FRS 102 Legal Advice for Businesses
FRS 102 is the UK’s standard accounting framework. Its introduction means that businesses, directors, and accountants are now required to account for derivatives on their balance sheets.
Crucially, FRS 102 is retrospective, which means that it has to be applied as far back as the earliest period reported in your company’s financial statements.
FRS 102 became mandatory for accounting periods beginning on or after 1 January 2015.
As mentioned above, one crucial element of FRS 102 is the requirement for businesses to recognise derivative instruments on the balance sheet at value.
The effect of the derivative can either be favourable (an asset to the business) or adverse (a liability of the business). For example, a fixed interest rate swap instrument in the current economic climate is more likely to have an unfavourable or negative value.
Business properties and avoiding disputes
Where a property is owned by the business and is used for business purposes, FRS 102 requires such a property to be valued and accounted for within the financial statements, with deferred tax being accounted for as necessary.
If significant property re-valuations take place, this may have an impact on the net asset position, because additional deferred tax liabilities will be recognised. This could cause issues with Bank Covenants and the business’s ability to pay out profits by way of dividend, and it could create property disputes.
Other items on the balance sheet
It is not just loans and banking products that will come under scrutiny under FRS 102.
Many businesses allow their employees to carry forward unused holiday and other leave entitlements into the next financial year. Within the FRS 102 changes, the financial value will need to be reported within your accounts as a cost to the business. There may also be a legal requirement to hold a contract audit of terms and conditions for all employees, and to provide employee consultation on any new proposed terms.
Potential impacts: insolvency, breaches of duty, and lending relationships
The presence of liabilities on the balance sheet may, if left unexplained, cast a negative light on a company’s accounts or worse still can make the company appear to be insolvent. In turn, failing to recognise potential insolvency may inadvertently lead to breaches of directors’ duties and may incur personal liabilities for the directors.
It is also likely that bank covenants contained within loan documentation will need to be renegotiated to take account of the new regime.
Why is professional legal advice so important?
- To undertake a review of important financing agreements
- To identify any derivative instruments you may not be aware of, and which could possibly reduce the value of the company’s balance sheet
- To review loan documentation and identify any potential breaches of covenant
- To manage potential risk
- For experienced and specialist sector knowledge from Kennedys
From our extensive expertise in dealing with financial and regulatory disputes, we have the experience and knowledge required to review even the most complicated of loan agreements.
Working closely with your accountant, we can help to identify where issues might arise, how to deal with banks and finance houses, where covenants are likely to be breached, and we can ensure that any renegotiations with the lender are handled quickly and effectively.