatever its previous framework, including FRS 105. Paragraph 35.4: an entity's first FRS 102 financial statements are the first in which it makes an explicit and unreserved statement of compliance with FRS 102, for example after accounts that conformed to FRS 105. Paragraph 35.2: an entity that applied FRS 102 in an earlier period, but whose most recent accounts did not contain that statement, must either apply Section 35 or apply FRS 102 retrospectively as if it had never stopped.

SourcesFRC