New Accounting Rules Could Have Big Impact On Companies
The main concerns for construction companies are in connection with new rules for:
• The measurement of loans and financial instruments (including intra-group loans)
• Loan covenant compliance
• Intra-group guarantees; and
• Investment property valuations.
Loans and financial instruments will be classified as either basic or non-basic.
There is little change in basic financial instruments, such as cash balances, trade debtors and creditors, and typical bank loans will be recognised. Non- basic financial instruments are now recognised o the balance sheet, which is likely to generate greater volatility.
Unless the impact is considered in advance, this volatility may affect a company's compliance with banking covenants.
When changes in accounting standards potentially create this type of commercial difficulty, it is understandable that businesses are starting to take note of FRS102. When negotiating bank loans and associated covenants, the impact of FRS102 will be another important factor to consider.
Intra-group loans are common among construction and property groups. These will now be recognised at fair value. The terms, conditions, and circumstances of the loan will determine the impact of this, but generally complications lie with long-term intra-group loans on which interest is not charged at a market rate. These will require adjustments to reflect the fair value of the loan and can result in different amounts being reported in the debtor and creditor companies.
Fair value also underpins the accounting treatment for investment properties. These will now be measured at fair value at each period end. Of course the implications of FRS102 will not only apply to the construction industry and companies are urged to seek the advice of professionals.