Whilst the everyday pressures of running a business can be all consuming don’t assume that the upcoming  change in accounting standards is only a technical accounting exercise. New UK GAAP, applicable to December 2015 year ends for the first time, can affect a business’s tax and dividends, and even put its loans at risk.

1. Paying dividends

As a company moves from old to new GAAP, the difference between the book value and fair value of certain assets and liabilities is taken to reserves – the figures used to calculate how much profit can be distributed as dividends.

If your company declares dividends that are then payable during your first new GAAP accounting period you will need to check you still have the reserves to make these payments after transition, otherwise they could be illegal.

2. Calculating tax

Many assets and liabilities previously accounted for at cost will need to be re-recognised at their fair value. Meanwhile the fair value of other assets and liabilities, not previously recognised, will need to be brought onto the balance sheet. The difference between cost and fair value will be added to – or taken from – the company’s opening reserves. Combine this with ongoing fair value volatility measurements going through the P&L and this can have a big impact on taxable profits, and hence tax payable.

The good news is that while you must make the changes to the company’s accounts you can voluntarily elect to ignore these fair value movements for tax purposes. But first you need to calculate them and see whether it’s worth making this election. If it is then you need to act before the deadline which for most companies is when you file the first set of new GAAP accounts.

3. Bank loans

The changes to reserves might mean you no longer meet the terms of covenants on loans. Property companies with revalued assets will need to recognise deferred tax on the gains for the first time which could lead to reduced reserves and, depending on loan covenant definitions, decreased loan to value headroom.

If your company has a loan covenant, you will need to talk to the bank about the impact of the new standard and possibly consider getting a frozen GAAP clause (under this you would still need to use new GAAP for your general financial statements but can continue to use old GAAP for any accounts given to the bank). But you will need to understand how new GAAP will affect your accounts before sitting down with the bank to discuss this. Plus you need to consider the implications of producing two sets of accounts under different standards.

4. Financial instruments

Most companies are adamant that they don’t have financial instruments. Unfortunately this is often not the case. Even something as simple as a bank loan can be what new GAAP calls a complex financial instrument, and as such needs to be recognised and accounted for at fair value. Other seemingly simple contracts that fall into the complex financial instrument category include interest rate swaps and foreign current forward contracts – both of which are surprisingly common.

5. Buying a business 

New GAAP introduces new rules for valuing business combinations and buying intangible assets. This is no longer as straightforward as calculating a single number for goodwill and writing it off over 20 years, as it has been to date. Under new GAAP the write-off period of any goodwill is possibly much shorter, resulting in a greater hit to profits than before.  Based on conversations that have already taken place with some clients they may choose IFRS over new GAAP simply because a reduction in the carrying value of goodwill at the transition date will cause them commercial problems.  Adopting IFRS will require an annual impairment review instead of the accelerated amortisation under new GAAP and provide a more true and fair view of the company.

Further work must also be performed on individual intangible asset acquired to ensure they are separately identified and independently valued – a potentially costly and time-consuming exercise.

6. Systems

You will need to account for a lot more information under new GAAP than before, with everything from market values to calculating holiday pay accruals adding a new level of complexity to the accounts teams work. At the same time you need to ensure that the company’s systems continue to record information in a form suitable for decision making. Employees will need training, systems may need rebuilding – all of which takes time and may cost money.

7. Talk to your auditors

The conversion to new GAAP includes not just looking at this year’s figures but also at the restated prior year figures, and ensuring all the new systems and procedures are in place so that calculations are correct and transactions properly accounted for. This calls for forward planning with your auditor.

Not sure where to start?

The hardest part of any conversion is the first step. We can help get the ball rolling and work out the issues that need to be tackled in order to perform the conversion in the most logical order.

But time is running out. Any company with a December 2015 year-end is effectively using new GAAP from 1 January 2015, with a re-statement of its prior year figures required to be able to assess the impact of the commercial considerations outlined above.