Extracting information from abbreviated accounts.

[denwood]

I am currently thinking of spending a large amount of money with a company and I am trying to work out their worth from their abbreviated balance sheet. My first question is, what does 'shareholders funds' tell us about the company at the bottom of the abbreviated balance sheet?

[GRDCredit]

In simple terms it is the amount invested in the business by the shareholders including retained profits.

It tells you how much of their own money the shareholders have invested in the business and also gives an indication of how much they draw out each year.

If making a lending/credit decision however it is only one factor to be considered and with respect if you are not 100% sure of what you are looking at you need to either get someone with experience to have a look or obtain a proper credit report from Experian, Creditsafe, D& B etc. It sounds as if you have just obtained a copy of accounts from Companies House at present.

How much is a large amount? What is the payment for - stock, building etc?

[denwood]

Cheers GRDCredit. Inbetween £60k to £70K, not agreed yet, for machinery.

I have an accountant but I know as a proffesional he is only allowed to state the facts without speculation. This is why I have come on this forum where people can speak more freely.

I have had a credit report from snoop4companies and has given a score of 80 for this company. I don't know what this score was based on but I think it might be missing something.

This firm has been trading for 10 years and up until 2007 it's shareholder's funds were only £10k(approx) and then in 2008 it jumped to £160k(approx).

From 2007 to 2008 the share capital and the capital redemption reserve didn't change. The only thing that changed was the profit and loss account. According to the abbreviated balance sheet, these three things make up the shareholder's funds.

So from 2007 to 2008 there is a difference of £150K. This company is basically a two man team with a secretary. What does this tell me?

[David Griffiths]

In simple terms it is the amount invested in the business by the shareholders including retained profits.

It tells you how much of their own money the shareholders have invested in the business and also gives an indication of how much they draw out each year.



Correct within itself, but the accounts do not show the amount invested by the shareholders on shareholders/directors loans. Such amounts are supposed to be disclosed separately if material, but in practice that disclosure is quite rare.

Denwood, I don't know where you got the idea that an accountant "is only allowed to state the facts without speculation." If that's the case then I've been behaving unprofessionally for years! The facts are stated on paper in black and white - I'd regard it as my job to explain what could lie behind the paper figures so that my client can understand the possible positions that might exist - you'll already know that there's not much information there, so all you can do is speculate.

Without seeing the figures, the jump in profit and loss account tells you that the company made a profit of £150,000 after tax and after dividends in the year in question. That might mean only £150k, if there were no dividends, or it might mean £300k with £150k in dividends.

In previous years, it suggests that all profits after tax, if any, were withdrawn by the shareholders. You'd need to look at other balance sheet figures for evidence of increased trading activity.

[denwood]

Thank you David. You have just made me look at my own abbreviated accounts. My accountant has given a breakdown of how our own 'shareholder's fund' has been calculated. This breakdown shows our profit after tax, the amount of dividends took as well as the opening shareholder's funds. I never realised our profit and dividends were being made public. Does our accountant need to give a breakdown showing dividends and profit because I haven't seen anyone elses abbreviated accounts showing this information.

Our accountant hasn't shown what we as directors have lent the company, which I suppose is a good thing.

[denwood]

My accountant has told me that he has been instructed by the authorities that he has to show dividends and profit in the notes for the shareholders funds otherwise he could be in trouble. If this is true, there are a lot of people filing abbreviated accounts incorrectly and should be repremanded for it.

I have also noticed that my accountant gives an accountant's report in my abbreviated accounts and prints his name and address at the bottom of it. There is no accountant's reports is not shown on many abbreviated accounts that I have downloaded. Are accountants aware that they are not acting correctly and are ashamed to put their names to incorrect abbreviated accounts?

I have emailed a complaint to companies house about this? Can anybody tell me which regulatory body I need to complain to other than companies house?

[KidsBeeHappy]

I have also noticed that my accountant gives an accountant's report in my abbreviated accounts and prints his name and address at the bottom of it. There is no accountant's reports is not shown on many abbreviated accounts that I have downloaded. Are accountants aware that they are not acting correctly and are ashamed to put their names to incorrect abbreviated accounts?

I have emailed a complaint to companies house about this? Can anybody tell me which regulatory body I need to complain to other than companies house?

They do not have to put an accountants report.

Maybe the company in question prepare their own accounts in house, and don't use an external accountant. It is not a legal requirement. Some companies have in house qualified accountants, and are not required to have an audit. If they have no outside investment, and all the skills inhouse, it would seem unfair to insist that they need to pay an external accountant to prepare the accounts.

[KidsBeeHappy]

Denwood, My advice would be just to go to them direct and ask for a copy of their full accounts. If the amount involved is significant to them as well as you then its not an unreasonable request.

[denwood]

Thankyou Boxby. It seems a bit cheeky to ask for full accounts, I suppose it is an option.

I told my accountant that no one else was declaring profit and dividends in the notes for shareholder's funds in their abbreviated accounts. He wasn't sure why people were not doing this but he told me he would have to find a way around it if everybody else was doing it. I have rang companies house about this and they told me they didn't know and I was to speak to my accountant to which I told them I had. They then told me there was nothing else they could suggest to me or tell me about.

Does anybody know the rules concerning dividends and profit being shown in the abbreviated accounts for sharholders funds? or is it just a grey area that nobody really understands so people do as they like?

My accountant wants me to put something in writing to instruct him not to show the dividends and profit in the abbreviated accounts but I don't know as whether I will be breaking some law or rule or requirement. Can anyone tell me either way?

[KidsBeeHappy]

Is your accountant a Chartered Accountant?

[KidsBeeHappy]

Someone sent me this once - very useful!
http://www.vtsoftware.co.uk/final_accounts/samples.htm

[David Griffiths]

My accountant has told me that he has been instructed by the authorities that he has to show dividends and profit in the notes for the shareholders funds otherwise he could be in trouble. If this is true, there are a lot of people filing abbreviated accounts incorrectly and should be repremanded for it.

I have also noticed that my accountant gives an accountant's report in my abbreviated accounts and prints his name and address at the bottom of it. There is no accountant's reports is not shown on many abbreviated accounts that I have downloaded. Are accountants aware that they are not acting correctly and are ashamed to put their names to incorrect abbreviated accounts?

I have emailed a complaint to companies house about this? Can anybody tell me which regulatory body I need to complain to other than companies house?

I think that he is wrong about the profits and dividends. I've checked our disclosure checklists for this, and they make no reference to it, nor does the format for online filing at Companies House, nor the formats produced by our accounts production software. No idea where he gets it from. Given the amount of accounts filed without this information, he seems to be saying that the whole world is out of step except him. There's nothing wrong with including it, apart from excess disclosure.

If he still thinks he's right it would be interesting to see if he can quote the legal authority for it, not "somebody told me" :)

Same with the accountants report. You can include it if you want, but there's no reason to

The inclusion of an accountant's report

[RAL]

Thankyou Boxby. It seems a bit cheeky to ask for full accounts, I suppose it is an option.



It is not an option but you have to ask for full accounts for at least last 5 years if you are buying a business. Without full accounts how you going to carry out due diligence?

You have to know profitability of the business, their cost, their debtors and creditors etc.

[denwood]

RAL:Thankyou.

Boxby: He is Charted according to his letter heads. He has these letters after his name: F.A.P.A. whatever they mean. I looked at your link but I don't think it was for abbreviated accounts.

David: Thankyou, that's the answer I was looking for. He told me that he had been on an accountant's semina that informed him of this. I don't know when this semina was.

I had a look at companies house website for such a disclosure checklist but couldn't find one. I think that a checklist from companies would be very helpful but there doesn't appear to be one.

I have another question about abbreviated accounts. How important is the 'nature of business' description? What would happen if someone described their companies activities incorrectly? Is it an offence?

[Zeno]

What the devil is a F.A.P.A when it's at home?

[KidsBeeHappy]

Click on the button that says "small company limited abbreviated accounts" and it gives you a template of what is legally needed.

[MyAccountantOnline]

What the devil is a F.A.P.A when it's at home?

New one on me??:|

Never heard of it.

[David Griffiths]

I have another question about abbreviated accounts. How important is the 'nature of business' description? What would happen if someone described their companies activities incorrectly? Is it an offence?

The nature of the business doesn't have to be in the abbreviated accounts either!

[MyAccountantOnline]

According to Wikipedia

FAPAFormosan Association for Public AffairsFAPAFellow of the American Psychiatric AssociationFAPAFlorida Academy of Physician AssistantsFAPAFlorida Association of Property AppraisersFAPAFamily Abuse Protection ActFAPAFirst Air Pilots AssociationFAPAFlorida Association of Police Attorneys, Inc (Orlando, Florida)FAPAFreehold Academy of Performing Arts (Freehold, NJ)FAPAFuture Airline Pilots of AmericaFAPAFlorida Association of Physician AssistantsFAPAFlorida Alliance of Paralegal Associations, Inc (Miami, FL)FAPAF-15 Adapted Place Atlas

[Jaydee]

The accountant must be a fellow of the Association of Authorised Public Accountants to use the designated letters FAPA.

No idea whether this association is a good or bad one, but this particular member appears to need some urgent CPD courses!

[denwood]

David: Sorry, I was meaning the company record and not the abbreviated accounts when I was asking about the 'nature of business' description.

Boxby: Thankyou, the format of the abbreviated accounts in your link is in the same format as all the accounts I have downloaded. There is no accountant's report or shareholder's fund notes in your template for the shareholder's funds either.

F.A.P.A.: I getting a bit worried now. I hope he isn't reading this.

Is it bad for an accountant to disclose information in the abbreviated accounts that is not required if the client didn't want it disclosing?

[GRDCredit]

Denwood

All of the above although interesting is missing the basic point which is that you want to pay £60k to this company for some machinery.

Where is the risk from your point of view - are you having to pay pro forma/up front?

If you want to PM the company name and a bit of background I am happy to have a look at this evening when I have a few minutes to spare and let you have my thoughts to assist you in your decision making.


Geoff

[denwood]

The risk is, I will have paid out all the money before this machine is installed and commissioned. If it doesn't work correctly I will need someone to sue and I believe it is pointless sueing a shell company. The machine is made by a european country and I'm buying it through a UK based company. There is also the issue of warrantee. The machine may work fine for the month or so but what happens if the machine ceases to function? My contract will be with the UK based shell company. The machine comes with a one years full warantee but what happens if the shell company goes bust?

I'm thinking of a contract that will tie the company I work for, the shell company and the manufacturer together so they will have to take responsibilty if anything goes wrong.

[wizzard]

Can't you come up with some agreement that you'll only pay part of the money upfront and then upon successfull installation and commissioning of the equipment you pay the rest?

I wouldn't like to fork out the full £60k before the machine has been tested.

[denwood]

I have been told about the use of 'letters of credit'. What they are wanting is 10% upfront and then the 90% is paid when the machine enters this country through this 'letter of credit'. I'm not sure how a letter of credit works at the moment.

The machine I'm buying is to my specification, i.e., it's not like it is off the shelf where if I didn't pay they could just take it back and resell it to someone else for the same price.

It is a catch 22. The ideal terms for me would be not to pay anything until it is installed, commissioned and tested but I how far can I push them until they just say no. As far as ordering machines go, 10% upfront is a very small percentage. Sometimes they ask for 40% but there is no way I would agree to that. This is why I want a contract as well. The contract would say that if the machine wasn't delivered in a certain time, I could claim my money back. This would only work if the company I was making the claim on wasn't a shell company.

There are a lot of people in my trade that have been ripped off by giving deposits and never seeing them again.

[cvs]

Denwood, My advice would be just to go to them direct and ask for a copy of their full accounts.
I would be grateful if you could clarify what exactly is meant by "full accounts". Does it mean details of all the transactions on the books or is it still a summary statement, albeit more detailed that the abbreviated accounts?

[Zeno]

I would be grateful if you could clarify what exactly is meant by "full accounts". Does it mean details of all the transactions on the books or is it still a summary statement, albeit more detailed that the abbreviated accounts?

It generally means profit & loss statement, balance sheet and sometimes the cashflow statement if the company is required to produce one.

I suspect they will still not be detailed enough for your purposes though.

[Kjp001]

Hi Denwood,

just read your post. Dont know if you have yet made a decision, but if nor i may be able to help by providing a full credit score and limit on the company and all other companies the directors are involved i. This may help as you will have a much broader view of the company.

KJP.