On 1 January 2015, a new set of accounting standards (FRS 100, FRS 101 and FRS 102) came into force in the UK which will apply to all companies unless they are already following the International Financial Reporting Standards (IFRS). The FRS for Smaller Entities (FRSSE) will remain available for use by smaller companies for the time being although they too are subject to some amendments.
The new standards are noteworthy for lawyers for two particular reasons.
Firstly the new standards change (it appears negatively) the way in which a company must calculate its distributable reserves. This is relevant for a number of smaller corporate transactions which, under the Companies Act 2006, require the company to have a certain level of distributable reserves before proceeding, for example making distributions (cash or otherwise) to its shareholders and buying back shares from its shareholders in the simplest method.
Secondly accounting standards are used as a benchmark when purchasing a business, for example when deciding how earn out accounts should be prepared following completion and when drafting accounting warranties to ensure the relevant standards have been met. When negotiating sale and purchase agreements, the parties will need to consider carefully the right standards to make sure there is a fair allocation of risk and responsibility.
Please contact Henry Maples if you would like to discuss any of the issues raised in this article. The information provided in this article is for general information purposes only and does not constitute legal or other professional advice and cannot be relied upon as such. Any law quoted in this article is correct as at 2nd January 2015. Appropriate legal advice should be sought for specific circumstances before any action is taken. Copyright © Murrell Associates Limited, January 2015.