Demystifying Accounting And Finance In The Uk: A Comprehensive Guide

Changes to the rules on annual accounts are intended to make life simpler. They have ended up bringing their unique complexities, writes ACCA’s Fahed Bashir.

DIRECTORS of small companies are facing significant changes to the rules regarding preparing annual accounts. These are following the government’s final recommendations on how the new EU Accounting and Finance Directive will be implemented in the UK.

For one, the definition of a small company is changing while the changes are intended to simplify life. It is particularly in terms of disclosures. These. have ended up bringing their own complexities. Finally, the standards governing how the numbers in the accounts are calculated will be changing too.

The main definition depends on whether you meet two out of three thresholds. We can see, two of the criteria for small companies are increasing significantly. So several thousand companies that are now medium-sized will become small in the future. It is also a crucial thing to note that these new thresholds apply in terms of the statutory audit requirement. Some restrictions prevent financial services companies and those in groups containing listed companies from being small, and these largely remain unchanged.

The other point to ponder is that there is an important category of micro companies. Micro companies have reduced reporting requirements, but this has not been as widely recognized as expected and cannot be changed now as it already exists.

Disclosure reductions

The EU directive has brought in changes to the Companies Act that are designed. On the whole, to reduce requirements on small companies. The main simplification included in these changes is to limit the disclosure requirements in the notes to the accounts to thirteen items (see box).

Some of these may entail extensive disclosures – for example, financial commitments and off-balance sheet arrangements. A revised version of the accounting and finance standard FRS102 will make this plain in these cases.

Companies can use the IFRS layouts for income statements and balance sheets more flexibly. The board ensures that the financial statements accurately reflect the company’s financial position. The recent changes extended the default life for goodwill from five to ten years, which is good news but may also increase complexity. Meeting the disclosure requirements under FRSSE may not be sufficient to pass the true and fair test, even though the disclosures are limited.. The board will have to exercise judgment in ensuring compliance. Furthermore, the proposal in FRED59 suggests that companies should disclose additional information, such as uncertainties surrounding the going concern assumption and dividends.The last one is worth noting – without dividends, the profit for the year may not fully explain the movement in the shareholders’ funds between the balance sheets.

When must these changes be made?

The changes to the Companies Act are currently going through Parliament. You can apply the changes early, but you must have them in place for accounting and finance periods starting January 2016. The exposure draft form (FREDs 58 to 60) contains the changes in accounting and finance standards, but they are running a little behind and will apply in the same way. The FRSSE will be withdrawn from then on. Considering accessing the disclosure reductions as soon as possible is an attractive option, but there may be drawbacks to it. Any software may not be adjusted for early adoption, and there are significant accounting and finance changes that you would have to apply early as well.

From 2016 onwards, small companies will have to use the accounting and finance treatments in FRS102 instead of the FRSSE they may currently use. Medium-sized and large companies are shifting from old UK standards (FRSs and SSAPs) to FRS102. The experience of this transition will be helpful for the small companies needing to make the change a year later.

accounting and finance for financial instruments

For instance, accounting and finance for financial instruments have produced the most substantial and difficult changes. The FRSSE needs more guidance.[Plate_number_1] requires companies to value shareholdings at fair value and to document derivatives such as forward contracts or interest rate swaps. The regulation also mandates the designation and documentation of existing hedges in accounting and finance. Companies must impute a market rate when valuing loans with nil or below-market interest rates by discounting cash flows. The company will include any changes in the value of the investment properties in the money earned for the year, rather than including them in the Statement of Recognised Gains and Losses as they currently do because they currently value the properties at the fair value. Deferred tax must be provided on all revaluation surpluses.

The above are examples. FRS102 is a new standard, and there may be more detailed differences that could be significant for some companiesWe need to thoroughly go through FRS102. We will have to reflect most changes by restating comparative figures, but there may be some exceptions where we need to take a different approach.

In addition to small companies, there are also micro companies. Companies with micro status can use a simplified profit and loss account and balance sheet with minimal note disclosures, which only include loans to directors, commitments, and contingencies. A simpler finance and accounting regime is also available for micro companies. Companies must not perform evaluations, fair valuations for finance and accounting, capitalization of borrowing costs, or development costs. They are not required to account for deferred tax and share-based payments.

What to do now for finance and accounting?

As noted above, there will be more companies that will count as small with the increased thresholds. For their 2016 accounts, they will have to use the new UK finance and accounting standard FRS102, and the FRSSE (which most are following now) will be scrapped (see FRSSE box). This entails some significant changes to finance and accounting. This is because medium-sized and large companies are finding it hard to do. Restart finance and accounting numbers as they did a similar switch in 2015.

While there will be significant reductions in the specified note disclosures.There is a need to show a true and fair view may mean some need for restatements. Many small companies could use the micro-company regime. That is still lighter-touch in terms of finance and accounting, and disclosures.

The proposals for finance and accounting standard changes are currently open for comment, and the lawmakers may finalize them this summer, even though they have essentially completed the legislation at this point. After that, the process can begin with a detailed assessment of the changes, any restatement of prior years, and reformatting of the financial statements. ?

Keep your personal and business finances separate.

Mixing business with personal is the greatest mistake you might make. It can prevent you from understanding the true state of your finances.

To pay for personal expenses, stop using your company credit card in the long run. Keep separate bank accounts for your company and personal finances. Doing so can save you time and make monitoring expenses easier.

 Maintain records

You must always keep hold of receipts, invoices, bills, bank statements, and so on. If you write down a number today for office expenses and fail to keep your receipts, you won’t remember. You will forget number came from for a few months from now.

Keep your receipts and financial records sorted in a way that, either alphabetically or by date. Only then can you easily locate them.

 Create an Accurate Invoicing System for finance and accounting

It is important to put technology in place to keep all your accounts coordinated. Also, the more focused you are, the fewer headaches you will have down the road. Choosing the right business finance and accounting software is critical in today’s technology-driven era.  The very first step in developing a successful invoicing process.

 Create a Payroll System

Your company is likely to have staff. If so, then payroll seems very straightforward. However, in fact, small business content is very complicated. To keep track of the payroll, there are two choices. You can either use and manage payroll software in-house or hire a payroll firm to handle anything. These include measuring the right withholdings and taxes to making direct contributions to your employee’s bank accounts.

 Triple-Check All Records to Ensure Accuracy

The more often you file and cross-check your documents against each other, the less likely you will have problems. Keep your reports as structured as possible and check all expenses several times per month before filing them, even though you store it in the cloud.

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