How will new UK GAAP impact your company’s results?

The implementation date for new accounting framework to replace existing UK Generally Accepted Accounting Principles (UK GAAP) is getting closer and is expected to have a significant impact on unlisted private companies in the UK. Businesses should be aware that the changes will not only affect technical aspects of financial reporting but could also have a commercial impact for a number of companies as profits reported and the balance sheet value can be affected. It is therefore worth considering the impact on your business at an early stage.

The commercial impact of new UK GAAP will need to be considered as financial results reported are used in assessing business decisions in a number of ways. Will there be an impact on the calculation of covenants set by lenders? Will there be an impact on the company’s tax position? Will the valuation of the company be affected? What impact will this have on profit related agreements for employee share and bonus schemes? Will the change affect the level of distributable profits and the ability to pay dividends? Will the credit rating of the company be affected? Planning ahead will help management answer these questions and give the opportunity to address the associated risks.

The implementation date of periods commencing 1 January 2015 may suggest that this does not require immediate consideration; however the need for comparative figures based on the revised principles means that the opening position for periods commencing 1 January 2014 needs to be assessed. It is recommended that companies give attention to the key issues and options available to them during 2014 to address matters while the figures are fresh in the memory.

An example of an area to consider includes whether the company want to take the opportunity to re-value fixed assets at transition to strengthen the net assets reported. Obtaining the relevant valuation is essential and would need to be carried out at the transition date as this may be difficult to achieve if delayed until the implementation date two years later.

Another example is for business combinations where changes in guidance on the write off period of goodwill arising on business combinations could have a significant impact on profits reported for highly acquisitive groups. Companies should start considering how to justify any amortisation in excess of the prescribed 5 year useful life which is a major shift from the previous 20 year useful life in current UK GAAP. The impact of a reduced profit and the impact on stakeholders should be addressed at an early stage.

Planning ahead will allow companies to assess what actions they need to take now. With restatement of prior year figures required, leaving the changes to the last minute could put strain on company resources and leave companies looking for historical information that is not readily available.

For more information contact Chris Masson.