By Daniel Hunter
Fiona O’Loughlin, director at DTE Business Advisers believes that FRS 102, the new accounting standard set to replace UK GAAP in January 2015, will impact the bottom line reported profit of around two thirds of the 50,000 companies affected by the changes.
The new FRS 102 framework will replace all UK financial reporting standards for medium and large non-listed companies whose financial year begin on or after 1, January 2015, and bring the UK into line with international reporting standards.
“2015 seems like a long way off, but the changes will alter the bottom line reported profit of many companies — as many as two thirds — and the knock on effect of this in terms of tax implications, adjustments in earn-outs based on profits and levels of distributable reserves needs considering now in readiness for any fall-out,” said Fiona O’Loughlin, director, DTE Business Advisers
Two of the biggest changes to affect reported profits will be the changes to how companies account for goodwill and investment property.
“Currently, goodwill has a maximum life of 20 years. Under FRS 102 goodwill will have a finite life and if the length is not readily known, then it is limited to just five years for the write off,” explains Fiona O’Loughlin.
“This will have a huge impact on the reported profits and net asset position of many companies and will significantly reduce distributable reserves.”
Investment properties are currently accounted for at market value with any change in value taken to a reserve at the bottom of the balance sheet. Under FRS 102, the difference between cost and fair value will be taken directly to the profit and loss account. While there will be an adjustment to ‘remove’ this for tax purposes or to calculated distributable reserves there will be an effect upon reported profits that will impact bank covenants.
“Many other areas will also be affected and whether profits are positively or adversely adjusted — being forewarned of the changes will enable companies to make an early assessment of the impact, taking steps to manage any adverse effects or to take opportunities to increase distributable reserves where appropriate,” explains Fiona O’Loughlin.
“Leaving it to the last minute may mean that loan covenants are breached, and dividend policies, earn-out and employee bonus schemes are adversely affected.”
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