After much publicity over the course of the last few years, the new accounting framework for companies registered in the UK, FRS 102, is finally applicable. As a chief executive, you might be relying entirely on your finance team to manage the transition. But you should ask yourself the following question: is there someone in the company who is on top of the change and prepared to explain what’s changed when necessary?

While this article considers the implications for businesses in the UK that currently use UK GAAP, many European businesses that apply IFRS will face some major upheavals in the coming years as the IASB’s standards on revenue and financial instruments, and the soon to be released standard on leasing, come into force. CEOs would be well advised to ensure they know what standards are likely to affect their businesses and, as this article seeks to demonstrate, how their businesses will be affected.

You need to ask yourself whether or not you need some understanding of the impact

During the course of the last year I have been travelling the country running workshops for businesses affected by the impending change. If I am honest, I was a little bit surprised by how little had actually been done, and by how ill-prepared a number of businesses appeared to be. Indeed I was surprised by the number of businesses that admitted that FRS 102 was still in the cellophane wrapper.

All of this left me with the question – is the board ensuring the finance department is engaging with this standard?

As a CEO you might think this is something the finance department should be taking care of. You would be right. However, it will have an impact on your business, and possibly you personally. So you need to ask yourself whether or not you need some understanding of the impact. Below are some topics where I think, as a CEO, you need to have some knowledge and assurance the finance team is working on this project and managing the business implications.

Staying tax efficient

Many tax-efficient reward structures for key management involve a mix of salary and dividends. The ability of a company to pay dividends depends on the availability of realised profits. As FRS 102 changes the measurement of certain assets and liabilities, and brings certain liabilities onto balance sheet that were previously not recognised, this can have a negative impact on the ability of a company to pay dividends.

For example, certain derivative financial instruments and pension obligations are currently off-balance sheet but will be recognised on the balance sheet on transition to FRS 102. This might prevent those businesses affected from continuing to pay dividends as part of any reward structures.

There are ways in which to manage the impact both derivatives and pension structures have on distributable profits, but only if action has been taken early to identify these problems.

How will banks respond?

Many bank covenants are based on measures of profitability or assets. As both these measures could be affected by the new accounting framework there is a risk banks will use this opportunity to renegotiate those covenants, or if they have been looking for a reason to, renegotiate the entire loan.

If your business is currently reliant on bank financing, or you are looking to expand operations through the use of bank finance, how confident are you the bank understands the impact the new standard will have on your reported results?

My discussions with many stakeholders has indicated most banking staff are in the box “FRS 102 is still in the cellophane wrapper”. Reading between the lines, I think that this might in part be because businesses have not engaged with their banks to explain the impact the standard is going to have on them. In my view, you need to proactively manage your relationship with the bank around this impending change.

Making things clear

Many trading partners, both suppliers and customers, and credit rating agencies use your financial statements to decide whether, and on what terms, they are prepared to contract with your business.

With changes to all the primary statements in your accounts I would expect them to have questions about those changes. When you are negotiating with these partners are you ready for their questions? Do you understand the changes sufficiently to alleviate any concerns they might have?

Ultimately, the directors are responsible for the financial statements

Will you really understand the financial statements?

Ultimately, the directors are responsible for the financial statements. The directors need to satisfy themselves that the financial statements show a true and fair view. All directors have an obligation under company law to ensure they only approve the financial statements if they are satisfied they show a true and fair view. When you prepare your first financial statements under the new accounting regime, will you be in a position to determine whether they show a true and fair view?

Next steps

Your finance team should be briefing you on the implications of the new accounting framework for your business. Have they booked time with you to explain the impact on the business and their plans for managing any challenges your business might face? Have they proposed a communication plan to communicate with all of your business’ key stakeholders: customers, financiers, suppliers?

If they are not doing this proactively, then I would recommend you seek to engage with them. Make sure you will be in the best possible position to answer any questions you might be asked. When asked where they thought they should be on the transition to FRS 102, finance teams felt they should be further along. Maybe they just need the encouragement of the CEO to get cracking.