Challenging times ahead

Accounting standards have been overhauled and generally accepted practice for preparing accounts in the UK (UK GAAP) is changing. This comes into effect on a mandatory basis for accounting periods beginning on or after 1 January 2015 although earlier adoption is permitted. There is a new company accounting standard (FRS102) and an updated version of the standard for smaller entities (FRSSE 2015). These replace all existing accounting standards and guidelines.

You may think that this does not affect you or is in the future. However the changes that are coming may affect your reported profits, tax charges and distributable reserves.  Furthermore the comparative figures in any accounts will need to be on the new basis, which means a balance sheet would need to be prepared as at 1 January 2014 for the earliest mandatory set of accounts.

The main changes are:-


Currently under Financial Reporting Standards (FRS’s) and the Financial Reporting Standard for Smaller Entities 2008 (FRSSE 2008) there is a default maximum amortisation period where a reliable estimate of useful life cannot be made. This is 20 years.

Under the new standards this has been shortened to five years.

Under the FRS’s if a reliable estimate could be made this useful life could be extended beyond 20 years. This treatment continues under both new standards whereby with a reliable estimate the life can be treated as being in excess of the five year maximum.

Where there are no reliable estimates of useful life the effect will be higher charges against profits than currently, which will lower profits available for distribution, although this will also bring forward tax relief. As dividends can only be paid from distributable reserves this reduction in profit could affect your ability to pay dividends on the basis which you currently use.

Lower profits may affect banking covenants, bonus agreements and shareholder expectations. These may need advance discussions with the relevant organisations.


There are a few issues around the revaluations of properties and investment properties.

Presently any revaluation gains and losses go into a separate revaluation reserve on the balance. Nothing is charged to the profit and loss account unless the revaluation reserve has been fully extinguished.

Under the new standard revaluation gains and losses on investment properties will all go into the profit and loss account.  There will be no reserve accounting for them.  This may have a dramatic effect on the accounting profit or loss for the period depending on the magnitude of the revaluation. We have no certainty at the moment but it is unlikely that these revaluation gains and losses will be taken into account when calculating taxation.

A second change affecting revaluations is that of deferred tax, which is accounted for only as a provision and does not affect the actual tax payment. Presently deferred tax is not accounted for on revaluations. The tax charge occurs when the item is sold.

This changes under the new standards and deferred tax is accounted for in full on all revaluations. This may have an immediate effect on distributable reserves if the revaluation reserve has been utilised to offset higher depreciation charges or used to issue further shares. Any shortfall between the deferred tax charge and the revaluation reserve will reduce the profit and loss  balances available  for dividends.

Lease Incentives

At present any lease incentive received for entering into a lease, for example a rent free period, is spread over the period to the first break clause.

Under the new standards the lease incentive would be spread over the period of the lease regardless of any break clauses. Transition rules mean that any existing lease could continue under the old rules but new ones would have to be on the new basis.

This means that the profit effect will be spread over a longer period and can have a major impact where previously there were long leases with short break clauses.

Holiday pay accruals

Under the new standard there is a requirement to accrue for untaken employee holiday entitlement. For entities that have not accrued for this in the past there may be a significant liability to account for, especially where the holiday entitlement period is not in line with with the accounting period.

This will mean that there may be a significant impact on profit in the year of recognition and on the reserves available for distribution.

All of the issues raised need some consideration on how they affect your individual business. This is something that should not be left to the last minute.


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