Scottish businesses warned over danger of non-compliance

Scottish companies may face serious tax and accounting implications for their businesses if they do not act immediately to implement the new FRS102 accounting standard, according to accountants BDO LLP.

While the development may seem like a technical or obscure change, it may have wide-ranging implications on many businesses in areas such as tax, asset value, the future ability to raise finance, payment of dividends and other integral elements of running a company, the firm says.

Introduced on January 1st 2015 FRS 102 primarily targets all medium and large companies and brings financial instruments on to the balance sheet for the first time. It means that businesses with December 2015 year ends should aim to ensure they are compliant by the end of next month.

For example, the new accounting standards will affect firms involved with interest swaps (this will involve many nursing home groups with tied interest rates over a lengthy period); foreign currency contracts; and business combinations.

Mark McCluskey, audit partner with BDO, explains: “There are many commercial, practical and tax implications of FRS 102 which business owners should consider. The danger is that the longer business owners take to act could mean many will be unable to counteract any negative impact these changes may have on their balance sheet.”

“For example, asset values, debt covenants, management agreements and remuneration calculations may all be affected. For owners wishing to sell their business they may find the asset value severely reduced limiting their opportunities for a successful sale.

Further issues could arise for budgeting, forecasts and tax planning. Dividends could be restricted as companies distributable reserves may be affected by these changes.”

Mr McCluskey added: “From past experience the sooner the prospective changes are considered the better. This gives businesses the chance to plan their transition, choose the most appropriate accounting policies and consider the tax impact. These changes were introduced to simplify financial reporting but, certainly in the short term, this may not be the case. The transition can negatively impact upon the look and feel of the financial aspects of a business and then influence the ability to raise finance, meet covenants and budgets. Company owners need to look now at their systems and actions to ensure they are making their businesses compliant before the deadline when they may feel rushed into decisions which could ultimately be detrimental.”