Three sets of books? Well that makes everything clear then…….

I recently read an recent article in Accountancy Age (no please keep reading, it’s not going to be that bad), which railed against the proposals made last year by the Accounting Standards Board concerning the future of financial reporting in the UK . In essence big companies will need to use the full set of International Financial Reporting Standards (IFRS), smaller companies will use IFRS “lite”, and the smallest will continue use the Financial Reporting Standard for Smaller Entities (FRSSE). It is hoped that this will promote consistency in financial reporting and enhance global comparability and understanding of the numbers presented.

Still with me? Good, because here is the bit that ought to concern you.

There are going to be three ways of presenting your accounts, all of which involve theoretical approximations of certain economic situations e.g. financial derivatives, share option schemes, pension, most of which are not relevant to SMEs, and arguably none of which really explain how a business is performing, and what the end cash is likely to be. The last comment is pertinent because, as we all know, the value of any business is based on its cash flows to investors.

This all reminds me of that old story of a certain faraway country (OK you’re not that far away, are you Italy?) where each business used to keep three sets of books. A first set was given to the tax authorities, who would normally return them after collapsing on the floor laughing. They were then given a second more acceptable set. The third set, of course, were the real books used by the people that actually owned and managed the company to run the business.

It seems to be we are all being driven in the same direction as regards company reporting, although this time it is not the taxman being taken for a ride (not intentionally anyway), but anybody who wants to use their accounts to manage their businesses efficiently and effectively, and explain to investors what is really happening.

We will have a set of books which constitute the statutory accounts of the business, which are legally required and used by the wider investor community based on a combination of IFRS and FRSSE. We will then have internal management accounts with key performance indicators (KPI’s) reflecting whichever agenda the incumbent management have chosen to make them look good. Finally, we will have the cash focused set of books which really determine business success or survival, but will probably get hidden from the people who really matter.

As the accounting profession rushes to place emphasis on the former, and in house finance functions focus on management reporting, it does seem that we are all losing sight of what really makes the business live or die.

It is surely our responsibility as finance professionals to report financial issues in as clear and unambiguous way as possible. If we do not then frankly we are not doing our job properly. The message from company owners and managers needs to be clear. Show us where the cash has come from and where it is ultimately heading. Then we can know if the business is worth continuing with or not, and whether you, Finance Professional, are actually adding value.

Credit where credit’s due…

Abbreviated accounts filed ten months after the year end.

“At last! What a horrible year it was, glad that’s out of the way. Well, that is all my accounting done for another year apart from a few other bits and pieces to keep the taxman happy. Still the accountant and bookkeeper take care of all that. Job done, next!”

“What’s that? Our main supplier has cut our credit lines? Why? Because our latest set of accounts as filed at Companies House aren’t very good and are out of date? But that was ages ago! What about those new orders we’ve just won in the teeth of the recession? A couple of them gave us some cash up front and we’ve just banked some large receipts on a profitable old job so we’re quite flush at the moment. However we really need those additional supplies. You want a set of management accounts? What are they when they’re at home?”

Genuine quotes from a small business owner? Maybe not yet, but they soon could be. Research by Graydon, the credit management specialists indicates that the lack of publicly available financial information could lead to many SMEs being refused credit by key suppliers. Therefore such businesses may need to have up to date financial information available to share with credit rating agencies. Indeed Graydon have teamed up with Validis to develop their own enhanced credit information service based around validated up to date management accounts.

The increasing number of financial reporting obligations that are likely to be imposed on SMEs don’t end there. Debate is raging within financial reporting circles as to when and how SMEs can be brought into the International Financial Reporting Standards (IFRS) net. Indeed, if the Accounting Standards Board has its way, it could be that our much loved UK GAAP will soon be a feature of history textbooks rather than accounting textbooks, as companies will ultimately be expected to adopt either full IFRS, IFRS for SMEs or the FRSSE for smaller entities.

Funnily enough, during a recent clearout, I came across an old exam paper that posed the question as to whether the future should be “accounting for everyman” i.e. simple and understandable or a highly specialised profession. It seems to have gone in the direction at the latter, with accounts being increasingly detailed and complex and requiring an in depth study by experts in order to fully understand what they are actually saying. This was particularly brought home to me when analysing the accounts of a couple of quoted US companies for a client recently (although ironically the disclosure requirements for unquoted companies in the US would appear to be minimal).

Perhaps another anguished cry can be added to the list of quotes above. “International Accounting Standards? But we don’t do any export business! Help!”

Antony Doggwiler