What happens if you’re reorganising your business?

Understanding the different obligations, requirements and legalities is pivotal to the success of any reorganisation.

Firstly, there are a variety of costs that can be accrued and accounted for if you are planning a move or downsizing your business, for example.

Ending one lease agreement and starting a new one is a process that requires notice for your landlord, staff and customers. Then there are the financial costs of potentially leaving a lease agreement early, which should be included in the accounts, if the relevant conditions are met.

Staff engagement is a key issue, with a record of any communication needed for various agreements, as well as notification when elements of the business are changing or being reorganised.

The following is a guide to some of the considerations to make, that may impact on costs recorded in your accounts, if you’re reorganising your business:

Evidence and expectations

Documentation would be needed (e.g. meeting notes), in addition to information about how the plan for reorganising has begun, and how it has been announced. Actions such as informing staff and customers, as well as giving notice to the landlord, must be taken.

To create a constructive obligation, actions need to take place before the financial year-end, and evidence of communication and the expectation that the liability will fall due and subsequently be paid should be evident.

Constructive obligation

A ‘constructive obligation’ is an obligation that has arisen from an action rather than from a contractual obligation. They can include a recognised pattern of practice or published policies.

Constructive obligations only arise when a detailed formal plan for the restructuring has been carried out, and a valid expectation that the restructuring will be carried out by either starting to implement the plan or by announcing the main features of it to those affected by the plan.

Redundancy

Redundancy costs should be included in the accounts as long as they have been communicated to all staff before the end of the year.

This then creates a ‘present obligation’, as a result of a past obligating event. There should be clear evidence of the communication to staff, such as a letter to each individual potentially affected.

Assets

The writing down of fixed assets prior to a year end, such as former premises, requires evidence of the plan, as well as evidence that shows future intent to sell or dispose of assets at a rate lower than the net book value.

Larger assets should include independent quotes, and then the assets should be written down to their net realisable value.

Lease agreements

In a lease agreement, the unavoidable costs under a contract need to be considered. This would be the lower of the costs of fulfilling the lease vs any compensation or penalties arising from failure to fulfil it.

Communication with the landlord and any other relevant parties would also be necessary.

At MGI Midgley Snelling LLP our team are experienced in helping businesses with their reorganisations so please contact us for help.