Prepare for 2020 year-end financial reporting now

Kate Arnott, head of professional services, partner at MHA MacIntyre Hudson, says SME law firms shouldn’t wait to review the financial reporting implications of Covid-19 on their year-end.

The impact of Covid-19 has been felt far and wide in all aspects of our lives, in fact 2020 has often felt like the year that will never end. Like most things it will end and before it does, or at least before the next financial year ends for firms, there are several financial reporting issues to consider.

Members’ report

The Members’ or Directors’ Report gives the users of the accounts a flavour of the firm’s year, with this in mind it should include a Covid-19 impact assessment to provide reassurance about the firm’s pandemic response. Balanced reports and disclosure provide greater credibility than boiler-plate management information and will provide more stability during these turbulent times.

Going concern

Members or directors must consider the firm’s long-term viability. Reviewing anticipated cashflows and documenting how they have determined the firm has sufficient financial resources to continue trading for the year ahead, either through bank facilities, partner support, existing cash resources, deferral of liabilities, government support, anticipated trading profits or a combination thereof is vital.

Exceptional items

Separately disclosing the nature and number of exceptional items in the financial statements helps readers understand non-recurring costs that have depressed current year profits. This may prevent any short-term effects of Covid-19 adversely influencing external viewers.

Furlough income and other grants

Furlough income (and SSP support) should be shown within ‘other operating income’ and will be taxed accordingly. From a timing perspective, income should match against related expenditure. It’s not permitted to simply net-off furlough income against salary costs.

Year-end dates

Firms may consider accelerating the Covid-19 impact to smooth profits and reduce tax liabilities through changing the year-end date. If your year-end falls before the lockdown the impact is likely to be ignored in the financial statements in all but disclosure terms as a post balance sheet event.

A provision for items such as redundancy or restructuring may only be made where a constructive obligation exists at the balance sheet date. Making a provision for future anticipated operating losses is prohibited.

So a change in year end could help delay any adverse Covid-19 disclosures until a later period where trade and results may have picked back up again.

WIP and debtors

Firms should have realistic provisions against accrued revenue and debtors to avoid paying tax on profits which will not be realised. Consider the risk of carrying forward irrecoverable work in progress (WIP) as well as impairment losses, such as customers defaulting on payments or requesting concession.

Impairments

Certain assets may be impaired and need to be written down, such as goodwill, intangible assets, property assets and investments. Impairments of goodwill cannot be reversed in future periods so care should be taken.

CBILS loans

For anyone in receipt of a coronavirus business interruption lean scheme (CBILS) loan there is a 12-month interest holiday on the government backed scheme. But be careful the total finance charge should be spread systematically over the term of the loan rather than when paid.

Profit allocation in LLPs

Where profits haven’t been allocated formally, they remain under the ownership of the entity as a business asset, rather than partners personally. If the firm fails before profits were allocated, then partner drawings relating to that year’s profits would be potentially repayable to the LLP.

There is a lot to consider and some of these actions are recommended before your year-end accounts become due, we recommend taking professional advice sooner rather than later! Read our full guide here.