The new world of converging standards

1^st January 2015 will see the introduction of new accounting standards in the UK (FRS 101, FRS 102 and FRS 103), which may well change the way your professional adviser deals with your company figures. Here’s what the new rules mean.

We’ve been talking about new accounting standards for a number of years and some accountancy firms have already chosen to adopt them. By the beginning of 2015, it will no longer be optional. Everyone will need to comply.

Put simply, figures are going to be calculated in different ways to reflect the increased drive towards standardisation in accounting practice around the world. You may see the impact on both your profit and loss account and your balance sheet. In turn, this might change the view taken of your business by both your bank and HMRC as well as credit reference agencies.

At the time the switch is made, there will be a need for two sets of figures. Your accountant will review the books in the light of current UK GAAP rules, but also produce a set of accounts which complies with the new regime. This will allow year-on-year comparison between two points – say, 31^st December 2014 and 31^st December 2015.

If the banks see a reduction in the net assets, there’s a danger they may argue you’ve broken a covenant when in fact under the old rules you were fully compliant. If your accountant feels this is likely to be an issue, it may be necessary to sit down and talk the numbers through – explaining the way in which the accounting procedures have changed and reassuring your bank that there’s been no material change to your position.

It’s even possible that a company which has been solvent under the old standards might technically become insolvent under the new rules. This situation could arise if your profits are hit by the rebuttable 20-year maximum amortisation period for goodwill becoming five years or indeed the changes to how deferred tax is calculated.

The revision to the figures could, for example, then lead HMRC to argue that dividend payments are technically illegal. In larger businesses, changes will mean the revaluation of investment property being reflected in the P&L reserve, leading to ring fenced profit which is non-distributable.

If this all sounds a little worrying, remember that there’s an upside too. If your business is operating across different market places, we’re now getting closer than ever to ‘convergence’ in accounting practices. This means that consolidation of accounts is potentially going to become a lot easier.

Your accountants will be anticipating the changes and will be well equipped to advise you on their implications, although as a rule of thumb, the smaller your business, the less likely you are to see a major impact.