New financial reporting rules come into force for UK companies from January 1. Elman Wall audit director Yasin Khandwalla explains
The GAAP in the headline stands for Generally Accepted Accounting Principles – the framework of guidelines, standards and conventions required in the preparation of financial statements.
The UK accounting framework or GAAP is changing in a big way, representing one of the biggest changes to the UK financial-reporting landscape for a long time.
Why is it changing? The UK Accounting Standards Board has planned a convergence between the UK GAAP and International Financial Reporting Standards (IFRS) requirements used by listed and public-interest companies for many years.
However, the vast majority of UK companies are family-run, small or medium-sized businesses and without the skills to implement the IFRS rules used by listed companies.
This led to the idea of just one accounting standard, aligned to the International Financial Reporting Standards, for entities that are non-publicly accountable.
The new thinking is that everyone follows the same accounting rules, so all companies will be affected.
The UK’s Financial Reporting Council (FRC) has published four standards which together form the basis of the new regime.
For larger companies, these changes will be effective for accounting periods commencing 1 January 2015.
For small companies, a move to the new UK GAAP is still under consultation but it is expected the changes will be effective for accounting periods commencing 1 January 2016.
Bear in mind that the comparative period in accounts will need to be restated to reflect this change.
The transition from the current regime to the new UK GAAP is likely to alter some of the reported numbers for most businesses. Some of the key changes to travel businesses include:
Financial instruments – foreign exchange forward contracts will have to be measured at ‘fair value’ at each balance sheet date, with movements recognised in the profit and loss account. These are currently not recognised at all.
Goodwill – where the estimated useful life of goodwill cannot be reliably estimated, the useful life will be limited to a maximum of five years and not 20 years.
Investments in listed shares – the new UK GAAP requires the use of fair value and not the ‘historic cost’ of shares, with movements recognised in the profit and loss account.
Holiday pay – a provision for untaken holiday entitlement will be required. There is currently no such requirement.
How will all this affect businesses? The changes could have a number of important implications.
They will impact on balance sheets and taxable profits, which will affect dividend planning and tax planning.
They will also impact on the users of company accounts, especially travel regulators.
However, this is not simply bad news – the heavy reliance on fair-value accounting provides an opportunity to strengthen balance sheets.
It is very important to plan. The sooner businesses deal with the mechanics of these changes the better.
More details: frc.org.uk