Disproportionate Expense and Undue Delay in Accounting

The term 'disproportionate expense and undue delay' refers to circumstances in traditional UK accounting practices where an individual subsidiary undertaking might be excluded from consolidated financial statements due to excessive cost and time requirements to obtain the necessary information.

Definition

Disproportionate expense and undue delay refer to a concept in traditional UK accounting where individual subsidiary undertakings could potentially be excluded from consolidated financial statements of a group. The rationale behind this was that the costs and time required to gather the necessary information for consolidation might be excessively high or delayed significantly.

However, the Financial Reporting Standard Applicable in the UK and Republic of Ireland (Section 9) clarifies that such reasons cannot justify the exclusion of subsidiary undertakings from consolidation if they are individually or collectively material to the group.

Detailed Explanation

In the landscape of accounting, the consolidation of financial statements is important for presenting a complete financial picture of a group of companies as a single entity. Traditionally in UK accounting, certain practical difficulties such as disproportionate expense and undue delay were considered legitimate reasons for excluding a subsidiary from the parent company’s consolidated financial statements.

Key Points:

  1. Disproportionate Expense:

    • This refers to a scenario where the costs involved in procuring the necessary information for consolidation are excessively high relative to the benefits.
    • For instance, a subsidiary in another country might incur high costs to comply with the parent company’s reporting standards.
  2. Undue Delay:

    • Refers to significant time delays in obtaining the required information, which can render the consolidation process impractical.
    • Delays may arise due to differences in financial reporting timelines or logistical challenges.
  3. Regulatory Update:

    • According to the Financial Reporting Standard (Section 9), excessive costs and delays are not valid grounds for excluding subsidiaries from consolidated accounts if they hold material significance.

Examples

Example 1:

A parent company based in the UK has a subsidiary in a developing country where financial reporting systems are less advanced. The cost of harmonizing the subsidiary’s records with the parent company’s standards might have previously been considered too high. However, under current standards, if the subsidiary is materially significant, it must be included, regardless of cost and time constraints.

Example 2:

Consider a multinational group with subsidiaries in various countries, each with its financial reporting periods. Previously, logistical challenges and misalignment in timelines could have justified further delay. Present standards, however, mandate inclusion if the subsidiary’s financial data materially impacts the group.

Frequently Asked Questions (FAQs)

1. Can disproportionate expense and undue delay exclude any subsidiary from consolidation?

No, under current UK accounting standards, disproportionate expense and undue delay cannot justify excluding a subsidiary if it holds material significance to the group.

2. When did the change in standards come into effect?

This change is part of the Financial Reporting Standard Applicable in the UK and the Republic of Ireland, with Section 9 providing clarification.

3. Does this apply to small subsidiaries too?

Yes, provided that the subsidiaries are materially significant to the group, regardless of their size.

4. How are disproportionate expenses measured?

They are measured relative to the benefits they bring in providing a complete financial picture of the group.

5. What is meant by a subsidiary being ‘materially significant’?

This means its financial data is significant enough to influence the total financial statements of the group.

  • Consolidated Financial Statements: Financial statements that present the assets, liabilities, equity, income, expenses, and cash flows of a group of companies as one entity.
  • Financial Reporting Standard Applicable in the UK and Republic of Ireland: A set of accounting standards followed by entities in the UK and Republic of Ireland for financial reporting.
  • Exclusion of Subsidiaries from Consolidation: Situations or rules under which subsidiaries might be excluded from consolidated financial statements.

Online Resources

Suggested Books for Further Studies

  1. “UK GAAP 2019” by Ernst & Young LLP
  2. “Wiley IFRS 2023: Interpretation and Application of IFRS Standards” by Wiley
  3. “Financial Reporting and Analysis” by Revsine, Collins, Johnson, Mittelstaedt, and Soffer

Accounting Basics: Disproportionate Expense and Undue Delay Fundamentals Quiz

### Can a subsidiary be excluded from consolidated financial statements due to disproportionate expense under current standards? - [ ] Yes, always. - [ ] Yes, under special conditions. - [x] No, if it is materially significant. - [ ] No, under any circumstances. > **Explanation:** Current standards do not allow the exclusion of subsidiaries from consolidated financial statements due to disproportionate expense if the subsidiary is materially significant. ### What does the term "undue delay" refer to? - [x] A significant time lag in gathering necessary information. - [ ] Delay caused by financial institutions. - [ ] A delay due to personnel changes. - [ ] Delay in payment processing. > **Explanation:** "Undue delay" specifically refers to significant time delays in obtaining the necessary information for preparing consolidated financial statements. ### Is it true that small subsidiaries must also be included if they are materially significant? - [x] True - [ ] False > **Explanation:** Small subsidiaries should be included in consolidated financial statements if they are materially significant to the group. ### What standard provides the guidance that excessive costs and delays cannot justify exclusion from consolidation? - [ ] International Accounting Standard 16 - [ ] UK Corporate Governance Code - [x] Financial Reporting Standard Applicable in the UK and Republic of Ireland (Section 9) - [ ] Generally Accepted Accounting Principles (GAAP) > **Explanation:** The Financial Reporting Standard Applicable in the UK and Republic of Ireland (Section 9) provides that excessive costs and delays do not justify the exclusion if the subsidiary is materially significant. ### What is a primary reason for including all material subsidiaries in consolidated financial statements? - [ ] To reduce tax liability. - [x] To present a complete financial picture of the group. - [ ] To comply with banking regulations. - [ ] To increase investor confidence. > **Explanation:** Including all material subsidiaries provides a complete financial picture of the group, ensuring transparency and accuracy in the reported financial statements. ### How are "disproportionate expenses" measured in the context of consolidation? - [x] Relative to the benefits they provide. - [ ] Based on the absolute amount. - [ ] By the number of personnel required. - [ ] Through annual budget estimations. > **Explanation:** Disproportionate expenses are measured relative to the benefits they bring in providing a more complete financial picture of the group. ### When encountering undue delay, what should a company prioritize in its financial reporting? - [ ] The efficiency of internal processes. - [x] The inclusion of materially significant subsidiaries. - [ ] Cost-cutting measures. - [ ] External auditor recommendations. > **Explanation:** The company should prioritize the inclusion of materially significant subsidiaries in the consolidated financial statements despite undue delays. ### Which of the following is impacted most by disproportionate expense? - [ ] Tax liabilities - [ ] Earnings per share - [x] The cost-benefit balance of obtaining consolidation information - [ ] Management decisions > **Explanation:** Disproportionate expense refers mainly to the cost-benefit balance – whether acquiring necessary consolidation information is justifiable in terms of the costs incurred versus the benefits provided. ### Does the UK's financial reporting standard align more with presenting a full financial view or minimizing expenses? - [x] Presenting a full financial view - [ ] Minimizing expenses > **Explanation:** The Financial Reporting Standard prioritizes presenting a complete financial view of the group over minimizing the expenses of obtaining consolidation information. ### What influences the decision to consolidate a subsidiary significantly? - [ ] The physical location - [x] Its material significance to the group - [ ] Its market share - [ ] The parent company's revenue > **Explanation:** The material significance of the subsidiary to the group strongly influences the decision to include it in consolidated financial statements.

Thank you for engaging with our comprehensive overview of the term “Disproportionate Expense and Undue Delay” and for tackling our associated quiz questions. Keep striving for excellence in your financial and accounting knowledge!

Tuesday, August 6, 2024

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