I note there is a debate going on at AccountingWEB on the suitability of IFRS for use in the UK, and especially with regard to small and medium sized enterprises (SMEs). This is an entirely appropriate discussion, but I’m not sure that the proper reasons have been noted.
Let’s be candid about why small businesses need statutory format accounts, in law. there are, fundamentally, three such reasons. The first is to satisfy the tax authorities that they are declaring the right amount of taxable income.
The second is to ensure that if a dividend is paid it is legal — because there are serious ramifications if they are not, for both tax purposes and in company law.
Third, and not so obviously clear, but a fact none the less, is that is accounts prepared under the requirements of company law are true and fair — as they should be — then they show if the company is trading solvently or not, and that protects the directors from allegations of wrongful trading if anything then goes wrong and the company goes into liquidation. This happens to be related to the objective related to the payment of dividends — because of the company is solvent enough to pay a dividend it is also solvent enough to pay its creditors, which makes this a pretty big deal.
It is then astonishing that the International Accounting Standards Board ignores these issues when it comes to the proposed International Financial Reporting Standards for smaller entities — the so called International FRSSE. When deciding on the objectives for this standard they said:
The Board decided that determination of taxable and distributable income should not be added to the objectives of financial statements of private entities.
To put it another way — the accounts they’re suggesting be prepared by smaller enterprises under the rules of their FRSSE will not be suitable as a basis for determining tax liabilities and give no clue as to whether the company is solvent or not.
The very reasonable questions can hen be asked:
— what use have they?
and
- why does small business want these accounts?
and
- would these accounts be legal under UK company law?
Perhaps Sir David Tweedie would like to comment.
Or any member of the UK Accounting Standards Board who seem sold on this project, come to that.
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hmm, a strangely incorrect analysis from an accountant. You might recall that true and fair does not apply to summary financial statements. You might also recall that tax liabilities are calculated based on tax law, which uses a different definition of profit. And finally you might recall that the the legality of a dividend is not dependent on statutory accounts, but rather the amount of distributable reserves available at the time the dividend is declared.
The other recollection you might make is that should the proposed IFRS become a standard, then the companies acts would specifically allow accounts to be drawn up under its provisions, in which case YES the accounts would be legal under UK company law.
@alastair
Let me assure you – read section 830 to 837 of the CA 2006
The you’ll find it is strangely correct
What is odd that you think that the FRSSE relates to summary financial statements
If that’s your position you clearly are very very ill informed
As you are about tax. Have yo ever seen a corporate tax comp that did not start with profit per the accounts? If you agree all do then again what you have written here is, to be very polite, utter garbage – as you should well know
But clearly don’t
@Richard Murphy
I will live with my interpretation thank you very much. But don’t feel you have to be polite.
In answer to your specific point about a corporation tax comp, then you will notice it starts with profit per the accounts, and then goes on to make a number of adjustments to get to the profit chargeable to corporation tax. As I recall it does this because of the requirements of the various taxes acts, which have a different definition of profit to that given in the statutory accounts. I’m not trying to be pedantic – but its a simple enough point.
The point about summary accounts is a technical one, but perhaps you might like to peruse the opinion attached. It is the form of words that is relevant to an understanding of the point I am making.
@Richard Murphy
but what is most strange is that there are lots of other reasons why the proposed IFRS for SMEs is not fit for purpose – so why pick up on technical points that don’t stand up to scrutiny? Don’t get it.
@alastair
You can adjust profit all you like (half the adjustments coming from the accounts, of course
But if you start with the wrong profit you get the wrong answer
How odd you can’t spot that
And no attachment……
Try a url – this is a blog