SME accounting - changes

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peugeot
peugeot Registered Posts: 624 Epic contributor 🐘
in General accounting discussion
Hi All,

I have prepared an article which highlights the proposed convergence of the rest of the UK (those in the SME sector) to international accounting standards.

It's going to be published in the various accounting medias but I thought I would provide a link to the article so those of you dealing with clients in the SME sector can gain an understanding of the major changes that are on the horizon.

I hope it helps.

http://www.accountancystudents.co.uk/cms/news/read/all_change_on_the_horizon_for_smes/

Kind regards
Steve

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  • Poodle
    Poodle Registered Posts: 711 Epic contributor 🐘
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    Hi Steve

    I was aware of this but thank you very much, as always, for your support.:thumbup:

    I have pasted the link to your article straight into my CPD log and will review more carefully when it is cooler!!

    Regards

    Poodle
  • peugeot
    peugeot Registered Posts: 624 Epic contributor 🐘
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    No problem Poodle. It will be on accountingweb this week but I don't know how many MIPs actually read accountingweb, so thought it might help those who just visit this site as it may go towards CPD points.

    Best regards
    Steve
  • shaxxa
    shaxxa Registered Posts: 82 Regular contributor ⭐
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    Thanks Steve, have done the same as Poodle :001_smile:
  • peugeot
    peugeot Registered Posts: 624 Epic contributor 🐘
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    I hope you find it helpful Shaxxa.

    There will be follow-ups in the various on-line accounting medias in the next few weeks from my last article, as I am led to believe from my 'sources' that this standard should already have been finalised and guidance issued to the SME sector (this should have happened in March). This suggests to me some 'fine tuning' is going on down at the IASB. Apparently, there's still a lot of toys being thrown out of the cot by the UK ASB as they still want a FRSSE equivalent (what they want and what they get are two entirely different things where this is concerned!!) If the Government say, "right international standards are the way forward, so let's live the dream for all companies from 1.1.09" then there's not very much the ASB can do about it, apart from continue with their tantrum!

    I think the general concern amongst practitioners (certainly those I deal with) is the implementation of this new standard and how it will impact on them - certainly those who don't have accounts production software. As an optimistic person myself, I think we do pretty damn well in the UK adapting to change, so I see very few problems if the change is managed appropriately. One question that keeps being asked of me is "when?" I, personally (don't take this as gospel), think it will come in for accounting periods beginning on or after 1.1.09 (dec 09 year ends with 08 comparatives being restated to conform with the new standard) as 1st Jan is the date when all existing companies currently reporting under IFRS had to start from - that date should become definite if the IASB do (as they estimate) issue the exposure as a standard in the 4th quarter of 2008.

    Watch this space - I'll keep you all posted!

    Best wishes
    Steve
  • Dean
    Dean Registered Posts: 646 Epic contributor 🐘
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    Hi Steve, another great article!

    Have I digested this correctly?
    However, recently the EU have acknowledged that there are companies out there (especially in the UK) that are very small. They have termed these companies, ‘micro entities’ – some of you may have seen various guidance issued recently about these ‘micro entities’. The EU has said that a ‘micro entity’ is an entity that has less than 10 employees, turnover not exceeding 1 million Euros (approx £700k) and a balance sheet total not exceeding 0.5 million Euros (approximately £320k).

    The proposal here is to exempt all such companies from EC Directives on accounting requirements. In other words, they will not have to follow accounting standards!

    There are lots and lots of companies in the UK that would fall within the scope of a ‘micro entity’, but before they go about preparing their accounts as they see fit, we have to consider the fact that under tax legislation issued by HM Revenue and Customs, HMRC require companies in the UK to prepare their accounts under GAAP, so accounts will still have to be prepared under, and follow, a prescribed format – definitely under the accruals concept! Other EU proposals for simplifying accounting requirements for micro-entities are:


    increases in the transition period from being a ‘micro entity’ to having to adopt the ED by extending this to five years from the current two years;
    exempt ‘micro entity’ companies from publishing accounts;
    enable some medium sized companies to take advantage of small company exemptions and reduced disclosures;
    extend the audit exemption to small and medium sized companies where their results are consolidated with the parent; and
    exemption from deferred tax provisions.
    At the time of writing, the UK government has not yet decided whether it will adopt any or all of the proposals laid down by the EU for simplifications for micro-entities. The government is under no obligation to accept any, or all of the proposals but we should know the decision in the forthcoming few weeks.

    In summary;

    Companies with less than 10 employees, turnover not exceeding £700k and a balance sheet total not exceeding £320k, will not have to following accounting standards.

    HMRC will still require companies to prepare their accounts in a prescribed format. (presumably, we don't yet know what this will be?)

    If or when IFRSSME is introduced early in 2009 'micro entities' can deffer using IFRSSME for 5 years i.e implementation 2014.

    Mircro entities that decide to implement IFRSSME early won't have to publish their accounts. (Does this mean, at Companies House?) They will also be exempt from deferred tax provisions (about time - all in favour of this!).

    Can you just let me have clarification?

    Regards

    Dean
  • Dean
    Dean Registered Posts: 646 Epic contributor 🐘
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    There is also a change to certain terminology:


    The ‘profit and loss account’ is not the profit and loss account – it is the ‘income statement’;
    ‘Turnover’ is renamed ‘revenue’;
    There is no ‘operating profit’ in the income statement. From gross profit it goes all the way straight to ‘profit before tax’;
    Current assets go before ‘non-current assets’ in the balance sheet (non-current assets are known in UK GAAP as ‘fixed assets’);
    Stock is renamed ‘inventories’;
    Debtors and creditors are renamed ‘trade receivables’ and ‘trade payables’ respectively;
    Creditors falling due within and more than one year are renamed to ‘current’ and ‘non-current’ liabilities respectively;

    :001_rolleyes:
  • peugeot
    peugeot Registered Posts: 624 Epic contributor 🐘
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    Hi Dean,

    Thank you for your feedback.

    The 'micro entity' is a proposal for simplification by the EU. I know the terms 'simplification' and 'EU' are very, very rarely interrlated but this is what the proposal is.

    However, the Government have still not yet made their mind up whether or not they are going to adopt any (or all) of the propsals laid down by the EU (I suspect it won't be as clear cut as there's disagreements via the professional bodies about the non-publishing of accounts at Companies House and various other discussions about the proposals).

    However, at the minute the government are far too busy making a total hash of our tax system at the moment, so no doubt once they have finally achieved putting our tax system into meltdown, they'll then make a start on demolishing the financial reporting framework!

    The Government do not have to accept any of the proposals, but if they do then, yes those provisions may well apply (they are subject to potential amendment at the moment). The prescribed format for financial statements by HMRC is generally GAAP, which will essentially be IFRSSME even for 'micro entities'. Note - the Government can select any or none of the EU proposals.

    So if the Government to allow recognition of the EU's proposal, then no filing at companies house and no deferred tax computations for your 'micro' companies. The decision is due out any time now and I will let you know when I get the answer.

    Kind regards
    Steve
  • Dean
    Dean Registered Posts: 646 Epic contributor 🐘
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    Many thanks Steve.
    peugeot wrote: »
    However, at the minute the government are far too busy making a total hash of our tax system at the moment, so no doubt once they have finally achieved putting our tax system into meltdown, they'll then make a start on demolishing the financial reporting framework!

    Isn't that the understatement of the year so far!

    Payroll departments across the country can't wait until September so they can reprocess the P6s!!!

    Regards

    Dean
  • deanshepherd
    deanshepherd Registered Posts: 1,809 Beyond epic contributor 🧙‍♂️
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    peugeot wrote: »
    ..and no deferred tax computations for your 'micro' companies.


    You mean some small companies do currently provide for deferred tax?!

    ;)
  • peugeot
    peugeot Registered Posts: 624 Epic contributor 🐘
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    The concept of deferred tax is pretty redundant for your average owner-managed husband/wife incorporated company and I think they're coming to that conclusion themselves at the ASB.

    That's my opinion, the ASB will obviously take a different view because "you must recognise a liability at the balance sheet date!!!!":001_rolleyes:
  • saiqa
    saiqa Registered Posts: 2 New contributor 🐸
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    I am just in the process of setting up in self employment and am a bit concerned about all this issue.

    You say it will be with us next year but is there going to be any sort of movement period over which we can get used to this new regime? I mean are software companies aware of this change?

    Saiqa.:001_smile:
  • peugeot
    peugeot Registered Posts: 624 Epic contributor 🐘
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    Hi,

    Can I just clarify one point - my article only estimates it will be with us next year. I don't actually specify an implementation date within the article, because the actual date of implementation has not yet been issued by the ASB or IASB.

    Both boards estimate the exposure draft will become effective for accounting periods beginning on or after 1 January 2009 (ie December 09 year ends).

    In terms of a transition period, there won't be one - it will simply be a case of cremating UK GAAP on (by estimate) 31 December 2008 and start with the IFRSSME on 1 January 2009. I cited the TV 'digital switchover' to an accountant this week who (more or less) asked me the same question i.e. they'll switch off analogue and turn on digital - it's the same thing in financial reporting!

    I won't mislead people when I say it will probably be hard work when it comes to implementing it. Certainly the transition of auditing standards from UK SASs to ISAs proved to be hard work in most aspects (and from what I've seen in terms of audit work they still are) - I suspect this won't be any different. My article does highlight these issues and there are going to be a series of 'follow ups' on AccountingWeb (I will of course post links on here also). These articles shouldl help because if the ASB do adopt it for A/Ps beginning on or after 1.1.09, it will affect the 2008 comparative year which will have to be restated to comply with the new standard.

    Don't worry too much about it - software companies will adopt the changes, but (as I say in my article) you should not place 100% reliance on the software package you use complying fully with the standards - each client has different circumstances which may need 'tailoring' to accord with the new standards. I will of course keep you updated with developments in this area, but with adequate preparation, firms should be able to handle the changeover quite well.

    Kind regards
    Steve
  • saiqa
    saiqa Registered Posts: 2 New contributor 🐸
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    Thank you for your detailed reply. I am aware that these changes are going to happeh, but as I am just starting out am a bit dubious that i may be doing these things incorrectly when the new standards come in. Thankfully we have experts like you to rely on to guide us through the minefield!!:thumbup1:

    Thank you for your assistance.

    Saiqa.
  • peugeot
    peugeot Registered Posts: 624 Epic contributor 🐘
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    The standards are not that much different than what we have in already. There are some differences - notably recognition of Goodwill and the prohibition of amortisation (you have to test for impairment annually), the LIFO method of stock valuation is prohibited and the overall presentation of the financial statements. Future articles will cover these differences, but software companies will adapt their accounts production/bookkeeping software to incorporate the changes.

    Those accountants who do not have reliable accounts production software will find the transition much more difficult than those that do as cash flow statements are going to be a mandatory document as well as the income statement and balance sheet.

    Kind regards
    Steve

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