What would you do here, potential insolvency.

What would you do here, potential insolvency.

Didn't find your answer?

I had a client who had just finished his second years trading and we filed his accounts very quickly with Co House to improve his credit rating.

Unfortunately a year end debtor who also had a large amount of WIP at Balance Sheet has since gone bust.

Obviously I was in the process of doing CT returns and will now want to amend the accounts / returns as the bad debt and WIP now W/O is substantial and may well also take my client down.

If I amend the accounts how do I also amend the accounts at Co House, do you send a paper copy explaining what has happened.

I have had to involve an IP in looking at my client, to either look at a CVA or liquidation.

If the company ends up in liquidation do you think that the change of accounts with Co House will look a bit "fishy" 

Replies (30)

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By johngroganjga
08th Feb 2016 14:51

Strictly speaking the accounts were not wrong when they were finalised. You seem to be saying that if they had not been finalised you would now be amending them, but that is not the same thing.

I would bend over backwards not to amend the accounts already completed and filed. I would need a very good reason for doing so. Will it affect the company's tax position, and therefore cash flow, for the better would be one question I would ask.

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Glenn Martin
By Glenn Martin
08th Feb 2016 15:01

@john

The accounts were filed with Co house within about 5 weeks of the year end, but not with HMRC. The adjustment to profit now that we know the debt and WIP will not be paid is substantial and will turn a decent profit into a loss. The impact on tax payable is also large. I would not want to file the accounts with HMRC showing a large CT liability, when if adjusted for the bad debt would now show no liability.

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Replying to charlieACC:
By johngroganjga
08th Feb 2016 16:58

Amend

Glennzy wrote:

The accounts were filed with Co house within about 5 weeks of the year end, but not with HMRC. The adjustment to profit now that we know the debt and WIP will not be paid is substantial and will turn a decent profit into a loss. The impact on tax payable is also large. I would not want to file the accounts with HMRC showing a large CT liability, when if adjusted for the bad debt would now show no liability.

Then in that case I would indeed amend the accounts.

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By Smartie99
08th Feb 2016 16:41

Leave accounts as they are and shorten the following period?  Alternatively, although the CT would be technically due for payment at 9 months, the CT600 doesn't need to be filed until 12 months at which point you could file the following years figures very quickly with a loss and roll this back?

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By petersaxton
08th Feb 2016 20:23

"Amending"

I write "amending" on the first page and send with a covering letter.

Companies House used to explain it on their website but now they've "improved" it - or should I say "amended" it? - I can't find any mention of it.

 

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By bumpdinkwhallop
08th Feb 2016 23:38

***AMENDED****
Just write ***AMENDED*** Abbreviated Account

Exactly as above on the front page of the accounts (if indeed abbreviated) No cover letter with a big rambling explanation needed. Get the client to sign the amended accounts and post to CH

Also no it won't look fishy to an IP. The business will have failed for a genuine commercial reason. Also as its a IP you have involved from the start surely he will know exactly why you have amended the accounts. Even if its a court appointed IP the explaination is the same. The directors report will surely be favourable in either circumstance at the end of the process. Hopefully theres no outstanding directors loans detailed on the accounts filed

On an aside if the business is going to fail why are you going to the trouble of amending the accounts in the first place especially if its only to show an accounting and tax loss for the revenues purpose. Or have i misunderstood your post?? Let the IP deal with the claims and realisation of asset, payments of dividends etc. That is why they get the big bucks after all.

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Glenn Martin
By Glenn Martin
09th Feb 2016 10:53

@bumpdinkwhallop

We are looking at a CVA as first route as if sufficient work in the pipeline to possible trade out of it providing no one throws in the towel before new projects start.

So was wanting correct tax liability in accounts when entering CVA.

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By Garyjp23
10th Feb 2016 13:30

Amending Company Accounts
I am assuming that the accounts did not require an audit.
Despite this they still required approval by the directors which carried a presumption of a true and fair view.
Whats happened to your client is no more than would happen to any other company who has a major loss after their accounts are approved and the AGM held. BP didn't reissue their accounts after their major oil spilll costing billions.
Accordingly, no legal basis for amending accounts.
In addition, you need to disclose more information than merely writing amended on the face of the accounts. Disclosure of facts surrounding adjustments required on balance sheet...see guidance from Companies House.

Suggestion of shortening the next accounting period to six months seems a workable solution to me to mitigate impact.

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Replying to Murray Willson:
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By bumpdinkwhallop
10th Feb 2016 13:49

Potty

Garyjp23 wrote:
I am assuming that the accounts did not require an audit. Despite this they still required approval by the directors which carried a presumption of a true and fair view. Whats happened to your client is no more than would happen to any other company who has a major loss after their accounts are approved and the AGM held. BP didn't reissue their accounts after their major oil spilll costing billions. Accordingly, no legal basis for amending accounts. In addition, you need to disclose more information than merely writing amended on the face of the accounts. Disclosure of facts surrounding adjustments required on balance sheet...see guidance from Companies House. Suggestion of shortening the next accounting period to six months seems a workable solution to me to mitigate impact.

 

No legal basis......absolute nonsense. I can only assume you have never actually amended accounts at companies house.I have done it numerous times with absolute no issue. 

 

Do as suggested. Put Amended clearly on the front page, put a cover letter to companies house that they are amended accounts. Stick a basic note in the accounts detailing circumstances loss is being written off.  If in doubt call companies house and they will tell you exactly what a few people on here have already said.

Re what your doing for the tax postion is exactly what i would do too. Your obligation is to create the best postion possible for your client and if you were preparing the accounts & teturn now knowing what you know know, then you would most certainly do exactly what your planning to do. Crack on and you will have absolutle no issues 

BP, AGMs..................... come on you behave yourself!!!  

 

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Replying to North East Accountant:
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By Garyjp23
11th Feb 2016 14:17

To amend or not to amend?

I have in fact submitted amended accounts which were compliant with the Companies ACT 2006.

I always thought this forum was about obtaining various technically accurate opinions along with a few pragmatic replies to give the originator the opportunity to consider the most appropriate answer for his particular scenario. Some of the replies to this question lead me to doubt the validity of that view particularly the answer above which is at best an expedient solution and a bit over simplified.

CA 2006 allows revision to accounts in Section 454 where the accounts do not comply with the Act or Article 4 of the IAS regulations.

FRS 102 para 32 deals with post balance sheet events and define them as events after the reporting date and before the date the financial statements are signed.

The adjustments in question are the revision of estimates made for bad debts and inventory provisions.

Clearly under Accounting Standards the accounts cannot be revised as the accounts have been approved. More so they have been submitted to the Registrar which should be clear evidence that the Directors were satisfied as to the validity of the accounts at that time.

Turning to the legal position I can identify two reasons.

a) The accounts do not give a true and fair view

b) The directors have not carried out their duty of care in the preparation of the accounts

As to (a) I would contend that compliance with FRS would support that a true and fair view was been given if the accounts comply with FRS which they do by not treating the entries as requiring to be adjusted.

In respect of (b) you would need to be satisfied that the directors knew that the provisions were required and deliberately did not make adequate provision in the accounts for those events.

The original question did allude to submitting early to get a better credit rating.

Suggesting (b) to your client is clearly not an option.

I would therefore stand by my original contention that their is no basis in law or FRS for treating these adjustments as warranting the revision of t6he companys accounts.

Two further considerations to be considered. Firstly whether the going concern basis of preparation is still appropriate...probably not in light of the talk of liquidators. Secondly, whether any dividends paid have been done so legally....this is more complex but has been answered on this forum previously.

Lastly the note to the accounts referred to should be on the face of the balance sheet and should contain:

a)Statement that these accounts replace the original

b)Statement that these are now the new statutory abbreviated accounts

c)State part of the ACT that accounts did not comply with

d)Quantify the effect on each item of the accounts changed

And yes your clients should hold the appropriate directors meetings and shareholders meeting which will necessitate an EGM if they wish to be fully compliant with the law.

Or perhaps expediency will triumph again

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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Replying to I'msorryIhaven'taclue:
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By Garyjp23
11th Feb 2016 14:25

To Amend or not Amend

Garyjp23 wrote:

I have in fact submitted amended accounts which were compliant with the Companies ACT 2006.

I always thought this forum was about obtaining various technically accurate opinions along with a few pragmatic replies to give the originator the opportunity to consider the most appropriate answer for his particular scenario. Some of the replies to this question lead me to doubt the validity of that view particularly the answer above which is at best an expedient solution and a bit over simplified.

CA 2006 allows revision to accounts in Section 454 where the accounts do not comply with the Act or Article 4 of the IAS regulations.

FRS 102 para 32 deals with post balance sheet events and define them as events after the reporting date and before the date the financial statements are signed.

The adjustments in question are the revision of estimates made for bad debts and inventory provisions.

Clearly under Accounting Standards the accounts cannot be revised as the accounts have been approved. More so they have been submitted to the Registrar which should be clear evidence that the Directors were satisfied as to the validity of the accounts at that time.

Turning to the legal position I can identify two reasons.

a) The accounts do not give a true and fair view

b) The directors have not carried out their duty of care in the preparation of the accounts

As to (a) I would contend that compliance with FRS would support that a true and fair view was been given if the accounts comply with FRS which they do by not treating the entries as requiring to be adjusted.

In respect of (b) you would need to be satisfied that the directors knew that the provisions were required and deliberately did not make adequate provision in the accounts for those events.

The original question did allude to submitting early to get a better credit rating.

Suggesting (b) to your client is clearly not an option.

I would therefore stand by my original contention that their is no basis in law or FRS for treating these adjustments as warranting the revision of t6he companys accounts.

Two further considerations to be considered. Firstly whether the going concern basis of preparation is still appropriate...probably not in light of the talk of liquidators. Secondly, whether any dividends paid have been done so legally....this is more complex but has been answered on this forum previously.

Lastly the note to the accounts referred to should be on the face of the balance sheet and should contain:

a)Statement that these accounts replace the original

b)Statement that these are now the new statutory abbreviated accounts

c)State part of the ACT that accounts did not comply with

d)Quantify the effect on each item of the accounts changed

And yes your clients should hold the appropriate directors meetings and shareholders meeting which will necessitate an EGM if they wish to be fully compliant with the law.

Or perhaps expediency will triumph again

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

This relates to the reply POTTY above not the reply immediately above.
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By petestar1969
10th Feb 2016 13:55

OK

I see no reason to file amended accounts as they were correct when they were filed.

The subsequent bad debt is surely just an adjusting item on the CT600.

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By DBSeear
10th Feb 2016 14:23

True & fair view

Am I missing something. Surely at the Balance Sheet date there was no bad debt or anticipation of a bad debt. The debtor has gone bust after the balance sheet date so the bad debt can only be accounted for (an claimed against tax) in the following year's accounts.

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Replying to Justin Bryant:
paddle steamer
By DJKL
10th Feb 2016 15:26

Accounts approval

DBSeear wrote:

Am I missing something. Surely at the Balance Sheet date there was no bad debt or anticipation of a bad debt. The debtor has gone bust after the balance sheet date so the bad debt can only be accounted for (an claimed against tax) in the following year's accounts.

Surely it is after the accounts were approved not after the balance sheet date!

What is the point of reviewing post year end when preparing accounts if the data is ignored, one ought to incorporate data from after the year end pertaining to transactions within the year/ balances at the year end; a provision for a specific bad debt would seem on point and a reduction in WIP calculated.

 Turning to the revision, CA2006 s 454 allows for accounts revision so not really an issue unless the proposed revision is not within the parameters of S454, but a quick read leaves it pretty all embracing:

"If it appears to the directors of a company .......that the company's annual accounts do not comply with the requirements of this Act they may prepare revised accounts......"

And of course  under section CA2006 s393 "Accounts to give true and fair view" is pretty broad covering assets/liabilities, financial position and profit and loss.

So, it appears that to give a True and Fair view the directors are obliged to make use of section 454.

 

 

 

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Glenn Martin
By Glenn Martin
10th Feb 2016 15:39

Thanks for comments

even if they are contrasting.

I am going ahead with amending the accounts, I just hope we can trade out of this as its one of my best jobs.

 

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By iampav
10th Feb 2016 15:52

Insolvency

If the Company is to enter Liquidation, the IP will be able to reference the losses post-period in the Company's Deficiency Account and Statement of Affairs. They can also adjudge HMRC's claim.

From an investigation point of view, as noted above, the accounts are prepared based on the Director's knowledge of the Company's position at the time and the balances are taken to be true to the best of his knowledge and belief. If the accounts are superseded, does it follow that the Director had knowledge that the Debtor would not be recoverable? It might infer so. Providing no mistake has been made in preparation, surely it is better to retain the accounts as a correct record? Alternatively if the plan is to pursue a CVA - any claim for CT by HMRC in the CVA will include the whole tax year in which the CVA is approved. This will presumably include the next accounts rectifying the position.  Prior to these accounts being filed, the CVA Supervisor would be able to discuss the revised position and adjudge HMRC's claim accordingly, pending their final claim upon receipt of the next accounts.  The Company trading on would only pay CT on profit for the first full tax-year post CVA commencement. Presumably it would have some for the CVA to be viable.  It would seem it is only worth amending the accounts if there was to be a straightforward advantage by carrying forward the losses versus the debt written-off. 

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By DBSeear
10th Feb 2016 16:05

DJKL - Accounts approval

Although not totally clear, I had assumed that the accounts were signed & filed prior to the debtor going bust. If the debtor had gone bust between balance sheet date & date of signing then an appropriate post balance sheet event would be noted in the accounts but no bad debt provision would apply (because there was no bad debt or anticipated write down of WIP at the Balance Sheet date).

The point of reviewing post year end transactions is to provide provisions for items that did exit at the balance sheet date (e.g. goods & services provided in the year but invoiced after the year end) and to assist  disclosure of any material post balance sheet events, capital commitments, going concern issues, etc.

 

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Replying to Paul Crowley:
paddle steamer
By DJKL
10th Feb 2016 16:27

Sorry, I disagree

DBSeear wrote:

Although not totally clear, I had assumed that the accounts were signed & filed prior to the debtor going bust. If the debtor had gone bust between balance sheet date & date of signing then an appropriate post balance sheet event would be noted in the accounts but no bad debt provision would apply (because there was no bad debt or anticipated write down of WIP at the Balance Sheet date).

The point of reviewing post year end transactions is to provide provisions for items that did exit at the balance sheet date (e.g. goods & services provided in the year but invoiced after the year end) and to assist  disclosure of any material post balance sheet events, capital commitments, going concern issues, etc.

 

Sorry, I disagree, if  post year end but prior to signing the accounts I discovered that a debtor was now not going to be recovered and the WIP I had provisionally calculated re the same party was now materially overstated I would amend the  actual accounts not merely insert a post balance sheet event note. Whilst these days I am pretty  useless re accounts disclosure rules (they are boring) I would never go past SSAP2 preparing any accounts (Prudence) and knowingly leave current assets on a balance sheet that I knew were materially overstated.

If you were auditing would you take the same approach, surely not?

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Replying to Paul Crowley:
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By DBSeear
11th Feb 2016 12:47

Still beg to differ

SSAP2 is no longer in use! Provisions are dealt with under FRS 12 (applicable to small companies as well as large). A basic principal is that the Balance Sheet reflects the state of affairs that existed at the Balance Sheet Date. There was no knowledge of a bad debt at that date. You would only make  specific bad debt provisions for  bad debts that existed at the Balance Sheet date although you can make general bad debt provisions (not tax deductible). A general provision would be an estimate based on judgement applied on a consistent basis. It should be noted that changes to estimating found after the accounts have been signed off can not be applied retrospectively.

WIP was not overstated (or provisional) but would be the amount calculated under GAAP. It is only subsequent to the Balance Sheet date that that WIP became irrecoverable and would then be written off in the current year.

That's my opinion but if anyone out there can point to an area of GAAP that I'm missing then please let me know.

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Replying to lionofludesch:
paddle steamer
By DJKL
11th Feb 2016 14:31

@ DBSeear ,I need to retire if what you say is right

"That's my opinion but if anyone out there can point to an area of GAAP that I'm missing then please let me know." DBSeear

 

I did appreciate that "Dear Prudence" had suffered demotion, however the idea of prudence within accounts still hopefully remains.

Try:

FRSSE section 14 re adjusting post balance sheet events

and

FRS21

See this article from accounting Web:

https://www.accountingweb.co.uk/article/accountingwebcouk-guide-post-bal...

 

I hate to say that the approach you advocate is imho  madness from a common sense point of view, but nothing would surprise me re standard setters these days.

I appreciate accounts have strayed a bit from accountant/auditor judgement (true and fair override) with a plethora of prescriptions dealing with our ever more complex world, and I will acknowledge that my reading of FRS edicts since 1999 has been a little sparse consisting mainly of a flick through the FRSSE  as none of my clients really need to go beyond the FRSSE and a heated argument  a few years ago with our then auditors about FRS25 (preference shares as liabilities- I think I suggested to them that for smaller companies lunatics were taking over the asylum)

This is probably nearly the sum total of my recent reading apart from odd articles here and there, and I do know I  need to get down to a good read of FRS102/105, but the way you are interpreting makes no logical sense to me (it may be the rules?) and flies in the face of pretty much everything I have ever learned or read about accountancy-that one would knowingly overstate an asset within a  balance sheet at a particular date because the event that destroyed the value of the asset( existing at that date) had not taken place at that date but did take place before I completed the accounts-madness.

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By johngroganjga
11th Feb 2016 12:54

Adjusting post balance sheet event

The debtor's insolvency is clearly an adjusting post balance sheet event and I have never known anyone not treat it as such.

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By paulwakefield1
11th Feb 2016 13:14

I think

you are both right. The Balance Sheet must indeed reflect the state of affairs at the balance sheet date. But if the customer went bust fairly shortly after the year end then there is a very high probability that they were in trouble at the balance sheet date so provision at that date would be appropriate. If they went bust due to some catastrophic post year end event then no provision would be appropriate.

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By DBSeear
11th Feb 2016 14:45

I stand corrected

and agree that under FRS 21 provision can be made for adjusting events occurring between the Balance Sheet date & date accounts were signed off.

However, in the circumstances of the question, I would agree with Garyjp23 that there would appear no basis to file amended accounts. There is, however, one scenario that I can think of that would enable the accounts to be adjusted & re-filed. That would be If the owners of the company have the power to amend them after they have been issued (because the accounts are approved for issue by the directors before they are laid before the members). Although I think that if they had the power then it would have needed to have been disclosed in the accounts.

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By johngroganjga
11th Feb 2016 14:55

The OP's question is not about whether withdrawal and amendment of the accounts is required, but whether it is possible, and if so how to do it.

The first sentence in the first response (mine) said that amendment was not required.

I think it is perfectly reasonable to do what the OP has been advised to do.

 

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By Garyjp23
11th Feb 2016 15:17

Is it possible?
On what grounds is it possible? Certainly not FRS. So what part of CA 2006 does it not comply with assuming you exclude a true and fair view override which I exclude if the accounts as they stand are FRS compliant.

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By johngroganjga
11th Feb 2016 15:23

It's possible because Companies House accept them.

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By Garyjp23
11th Feb 2016 15:38

Its possible because companies house accepts them
What reason do you state in the note required regarding the basis on which you are submitting revised accounts.....presumeably its not "because your dumb enough to accept them".

What I am interested in is what valid reason will be documented in the required note to substaniate the revision.

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By johngroganjga
11th Feb 2016 17:05

You don't need to explain the reason for the change. You just need to describe the accounts as Amended.

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Glenn Martin
By Glenn Martin
11th Feb 2016 17:10

Thanks Lads

I will discuss this with the IP that is appointed an see what he feels his best way as he needs to be happy with what we are proposing.

I didn't this debate would produce such contrasting views.

 

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By ksagroup
12th Feb 2016 12:35

Out of curiosity

Who is the IP?

 

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