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Complaints pile up over changes to accounting regulations

THE GOVERNMENT has promised to cut regulation and the red-tape suffocating organisations, with its latest plans seeing it look to reduce accounts filing obligations. However, SMEs’ mosted trusted advisers fear that it will do more harm than good.

The ICAEW claims that recent changes to reduce accounting regulations for micro-entities could damage the UK economy and make it harder for companies to access finance, while ICAS claims the proposed changes should be rejected outright – in that the Department for Business’ proposals will throw the baby out with the bath water.

On 21 February the European Council incorporated a set of exemptions for micro-entities’ accounting requirements. Each member state was given the flexibility to decide whether, when and how to bring the exemptions in. The rules will apply to companies that do not exceed three of the following criteria: net turnover of €700,000 (£580,000); ten staff; and gross assets of €350,000.

What has riled up the profession are some notable changes included within a consultation document launched by the Department for Business.

The mooted changes include organisations only needing to prepare an abridged balance sheet and a ‘reduced’ profit and loss account, which would no longer need to be filed at Companies House. Many financial disclosures would also be exempt from reporting, except for some, including: advanced loans to directors; any guarantees on the business; or if another company has shares in the organisation.

The ICAEW believes the lack of transparency and dearth of financial data would lead to more rejections of credit to these smaller organisations.

“We have a number of concerns about the suggested changes, as they may result in less transparency and less useful financial information. This, in turn, can over time have a negative impact on market confidence and on micro businesses’ ability to access finance, at least at the margins,” says Dr Nigel Sleigh-Johnson, head of the ICAEW’s Financial Reporting Faculty.

“The ability to access appropriate finance is dependent amongst other things on confidence in the performance and prospects of the business. If the usefulness of available financial information falls, some lenders may be less inclined to part with their money. That’s not a risk we would encourage BIS to take just now,” he adds.

His concern is backed up by ICAS’ director of technical policy James Barbour, who says there is a danger that smaller companies will fall foul of automated banking systems designed to gauge credit-worthiness.

“[The proposals are a] retrograde step for UK businesses,” says Barbour.

“Ultimately, decisions about provision of credit facilities lie with lenders,” he said, “but these proposals would make ascertaining the full financial position of a micro-entity more difficult to ascertain…at a time when they and the UK economy need to see the very opposite.”

“We support the government’s overall objective to support growth and encourage enterprise, whilst reducing unnecessary burdens on businesses,” Barbour says, “but this is not the way to do it.”

Accountants believe that the government has focused on the wrong issue. The major problem facing small businesses are not accounts filing requirements, but access to finance.

While many bemoan the banks’ attitude to business lending, reducing the integrity of accounts will make the process much harder. the worst of both worlds.

“They already have fewer obligations than listed companies and do not need to be cut any more slack,” says Reeves partner Fiona Hotston Moore.

“Initiatives such as the Enterprise Finance Guarantee Scheme and the Business Bank are welcome, but there needs to be a more revolutionary approach to the way this problem is tackled.”

The concerns are wide, and varied. Proposals to allow either cash or accruals accounting wll lead to users’ confusion and misunderstanding.

“In our view it is a myth that accounting is one of the more significant burdens on micro businesses. Much of the accounts preparation process is done automatically, using specialist software. Whilst the impact of the proposals would vary from business to business, any savings in accounts preparation costs are likely to be limited for the majority,” said Sleigh-Johnson.

Time flies

A 23-day consultation period has not gone down well either.

On 27 February the Department for Business Innovation & Skills published the consultation: Simpler Financial Reporting for Micro-entities: the UK’s proposal to implement the Micro Directive. Comments had to be submitted by 22 March 2013 just 23 days later. However, the ICAEW submitted its comments on 29 March after reaching an agreement with BIS over its “unusually short” consultation period.

Although it has only been months since the European Parliament gave the UK free reign to change accounting requirements, this issue has been ongoing for years. In July 2011 ICAS claimed that discussions in Europe to reduce financial reporting requirements were misguided and could hamper trade and credit, following a survey of account prepares.

Respondents at the time said that in a highly risk-sensitive environment, reducing disclosures could undermine companies’ positions when it comes to financiers, credit reference agencies and insurers.

In 2011 David Wood, executive director of technical policy and services at ICAS, said: “While abbreviated accounts may not be ‘perfect’, they do provide a balance between the needs of users and preparers of accounts. We believe that the usefulness of abbreviated accounts could be improved with some additional disclosures while still retaining a confidentiality element that preparers greatly value.”

However, regardless of the outcries from the account prepares and advisers, it seems that BIS is steaming ahead with the changes – with implementation due later this year. The profession needs to get to grips with what will be required, and micro-entities must prepare for what many fear will be a messy situation.

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