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Wednesday, 18 August 2010

Accounting rules to make majority of businesses technically insolvent?

Accounting rules to make majority of businesses technically insolvent?

If businesses had to account for the total of their long term liabilities, such as ongoing rent commitments, in one financial year, would most then be technically insolvent? The idea, published today, by the international accounting standards body (IASB) is designed to make company balance sheets more transparent. However as it is not the case that these liabilities can actually be called in all at once we cannot see what more information this really gives. Imagine if your landlord demanded all the rent for the next 10 years in advance!

The retail industry would be most affected as they usually have expensive leasehold property. Currently the rules allow retailers added flexibility in accounting for leases but this could change.

One of the tests of insolvency is the balance sheet test so this new rule, if brought in in 2011, will need to take into account the insolvency rules.

Watch this space for more updates on this. We will be keeping a close eye on developments.

Posted by Rob Moore 18/08/2010

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