The operational and commercial impact of the biggest change in the company accounting rules for a decade should be a new year priority for North East business owners.
That’s the advice from Paul Gainford, director of commercial services at RMT Accountants & Business Advisors, after updated financial reporting standards for the UK and Republic of Ireland came into force at the start of January.
The changes to FRS 102 have been made to bring UK standards closer to international best practice and will have a wide-ranging impact on how financial results are reported, especially in relation to lease accounting and revenue recognition.
Many leases have previously been treated as “operating leases” with rental costs simply expensed to a business’s profit and loss account, but almost all leases will now be recognised as a “right-of-use asset” with a corresponding “lease liability.”
This means that businesses will now show higher assets and liabilities, with lease costs split between depreciation and interest, and it will have a significant impact on the financial reporting for any companies that have substantial property or equipment leases, such as retailers, logistics firms and manufacturers.
Paul Gainford at RMT Accountants & Business Advisors says: “There’s a clear rationale for the reporting changes that have been brought in, but they will still mean that business owners have to take significant additional steps in order to meet their updated financial responsibilities
“They need to be examining all aspects of their property and equipment leases, including any covenants, break clauses, bank loans or liabilities, and to have a full understanding of any consequences for their balance sheets that might follow from what they find.
“Having to split lease costs between depreciation and interest may significantly affect the details of their reporting, while there will also potentially be an impact on any acquisitions or other transactions that are ongoing.”
Alongside the reporting changes to leases, a new five-step revenue recognition model has been introduced to provide greater transparency and consistency on how sales are being recognised for a business.
Smaller businesses must now also meet new requirements around related party disclosures, which means more transparency is required where transactions involve directors or related parties.
Paul Gainford is now advising business owners to take a holistic view of what all the changes might means for them and to get qualified advice on any issues where they need it.
He continues: “The FRS 102 changes are more than a technical adjustment – they will affect how businesses report performance, how others view it and ultimately how their bottom line reads.
“Reviewing your leases and long-term contracts, assessing what the potential impact on your accounts is going to be, considering updating your systems if required and training your finance team on the new things they need to know should be the starting point for every responsible North East business owner.
“The quicker you move and the more expert advice that you seek, the easier the changes should be for your business operations to adopt.”
Part of the Sumer Group, the UK’s fastest-growing accountancy firm, RMT Accountants & Business Advisors provides a full range of financial and business advisory services through its specialist teams covering audit, accountancy, tax, medical and healthcare, corporate finance and restructuring.