Helen Clayton – partner in the Corporate Services team at PM+M – on the changes to financial statements and what they mean for law firms
There are a number of changes due to be implemented soon to the way in which financial statements are presented – in terms of the numbers reported in the primary statements such as the profit and loss account and balance sheet but also the disclosure notes.
Whilst understanding financial accounting and the accounting rules that govern it may not be top of your list, this is a time to give it some priority. For legal firms, there are numerous considerations which should be given serious time and thought to, without further delay. Not only is this potentially going to impact your own firm’s reported financials, it could also have an impact on those of your clients.
Financial Reporting Standard 102 (FRS 102) is replacing what we have known for a significant number of years as UK GAAP (General Accepted Accounting Practice) and, whilst it can be adopted earlier, is mandatory for accounting periods commencing on or after 1st January 2015. FRS 102 is the Financial Reporting Standard applicable in the UK and Republic of Ireland. Assuming a full year’s accounting period, accounts will need to adopt FRS 102 for years ending on or after 31st December 2015.
Having said that, due to the way in which financial reporting works, the opening balance sheet will need to be restated too; for a 31st December 2015 year end, this will result in the opening balance sheet, at 1st January 2014, being restated to be in accordance with FRS 102.
For a law firm, potential impacts could be on, but not limited to, amortisation of goodwill, leases and business combinations. For your clients, there could be wider considerations including government grants, borrowing costs and financial instruments.
The considerations for your board’s agenda should include:
• Liaising with your bank and other lenders so that they are prepared, understanding impacts on covenant compliance and whether any banking arrangements need to be revised;
• Preparing revised forecasts to consider changes in cash flow vs. profit, the cash flow impact on tax payments and whether drawings or dividend policies, bonus arrangements or planned investments need to be revised; and -
• If you’re considering acquisition or merger, what is the impact not only to your own financials and cash flows but also those of the other party to the deal. Due diligence will be critical.
Further there are planned changes to how revenue is recognised that will impact law firms where all or an element of their work-in-progress (WIP) is currently valued at nil, based on it being contingent. An increased WIP valuation will increase reported revenues, subsequently impacting on profitability and the timing of tax cash flows.
Again, early consideration to the impact not only on cash but drawings, dividends or bonus arrangements will be critical to ensure that your firm’s working capital requirements can be met.
If you haven’t yet started to consider this, I would encourage you to do so. As ever, it’s not black and white and decisions will need to be taken on a firm by firm basis.