New UK GAAP - can you account for it? ; FINANCE MATTERS A major change to UK GAAP will involve a number of challenges. While the process could be... [Western Morning News (England)]
(Western Morning News (England) Via Acquire Media NewsEdge) New UK GAAP - can you account for it? ; FINANCE MATTERS A major change to UK GAAP will involve a number of challenges. While the process could be painless for some, others will need to make significant changes to the way they report their finances, advises Nick Farrant, director at Francis Clark
Over the course of the next two years a complete overhaul of UK accounting standards (UK GAAP - Generally Accepted Accounting Practices) will change how and when companies account for certain assets and liabilities, with potential implications on profitability and balance sheet values. This is the first major change in UK GAAP for many years and will involve both cost and short-term technical, and perhaps commercial, challenges.
The extent of the impact will depend on a company's activities, assets and liabilities, and while some may find it fairly painless, others will need to make significant changes to how they report their financial performance and position.
The changes may also impact on commercial arrangements such as bank covenants, earn-out agreements and remuneration schemes. Companies need to start planning for the change now.
The new regime will completely replace existing Financial Reporting Standards (FRSs) and associated guidance and, for example: Companies will be required to restate their comparative figures the first time they adopt the new rules, with a potential impact on retained profit; There will be opportunities to review existing policies and take advantage of one-off valuation adjustments on property; Some of the new requirements, such as fair valuing interest rate swaps and forward exchange contracts, are complicated and unfamiliar to many UK GAAP users.
To understand the implications of this, we need to look at the what, who, how and when and to examine some of the key questions.
What? Existing UK accounting standards will be replaced with a new single standard, FRS 102.
Who? The new regime will apply to any company that is not eligible to use the small companies' regime and is not required, or does not choose, to apply EUadopted International Financial Reporting Standards. When? Accounting periods beginning on or after January 1, 2015, although earlier adoption is permitted and comparative periods will need revisiting. How? Establish a transition date. This is the beginning of the comparative period to the one in which you first apply the new rules. For those adopting from January 1, 2015, it is January 1, 2014; Identify transactions and balances which will be accounted for differently under FRS 102 - the extent of differences will depend on the nature and complexity of your existing operations; Consider the commercial and strategic implications of changes to reported profit and net assets; Determine new accounting policies where applicable; Calculate the financial impact of the changes as at your transition date - these will be reported as a prior year adjustment.
Accounting and financial reporting systems and the staff who use them may need preparing for the new framework and for some entities this may represent an opportunity to improve reporting processes.
Key questions companies should be asking include: Do you use forward rate agreements or swaps to manage interest rate or foreign exchange fluctuations? Do you lease property, either as a landlord or a tenant? What benefits do you provide to your staff - paid holiday, defined benefit pensions? Are you planning acquisitions or disposals in the next two years? How much profit do you currently have to fund dividends or share redemptions? How is your bank or other finance covenants calculated? Will the new regime affect how much tax you pay and when? What will the stakeholders to your business need to know about the changes? For further information: Nick Farrant, director at Francis Clark LLP.Telephone: 01823 275925 Francis Clark has offices in Exeter, Plymouth, Salisbury, Taunton, Tavistock, Torquay and Truro. More information is available at www.francisclark.co.uk
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