FRS 102 includes a Small Entities (SE) regime with substantial disclosure and measurement exemptions. These reliefs can significantly simplify financial reporting. This guide covers qualification, exemptions, and audit considerations.
Small Entities Qualification (2026/27 Thresholds)
An entity qualifies for SE status if it meets 2 of 3 size thresholds for two consecutive years:
| Metric | Threshold | Note |
|---|---|---|
| Turnover (revenue) | ≤ £10.2m | Annual turnover in the year |
| Balance sheet total (assets) | ≤ £5.1m | Total assets at year-end |
| Employees | ≤ 50 | Average during the year |
Important: Thresholds increased in 2023 (from £8.8m / £4.4m) to help more SMEs benefit. Exceeded thresholds in one year does not disqualify; must exceed in two consecutive years to lose SE status.
Major SE Exemptions
1. Cash Flow Statement (Biggest Relief)
Exemption: SE entities do NOT need to present a cash flow statement.
Impact: Saves significant accounting effort (no need to segregate operating/investing/financing activities).
2. Deferred Tax (Significant Simplification)
Exemption: SE entities are NOT required to recognize deferred tax assets or liabilities.
Practical impact:
- No need to analyze temporary differences (depreciation timing, provisions, etc.)
- Tax provision = current tax only
- Simplifies year-end estimation process
3. Related Party Disclosures
Exemption: SE entities need only disclose key management compensation (not full related party transactions).
Practical impact: Reduced disclosure burden for intercompany transactions, shareholder loans.
4. Segmental Reporting
Exemption: No requirement to disclose operating segments (often required for larger entities).
5. Fair Value Measurement
Exemption: Investment property can use cost method if no active market exists (no fair value estimate required).
Worked Example: SE Compliance Assessment
Scenario: ABC Ltd (2025 Year-End)
2024 (year 1):
— Turnover: £9.5m ✓
— Assets: £4.8m ✓
— Employees: 40 ✓
Status: Meets 2 of 3 →’ SE in 2024
2025 (year 2):
— Turnover: £11m ✗ (exceeds threshold)
— Assets: £5.0m ✓
— Employees: 48 ✓
Status: Meets 2 of 3 →’ Still SE in 2025
2026 Onwards:
— If both 2025 and 2026 exceed thresholds →’ Loses SE status in 2027
Exemptions Available (2024 & 2025)
- ✓ No cash flow statement
- ✓ No deferred tax
- ✓ Minimal related party disclosure
- ✓ No segmental reporting
- ✓ Investment property: Cost or fair value (choice)
Measurement Simplifications for SE
1. Goodwill Amortization (vs Impairment)
SE entities may amortize goodwill over a useful life (often 10 years) rather than the more complex impairment-only model.
2. Development Expenditure
Development costs: expense immediately (no capitalization) unless specific exemption met (simpler than IFRS R&D criteria).
3. Leases
Operating vs finance lease distinction (not ROU asset model); lease payments expensed unless classified as finance lease.
Audit Red Flags: SE Status Misapplication
Red Flag 1: SE Exemptions Applied Without Qualifying
Finding: Entity exceeds thresholds; still applies SE reliefs (e.g., no cash flow statement).
Auditor action: Require full FRS 102 application; add cash flow statement; recognize deferred tax.
Red Flag 2: Incorrect Threshold Calculation
Finding: Turnover of £10.5m assessed as ≤ £10.2m threshold due to rounding/categorization error.
Auditor action: Verify thresholds carefully; entity does not qualify for SE status.
Red Flag 3: Deferred Tax Omitted After SE Loss
Finding: Entity loses SE status in Year 3 (exceeds thresholds in years 1 & 2). Year 3 accounts still omit deferred tax (continuing SE treatment).
Auditor action: Require deferred tax recognition in Year 3 onwards. Restate Year 2 comparatives if SE no longer qualifies.
Non-Exemptible Requirements (Even for SE)
Even SE entities must comply with:
- Measurement: IFRS measurement bases (fair value for certain items, amortized cost for debt)
- Going concern: Assessment and disclosure if issues exist
- Impairment testing: On relevant assets (goodwill)
- Accounting policies: Disclosure of policies adopted
Real-Life Case Study: A Small Company Using Section 1A
Scenario. A company qualifies as small (turnover £9m, balance sheet £4m, 30 employees, meeting two of the three thresholds) and prepares accounts under FRS 102 Section 1A.
What changes. It follows the same recognition and measurement rules as full FRS 102 but with vastly reduced disclosures, an abridged balance sheet and P&L, and no need for a cash flow statement. It still must give a true and fair view, so some "encouraged" disclosures may be needed in practice.
Takeaway. Section 1A cuts disclosure, not measurement: the numbers are computed the same way as for a larger FRS 102 entity. The judgement is whether the reduced disclosures still deliver a true and fair view.
Illustrative composite scenario for educational purposes. Figures are indicative and do not represent any specific company.
• FRS 102 Transition from IFRS: Accounting Changes & Restatement
• FRS 102 Financial Instruments: Classification, Measurement & Impairment