Disproportionate Expense and Undue Delay is an accounting term traditionally used within UK accounting practices to justify the exclusion of certain subsidiary undertakings from the consolidated financial statements of a group due to the high cost and significant time lag involved in obtaining the necessary information.
Historical Context
Historically, under UK Generally Accepted Accounting Principles (UK GAAP), there were specific circumstances under which a subsidiary could be excluded from consolidation. The concept of disproportionate expense and undue delay was acknowledged as a valid reason for such exclusion, provided that the cost and effort involved in gathering the required information were excessive compared to the benefit derived from its inclusion in the consolidated accounts.
Types/Categories
- Material Subsidiaries: Entities that significantly impact the financial health and operations of the parent company.
- Immaterial Subsidiaries: Entities whose financial impact on the parent company is negligible, making their exclusion less critical under the pretext of disproportionate expense and undue delay.
Key Events
- Introduction of FRS 102: The implementation of the Financial Reporting Standard applicable in the UK and Republic of Ireland (FRS 102) has made significant changes to the practice of excluding subsidiaries from consolidated financial statements.
Detailed Explanations
With the introduction of FRS 102, Section 9 explicitly states that disproportionate expense and undue delay cannot justify the exclusion of subsidiary undertakings that are individually or collectively material to the group. This means that the financial statements must reflect a complete and accurate picture of the group’s overall financial position, regardless of the costs and time involved.
Applicability
This concept applies mainly to larger groups with complex structures, where the effort to gather and consolidate financial information from every subsidiary might be burdensome. However, under current standards, the emphasis is on comprehensive financial reporting that provides a true and fair view of the group’s financial health.
Examples
- Historic Application: A conglomerate with global operations may have historically excluded a distant subsidiary from its consolidated accounts due to high costs and time delays in collecting financial data.
- Post-FRS 102: Under current regulations, the same conglomerate would need to include that subsidiary in its consolidated financial statements, regardless of the associated costs and delays.
Considerations
- Cost vs. Benefit Analysis: Although the concept allowed for a cost-benefit analysis historically, current standards prioritize comprehensive financial reporting.
- Compliance and Materiality: Ensuring all material subsidiaries are included in the consolidated accounts is crucial for compliance with FRS 102.
Related Terms with Definitions
- Exclusion of Subsidiaries from Consolidation: The practice of not including certain subsidiaries in the consolidated financial statements based on specific criteria.
- Consolidated Financial Statements: Financial statements that present the assets, liabilities, equity, income, expenses, and cash flows of a parent company and its subsidiaries as those of a single economic entity.
Comparisons
- UK GAAP vs. IFRS: Both frameworks emphasize the importance of including all material subsidiaries in consolidated accounts, although IFRS has its specific criteria for exclusion.
- Pre-FRS 102 vs. Post-FRS 102: The major shift with FRS 102 is the removal of the disproportionate expense and undue delay as a justification for exclusion.
Interesting Facts
- Global Adoption: Many countries follow similar principles, ensuring financial transparency and reliability in global markets.
Inspirational Stories
- Modernization of Financial Reporting: Companies adapting to more stringent reporting standards often find improved investor confidence and better strategic insights.
Famous Quotes
- “The minute you choose to do what you really want to do, it’s a different kind of life.” - Buckminster Fuller, which can be related to companies striving for transparent financial reporting.
Proverbs and Clichés
- Proverb: “Penny-wise and pound-foolish,” highlighting the importance of comprehensive financial reporting despite perceived immediate costs.
- Cliché: “Better safe than sorry,” emphasizing the need to include all relevant subsidiaries in financial reports to avoid future compliance issues.
Expressions
- Financial Transparency: The clarity and comprehensibility of a company’s financial statements.
- Material Impact: The significant effect on the financial health of a company.
Jargon and Slang
- Conso: Short for consolidated accounts, commonly used in finance circles.
- Topco: Refers to the top holding company in a group structure.
FAQs
Q1: What is disproportionate expense and undue delay?
A1: It refers to a situation where the cost and time required to gather information for a subsidiary are excessively high, historically allowing for its exclusion from consolidated financial statements.
Q2: Is disproportionate expense and undue delay still a valid reason for exclusion under FRS 102?
A2: No, FRS 102 states that material subsidiaries cannot be excluded for this reason.
References
- Financial Reporting Standard (FRS 102), Section 9
- Historical UK GAAP documentation
- Institute of Chartered Accountants in England and Wales (ICAEW) guidelines
Final Summary
Disproportionate expense and undue delay was once a practical consideration in the exclusion of subsidiaries from consolidated financial statements in the UK. However, with the introduction of FRS 102, this practice is no longer acceptable for material subsidiaries, emphasizing the need for comprehensive and transparent financial reporting that reflects the true financial position of the entire group. By prioritizing accuracy and completeness, modern accounting standards ensure that stakeholders are well-informed and capable of making sound financial decisions.
