Steve Brice, partner in Mazars Financial Reporting Advisory and Jessica Howard, senior manager from the same department joined Stephen Eames, regional managing partner at the Milton Keynes office, to present this critical information.
Proposals from the UK ASB (Accounting Standards Board) signal the end of the road for UK GAAP (Generally Accepted Accounting Practice) as we know it. The new framework bases the future of UK and Irish accounting on IFRS (International Financial Reporting Standards).
The new financial reporting framework requires businesses to 1) prepare their financial reports according to a new standard 2) update their internal systems and processes accordingly 3) ensure key personnel are trained and aligned to the new requirements and 4) understand the implications for investors, banking, leasing, dividends and bonus agreements.
Businesses will be divided into three tiers. Listed companies will fall into tier one. Tier two will comprise the largest number of UK businesses which will need to apply the new FRSME (Financial Reporting Standard for Medium-sized Entities). Small entities will fall into tier three and will be allowed to continue to apply the FRSSE (Financial Reporting Standard for Smaller Entities).
The smallest of businesses, referred to as micro-entities , have been defined as those with less than 500,000 Euros in turnover, less than 250,000 Euros of assets and with less than 10 employees. They may fall outside of the tier framework, subject to ongoing discussions regarding European legislation.
“Milton Keynes is a thriving economy and many of the companies that I have worked with over the years will find themselves applying the new FRSME requirements. Most have a degree of international sales, suppliers or loans. They could find themselves in tier two rather than in the small company category at the drop of a hat. Many of these new rules will apply extremely quickly and so we are deeply involved in helping businesses ensure a smooth transition,” commented Stephen.
Although the finer details of these new requirements will be finalised early next year, Jessica and Steven both stressed the importance of putting it on today’s board meeting agenda.
“Financial reports are going to look very different. For example, at a basic level, profit for the year may no longer appear as ‘the bottom line’, it may appear in the middle of the page. Terminology will change. For example, balance sheet will be replaced with ‘statement of financial position’. The phrase ‘profit and loss account’ will be replaced with ‘statement of comprehensive income’. All of these seemingly simple changes will need to be explained to board members.” highlighted Jessica.
Most importantly, the changes will impact how assets and liabilities will be measured, how and when profits are recorded, as well as how much information will be required to be included in annual accounts.
Investment property valuation movements will be recognised through profit and loss rather than equity which will significantly impact profit volatility, even if the asset values remain unchanged. Tools used to manage risk towards overseas trading and debt financing, such as foreign exchange forward contracts and interest rate swaps, will appear on company balance sheets. This will impact net asset positions as well as profit volatility.
The new framework also requires more information to be provided on how management reached their year-end figures. For example, reports will need to include additional information on how judgements were made. In practice this would concern subjects such as bad debt provisions and write-offs.
“Do not wait until the last minute. If you are a December year-end company you are expected to need to move to the new rules from 1 January 2013 (‘the opening position’). The first thing to do is decide when you will start, establish which tier you will be in and research the framework you need to apply. Make sure you have key personnel in place as early as possible to ensure that you have the systems and processes in place to ensure you can collate the required figures prior to change.
“There will be implications on taxation, dividend and bonus schemes as the new accounting framework will produce different results from previous versions. Decide if you need to scope the changes into banking and loan agreements. Maintain detailed records of your leasing contracts as this will also become important,” advised Steven.
For many, on the simplest level, the changes will mean spending time reformatting information. For larger organisations it will be far more complicated, and the implications on financial position, results and distributable profits could be significant.
“Under the new framework, directors and board members are going to see new sets of accounts which will have to be explained. This is the new world we are living in and there is a lot to be done. We are providing technical bulletins and bite-sized articles, free of charge to anyone who requests them through our new online magazine www.insightoutmagazine.com,” concluded Stephen.
Issued on behalf of Mazars LLP by
Rachael Bean, Solution Factors Ltd.
Tel: 01908 587793
Mazars is an international, integrated and independent organisation, specialising in audit, accountancy, tax, legal and advisory services. At 1 January 2011, Mazars has its own offices in 61 countries, across five continents, with nearly 13,000 professionals. Through its correspondent agreements, joint ventures and representation offices, Mazars can operate in 21 additional countries and provide its clients with professional teams, who all share the same commitment to quality and a common determination to maintain the highest technical and ethical standards. Mazars’ always expanding portfolio of services reflects the Group’s ambition: to provide its clients, whether international corporates, SMEs or individuals, with tailored and global solutions to help them achieve sustainable growth.