A wave of change for accounting rules

CHANGE tends to be resisted, especially if it will cost people money. This explains the frosty reception given to news that US and international accounting standard bodies are proposing to change the ways that firms account for leases.

The new rules will mean that leases have to be recorded on a firm’s balance sheet; currently rules allow certain leases to stay off the balance sheet. This may increase the amount of liabilities that a firm records on its balance sheet, which could affect debt-to-equity ratios.

The change could be implemented by mid-2011 and will affect all firms that use International Financial Reporting Standards (IFRS), which includes all firms listed in the UK, even those listed on Aim.

But how will it affect the average small business? Dave Griffin from Deloitte says companies that use IFRS rules and that lease cars, technology equipment or office buildings will all be affected. For example, if you rent a building for £50,000 a year with a 20-year lease, the proposed changes would mean that you have to add a £1m liability to your balance sheet. This might stretch some small companies, especially in an environment of fragile economic growth.

But the changes, if they get passed into law, could have much more serious implications: “External investors might see companies as having bigger debts because of these changes and creditors might be less willing to lend,” says Griffin. The alternative is to only sign short-term leases, which are exempt from the changes. But this can mean that you don’t get the best deal.

CHANGE MEANS COSTS

Matthew Barbrook, head of finance at Addison Lee, welcomes any changes that increase transparency. However, he adds that is easier for a company the size of Addison Lee – with turnover of £100m a year – to adapt: “Eight years ago Addison Lee was a sixth of the size it is today. Back then it would have been very costly to adapt to the changes since we didn’t have the resources.”

This is just the tip of the iceberg. The plan is to converge to a global accounting standard by next year and there is a set of rules specifically for SMEs in the pipeline: “These changes will tie up resources just when British business needs to focus on things other than accounting,” says Griffin.

Accountancy rules will change –?so small firms should prepare now, so they are not caught out later on.