finance 39


Businesses face uncertainty over GAAP conversion, says EY


With the UK adopting a new framework of generally accepted accounting principles (GAAP) for all statutory accounts after January 1, 2015, many businesses still face uncertainty over which accounting standard could be best for their business, and some are finding a few surprises along the way. Rebecca Farmer, head of EY’s financial accounting advisory services team in the South of England, reflects on what she is seeing in the market


The popularity of our recent EY webcast, which had over 1,100 registrations, demonstrates that transition to the new basis for reporting annual results is now reaching the top of the finance team agenda. Nevertheless, 20% of companies that took part in our webcast have yet to decide which framework they are adopting, and two thirds have not yet undertaken an exercise to identify all of their GAAP differences.


One of the biggest


challenges when undertaking a GAAP transition is that of completeness – something which the auditors will want to see


With effect from January 1, 2015, the Financial Reporting Council (FRC) issued revised financial reporting standards for the UK and Ireland, permitting non-listed companies to choose between standards based on either IFRS (full IFRS as endorsed by the EU/FRS 101) or new UK and Irish GAAP (FRS 102). Companies across all industries must use this new framework for their financial reporting, with the changes having a potentially significant effect on volatility in the profit and loss account, and on tax and distributable reserves.


Making an informed decision about which standard to adopt saves time and money: it can impact tax payable, the ability to pay dividends and the level of disclosures which need to be made. It’s worth taking into account future plans for the business, anticipated acquisitions or re-organisations and any exit strategy if this is expected within the short to medium term. If the company is part of a larger international group, alignment with the group reporting GAAP is also a factor, and we have seen instances of parent companies overturning the initial choice of GAAP due to drives for greater consistency in current and future financial reporting and IT systems.


One of the biggest challenges when undertaking a GAAP transition is that of completeness – something which the auditors will want to see. Some differences are less obvious than others, and even those companies used to reporting under IFRS for group reporting can find themselves caught out by adjustments which have not previously been required due to consolidation adjustments or immateriality. Adopting a logical and comprehensive approach to identifying GAAP differences can therefore avoid higher audit costs and last-minute surprises.


Perhaps one of the most common but less obvious differences is the fact that inter-company balances


THE BUSINESS MAGAZINE – SOLENT & SOUTH CENTRAL – SEPTEMBER 2015 www.businessmag.co.uk


are financial instruments. Under both FRS 101 and FRS 102, therefore, intra-group term loans made at an off-market rate of interest need to be brought onto the balance sheet at fair value. It is not unusual for inter-company loans to be interest-free, or to attract relatively high rates of interest if private-equity or venture-capital funding has been introduced into the group. The resulting GAAP adjustment impacts both current tax and distributable reserves, and owing to the size of some of these balances, adjustments can be material. Areas such as hedging instruments, defined benefit pension schemes, embedded leases and joint arrangements are also causing considerable difficulty for some.


Once all GAAP differences have been identified, completing a disclosure checklist before year end will help to ensure that new disclosure requirements and related data are identified, so that new reports can be run from finance systems if required.


Tax elections exist to ease some of the potential pain resulting from some GAAP differences, but these are time-restricted so need to be understood now.


Unless you are one of the happy band of companies which is well-advanced in its GAAP conversion, I would urge you to get your transition well under way before the final months of 2015. Even in the simplest business, there are bound to be unforeseen details that could cause last minute headaches. Devoting time now to this project – even if it confirms your belief that it will be relatively straightforward – will allow you to reduce cost and stress, and maximise the choice and opportunity for your business.


Details: Rebecca Farmer 0118-9281119 rfarmer@ey.uk.com www.ey.com


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