International Financial Reporting Standards and their impact on UK SMEs

On 1 January 2015 the UK will begin to apply new accounting standards, based on IFRS for SMEs. This is the current proposal and, while that may seem a long way off, businesses need to start preparing today.

You may be aware by now that the UK Accounting Standards Board (ASB) has proposed a wholesale reform of UK GAAP which is likely to affect many businesses. With the effective date fast approaching, it’s about time those businesses affected by the changes begin preparing for the new regime.

Based on IFRS for SMEs, a slimmed-down version of the weighty International Financial Reporting Standard (IFRS), the ASB issued a draft version of FRSME in 2011. It is now in the process of being amended and reissued for consultation in 2012.

The aim of FRSME is to provide a simplified, standalone set of accounting principles appropriate for smaller, non-publicly accountable entities. This will not apply to the UK’s two million or so small companies, who will still be able to apply the Financial Reporting Standard for Smaller Entities (FRSSE), nor to the largest publicly accountable entities already applying full IFRS, but it does affect an estimated 50,000 SMEs in the UK.

While this results in a somewhat onerous undertaking for SMEs, the move is necessary - since UK GAAP is seen by many in the profession as being out of sync with the times. By transitioning to FRSME, the country will have in place a much more robust and comprehensive accounting infrastructure.

The ASB has tentatively decided to make FRSME effective from 1 January 2015, however companies will need to begin preparing their comparatives from 1 January 2014. By anticipating the business impact of the conversion process, strategic and operational issues can be addressed well ahead of the adoption date.

FRSME will be far less daunting than the 2,800-page original IFRS framework. Nevertheless, it requires some forethought. IFRS for SMEs and UK GAAP do share much in common, however, there exist a number of key differences between the old and new regime, including:

• Changes in the definition of financial instruments and also the technique for measurement.
• Goodwill is no longer amortised and annual impairment reviews will be required.
• Acquired intangible assets must be capitalised and assigned a finite useful life.
• Changes in the recognition basis of deferred tax, from timing differences under UK GAAP, to the temporary method under FRSME.
• Requirement to prepare a cash flow statement for all entities applying IFRS for SMEs.
• Choice available in respect of investment properties to measure at cost or at fair value.

Obviously, these changes will have direct tax implications for businesses, and entities should not underestimate just how much work will be involved. By planning early, they stand a much greater chance of being able to reduce some of this additional liability.

In terms of financial reporting, SMEs will need to compile information not previously required under UK GAAP. This may require new IT systems and reporting structures to be implemented.

Finally, in the case where employee bonuses or banking covenants are linked to accounting performance, businesses should anticipate how these might be affected by the move to FRSME and renegotiate them accordingly.

At a time when many businesses are already struggling to cope with highly adverse financial conditions, FRSME may be the last thing on their minds. However, experience of the conversion to IFRS in 2005 for listed companies shows that planning can save a lot of headaches further down the line. SMEs should therefore prepare for all the changes affecting recognition, presentation and disclosure requirements, and take relevant action at the earliest opportunity.

At Buzzacott, we have considerable experience assisting businesses with IFRS conversion projects. We can advise on how best to begin preparing for FRSME and whether early adoption could be beneficial for your accounts.

We will advise you when further pronouncements are made by the ASB, along with any consequential implications.