Small businesses in the West Midlands are being warned about a change to accounting rules which could force them to add leased assets to their balance sheet or risk failing to meet audit regulations.
The changes to the FRS 102 rules came into force on January 1 and mean operating leases are now treated in the same way as finance leases.
This means historic leases now need to be reflected on a firm’s balance sheet instead of a cost on its profit and loss account.
Prime Accountants Group, which has offices in Solihull, Birmingham and Coventry, is advising firms to check all historic lease agreements, such as property rentals, car, forklift and plant and machinery leases.
Director Viv Shadbolt said the key point centres around the criteria for assessing whether a business is classed as medium-sized – which are gross assets of up to £7.5m; turnover up to £15m and up to 50 employees.
Under the new rules, the gross assets of a company will increase and some companies which were never medium-sized before will now qualify, which means they will need to be audited and prepare consolidated accounts if they are in a group.
Viv warned non-compliance could mean companies fail to meet Companies Act requirements for audit regulations.
Viv said: “Our advice to businesses in light of this change would be to speak to their accountants to ensure everything is in order, as this rule could catch some companies out if they are not aware.
“Where rentals were previously charged as a trading expense, there will now be interest and amortisation charges for these assets.
“It’s a big change and it’s important for smaller companies to understand the potential pitfalls.”
Viv said there are some exemptions to the rules, which businesses also need to be aware of.
“Low-value’ leases and leases for 12 months or less at the beginning of the lease can be excluded from the new rules,” added Viv.
“However, cars, forklifts and land and buildings are specifically excluded from the ‘low value’ category.”
For more information on accounts auditing, visit https://primeaccountants.co.uk/prime-accountants/accountant-services/corporate-accountant-services/accounts-auditing.
