The Impacts of Cash Accounting on Small UK Companies (Essay Sample)

The Impacts of Cash Accounting on Small UK Companies
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Table of Contents
 TOC \o "1-3" \h \z \u  HYPERLINK \l "_Toc386768624"
Introduction  PAGEREF _Toc386768624 \h
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Definition of cash accounting  PAGEREF _Toc386768625 \h
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Cash accounting vs Accrual accounting bases  PAGEREF _Toc386768626 \h
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The Background  PAGEREF _Toc386768627 \h
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The Rationale  PAGEREF _Toc386768628 \h
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Objectives  PAGEREF _Toc386768629 \h
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Literature review  PAGEREF _Toc386768630 \h
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Main implications for small companies  PAGEREF _Toc386768631 \h
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Main implications for micro entities  PAGEREF _Toc386768632 \h
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Effects in the UK  PAGEREF _Toc386768633 \h
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Effects on Directors’ Report  PAGEREF _Toc386768634 \h
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Cash accounting makes statement simpler  PAGEREF _Toc386768635 \h
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Changes proposed to audit exemption levels  PAGEREF _Toc386768636 \h
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Research methodology  PAGEREF _Toc386768637 \h
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Conclusion  PAGEREF _Toc386768638 \h
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Bibliography  PAGEREF _Toc386768639 \h
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Introduction
This individual research proposal aims to assess the impact that the adoption of the cash accounting has on the small companies in UK. It tries to determine the effectiveness of the change of accounting method with respect to the various aspects of accounting as a profession. It enquires implications that the change in the reporting approach has on the various criteria of reporting of monetary statements. The big question is ‘why must we adopt an accounting method that prompts clashes with the going concern concept and the matching accounting principle?’ The main aim of any proposed accounting change always focuses on maintenance and improvement of quality of financial reporting for the sole purpose retaining confidence in the financial markets and the economy at large. The research is based on the following hypotheses:
Cash accounting has implications on small companies in the United Kingdom.
Cash accounting has implications cash accounting on UK micro entities of United Kingdom
Cash accounting has general effects in the United Kingdom
The adoption of cash accounting has implications on the Directors’’ Report in the annual reports prepared by the small, companies to the shareholders.
The adoption of cash accounting has made the groundwork of the financial statements simpler
The proposed cash accounting has effect on the audit exemption levels by the new UK GAAP.
On 14th March 2013 the Financial Reporting Council issued FRS 102, providing succinct accounting and reporting requirements such as cash accounting for unlisted entities. The standard finalizes a fundamental modernization of UK and Irish accounting standards and was officially approved at a meeting of the FRC Board on 5th March 2013. Moreover during the recent economic decline, the contribution of the Financial Reporting Council has been unfelt in the UK’s small business sector particularly, in addressing issue of “Gong Concern”.  There are over three million sole traders in the UK and half million unincorporated partnerships. The introduction of the introduction of the cash accounting further fails to address the issue of going concern. The claim by the FRC that it reduces costs of preparing the financial statements is partly realistic and partly vague. Instead of providing a direct solution to high costs of financial statements, FRC has resorted to elimination approach. This cannot be accepted that the FRC seems to ignore the existence of those unincorporated businesses.
To introduce cash accounting for the UK’s smaller businesses, the FRC and BIS issued its August 2011 paper and proposals which is a prospectus for mass deception and fraudulent accounting. The FRC has suggested that private accounts covering a recognizable gain and loss statement and balance sheet be detached by about 99% or so for all UK small businesses. The FRC paper requirement implies that its proposal is an indication, for around 95% of UK corporations will no longer experience development. The use of cash accounting implies that the submitted financial statements will not reflect “true and fair” figures. That is, the reported figures will be misleading, a form of fraudulence in the accounting and auditing field.
Definition of cash accounting
Cash accounting is an accounting method that doesn't record accruals but rather recognizes income or revenue only when payment is received and also recognizes expenses only when payment is made. This method does no emphasize there matching of revenues against expenses, making the comparisons of previous periods in a fixed accounting impossible.
It is now clear from the definition of cash accounting that it clashes with another important principle of accounting, the matching concept. The accounting basis is however, preferred for small businesses as makes the recording of business transactions much simpler and easier. In addition, this method confers some advantage when it comes to the calculation and the subsequent remission of taxes to the tax collection authorities. A small company may decide to postpone the recording of incomes in its accounting books to the next tax year, while recording the expenses incurred by the business simultaneously (Sale, Salter, & Sharp, 2007 pp 59-98).
The application of Cash accounting method should therefore not be left at the discretion of the accounting practitioners. The Financial Reporting Council ought to have not granted the small companies to optional mandate of choosing between cash accounting and the accrual accounting.
Cash accounting vs Accrual accounting bases
The cash accounting recognizes revenues when the actual payments is made while accrual accounting recognizes revenues when sales are made, hence the two methods record different transaction dates. In this regard, the accrual basis is better is provides the actual dates sequentially for transactions. This sequence indicates continuity, thus meeting the threshold of the business as a going concern. Cash accounting does not recognize expenses when incurred, but when the payments are made for such expenses. Thus, it fails to match the expenses and revenues to their particular periods, violating the matching principle of accounting (Sale, Salter, & Sharp, 2007 pp 59-98). The combination of these two clashes with the rules of accounting makes the adoption of the cash accounting method vague and an imprudent approach.
FRS 102 on going concern: When preparing the financial statements, management of an entity makes an assessment of the ability of the entity to stay as a continuing business. An entity is a going concern not unless the management either intends to liquidate the entity or wants to cease to engage in business transactions or has no alternative that can be considered to be realistic. In the assessment of whether the going concern assumption is appropriate, the management takes into account all available data regarding the future date when the financial statements are certified for issue (Sale, Salter, & Sharp, 2007 pp 59-98). If the management is aware of material uncertainties relating to events or conditions while making its assessments, in making its assessment, then the entity is required to make a disclosure of such material uncertainties. It further provides that when fails to prepare its financial statements on the basis of going concern, the entity shall disclose such facts in addition to the actual basis upon which it prepared the financial statements and the reason behind such entity not being regarded as a going concern.
The Background
Following the introduction of a new directive that requires the small UK companies to use cash accounting method, and having evaluated the effect that cash accounting has on the quality of financial reports, it is decided to take a keen step to research on the various aspects of the proposed use of cash accounting. Even though it was totally agreed with the fact that the current UK GAAP is complex, the implementation of the cash accounting was not a better idea so far (Price Water House Coopers, 2010 pp 345-349). The motivation on undertaking this research was the fact that there has been sufficient knowledge of the nature clash that might have existed between cash accounting method and the matching and going concern concepts.
The Rationale
The introduction of any changes in the accounting procedure of Financial Reporting Council under the banner of FRS 102 should promote transparency, true and fair view of the fiscal reports. The introduction of cash accounting meant reduces disclosures hence the shareholders will not regard the small company reports as being transparent and as those which report the true and fair view of the small companies.
Objectives
The Key objectives of the individual research proposal include:
To determine the main implications of cash accounting on small companies in the United Kingdom.
To determine the main implications cash accounting on UK micro entities of United Kingdom
To determine the general effect of cash accounting in the United Kingdom
To analyze the effects of adoption of cash acco...