Last year, over 5,000 company transactions occurred in the UK, of which over 80% were completed by private companies or private investment firms, according to research by Capital IQ.

2015 also saw the introduction of new UK reporting standards - FRS 102 Financial Reporting Standard applicable in the UK and ROI which applies for accounting periods starting from 1 January 2015, replacing UK GAAP.

Some decision makers at private businesses appear to be unaware that these new financial reporting rules impose more stringent obligations on their accounting for acquisitions.

Under FRS 102, many privately-owned acquiring companies are required to apply a purchase method of accounting broadly in line with International Financial Recording Standard (IFRS) (which largely applies to quoted businesses).

This means the cost of a business combination must be allocated to the fair value of any assets or liabilities acquired, including recognisable intangible assets, with any residual amounts left as goodwill.

Intangible assets

In essence, acquiring businesses are now required to get a thorough valuation of the individual components of the business they have bought, including valuing any intangible assets acquired (of which there are likely to be several). 

This did not have to been done previously and represents a sea change for private companies. Many of those making key decisions remain unaware of these substantial changes.

The valuation exercise typically needs to be conducted within 12 months of the business being acquired and - for deals completed in early 2015 - this could mean by the end of 2016. 

Historically private companies have not faced as many complex accounting requirements as listed companies over the past decade so it is entirely feasible that in the haste to complete the acquisition, awareness of certain aspects of the change in standards has simply slipped through the cracks.

Sanctions regime

The ultimate sanction companies face if they fail to undertake such an exercise is that their accounts may not be signed off by their auditors.

It is important that businesses check now that these valuation requirements have been met in order to avoid last minute surprises and difficulties in respect of the year-end audit process.

A survey conducted last year by Smith & Williamson suggested that over 90% of business were not ready for FRS102, and close to a third indicated that they were not aware that there would be any significant accounting impact arising from its introduction.

About the author

John Rugman is head of valuations at Smith & Williamson @SmithWilliamson

Disclaimer: By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of writing.