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February 14, 2018
By Paul Gainford, Head of Commercial Services at RMT Accountants & Business Advisors Ltd
At 350 pages long, the newly-published Financial Reporting Standard (FRS 102) could hardly be described as a light read, but there’s plenty in it that’s going to have an impact on to the owners of small and medium-sized businesses in the North East.
Based on the International Financial Reporting Standard for SMEs, FRS 102 brings about a simplified reporting regime for entities that will fall under its scope as well as introducing more up-to-date and relevant accounting requirements than those set out in the UK’s existing Generally Accepted Accounting Practice (or UK GAAP, as it’s better known) rules.
The chair of the accounting council at the Financial Reporting Council, which is the body behind the creation of FRS 102, says that it “modernises and simplifies financial reporting for unlisted companies and subsidiaries of listed companies, as well as public benefit entities such as charities.”
The new rules become mandatory for accounting periods commencing on or after 1 January 2015, with early adoption permissible, and there are a lot of issues that the management teams of firms to which this standard will be applicable (and their accountants) must consider well before this date.
UK standard-setters have always foreseen an international-based accounting framework being adopted and have always tried to align UK GAAP to its international counterpart wherever possible, but there are some significant changes coming, and far too many to cover fully here.
Currently, for example, investment properties are required to be valued each year to open market value with movements being reflected in reserves. FRS102 requires revaluation each year to fair value (essentially the same as open market value), but with changes in value being taken to profit and loss.
Other changes affecting profits include the requirement to accrue for holiday pay and the amortisation of goodwill and other intangibles. FRS102 requires intangibles, including goodwill, to be amortised over their useful life, but also to be able to justify where the life is more than five years, which could lead to some large amounts of goodwill being written off.
The issues above are just some of the areas that FRS102 covers, all of which will have a day-to-day impact of how North East SMEs manage and report their finances.
Specifically, these changes could have implications on how staff bonuses out of profit are calculated and how credit ratings of an entity are measured, and they could also impact on loan covenants if based on profit or balance sheet measures.
As ever when any regulatory updates are scheduled to come into effect, adhering to the old Boy Scout motto is the best approach to take – be prepared, and plan properly for the practical implications on your company of the changes that are on their way.
Paul Gainford is Head of Commercial Services at RMT Accountants & Business Advisors Ltd