Virtual CFOs can support busy business owners by identifying potential risks and implementing financial strategies to drive growth and achieve results. This added support has become increasingly in demand since the onset of the pandemic, as business owners have been faced with added pressures requiring their time and focus. Here we consider three accounting areas that skilled VCFOs can advise on to add value to a business and strengthen its capacity to make important decisions.
Accounting policies
A business, whether it be emerging and seeking capital to fund growth or progressing toward an IPO, must consider its accounting policies closely as investors will seek to understand the financials. Many accounting items have different values and treatment depending on accounting policies, reporting requirements and stakeholders involved. The main considerations here are the differences between general purpose financial reporting, special purpose accounts, and tax return reporting requirements.
General purpose reporting is governed by the External Reporting Board (XRB), which are primarily followed by large and listed organisations. Albeit at a cost, the benefits are that the standards are widely known by investors and easily comparable with other general purpose reporting entities. The reports are generally audited, providing investors with additional confidence and transparency of the business operations. Therefore, many companies see value in this and often opt in or are requested by key investors or stakeholders to prepare these reports.
Special purpose accounting policies provide more flexibility and are often the choice of small to medium sized entities. These policies commonly mirror tax reporting requirements as governed by tax legislation. The reports may satisfy stakeholders like banks and Inland Revenue, however they may not be as easily understood by investors and are often not reflective of the true value of a business.
For instance, an asset may be valued at cost under special purpose accounting but recorded at market or fair value for general purpose reporting; therefore, significantly influencing the story a set of financial statements tells its stakeholders. This is where VCFOs can advise on the right accounting policies to adopt to ensure the business is compliant and presenting the appropriate financial information to relevant stakeholders.
Tax losses
Tax losses occur when a business has more tax-deductible expenditure than assessable income. Tax legislation allows these losses to accumulate and be applied against future taxable income in most circumstances. Losses occur for various reasons, a common one being investment towards growth plans in the early years of a business. It is important that business owners are aware of the tax rules governing the ability to offset tax losses against future taxable profits.
The key considerations here are the continuity of ownership test (COT) and the business continuity tests (BCT). The eligibility and application of these rules are complex; however, a company will usually only be able to carry forward a tax loss provided it has maintained the same ultimate shareholders. If the company has not maintained at least 49% shareholder continuity, it will need to satisfy the business continuity test, which applies from 2020/21 income year onwards. The test applies to losses generated from 2013/14 income year onwards.
For instance, consider a sole founder tech company that incurred $2 million of tax losses while developing its IP. If the company undertook a capital raise and brought on two investors each with a 30% shareholding, the founder would now only own 40% of the company. The company would therefore fail COT and those tax losses may become unusable.
The BCT may facilitate the claiming of the tax losses, however, take the same example but now the business being impacted by the pandemic must close due to lockdowns. The business decides to change its business activity to find a new revenue stream. The company might now fail both the COT and the BCT rendering the tax losses unusable. Assuming a 28% corporate tax rate, the company may have to find funds to pay $500,000 in taxes that would have otherwise been reduced by the tax losses.
A VCFO could have averted this large tax liability by identifying and assessing how potential changes in equity and business models may erode the company’s ability to claim tax losses and impact on the value of the business.
Know your responsibility for company liabilities
Directors should be fully informed of their obligations and responsibilities to a corporate entity as prescribed under the Companies Act 1993 and other legislation. A fundamental duty of any director is to not trade while insolvent, and rather, to ensure the company is compliant and paying its debts as and when they fall due. Otherwise, a director may become personally liable for company debts such as PAYE and GST. Consideration should also be given to any finance agreements with a business which has individuals acting as guarantor for loans.
All directors have a responsibility for understanding the business and this is where the details matter. Has super been calculated correctly and paid on time? Has GST returns been lodged and paid on time? Is your home secured against a business bank loan? VCFOs play a crucial role in making directors aware of their personal exposures and helping them to fulfil their legal obligations.
If you’d like more information on William Buck’s Virtual CFO service and how it could drive growth for your business, please contact your Virtual Finance Management Team.
You can read the other articles in our Virtual CFO series via the links below:
Technology and the future Virtual CFO
