Date of issue: 20th November 2006

NEW ACCOUNTING PRINCIPLES TO HIT SMALL BUSINESSES

Small businesses are set to come off worse as new rules, regulations and accounting standards alter the way business profits are calculated and charged to tax. It is important for businesses to get to grips with what the changes mean to them say chartered accountants Clement Keys.

The Financial Reporting Standard for Smaller Entities (FRSSE) and the Urgent Issues Task Force (UITF) 40 now apply. Reporting standards have been under review for some time, provoked by the collapse of Enron, and new rules and regulations have been produced which govern the principals of what can and cannot be included in accounts.

"These changes to accounting practice could mean a significant alteration to the income that is to be disclosed in the accounts," says partner and tax specialist Shona Cutler.

"For some businesses the changes will be considerable and this will have a knock on effect as far as tax is concerned."

Previously, for example, businesses could value work in progress by recognising staff costs and a proportion of overheads. Now, where a business is entitled to payment for its services on the basis of time spent, this 'income' must be included in the accounts at the selling price.

To offset this, there is a three-year period in which businesses are allowed to spread the tax charge arising from this additional income, but because of the system of payments on account for individual taxpayers this is not as good as it seems.

Dividends and director bonuses are also affected. Unless dividends or bonuses are
agreed as due before the company's year end, the entries cannot be included in the accounts under the new accounting standards, as they will not represent a liability at the balance sheet date.

"The requirement to comply with the FRSSE and UITF 40 creates an added administrative burden for all businesses and will increase costs for small businesses," adds Mrs Cutler.

"SMEs will need to speak to their accountants regularly, have meetings before the firm's year end and improve their record-keeping to ensure they comply with these new rules
and regulations."