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.