Time to get ready for the new UK accounting standardsPrint publication
A new set of accounting standards came into force in the UK on 1 January 2015, replacing all existing accounting standards. The new standards are based on the International Financial Reporting Standards (IFRS) for SMEs.
The new regime is mandatory for accounting periods beginning on or after 1 January 2015.
The new standards are:
- FRS 100 (“Application of Financial Reporting Requirements”), which sets out the overall framework for financial reporting, for example, which standards apply to which entity and when does reduced disclosure apply
- FRS 101 (“Reduced Disclosure Framework”)
- FRS 102 (“The Financial Reporting Standard applicable in the UK and Republic of Ireland”), which introduces a new single standard for SMEs.
- FRS 103 (“Insurance Contracts”), which sets out the accounting and reporting requirements for insurance contracts.
All existing Financial Reporting Standards (FRS), Statements of Standard Accounting Practice (SSAP) and Urgent Issues Task Force (UITF) Abstracts are replaced. The FRS for Smaller Entities remains, but in modified format.
Companies will need to take accountancy advice on the application of the new standards on the preparation of their financial statements, and on the changes introduced by the new standards, but the advent of the new standards may also have an impact on corporate transactions and this should be borne in mind during this transitional year. For example:
- a change in accounting basis may impact on the calculation of an earn-out or bonus arrangement
- similarly, a change in accounting basis may impact remuneration arrangements with senior employees and directors
- where accounts warranties refer in detail to accounting standards, care must be taken to ensure reference is made to the correct standard. The obligation to give a true and fair view required by section 393 of the Companies Act 2006 remains
preparation of completion accounts. A completion accounts schedule will ordinarily refer to applicable accounting standards and care will need to be taken to ensure the correct standard is used
- sellers will want to ensure that any losses for breach of warranty are not extended by the change in accounting basis
- buyers looking to extract value from the target through distributions may seek a warranty as to the impact of the new standards on distributable reserves on the last set of accounts
- compliance with debt and other covenants in finance documentation may be affected by the move to the new standards and this should be borne in mind if financial covenants are being negotiated or re-negotiated
- calculations of available distributable reserves by reference to interim or initial accounts may produce a different figure under the new accounting standards than they would have under the old ones.
Some companies will already be using the new accounting standards. Those that aren’t should start familiarising themselves with the new standards now. The new standards may impact on corporate finance documentation currently being negotiated or which may be negotiated in the months to come and the impact of the new standards should be taken into consideration when doing so.