This summer, the Accounting Standards Board (ASB) is expected to announce that from 2012 most UK businesses must use a new accounting framework for their financial reporting. Technology companies will need to start working on the transition early to be ready on time.
It will be the biggest change to the UK accounting system for 30 years as, under the proposals, unlisted entities without public accountability will move from using UK Generally Accepted Accounting Practice (GAAP) as their accounting framework to the International Financial Reporting Standard for Small and Medium-sized Entities (IFRS for SMEs).
The new accounting standard will offer technology companies a set of high-quality accounting rules designed for use anywhere in the world, to generate financial statements for stakeholders wanting information about non-publicly accountable companies. The transition will inevitably incur time and expense to implement but should ultimately lead to more robust and straightforward financial reporting.
IFRS for SMEs is a simplified version of 'full IFRS' (currently used mainly by listed companies) written specifically for privately-held businesses. It uses different methods of measurement in a number of areas, compared to both current UK GAAP and full IFRS, which would be likely to change the balance sheet and profit figures.
A key example of this is development costs. Under IFRS the costs of developing a new product must be capitalised on the balance sheet if they meet certain criteria. Under UK GAAP, management can choose between capitalising and expensing these costs. In contrast, IFRS for SMEs does not allow capitalisation of internal costs, so all development costs would need to be recognised as an expense straight away.
Elements such as share options, bonus schemes, loan covenants and corporation tax bills could be affected by the change, which may have an effect on how the business is managed.
Easier access to finance?
However, the new standard should produce more comparable financial reports, which may increase access to finance. It is expected that the standard will be adopted globally – more than 30 countries have already committed to adopting it within the next three years – improving international comparability. This is particularly beneficial for companies operating internationally or with overseas subsidiaries.
Companies could instead adopt full IFRS as this would improve comparability with competitors or peers that also use full IFRS -- either because they are listed, otherwise publicly accountable or they choose to, as a way to boost their industry standing.
Yet full IFRS means disclosing an ever-increasing amount of financial information that some companies may prefer to keep private. The IFRS for SMEs would apply the same rigour as full IFRS but it is simpler.
Training for the new accounting framework will need to be considered soon to allow time for management and staff to adapt. Software and systems changes may be needed, and all users of financial statements will have to familiarise themselves with unfamiliar accounting terminology.
However, it is planned to amend the IFRS for SMEs only every three years, unlike current UK GAAP or full IFRS, which are frequently amended.
Many seem unconcerned about the proposed changes but there will be a cost of conversion and an effect on the way they manage their business. Do set a timetable and consider resource planning, assess the impact on each balance sheet item, discuss the changes with shareholders, and restate comparative financial statements by 31 December 2012.
Alison Seekings is technology partner at Grant Thornton LLP
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