Two new pronouncements from the UK’s Accounting Standards Board (ASB) due out next year will force companies to account properly for the cost of year 2000 compliance and many listed companies will be forced to restate their results. Due out in January 1998 is a new rule from the ASB’s Urgent Issues Task Force which will prevent companies from erroneously capitalizing the costs of year 2000 work, and thus boosting short term earnings. And by the Summer of next year, FRS 14 Provisions and Contingencies, will put a stop to the so called big bath provisions where companies make inflated, one-off charges for future costs in the hope of shielding long term earnings figures. The ASB has been aggressively targeting the more dubious accounting practices in the UK for some time, with its chairman Sir David Tweedie masterminding a flurry of detailed accounting standards over the last few years. But FRS 14, currently in draft format, is likely to be the standard with the furthest reaching consequences for companies with large year 2000 compliance problems. In essence, FRS 14 will force companies to charge the costs of compliance work to the profit and loss account in each and every period in which the work is performed, thus disallowing attempts to write off the whole expense in one isolated charge. Companies generally prefer the latter approach because the costs can be flagged as exceptional and earnings figures can be quoted before one off year 2000 costs; the company takes a so called big bath. Although the new standard will not be mandatory for companies reporting before next summer, the standard will apply retrospectively to all prior accounting periods. Companies which have already taken their bath will have to get wet all over again as they restate their results.
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