International Accountant 102 by Association of International Accountants

INTERNATIONAL

ACCOUNTANT NOVEMBER/DECEMBER 2018

ISSUE 102

Transforming technology: riding the digital wave SME lending: how to address the funding gap Company law: increasing tensions over the role of expert witnesses

Restrictive covenants: protect your business from the loss of key individuals

CONTENTS

In this issue Contributors 2 Meet the team

News and views

Member news

HMRC ‘should postpone’ Making Tax Digital for VAT

Employment law

Restrictive covenants David Fisher (CM Murray LLP) explores how a business can best protect its interests when key individuals leave to join a competitor.

AIA joins Northern Powerhouse Partners Programme

Company law

Expert evidence update With increasing tension in courts as to the role of expert witnesses, Jeffrey Davidson (Honeycomb Forensic Accounting) asks what instructing solicitors can learn from recent cases.

Students 8 Training record Document your learning by maintaining a training record, linking your experience to the skills you have developed.

AIA Achieve

An important message The benefits of the Interactive Distance Learning Programme.

Technology 15

Riding the digital wave Next-generation technologies can help business to ensure transformation readiness, explains Jennifer Warawa (Sage).

Finance 25

Reporting standards

Implementing the change Paul Lippett (Lex Autolease) believes that IFRS 16 has the potential to fundamentally change financial, operational and strategic decision making for lessees. Editorial Information International Accountant, the bimonthly publication of the Association of International Accountants (AIA).

Editor Rachel Rutherford E: editor@aiaworldwide.com T: +44 (0)191 493 0281

International Accountant Staithes 3, The Watermark, Metro Riverside, Newcastle Upon Tyne NE11 9SN United Kingdom

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SME lending Stéphane Blanchoz (BNP Paribas Asset Management) considers how lenders can finance the real economy by addressing the funding gap.

Dates for your diary Upcoming events

Technical 29 Global updates

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AIA does not guarantee the accuracy of statements made by contributors or advertisers or accept responsibility for any views which they express in this publication. ISSN: 1465-5144 © Copyright Association of International Accountants

EDITOR’S WELCOME

Contributors to this issue

Editor’s welcome

JEFFREY DAVIDSON

Jeffrey Davidson is a forensic accountant with over 20 years’ experience, working on complex business disputes, with focus on the accounting, financial, economic and commercial components. He has acted as an expert witness in more than 500 actions. PAUL LIPPITT

s we come to the end of the AIA’s 90th anniversary celebrations, we are continuing to see the AIA collaborate with partners, stakeholders and government to ensure that we are providing the skills, experience and professionalism expected of today’s accountants, whilst also ensuring that we can represent our members and influence policies that may have an impact on their work. To that end, AIA has become the latest organisation to join the Northern Powerhouse Partners Programme, which is a network of partners who all believe strongly in the economic potential of the North, and support the need for a combined effort by government and business to realise that potential. AIA’s vast experience in education and skills training across the financial sector, through its links with universities and academic institutions, alongside a network of trusted business advisers, means that we are well placed to support the ambitious objectives of the government’s Northern Powerhouse strategy. In this issue, we look at IFRS 16, the new international accounting standard for leases, which comes into force in January

Rachel Rutherford Editor, IA

Paul Lippitt is principal consultant at fleet leasing company Lex Autolease. He has been working closely with accountancy teams to help them adapt to the new rules relating to IFRS 16. Lex Autolease is the UK’s leading fleet management and funding specialist. STÉPHANE BLANCHOZ

2019 and presents a significant challenge to firms that lease vehicles, office space and equipment (see page 18). We also consider the international challenges of creating and enforcing restrictive covenants (see page 12); examine how new technologies and artificial intelligence can be utilised in accounting firms (see page 15); and consider how the role of the expert witness is changing in courts (see page 22). For students, we also have articles on AIA Achieve and how to succeed in obtaining the appropriate amount of work experience. Qualification with the AIA is via both examination and work experience. And whilst the AIA offers a flexible system by which its students can gain their initial professional development (IPD), it is worth taking some time at an early stage in your studies to see how best to complete the experience requirements. I would also like to thank everyone who contacted me after the last magazine was published for all their positive feedback on the redesign. The aim was to modernise the publication and improve the reader experience in both digital and hardcopy formats and I was pleased that so many of you took the time to say that you were happy with the new look.

Stéphane Blanchoz is head of SME alternative financing at BNP Paribas Asset Management’s structured finance team. He was appointed to his current role in November 2017, having previously headed BNP Paribas Asset Mangement’s structured finance team. JENNIFER WARAWA

Jennifer Warawa is the EVP of partners, accountants and alliances at Sage. She has led the group since 2017. Previously, she served as Sage’s EVP of product marketing from 2016 to 2017. She began her career at Sage as the director of partner programmes in 2008. DAVID FISHER

David Fisher is a solicitor and partner in CM Murray LLP, a leading specialist employment and partnership law firm. He has over 20 years’ experience advising on the drafting and enforcement of restrictive covenants. ISSUE 102 | AIAWORLDWIDE.COM

News MAKING TAX DIGITAL

AUDITORS

HMRC ‘should postpone’ Making Tax Digital for VAT

Front end of company reports must improve

Many of the 1.2 million UK businesses for which Making Tax Digital for VAT is being introduced in April will not be ready in time, according to a report from the House of Lords Economic Affairs Finance Bill Sub-Committee. As many as 40% of affected businesses have not heard of Making Tax Digital, let alone started to prepare for the substantial change to their accounting processes. The committee said that HMRC had “inadequately considered the needs and concerns of smaller businesses” in managing the rollout of the programme.

“We support digitisation of the tax system, but we are worried about the speed of the implementation. IPSE was grateful to the government for delaying the initial implementation until 2019. “However, many self-employed businesses simply don’t know about the new requirements. The costs could be higher than government predictions, so we’d welcome a further delay to give our smallest businesses some extra breathing room – a surprisingly large number still keep paper records.” Simon McVicker, Association of Independent Professionals and the Self-Employed

“AIA supports the wider use of digital technology within the tax system. However, it is apparent that many VAT registered businesses, in particular SMEs, are simply not ready for Making Tax Digital and we would prefer to see a revised schedule put in place that allows HMRC to properly communicate the changes and businesses the time to adapt.” Philip Turnbull, Association of International Accountants (AIA)

“We support the view of the Economic Affairs Committee that the government should delay the implementation of Making Tax Digital for another 12 months to give retailers more time to prepare for the change. “HMRC has not allocated enough time to learn from their pilot programme and awareness amongst small business owners is low.” James Lowman, Association of Convenience Stores

●● Making Tax Digital will not be ready in time for introduction in April 2019 ●● Key figures express their views about digitisation of the tax system

HONG KONG

Budget consultation starts

AIAWORLDWIDE.COM | ISSUE 102

external economic changes, and to seize opportunities.

The Hong Kong government has launched the public consultation exercise for the 2019/20 Budget. Financial secretary Paul Chan noted Hong Kong’s economic growth slowed down in the third quarter, affected by international trade conflicts and other factors, while the economic outlook for the next year is full of uncertainties. Chan said that he will carefully consider the macroeconomic risks to support enterprises, preserve employment and stabilise the economy. He will also consider measures to relieve the impact on people’s daily lives brought about by

Auditors’ work on the information in the front end of company reports outside of the financial statements does not consistently meet the requirements of auditing standards, according to a new report by the Financial Reporting Council (FRC). Inconsistency in the extent and quality of the work in part reflects the non-prescriptive requirements in the audit standards. This lack of prescription in the guidance given by firms to their auditors has led to varying approaches, even by different audit teams within the same firm. The FRC identified instances of good practice in its review. However, too often insufficient work was performed to support the statements made by auditors in respect of the Other Information (OI) in their audit reports. Investors place a great deal of focus on the OI in annual reports, often referred to as the “front end”, to guide their decisions when assessing a company’s future prospects. The amount of information included in the front end has grown significantly and in most cases is now larger than the financial statements. The auditor’s report must consider whether the OI is materially inconsistent with the audited financial statements or the auditor’s knowledge. The FRC expects auditors to: ●● undertake more targeted procedures, based upon more prescriptive guidance from audit firms; ●● place greater emphasis on their review of key non-financial information; ●● increase their scepticism and pay more attention to the completeness of information, particularly in relation to principal risk disclosures and their linkage to viability statements; ●● require Boards to prepare, on a timely basis, appropriate documentation to support key areas of the OI such as the Viability Statement; and ●● ensure staff have appropriate experience and knowledge to identify potential material misstatements and inconsistencies in the OI.

News BREXIT

‘No case to answer’ for former Tesco executives Mr Justice John Royce has ruled that Chris Bush and John Scouler have no case to answer over alleged financial misreporting that saw Tesco overstate its profits by over £250 million in 2014. On 5 December, the Court of Appeal upheld the decision that there was insufficient evidence for a jury to consider in respect of the individual defendants on trial and ordered an acquittal. A third defendant, Carl Rogberg, was severed from this trial. The SFO is considering whether to pursue a retrial. The judgment comes after Tesco Stores Limited accepted responsibility for false accounting practices through a deferred prosecution agreement (DPA) in March last year, the details of which remain subject to reporting restrictions. UK’s effectiveness in combating money laundering and terrorist financing The Financial Action Task Force (FATF) has conducted an assessment of the UK’s anti-money laundering and counter terrorist financing (AML/ CFT) system: a comprehensive review of the UK’s measures and their level of compliance with the FATF recommendations. The UK aggressively pursues money laundering and terrorist financing investigations and prosecutions, achieving 1,400 convictions each year for money laundering. UK law enforcement authorities have powerful tools to obtain beneficial ownership and other information, including through effective public-private partnerships. However, the UK financial intelligence unit needs a substantial increase in its resources and the suspicious activity reporting regime needs to be modernised and reformed. The UK’s overall AML/CFT regime is effective in many respects. It needs to address certain areas of weakness, such as supervision and the reporting and investigation of suspicious transactions. However, the country has demonstrated a robust level of understanding of its risks, and utilises a range of proactive measures and initiatives to counter the significant risks identified.

Orderly Brexit would see two years of steady growth

InBrief

●● Brexit result determines UK growth ●● Forecast based on an orderly Brexit

A smooth Brexit would mean that the UK can expect steady economic growth over the next two years, with an improvement in business investment and continuing export growth, according to the CBI’s latest economic forecast. However, it considers that a no deal Brexit would “blow these figures out of the water”. The underlying growth in the UK economy has largely evolved in line with the CBI’s expectations over the last six months. The leading business group is now predicting GDP growth of 1.3% for 2018, 1.4% in 2019 and 1.6% in 2020. The CBI’s forecast was carried out on the basis of the UK successfully securing an orderly Brexit in 2019, with the government’s Withdrawal Agreement being ratified.

Key drivers of the growth forecast include: ●● a gradual improvement in quarterly household spending growth as real earnings start to show more signs of life: 1.4% (2018), 0.8% (2019), 1.4% (2020); ●● business investment growth to pick up modestly from a poor 2018, as Brexit uncertainty lifts and the impact of spending on automation becomes more prominent: -0.5% (2018), 0.3% (2019), 1.7% (2020); ●● slightly more support from government consumption, following announcements of increased spending on the NHS: 0.6% (2018), 1.8% (2019), 2.0% (2020); and ●● exports to continue growing, supported by firm global growth: 1.4% (2018), 3.0% (2019), 3.1% (2020), though a corresponding pick up in import growth reduces support from net trade: 0.4% (2018), 1.9% (2019), 2.8% (2020). ISSUE 102 | AIAWORLDWIDE.COM

News

AIA

NEWS PARTNERSHIP

AIA in Northern Powerhouse Partners Programme

CHINA

AIA welcomes new graduates in Beijing On 11 November 2018, successful candidates gathered to celebrate their achievement in becoming AIA members. Held in Beijing, the graduation ceremony recognised the achievements of candidates who have successfully completed their qualifications. The graduation ceremony was attended by AIA president Les Bradley, AIA chief executive Philip Turnbull, AIA director of operations David Potts, AIA representative Wilson Shou and honoured guests representing the Chinese Association of Chief Financial Officers (CACFO) vice president Liu and secretary Sun. Recognising that the graduation was being held in the same year as AIA’s 90th anniversary celebrations, Les Bradley said that AIA’s original mission, begun 90 years ago, remains the same: to create world class accountants. He encouraged the recent graduates to take full advantage of the benefits provided to them by holding an AIA qualification and celebrated the hard work and success achieved by every individual.

AIA is delighted to be named as the latest organisation to join the government’s Northern Powerhouse Partners Programme. As part of the Government’s Industrial Strategy, the Northern Powerhouse Partners Programme is a coalition of businesses that aim to promote economic growth across the region. It achieves this by bringing together a range of businesses and institutions which are intrinsically invested in the success of the north of England and Wales and share the ambitions of government to develop the region’s cities, towns and rural communities to become a powerhouse for the UK economy. From its base in the north east, AIA has demonstrated that being located outside London is no barrier to the global market. We actively export the

benefits of a UK regulated qualification and work with the wider financial and professional services industry to support the development of talent within the Northern Powerhouse. AIA’s focus is on building skills, improving social mobility and developing practical skills to enable lifelong learning amongst its members. Announcing the news, Northern Powerhouse Minister, Jake Berry MP, said: “Our Northern Powerhouse Partners Programme brings together a rapidly growing coalition of private and public sector organisations who proudly champion the strengths of our region. I am delighted to welcome the Association of International Accountants (AIA) as our latest partner and I look forward to working with them as they equip the next generation with the opportunities and training they need to succeed in a globally competitive economy.” AIA’s engagement with government, standard setters, regulators and other stakeholders forms an integral part of its member services and ensures that the AIA remains at the forefront of the profession by shaping its future. Through consultation, lobbying and partnerships AIA has been successful in ensuring that members’ voices are heard, and providing feedback and comment on all areas that impact on our members’ working environment, ensuring that best practice is maintained.

Northern Powerhouse Minister, Jake Berry MP AIAWORLDWIDE.COM | ISSUE 102

News GLOBAL CONGRESS

World Congress of Accountants 2018 The 20th World Congress of Accountants (WCOA) took place in Sydney, Australia. Bringing together more than 6,000 delegates from over 130 countries, this quadrennial event is like no other in the accounting and finance calendar. Even though technology has made global communication and connectivity easier, there remains something uniquely stimulating about having the opportunity to come together as an industry in one location to identify new challenges, set new goals and share knowledge. This is particularly apt in 2018, as the event is being held against the backdrop of a rapidly changing economic and political landscape. The AIA delegation used the opportunity provided by the World Congress to discuss AIA’s professional education approach and IFAC membership application, and to engage with other professional accountancy organisations to find common ground on approaches to standard setting and representation. Recognising that

The WCOA brought together over 6,000 delegates from over 130 countries.

accountants will have to refine, enhance and extend their professional skills as the accountancy profession is radically altered with the rise of AI, automated processes and the impact of digital currencies and blockchain on finance, it is vital that AIA helps its members prepare for the accounting revolution. Keynote sessions were delivered by Professor Niall Ferguson discussing financial upheaval, and Michael Woodford and Diana B Henriques, who examined two scandals that changed the profession and shone a light on corruption: Olympus and Madoff. AIA’s president stressed the

important role that professional skills and ethics play in ensuring that international accountants work to uncover malpractice and maintain transparency. Commenting from the event, AIA president Les Bradley said: “The World Congress of Accountants provides a fantastic opportunity to bring together accountants from across the globe to discuss future trends in the accountancy profession and prepare for change. I am privileged to represent our members during the conference and push forward AIA’s agenda focused on our members and their requirements.”

ANNIVERSARY

AIA’s 90th anniversary On 8 October 2018, the historic House of Lords, Westminster, London played host to the Association of International Accountants (AIA) 90th Anniversary Dinner celebration. Over 120 guests from the world of finance and accounting attended the celebrations, which took place in the Cholmondeley Room and Terrace; a location which provided guests with stunning views of the River Thames and London Millennium Eye. Lord Beecham, Shadow Justice Minister in the House of Lords, kindly agreed to host the 90th Anniversary Dinner, opening proceedings on the evening with a congratulatory message for the AIA. The evening was truly one of celebration, marking the association’s historic Lord Beecham 90th birthday, as

well as the continued growth and success which the AIA has achieved globally to date in 2018. It was a pleasure to welcome several guests of honour on the evening, including Madam Liu Hongwei, CACFO president; Mr Ma Yuping, chairman, Fengyang Fund; and Mr Zhu Danian, Century Dingli chairman and Metro Education director. The presence of such distinguished guests is testimony to the role that international accountants play globally. The evening proceedings were closed by AIA president, Les Bradley. Within his closing remarks, Les commented: “It all began in 1928 as AIA pushed the boundaries of the accountancy profession and established one of the first global accountancy bodies, which quickly expanded across the world with British trade. At the time in the early 20th century, AIA was the only international accountancy body providing a professional qualification, which encompassed accountants all over

An event celebrated by the world of finance and accounting.

the world. The AIA aimed to create an organisation that would work on both a national and international scale, which would secure a recognised professional status for accountants. Much has changed over the intervening 90 years, but our ethos and values have remained steadfast throughout. AIA’s original mission in 1928 still remains true today; to create world class accountants. ISSUE 102 | AIAWORLDWIDE.COM

STUDENTS

Snapshot to gaining your work experience

Document your learning by maintaining a training record, linking your experience to the skills you have developed.

s a student you are required to complete accountancy work experience, which we term Initial Professional Development (IPD). The AIA does not prescribe completely the format that your training record should take, but we recommend that the catalogue of your experience should include:

●● details of the work performed; ●● the skills used during the period; ●● your observations and reflections on your performance; and ●● any other training or issues which may have arisen. AIA provides a sample training record (the Record) and additional advice for you and your ISSUE 102 | AIAWORLDWIDE.COM

STUDENTS employer. IPD can be gained before, during and after completing the professional exams. The length of the training period is three years and should be completed as part of a full time role. Usually we require continuous full time employment of more than six months, ideally one year in each position so you can demonstrate that you have acquired the necessary skills and competencies. AIA recognises that you may have gained accountancy experience before admission to student membership. AIA can consider this experience at its discretion. Please notify AIA and provide detailed evidence of your experience. When considering the experience, you need to show it has been gained in the previous three years, enabled the acquisition of relevant accountancy skills, and been adequately supervised and approved. You are required to maintain an IPD training record linking the experience you have gained to the skills you have developed, documenting your learning. Your supervisor (mentor) must verify the record. You should receive regular feedback and appraisals throughout the training. It is good practice to have formal appraisals (typically one per year) during the training period, and informal review meetings, so as to receive constructive feedback. Your firm should nominate a mentor who is responsible for the training and making sure others meet their responsibilities. The mentor can delegate the responsibilities to others. You can retain your IPD record as a hard or soft copy. The AIA specimen record is provided in word format and you can adapt this to suit your employment. You should make sure the Record is securely held, as it forms part of the documentation we require to eventually admit you to Associate membership. Should you decide to move to a different role/position either within your current firm or to a new employer, make sure your mentor (supervisor) signs off your IPD record. Your next step should be to read the IPD Guidelines, which provide useful guidance on gaining work experience and maintaining the record.

IPD Frequently Asked Questions Is my work accountancy work experience gained before I joined the AIA acceptable towards the IPD? AIA can recognise relevant prior experience and take this into account to reduce the period of training. Be prepared to submit a diary and verified training records of your work experience for consideration. Does it matter when I complete the IPD? Ideally, you should aim to complete the IPD in sync with the examinations, or as close to completion as possible. During the training there are key elements of each skill. You will develop these skills through a mixture of observation, completing work and tasks, and assisting others. AIAWORLDWIDE.COM | ISSUE 102

Should I complete a weekly and a monthly diary of work task and assignments? Yes, make sure you retain as much evidence as possible, build up a weekly diary of summarised notes, and transfer these to a monthly record, which should be verified by your supervisor (mentor). AIA will contact you every year to track your progress with IPD. Should I ask for an appraisal? Yes, an appraisal will allow you to reflect on your work and learning needs in order to improve your performance. You can discuss your development and receive feedback. How much time should I spend on completing the training? AIA does not specify the amount of time that should be spent in each area. However, it suggests that to gain the appropriate experience, you need to spend the equivalent of at least three months in any subject area.

You are required to maintain an IPD training record, verified by your supervisor, that will link the experience you have gained to the skills you have developed.”

What should I do if I change jobs? You should make sure your training record is signed by your supervisor, as this evidence will be required by AIA and may well prove transferrable to your new employer, especially if your supervisor is a qualified accountant and member of an IFAC body. Your supervisor may also provide a reference on your behalf, which can prove useful when verifying your employment status. What will happen if I need to take a career break? You should make sure you have your training records signed by your supervisor. Retain the training records either as a hard or soft copy, and notify AIA as soon as your circumstances have changed. What happens if I lose my job and must take up temporary employment which is not in the accountancy field? You should notify AIA immediately if your circumstances change. Working in an unrelated field cannot count towards the IPD requirement so you should aim to find a relevant position as soon as possible. Will AIA verify my student status to my employer? Yes, but we do require your written consent to release your personal details. AIA takes privacy seriously and only uses personal data for relevant lawful grounds as permitted by the General Data Protection Regulation (GDPR). AIA’s Data Policy and Privacy Statement can be accessed at www.aiaworldwide.com. Can AIA offer advice to my employer on the IPD requirements? Yes, Membership Services can speak to your employer at any stage of your training.●

Â© iStockphoto/AlexLMX

AIA Achieve

ISSUE 102 | AIAWORLDWIDE.COM

AIA Achieve

Start 2019 with Achieve

An important message to all AIA students...

s an AIA student you will understand that you need to sit exams in every May and November exam session. Here at the AIA we appreciate that this can be a daunting task, with even the most proactive student sometimes struggling for motivation and/or time to sit down and revise whilst trying to maintain a healthy work/life balance. If this is you, then you may wish to consider taking advantage of the AIA Achieve, Interactive Distance Learning Programme. The timing couldn’t be better. With the November exams over, you have plenty of time to fully utilise all the benefits Achieve has to offer. You may be asking yourself what exactly is the Achieve programme? And how can it help me pass the professional accountancy exams? The answer is simple. Achieve has been designed specifically for you, the AIA student, with affordability and flexibility in mind, alleviating unwanted and unnecessary study planning stresses and providing you with a variety of resources to optimise your chances of exam success. So then, to answer how it can help you pass the AIA professional accountancy exams. This is answered most easily if we look at a selection of the key benefits offered by the programme.

e-tutors

As an Achieve student you will have access to an array of e-tutors who specialise in a variety of fields including accounting, finance and legal. The e-tutors form part of the study support team who are on hand to provide answers to your technical queries, feedback on your marked practice questions, and bespoke exam advice following your mock exam.

Practice questions

They say practice makes perfect, so the programme offers you the opportunity to sit up to four practice questions during the study period. These practice questions are designed to test and reinforce your knowledge at key intervals during the programme. Each practice AIAWORLDWIDE.COM | ISSUE 102

question is marked by your e-tutor and in-depth feedback is provided.

Webinars

As part of the programme*, you will have the opportunity to attend a series of live webinars hosted by a selection of our e-tutors. The webinars will aim to guide you through how to approach an exam question successfully and give you vital advice as to what the examiners are looking for in your exam responses. The webinars also allow you the opportunity to ask questions face-to-face with your e-tutor. *Professional Level 2 only

Mock exam

Achieve has been designed specifically for you, the AIA student, with affordability and flexibility in mind, providing a variety of resources to optimise your exam success.”

An integral part of the Achieve programme is the mock exam. The mock exam takes place six weeks before the “real thing”, offering you the opportunity to hone your exam techniques. Your e-tutor will mark your exam and provide you with written feedback, allowing you a minimum of four weeks to focus any additional revision on areas of potential weakness. All these resources will undoubtedly enhance your chances of exam success. A personalised study planner will allow you to maintain a healthy work/life balance, which is essential whilst studying for a professional qualification. Enrolment onto the Achieve programme for the AIA May 2019 exams is already open, so don’t delay. Make the right decision today and become an Achieve student. The sooner you enrol, the sooner you will start reaping the benefits of the AIA Achieve programme. We are so confident that the Achieve programme will help you deliver the exam results you deserve that we also offer the “AIA Pass Pledge”. This pledge states that if you fail your exam, we will offer you a free exam entry to resit the paper at the next exam session.* For further information, contact the AIA Study Support Team by emailing achieve@aiaworldwide. com.● In order to be eligible for the “AIA Pass Pledge”, you must submit your practice questions on time and achieve 45 marks or more in your mock exam.

Â© iStockphoto/triloks

EMPLOYMENT LAW

ISSUE 102 | AIAWORLDWIDE.COM

EMPLOYMENT LAW

International enforcement of restrictive covenants David Fisher explores how a business can best protect its interests when key individuals leave to join a competitor.

s in any other type of business, partnerships and companies in the accountancy sector need protection when key individuals leave to join a competitor. Most firms include posttermination restrictive covenants in their partnership agreements and employment contracts, and it will be unusual for a partner, an LLP member, or a senior or other key employee not to be subject to posttermination restrictions of one form or another as part of their terms of engagement. Restrictive covenants are notoriously difficult to get right, and employers frequently try to enforce them in the courts and fail, but they can give vital protection to a business if drafted carefully and used appropriately. In most cases where a court decides that a restrictive covenant is unenforceable, it is because the relevant clause in the partnership or LLP agreement, or in the employee’s contract, is badly worded or it tries to impose restrictions that are not necessary for that individual. Restrictive covenants need to be tailored to the business and the role of the individual concerned, otherwise they are likely to be worthless.

David Fisher solicitor and partner, CM Murray LLP

Types of restrictive covenant

Although restrictive covenants are often referred to as “non-compete” provisions by many people, they are not permissible if they are only intended to prevent competition. In fact, the basic starting position in the UK is that restrictive covenants are void on grounds of public policy as they are in restraint of trade, but the law will allow them provided they meet the following conditions: AIAWORLDWIDE.COM | ISSUE 102

Author bio

David Fisher is a solicitor and partner in CM Murray LLP, a leading specialist employment and partnership law firm. He has over 20 years’ experience in the drafting and enforcement of restrictive covenants.

●● They are necessary to protect one or more of the employer’s “legitimate business interests”, which normally means its trade secrets or other confidential information, its client or supplier connections, or the stability of its workforce. ●● They go no further than is reasonably necessary between the parties to protect those interests – which means a restriction is unlikely to be enforceable if the duration of the restriction is too long or if a less stringent restriction would have sufficed. The most common restrictive covenants are those which: prohibit the misuse or disclosure of the employer’s trade secrets or confidential information; prevent the former partner, LLP member or employee from soliciting or dealing with particular clients or customers for a limited period; and prohibit the poaching of senior staff and other key employees who have remained with the business. In the majority of situations, these types of restrictions will give the employer sufficient protection, and anything more onerous will be unnecessary and could therefore be unenforceable. However, in some cases the courts recognise that the only way the business can effectively protect its legitimate interests (and especially its trade secrets and other confidential information, where the individual had access to such information) is to stop the individual from working for a competitor for a period of time, in which case a restriction of this type will be permitted. This could have the effect of shutting the individual out of the industry or their specific area of expertise for the duration of the restriction. It is not just partners, LLP members or senior managers who might have a restriction of this type as part of their terms of engagement –

EMPLOYMENT LAW relatively junior members of staff can be bound by such a term if the nature of their work requires it. In some countries, if an employer wants to prevent a former employee from working for a competitor in accordance with a restrictive covenant, it has to carry on paying the individual for the duration of the restriction. Contrary to many employees’ expectations, this isn’t a requirement of the law in the UK, unless the individual has negotiated such an entitlement as part of their contract – and it would be very unusual for an employer in the UK to have agreed to this.

Garden leave

“Garden leave” is when the business wants an individual who has resigned or been given notice of termination to stay away from the workplace and/or stop carrying out their usual work and having contact with clients and other employees until their partnership or employment comes to an end, although the individual is still entitled to be paid as normal up to their final leaving date. Putting a partner, LLP member or employee on garden leave during their notice period can be a very effective way of protecting the business, but the employer might still want them to carry on working up to their leaving date for various reasons. It is therefore better for employers to have the option of using restrictive covenants alongside garden leave. If an employer decides to place an individual on garden leave as provided for in their partnership or LLP agreement or in their employment contract, the employer can still enforce their posttermination restrictions, although the agreement or contract might stipulate that any time spent on garden leave has to be deducted from the length of the restrictions. If, for example, an employee has a restriction against soliciting clients for 12 months after the end of their employment, and they were on garden leave for three months before the termination date, the restriction will last for nine months after the termination date. Not all partnership or LLP agreements, or employment contracts, contain such set off provisions, and there is no strict rule that they have to, but employers should consider including one when putting new terms in place – otherwise a court might think that the combined period of garden leave and the restrictions is too long, and decide that the restrictions are unenforceable as a result.

Blue pencilling

In some circumstances, the court can remove (or “blue pencil”) parts of a restrictive covenant, where those parts would have prevented the restriction from being enforceable. However, there is limited scope for this, and in particular the court cannot rewrite a restriction by adding or changing words. For example, if the court thinks an 18 month restriction against soliciting clients is unreasonable in a particular case, but it would have allowed the same restriction if it only lasted for three months, it can’t simply replace the 18 months with three months and enforce the restriction.

International covenants

Restrictive covenants are notoriously difficult to get right, and employers frequently fail to enforce them, but they can give vital protection if drafted carefully.”

There is nothing to prevent a UK firm and UK based employee from agreeing to restrictive covenants that have an international scope; for example, to restrict the employee from dealing with particular clients in any country where the business that the employee has been involved in operates, or even from being engaged in a competing business in such countries. As with any restrictive covenant that is being applied in the UK, the question will be whether the restriction is necessary to protect one or more legitimate business interests and whether it goes no further than is reasonably necessary to protect those interests. A common mistake that some employers make is not to limit the geographic scope of the restriction in circumstances when they ought to do so, which leaves it open to challenge. Many international firms impose the same set of restrictions across several offices in different countries. This is often (but not exclusively) the case with LLP members, who might have some contractual arrangements with their own national entity but are also bound by the terms of a regional or global LLP agreement governed by the laws of one particular country which contains the restrictive covenants. This can create a number of difficulties for the firm, as a restriction that is enforceable under the laws of one country will not necessarily be enforceable in other countries. Some countries do not permit restrictive covenants at all, whereas others might have stricter requirements for their enforceability. So a restriction in a global LLP agreement which is governed by English law might well be enforceable against an LLP member who works in the UK, but it could give the LLP limited or no protection as regards a member who is based in Paris or Moscow, for instance. There might also be a dispute about the correct forum for any legal action. For example, an employee who works in London for a global firm might be subject to a restrictive covenant which is governed by New York law, and which gives the New York courts exclusive jurisdiction over any claim relating to it. However, the employee could argue that he has the right to be sued in the UK (his country of domicile) by virtue of the EU Recast Brussels Regulation, so if he is accused of breaching the restriction there could first be a battle to determine where the firm’s claim should be heard. If the correct forum is London, then the English court will need to apply New York law (as the law governing the restriction) to determine whether the restriction is enforceable and has been breached, but it will also have regard to English public policy principles – and might therefore decide that a restriction which was fully enforceable in New York will not be upheld against an employee in London. Given these issues, there is much to be said for adopting restrictive covenants on a country by country basis, rather than in a blanket way as part of a global agreement.● ISSUE 102 | AIAWORLDWIDE.COM

TECHNOLOGY

Jennifer Warawa explains how next-generation technologies can help business to ensure transformation readiness. Jennifer Warawa Executive VP of Partners, Accountants and Alliances, Sage

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Riding the digital wave 15

TECHNOLOGY

Author bio

Jennifer Warawa is Executive VP of Partners, Accountants and Alliances at The Sage Group. She has been responsible for leading Sage’s portfolio of accounting products, including launching core cloud accounting technology.

With AI tools carrying out once manual processes, firms can take advantage of technologies to maximise the time spent on their delivery of informed, trusted advice.” 16

y leveraging emerging technology like artificial intelligence (AI), today’s accounting firms are able to expedite key tasks, such as matching purchase orders and flagging invoices for payment. According to research led by the McKinsey Global Institute (MGI), collecting and processing data can increasingly be done better and faster with machines. With AI tools carrying out these once manual processes, client facing documents and reports can be created and delivered faster than ever before. Now, firms can take advantage of technologies that minimise manual work to maximise the time spent on delivering informed, trusted advice. Being operationally prepared to transition to a modern way of working should be the primary focus of any 21st century accounting firm. In order to stay competitive in the long term, firms will have to build a practical understanding of exactly how next-generation technologies can streamline operations, empower their workforce and enhance the experience of their clients. As digital transformation gathers pace, here are three key steps accountancy practices can take to prepare for technological transformation. 1. Understand the role of different technologies With the accelerating pace of innovation, it’s easy to get overwhelmed and confused about where technologies can have the biggest impact. That said, investing in the wrong type of technology could end up being extremely costly, and it’s vital that firms build an understanding of what different technologies can help you to achieve and which processes they can help to improve. For a thorough understanding of how technologies can be beneficial, accounting firms should start by paying attention to how their clients engage with new technologies themselves. For example, in the future, a greater number of clients may start considering initial coin offerings (ICOs) as a potential method for raising funding. If a firm recognises this trend, it will have to understand the technology enough to be able to offer suitable guidance. If it doesn’t, clients will simply end up moving to a firm that does. In considering how technology impacts employees, firms must recognise that the next generation of accountants has grown up surrounded by innovation and places significant value on technology in the workplace. Becoming cloud-enabled, automating processes and using mobile technologies to support flexible working are now workplace necessities. In the short to medium term, firms should focus on mastering and investing in the right solutions to help employees work in smarter, more efficient ISSUE 102 | AIAWORLDWIDE.COM

TECHNOLOGY

ways. This may include deploying solutions that provide constant access to live client data, or equipping accountants with powerful reporting tools that provide opportunities to offer clients strategic advice. By investing time and resources in understanding the technology landscape and how it impacts all stakeholders, accounting firms will stay ahead of continued industry change and better meet the needs of forward-looking employees and clients. 2. Focus on business goals When it comes to digital transformation, a “one size fits all” approach simply does not exist. For both long and short term goals to be achieved, firms must address technological gaps specific to their organisation. Focusing on individual business goals, such as giving staff and clients 24 hour secure access to data, or building new revenue streams, will provide structure to digital transformation strategies and help firms to focus their attention on the right solutions. Once the appropriate transformation strategy has been determined, firms should evaluate the skills gap across their organisation and respond proactively. Firms may have to run training programmes and provide ongoing support for accountants learning how to use the new tools – but that’s okay. This investment in time and resources is well worth it. By ensuring that employees are well equipped to operate the right technologies, accounting firms will be in the position to leverage the modern tools needed to hit their specific company goals.

3. Stay one step ahead Mindful of today’s rapidly innovating technologies, it’s essential that firms adopt a future gazing approach and stay focused on preparing for whatever industry change is on the horizon. For example, evaluating what technological developments are coming next and how they may impact the current ways of working will be key. In fact, firms should encourage their entire workforce to stay informed on industry trends and any new technologies that will help them transition to smarter, more efficient ways of working.

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All the more important will be evaluating how future innovations could be used to improve the way clients are serviced and anticipate their future needs. After all, using technology to stay ahead of client demands will be one of the most effective ways of remaining competitive in the years to come. It’s the accounting firms focused on digital innovation that will be operationally prepared to respond to disruption and lead the profession in the technologically driven world of the future.●

REPORTING STANDARDS

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I F R S 1 6 18

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REPORTING STANDARDS

Implementing the change IFRS 16 has the potential to fundamentally change financial, operational and strategic decision making for lessees, explains Paul Lippitt.

Paul Lippitt Principal consultant, Lex Autolease

lease term, whilst the lease liability is reduced by rental payments made. Interest on the lease liability is charged to profit and loss to maintain a constant rate of return. The impact of the new rules will mean a change to key financial ratios, e.g. an increase in gearing, debt cover and EBITDA. In a recent global corporate study, PwC calculated that the average increase in reported debt and EBITDA for retailers will be 98% and 41% respectively. This has implications for banking covenants and managing the communications to key stakeholder groups.

FRS 16 â&#x20AC;&#x201C; Leases comes into force for accounting periods beginning on or after 1 January 2019. The changes will mean that all operating leases will need to be recorded on the balance sheet as a right of use asset with corresponding lease liability, with implications for gearing and other financial ratios. This article outlines the key steps that financial departments will need to take to ensure the smooth implementation of the new standard. Applicable to PLCs and organisations choosing to adopt International Financial Reporting Standards, IFRS 16 is set to fundamentally change the way operating leases are reported. The objective is to bring consistency to published accounts by requiring all leases to be treated in the same way, thus enabling users to more easily compare one organisation with another. The impact is likely to be felt most keenly by those organisations with exposure to high value or property leases; however, those operating leased vehicles will also need to comply.

Recap of the changes

IFRS 16 requires the creation of a right of use asset based on future lease payments discounted at the implicit interest rate of the lease (or if not available, the incremental borrowing rate), together with a corresponding liability. The right of use asset is depreciated over the remaining AIAWORLDWIDE.COM | ISSUE 102

Practical issues to consider

There are several issues to consider as organisations prepare to implement the accounting changes.

Collecting data

Author bio

Paul Lippitt ACA is a principal consultant at Lex Autolease. He has worked in the UK leasing industry since 2001, holding key roles in pricing, risk management and business planning.

Many corporates consider this to be the greatest challenge. Different properties will have different landlords and some leases may go back many years. The ability to access good operating lease data may determine which transition method is applied. Many organisations have decided not to follow the fully retrospective approach because there is often insufficient data to value the right of use asset and liability as though the new rules had always been in place.

REPORTING STANDARDS

Evaluate lease term

Organisations will need to understand from break clauses and options which exist in their lease contracts whether it is “reasonably certain” the clause will be exercised. Auditors are likely to review strategic plans to ensure that the lease term used for IFRS 16 reporting is consistent.

Determining discount rate

Whilst IFRS 16 requires the use of the implicit interest rate if available, in practice this creates challenges for many organisations which will have leases from different lessors. Property leases will be arranged through different landlords and not all will provide the necessary information. Also, when lease rentals change due to a rent review or re-evaluation of the asset value, the implicit rate may also change. Companies are generally finding it easier to apply their incremental borrowing rate relating to the particular class of asset, value and lease term in question and this can be obtained independently through their bank. This has the added advantage of consistency with the transitional provisions, which require the incremental borrowing rate to be applied on initial implementation of the standard.

Transitional options

IFRS 16 permits either: ●● a fully retrospective approach, where the right of use asset is calculated as though the new rules had always been in place, allowing for any asset revaluation since inception; or ●● a modified retrospective approach. In the latter case, there are two options to consider: ●● Option one: This requires restatement of the right of use asset as if the new rules had always been in place, but using estimates where necessary. ●● Option two: This requires the right of use asset and lease liability to be valued at the same amount. Many organisations are choosing to follow the modified retrospective route on practical grounds, but it also provides flexibility in how the right of use asset is calculated on a lease by lease basis. Option one is likely to result in an adverse reserves impact but a more favourable profit and loss position going forward, whereas option two does not impact reserves but may lead to less favourable reported future profit and loss.

Banking covenants/ratios

The increase in reported debt is likely to adversely impact debt ratio and debt cover and therefore has implications for banking covenants. For businesses with large property lease portfolios,

The objective of IFRS 16 is to bring consistency to published accounts by requiring all leases to be treated in the same way, thus enabling easier comparisons.”

this could be significant. Companies are utilising “frozen GAAP” clauses to base the calculations on the existing accounting rules for the time being, but ultimately they will need to fall in line with future market practice, whenever this is agreed by the Loan Market Association.

Software considerations

For organisations proposing to implement new lease accounting software, usual supplier due diligence considerations will apply. The challenge is ensuring lessors can provide the required data in the right format for upload into the software, which may require conversion of the source data into Microsoft Excel or Access as a first step. Test environments and test plans will need to be set up so the outputs from the lease accounting software can be independently verified, whilst new general ledger accounts will likely need to be created in the main accounting system. If lease costs are allocated to divisional cost centres, reconciliations will need to take place at a local level between lease costs invoiced and depreciation and interest charges made to divisional profit and loss accounts under IFRS 16.

Taxation

The draft Finance Bill sets out details of how taxation will interact with IFRS 16 accounting when the new standard comes into force. The basic principle for lessees is that the tax treatment will follow the accounting treatment, rather than being based on lease payments made, as is currently the case. This is likely to be beneficial for businesses with large property lease portfolios, where the “front loading” of interest could be significant. The other key aspect is that where the lessee elects to adopt modified retrospective approach option one, there will be no immediate tax relief for the amount written off to reserves; instead this will be given over time on an asset by asset basis, adding some degree of complexity to the calculation.

Managing stakeholders

There are a number of stakeholders which need to be managed to ensure there are “no surprises” when IFRS 16 is implemented. Debt capital providers: Early dialogue and quantification of impact to banking covenant measures are important to avoid a technical breach. Use of the “frozen GAAP” clause may be appropriate as an interim measure. Until market practice is established, corporates may wish to agree a bilateral arrangement with their lender(s) which is satisfactory for both parties. Suppliers: They may not understand why reported debt and gearing have increased and as a result may demand shorter payment terms for ISSUE 102 | AIAWORLDWIDE.COM

REPORTING STANDARDS

the perceived decline in creditworthiness. Again, early dialogue is worthwhile. Landlords: Consider future property needs and whether consolidation of space is appropriate. There is the potential opportunity to reduce the impact of IFRS 16 by renewing on shorter lease terms if this ties with operational needs. Auditors: They will look for consistent interpretation of the standard, e.g. treatment of property as a service contract or lease; and the application of the IFRS 16 lease definition, which might incorporate contracts not previously classified as a lease under IAS 17. It’s important to agree key assumptions upfront, e.g. the discount rate to apply, contract length (likelihood of exercising optional extensions), application of portfolio approach for similar asset classes, application of practical expedients, etc. Shareholders: Evaluate the effect of transitional options on reserves and/or future profit and loss and determine the desired approach to balancing the ability to pay current dividends with future profit growth. Manage messages around the increase in debt, gearing and overall creditworthiness. Ratings agencies: These already adjust key metrics for operating leases and would expect reported net debt under IFRS 16 to be similar. Corporates should be prepared to engage early and share the right of use asset and lease liability calculations. Management and staff: Consider whether bonuses are paid on financial measures such as EBITDA. Is there a need to revisit targets and thresholds? And if so how will this be communicated?

Conclusion

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Implementation of the new lease accounting standard has the potential to fundamentally change financial, operational and strategic decision making for lessees with significant exposure to property and high value leases. For those organisations which have yet to consider the broader consequences of implementing IFRS 16, it is important for them to act soon in order to ensure that they can deal with potential issues as they arise, as well as navigating a smooth transition to a post implementation world. ● Lex Autolease is working closely with businesses to manage the transition to IFRS16 and has created a series of free to access resources at: www.lexautolease.co.uk

COMPANY LAW

Expert evidence update With increasing tension in courts as to the role of expert witnesses, Jeffrey Davidson asks what they and their instructing solicitors can learn from recent cases.

udicial and public attention is increasingly being directed to the work of experts, not least in relation to the difficult tension between the expert’s contractual duty to his client, and his overriding duty to the court. In recent times, experts have come under criticism for denying accusations of ignorance, bias and incompetence. This recently resulted in the first conviction of an expert witness for “very serious perversion of the course of justice” in connection with the motor trade and the calculation of losses following car accidents. As for judicial comment, a scathing critique for an expert on how not to behave was handed down in the 2015 case of Van Oord Ltd and another v Allseas UK Ltd, where the court set out a 12 point list of failings by the expert in the case. This appraisal included: ●● taking the case at face value; ●● valuing the claim based only on his own side’s assertions; ●● not checking whether the information he was relying on was wrong; ●● ignoring actual cost data; and ●● passing off others’ work as his own.

Jeffrey Davidson

Managing director, Honeycomb Forensic Accounting

Suitable expertise

The result was that the expert had to accept in open court that his own report was misleading. Furthermore, he admitted that what he presented as his own opinions was nothing more than what others had told him to say. A salutary tale for all of us… In light of this, and other recent cases where attention has focused on the expert evidence, what can experts and their instructing solicitors take away and learn?

Independence

The first key issue remains, as it always has been, that of independence. We all know that the expert must be, and must be seen to be, impartial and independent. The expert signs a declaration to this effect, and the solicitor instructs him on this basis.

The solicitor knows that the value of the expert to his client’s case lies in the court accepting that his evidence is objective and impartial, and unaffected by the demands of the case or of the party instructing him. Why would the solicitor try to compromise the expert’s position, or the expert shoot himself in the foot by being partisan? The 2017 case of EXP v Charles Simon Baker was instructive with regards to this point. This was a case of clinical negligence where the medical expert failed to disclose his professional and personal relationship with the defendant on behalf of whom he was instructed. The connection only came out when he referred to the defendant in oral evidence by his first name. The court which heard the appeal stated: “The adversarial system depends heavily on the independence of expert witnesses and on the primacy of his duty to the court over any other loyalty or obligation.” Experts and instructing solicitors do well to be reminded of this from time to time, but hopefully not in a written judgment.

Author bio

Jeffrey Davidson is a forensic accountant at Honeycomb Forensic Accounting, with over 20 years’ experience working on complex business disputes.

Another important aspect of the relationship between solicitors and their experts is one of adequate expertise. While an expert should not accept instructions in a field in which he is not an expert, equally a solicitor must ensure that he identifies accurately the expertise he needs. Once this has been identified, only then should a solicitor find an appropriate expert in this field. This was the message in the 2014 case of Dr Pool v General Medical Council. The medical expert in this case was found not to possess sufficient expertise in the particular field in which the court needed assistance. The court said: “The expert witness requires more than clinical experience and knowledge. He also requires the ability to produce an adequate report and to give oral evidence in an authoritative and convincing manner.” The court added that the onus lay both on those instructing to understand what expertise they need, and on those asked to state clearly what they can be expert about, and what not. ISSUE 102 | AIAWORLDWIDE.COM

COMPANY LAW

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COMPANY LAW Fees and fee arrangements

Let’s not forget to mention the sometimes difficult subject of fee arrangements. Every solicitor knows (or should know) that an expert cannot be instructed on a fee basis where the amount of his fees can be affected by the outcome of the case. Therefore, with virtually no exceptions to the rule, the expert cannot accept instructions on a conditional, contingent or damages basis. Should the expert be instructed on such a basis, both he and the instructing solicitor will be at fault, and the damage to their client’s case of this being known can be substantial. This is not only because of the effect on the expert’s independence; it is also because an expert giving evidence on a contingency fee can materially influence the outcome of the litigation. In the 2016 case of Dr Adler v the Medical Practitioners Tribunal, it was established that Dr Adler had breached this aspect of the expert’s code, to the extent that he was found to have written two reports for the same claimant in different cases where he contradicted himself from one to the other.

View from the bench

So how does the bench regard experts? In general, if they behave themselves, judges will be welcoming and courteous to experts, recognising that their technical expertise can be of great value to the course of justice. However, there are a number of aspects to expert evidence which judges find annoying, if not unhelpful. The first of these relates to the management of expert evidence. Solicitors often feel that the expert is their key weapon – someone with special knowledge who can win the case for them. Often, this view is so strongly held that the solicitor may overlook problems with their factual evidence. This approach leads solicitors at times to rely too heavily on the expert evidence and to push for the use of expert evidence where it is not needed. Judges are now taking a much stronger line in allowing the use of expert evidence in their cases. Judges more often than not are resistant to allowing expert evidence, drawing a little more narrowly the meaning of the term “necessary” to the proceedings. Bear in mind that CPR part 35, which deals with experts, opens with the message: “Expert evidence shall be restricted to that which is reasonably required to resolve the proceedings.” The word “restricted” seems more and more often to be the word the court concentrates on. Overall, solicitors can expect judges to take a more critical look at the need for experts. They will look to solicitors to demonstrate the need for expert evidence and show that they have properly identified the issues where expert evidence will be needed. In this context, the court will allow such evidence only where it is persuaded there is need. It should also be borne in mind that no party may call an expert or put in evidence an expert’s report without the court’s permission (CPR Part 35.4 (1)).

The solicitor knows that the value of the expert lies in the court accepting that his evidence is objective and impartial, and unaffected by the demands of the case.”

What annoys judges more than anything else is when experts, either of their own volition or under pressure from instructing solicitors, take on an advisory or advocacy role, or usurp the function of the court. The former arises usually when the expert forgets his impartiality, or is being leaned on by instructing solicitors to say more than he should; the latter arises when the expert and his instructing solicitors have forgotten the limitations that apply to the role of the expert. There have been a number of recent cases where these issues have received judicial attention, if not criticism. In the 2016 Scottish case of Kennedy v Cordia, two criticisms were levied at the expert: “One was that he was inadmissibly giving his opinion on matters of law; the other [was] that an expert’s opinion of what he would have done in the circumstances did not assist the court, and was therefore inadmissible.” In the 2016 case of Darby Properties v Lloyds Bank, expert evidence was found by the court to have amounted to a tutorial on derivative products; and the expert evidence was not to be admitted as expert evidence but only as factual evidence. It remains to be seen whether or not the adversarial system will benefit from this narrowing definition being applied to expert evidence; and from the greater distinction between opinion evidence and expert evidence of fact – where one is controlled far more strictly than the other. Solicitors nonetheless need to be aware that this is the direction courts are taking. The courts are more actively deterring parties from seeking to enhance the value of what is only factual evidence by calling it expert evidence.

Reasonable expectations of instructing solicitors

Instructing solicitors, particularly where they may not have fully grasped the technical intricacies of their client’s case, like to rely heavily on their experts, often with excessive expectations as to the degree to which their expert can properly influence the case. My own experience is often the opposite: even where expert evidence is necessary and helpful, it is seldom on this that the case turns. This was forcefully brought out in the very recent 2018 case of Lehman Brothers v National Power. In its judgment, the court said: “Each party called expert evidence … I am grateful for the contribution made by each. It gave useful context. In the event, I found the assistance they could give to the resolution of the material issues in this particular case was very limited. With little exception, the issues in this case were, in the event, for the court directly rather than for the court to choose between the opinions of two experts. There was very little common ground between them and this showed the room for difference of opinion.” All these points should give food for thought to the instructing solicitor, resulting in the use of expert evidence carefully and in a fashion that is to the point.● ISSUE 102 | AIAWORLDWIDE.COM

FINANCE

SME lending Stéphane Blanchoz considers how lenders can finance the real economy by addressing the funding gap. Stéphane Blanchoz Head of SME alternative financing, BNP Paribas Asset Management

Credible alternatives

Lacklustre lending conditions are therefore forcing SMEs to seek credible alternatives to solve their funding shortages, conscious that a failure to do so could restrict future growth and development. Non-bank organisations are AIAWORLDWIDE.COM | ISSUE 102

decade ago, SMEs seeking development capital for business expansion would typically have had to look no further than their local bank branch to secure the necessary financing, with such transactions being usually fairly routine and straightforward. However, that once dependable funding source is no longer as readily available. Regulatory change in the aftermath of the financial crisis has required banks to hold more capital in reserve, severely restricting their ability to lend money to SMEs, irrespective of their growth potential or promise. Whereas lending capacity has contracted, the economic importance of SMEs certainly hasn’t, and should not be underestimated. SMEs account for more than 60% of UK private sector employees and are recognised as vital for both innovation and economic growth. But for those who are willing to lend, while the universe of SMEs is large (consisting of more than five million companies), the credit approval process is the same for a loan size of £500,000 or £5 million. At the same time, the cost to a bank of underwriting a £100 million loan equates to approximately that of lending £1 million, and as banks ultimately want to keep their shareholders happy they are looking to maximise their return on equity by focusing on lending to their larger corporate customers.

FINANCE recognising this and are plugging the lending gap. Asset managers have been especially active in launching private credit strategies, enabling them to offer their clients alternative sources of income in the ongoing low interest rate, low return environment, at the same time as providing SMEs with access to much needed development capital that they have struggled to raise from traditional sources. This is reflected in the growth of the private credit market, which is now 14 times larger than it was in 2000. It is currently worth $600 billion, and is forecast to grow to $1 trillion by 2020, according to the Alternative Credit Council (ACC), a global body that represents asset management firms within private credit and direct lending. Meanwhile technological progress has also led to a paradigm shift in SME lending. Digital solutions are becoming more prominent, with peer-to-peer (P2P) lenders and crowdfunding platforms increasingly dominating early stage equity fundraising. Between 2012 and 2014, the amount of capital amassed through crowdfunding grew by 410%, with some reports suggesting that these platforms accounted for as many seed equity deals as the private equity industry. An estimated £272 million was raised in 2016 through equity crowdfunding, while P2P loans totalled £1.23 billion. Research by CODE Investing, one of BNP Paribas Asset Management’s origination partners, suggests digital, alternative financial platforms could represent 9% of the total European SME lending market by 2021 (accounting for more than £50 billion), compared to just 2% currently.

The funding gap

While the emergence of a wider range of alternative lending providers is a welcome development, it is acknowledged that some borrowers are not yet reaping the benefits. With the average ticket size of a private credit manager in the region of £60 million to £80 million, beneficiary companies still tend to be fairly large. Even the ACC concedes that large cap companies receive roughly a fifth of all committed capital from private credit managers. In contrast, crowdfunding and P2P platforms typically support micro or small businesses, with the average P2P loan size in the UK standing at only £95,000, according to the CME Group Foundation’s 3rd European Alternative Finance Industry Survey. Many SMEs fall between the crack, being too small to access debt funds, too large for platforms and underserved by banks; but with an average loan size of £2 million, they nonetheless represent a substantial and attractive investment opportunity. In short, the financing needs of what constitutes a significant proportion of the UK corporate borrower market – estimated by the Department for Business, Energy and Industrial Strategy to number about 34,000 companies – are not being properly addressed by the current incumbents.

Alternative Financing platform

This funding gap is something that BNP Paribas Asset Management’s SME Alternative Financing platform aims to address, by issuing loans in the region of £500,000 to £5 million to companies with turnover of between £2 million and £50 million. This is also a key target market for Caple, a specialist facilitator of alternative credit for SMEs with whom BNP Paribas Asset Management has a strategic alliance. Caple acknowledges that the majority of companies it supports are in need of growth capital either to facilitate operational change or because they are undergoing an ownership transition. Supported by solid bank infrastructure, the SME Alternative Financing platform operates within a robust credit risk framework and focuses on senior unsecured fixed rate loans, which are sourced via across multiple channels. These include origination partners such as Caple and CODE Investing, which provide the scale, resources and geographical coverage that accessing the SME market requires. Institutional investors such as pension funds and insurance companies looking to enhance their returns access these loans via the direct lending fund (BNP Paribas UK SME Debt Fund 1) in which they are held. Meanwhile the volume of associated financial and company data needed to support formal credit approval requires significant technological investment, and BNP Paribas Asset Management has worked with big data specialists to build a quantitative credit scoring model used to support the approval process for individual loans.

Author bio

Stéphane Blanchoz was appointed to the role of head of alternative financing at BNP Paribas Asset Management in November 2017, having previously managed the company’s structured finance team.

A world of opportunity

From an institutional investor’s perspective, equity volatility, low interest rates and erratic geopolitics have all had a detrimental impact on returns, and there is a world of opportunity for those who are prepared to diversify beyond listed assets in search of alternative, non-correlated sources of income. Many pension funds face the twin challenges of sizeable deficits and negative cashflows, both of which would benefit from enhanced returns. SME lending funds can provide consistent, riskadjusted returns that are not subject to market volatility and are insulated against interest rate rises. While aggregate returns from direct lending funds may have declined to between 7% and 9%, their performance compares very favourably with other asset classes. Some critics maintain that SME lending is at the peak of its cycle and due a significant correction. This same criticism was being levelled five years ago, yet yields remain far superior to those of 10 year gilts and Sterling investment grade corporate bonds. Compared to capital markets, the credit risk of SMEs equates to a BB or BB- risk profile with a default rate volatility through the cycle far lower than that of European high-yield. European high-yield default rates peaked at 6.6% in 2009, ISSUE 102 | AIAWORLDWIDE.COM

FINANCE

Lacklustre lending conditions are forcing SMEs to seek credible alternatives to solve their funding shortages, as a failure to do so could restrict future growth.”

according to Credit Suisse’s Default Statistics Report, whereas the worst year for UK SMEs was 2008 when default rates hit 2.6%. Meanwhile from a corporate borrower’s standpoint, BNP Paribas Asset Management’s SME Alternative Financing platform is based around unsecured lending, rather than taking equity stakes, therefore allowing business owners to retain ownership and control, a key factor in building trust and ultimately driving heightened performance. There is no centralised market on which to base lending rates, so as the lender we have to be the price-maker, and we ensure that loans are priced fairly, rather than targeting maximum returns. We aim to lend responsibly, and while it is entirely fair that we are adequately compensated for the risk that we are taking, we believe that charging companies excessive rates is detrimental, as it can deprive borrowers of the ability to re-invest surplus profits in the future growth of the business.

A responsible approach

We also look for a responsible approach from our borrowers, in line with our broader ESG principles, which can help to reduce risk from both sides. High standards of transparency and governance can give investors an early warning signal if a company’s finances run into problems, while as an important component of the credit risk process, ESG can help to improve the knowledge of a company in terms of reputational, operational and financial risks. As the loans are unsecured – and in any case borrowers may be service companies with little by way of plant or machinery to offer as collateral – our due diligence focuses on cashflow, including an assessment of default probability based on the borrower’s needs and the robustness of their finances. Loan agreements incorporate covenants reminding borrowers to monitor their cashflow to ensure they can meet debt repayments. They can be regularly tested via quarterly cashflow updates to avoid a delay in interest repayments or, worse, a default. Loan agreements typically incorporate covenants requiring ongoing monitoring of net debt to EBITDA, EBITDA to interest cover, and cashflow available for debt servicing. In summary, BNP Paribas Asset Management’s SME Alternative Financing platform offers an open architecture approach to origination, distribution and systems that has digitised and automated the credit process, offering information transparency, efficiency and scalability to borrowers and lenders alike. This is designed to shorten the time from credit application to disbursement, with the goal of achieving this within five weeks. Through its focus on this area of the market, BNP Paribas Asset Management is able to deliver consistent returns to clients by lending to SMEs in support of their growth ambitions, helping to maintain the long-term viability of their businesses and providing a much needed boost to the real economy.● AIAWORLDWIDE.COM | ISSUE 102

Events FACE TO FACE

UK Note the change of venue for London Events in 2019. 5 February 2019 Cyber Security Seminar The University of London, The Garden Halls, 1 Cartwright Gardens, London 18.30 to 20.30 7 February 2019 Cyber Security Seminar AC Hotel by Marriott, Salford Quays, Manchester 18.30 to 20.30 2 April 2019 Ethical Accounting Conference AC Hotel by Manchester, Salford Quays, Manchester 9.00 to 4.00

WWW.AIAWORLDWIDE.COM/EVENTS

4 April 2019 Ethical Accounting Conference The University of London, The Garden Halls, 1 Cartwright Gardens, London 9.00 to 4.00

Ireland 4 December 2018 Budget and Year Review Camden Court Hotel, Dublin 10.00 to 14.30

5 March 2019 Wealth and Pension Conference Camden Court Hotel, Dublin 10.00 to 14.30

Hong Kong 15 March 2018 AIA Hong Kong Branch Annual Dinner 2019 Craigengower Cricket Club, Hong Kong 19.00 to 22.00

WEBINARS

20 February 2019 Work, Health & Wellbeing 11.30 to 12.30

1 March 2019 Finance Act 2019 11.30 to 12.30

26 March 2019 Insolvency Webinar 11.30 to 12.30

Cyber Security Seminar 5 February 2019 | London 7 February 2019 | Manchester 18:30 to 20:30 Join us for our first event in 2019 on either 5 February in London or 7 February in Manchester for the Cyber Security Seminar, where our speakers will be David Reynolds and Dennis Scott. Cyber security is about protecting your computer-based equipment and information from unintended or unauthorised access, change or destruction. Most modern companies use the internet to do business and it can bring huge opportunities and benefits. However, there are also risks, with attacks on IT systems from people or organisations trying to steal your information or money, or purely to disrupt your business. We have seen this frequently on the news over the last few months with big companies being targeted. With the new GDPR regulations in place, it is essential for companies to ensure they have the right safeguards in place. You can never be toally safe, but most

David Reynolds and Dennis Scott

online attacks can be prevented or detected with basic security practices for your organisation, people, networks, applications and systems. David Reynolds and Dennis Scott will discuss the whole spectrum of cyber security from understanding the risks to your business, planning your own cyber security and implementing that plan. David has over 40 years’ experience of the IT industry, working across various sectors. Dennis has over 30 years’ experience in business and is a certified GDPR practitioner with a strong expertise in information security. This vast wealth of knowledge and experience makes them the perfect speakers for this session on cyber security.

In addition to a highly informative presentation, delegates will also benefit from: ●● the opportunity to ask speakers direct questions and receive expert advice; ●● networking opportunities with peers; ●● 2 CPD units and a certificate of attendance; and ●● refreshments provided. Book now Book your place at this event at www.aiaworldwide.com/events, or call us on +44 (191) 493 0282, quoting the reference below! £25.00 | AIA members (CPD749) | London £30.00 | Non-members (CPD750) | London £25.00 | AIA members (CPD751) | Manchester £30.00 | Non-members (CPD752) | Manchester

ISSUE 102 | AIAWORLDWIDE.COM

TECHNICAL INTERNATIONAL

IFAC recommendations to the G20 focus on transparency and rebuilding public trust IFAC (the International Federation of Accountants) has called upon G20 countries to pursue smart regulation, heightened transparency and inclusive growth to rebuild trust in institutions and advance global economic progress. “Low levels of public trust threaten both economic and political stability,” said Fayezul Choudhury, IFAC CEO. “Leaders in government and business must work together to bolster good governance and collaborate for effective public policies that inspire confidence in the institutions supporting the global economy.” G20 countries play a crucial role in fostering institutions and governance models that can anticipate, respond to and mitigate future crises. In advance of the 2018 G20 Summit in Buenos Aires, Argentina, IFAC has issued ten actionable recommendations for G20 countries

INTERNATIONAL IAASB seeks public comment on exposure draft on agreed-upon procedures The International Auditing and Assurance Standards Board (IAASB) seeks public comment by 15 March 2019 on its Exposure Draft of proposed ISRS 4400 (Revised), Agreed-Upon Procedures Engagnements. The demand for agreed-upon procedures (AUP) engagements continues to grow across jurisdictions. Changes in regulation, such as the increase in audit exemption thresholds in many jurisdictions, have also driven increased demand for AUP engagements. This is especially relevant for smaller entities, as the increased audit exemption thresholds prompt stakeholders to look for alternative services to an audit. To ensure that the IAASB’s standard on AUP engagements remains relevant in the current business environment, the IAASB proposes to enhance key concepts in the standard, including: ●● the role of professional judgment in an AUP engagement; AIAWORLDWIDE.COM | ISSUE 102

to adopt that will support the global economy. Develop smarter regulation Regulation must effectively support the public interest through welltargeted conception, effective design and committed implementation. To achieve smarter regulation, G20 countries must: ●● develop and adopt consistent, comprehensive and high quality regulation; ●● create a coherent, transparent global regulatory environment that limits divergence; and ●● implement internationally accepted standards to enhance confidence and stability in the global financial system. Increase transparency Robust transparency in public and private sectors is key to earning ●● disclosures relating to the practitioner’s independence or lack thereof; ●● guidance on appropriate or inappropriate terminology to describe procedures and findings in AUP reports; ●● the use of a practitioner’s expert in an AUP engagement; and ●● restrictions on the distribution and use of the AUP report. In developing proposed ISRS 4400 (Revised), the IAASB has received significant stakeholder input, including feedback from its November 2016 discussion paper, Exploring the demand for agreed-upon procedures engagements and other services, and targeted continuing stakeholder outreach.

Public sector experts sought to join international Public Sector Accounting Standards Board At a critical moment of development and adoption of international public sector accounting standards, the Nominating Committee issues its Call for Nominations to join the International

public trust, fighting corruption, encouraging good governance and promoting ethical business practices. To increase transparency in the global economy, G20 countries must: ●● strengthen governance in the public and private sectors; ●● embrace integrated reporting; ●● enhance public sector financial management; and ●● collaborate to tackle corruption. The fruits of a growing global economy must be shared inclusively to inspire confidence in the future. To enable inclusive growth, G20 countries must: ●● foster an environment that supports small and medium sized entity growth; ●● create a secure and digital-ready investment environment; and ●● collaborate for a coherent international tax system. Public Sector Accounting Standards Board (IPSASB) for a term beginning in January 2020. Volunteers are central to the functioning of the IPSASB, through active participation in meetings, task forces and outreach activities. Experience The Nominating Committee is looking for candidates with: ●● experience as public sector national standard setters; ●● preparers of accrual-based financial statements at both national and subnational levels, including ministries of finance and treasury departments, and international organisations, especially those reporting in accordance with IPSAS; and ●● users of general purpose financial reports, such as parliamentarians, budget offices and credit rating agencies. The Nominating Committee considers matters such as relevance of candidates’ professional backgrounds, technical skills, past and present contributions to the accountancy profession, and the ability to make a significant contribution to the areas of emphasis in the IPSASB Strategy and Work Plan. Nominees

TECHNICAL are expected to be strong advocates of IPSAS and should be willing to make regular presentations in their regions every year. Gender balance is extremely important and nominations of qualified female candidates are strongly encouraged, as are nominations of candidates from Latin AmericaCaribbean, Africa-Middle East and Asia. Time commitment and financial requirements The minimum time requirement of an IPSASB member is approximately 48 days per year, excluding travel, with many members committing up to 70 days per year. This comprises approximately 18 days for physical attendance at Board and task force meetings and 30 days for preparation, teleconferences and outreach activities. Members are also strongly encouraged to attend the biannual meetings of the Consultative Advisory Group. Costs of attending IPSASB meetings are borne by the member or the member’s nominating organisation. Funding is available for public members who do not have a sponsoring organisation. There is additional financial support available to self-nominees and candidates nominated by qualifying organisations from developing nations. Nominations can be submitted online from the date of the issue of this Call until 15 February 2019. Instructions on how to apply are available on the Nominating Committee’s webpage.

Digital transformation and talent management are key to growth for small accounting firms Accountants working in SMPs are embracing technology to better serve clients and attract and retain top talent, according to 2018 IFAC Global SMP Survey results. IFAC (International Federation of Accountants) received more than 6,000 responses from SMPs in 150 countries, about their performance in 2018 and the factors most likely to affect them in the future. Over a quarter of SMPs (28%) plan to allocate more than 10% of practice revenue over the next year to technology investment, reflecting its critical importance in practice management and operations. The most frequent responses have been the development of in-house expertise in IT and the adoption and use of cloud options to better serve clients. “As the first-choice strategic adviser to their clients, firms are recognising

the importance of adopting technology to provide insights and expertise and strengthen their role as trusted business partners,” said IFAC CEO Fayez Choudhury. “There has been an increase and diversification in the provision of advisory and consulting services that are real time, forward looking and based on specialised sector knowledge, which we expect to continue in the future.” As transactional activities become increasingly automated, firms are also leveraging technology to provide business insights from data analytics as a new service offering. A significant majority (86%) provide business advisory and consulting services, with a majority (51%) predicting a moderate or substantial fee revenue growth over the next 12 months in this service line. Talent remains a top challenge for SMPs. The majority (54%) have difficulty attracting next generation talent, with 66% stating the number one reason is the lack of candidates with the right mix of skills. This highlights the importance of continuing education and the development of new competencies for the digital global economy. Firms are implementing talent management initiatives to attract and retain staff. The most popular initiative is the introduction of flexible working hours or work days.

UK AND IRELAND Many companies fail to provide complete information on their acquisitions in the annual accounts IAASA, Irelands accounting enforce, has published the results of a desktop review into the business combinations disclosures that companies included in their 2017/18 annual accounts. The review covered the annual accounts of 31 companies listed on Euronext Dublin (Irish Stock Exchange). Accounting standards (IFRS 3 Business Combinations) establishes the principles and requirements for how an acquiring company in a business acquisition or a business combination: ●● recognises and measures in its annual accounts the identifiable assets and liabilities acquired, and any interest in the acquiree held by other parties; ●● recognises and measures the goodwill acquired in the business combination; and ●● determines what information to disclose to enable the users of the annual accounts to evaluate the

nature and financial effects of the business combination. IAASA’s desktop review identified that: ●● 14 (2016/17: 14) companies had acquisition activity during their most recent reporting year; ●● the total consideration paid by the companies for acquisitions amounted to €4.8bn (2016/17: €5.7bn); ●● following the acquisitions, companies recognised goodwill amounting to €1.9bn (2016/17:€4.7bn) equating to 43% (2016/17: 82%) of the total consideration paid; ●● ten of the 14 (71%) companies disclosed that the amounts recognised in the annual accounts for completed business combinations had been determined provisionally; ●● six of the 14 (43%) companies did not disclose the estimate at the acquisition date of the contractual cash flows for acquired receivables that is not expected to be collected; ●● six of 14 (43%) companies did not disclose the amount of acquisition related costs following the completion of their respective business combinations; ●● five of the 14 (36%) companies did not disclose the basis for determining the amount of the contingent consideration payment; and ●● four of the 14 (29%) companies did not disclose the valuation techniques and the key valuation model inputs used to measure the contingent consideration in the annual accounts. Enforcement responses IAASA will continue to focus on this topic in 2019 and will engage with company directors in relation to business combination disclosures. It expects Boards and Audit Committees to carefully assess and consider the disclosure requirements of IFRS 3 Business combinations and ensure that all relevant information is disclosed in annual accounts.

Review of 2016 audit standards The Financial Reporting Council (FRC) is consulting with stakeholders to determine how effective the changes to ethical and auditing standards in 2016 have been in delivering high quality audit, and whether further steps are now needed to strengthen auditor independence, reduce conflicts, improve quality and preserve trust in independent audit. ISSUE 102 | AIAWORLDWIDE.COM

TECHNICAL The standards were introduced to support the implementation of new UK legislation in June 2016 addressing the requirements of the EU’s Audit Regulation and Directive. The aims are to: ●● gather feedback on whether the changes made to standards have had the desired impact on auditor independence, prevention of conflicts and audit quality; ●● consider whether further measures are needed to address weaknesses, and ensure that audit better meets the expectations of those who rely on it; and ●● consider whether auditor reporting and communication with those charged with governance could be further strengthened to better meet the needs and expectations of users. Mike Suffield, executive director for audit at the FRC, said: “High profile audit failures and a fall in quality identified by our inspection work make this the right time to look afresh at the standards that we introduced in 2016. Through this review we aim to address potential weaknesses and ensure that audit better meets the expectations of those who rely on it.” Feedback and responses to the FRC’s review questions should be sent by email to AAT@frc.org.uk and marked for the attention of James Ferris. Feedback should be received by 5pm on 15 February 2019.

FRC announces 2019/20 audit thematic reviews, priority sectors and audit areas of focus The Financial Reporting Council (FRC) will, in 2019/20, supplement its routine audit quality review (AQR) monitoring programme with two thematic reviews. These thematic reviews, which focus on aspects of audit practice across a number of firms to identify both scope for improvement and good practice, complement other AQR work, all adopting the FRC’s overriding objective of driving through improvements in audit quality. The thematic review topics are: ●● Audit Quality Indicators (AQIs): An assessment of the development and use of AQIs by UK audit firms. This review commenced during the FRC’s 2018/19 inspection programme and will be delivered in 2019/20. ●● The use of technology in audits. The FRC reported on firms’ use of data AIAWORLDWIDE.COM | ISSUE 102

analytics in January 2017. It will revisit the progress that the firms have made since, how the use of technology has widened beyond data analytics and the potential impact upon audit quality. The FRC will publish its 2018/19 thematic review of “The auditors’ work on other information in the annual report” later in 2018, followed by a report on Audit Firm Transparency Reporting in the first quarter of 2019. Priority sectors Priority sectors are those considered by the FRC to be particularly high risk in terms of corporate reporting and audit by virtue of particular economic or other pressures. The corporate reports and audits selected for review by the FRC in 2019/20 will have regard to the following priority sectors: ●● financial services, with emphasis on banks, other lenders and insurers; ●● oil and gas (CRR only); ●● general retailers and retail property; ●● business support services; and ●● construction and materials. Areas of focus Audit areas of focus are specific aspects of audit work or non-sector specific factors which the FRC expects to consider when reviewing an audit. As part of its audit monitoring programme for 2019/20, it expects to pay particular attention to the auditor’s work on: ●● going concern and the viability statement; ●● the other information in the annual report; ●● long term contracts; and ●● the impairment of non-financial assets. It will also consider the potential impact of Brexit, in both the selection of audits to review, and the individual areas of audit work to focus on.

ASIA PACIFIC New requirements for registration as a public accountant from 1 Jan 2019 With effect from 1 January 2019, an individual who wishes to be registered as a public accountant will need to: ●● have completed the Singapore Chartered Accountant Qualification

(SCAQ), formerly known as Singapore Qualification Programme, or a recognised equivalent professional qualification*; or ●● have passed the final examinations in accountancy in any of the qualifications currently prescribed under the Second Schedule to the Accountants (Public Accountants) Rules before 1 January 2019; and ●● be a member of ISCA who has been conferred with the Chartered Accountant of Singapore (CA (Singapore)) designation; and ●● have completed the practical experience requirements and other requirements (such as continuing professional education requirements) at the time of application. *A recognised equivalent professional qualification refers to accountancy qualification prescribed by accountancy professional bodies that have established reciprocity agreement with the Singapore Accountancy Commission and the Institute of Singapore Chartered Accountants.

UNITED STATES FASB proposes narrow scope improvements to financial instruments standards The Financial Accounting Standards Board (FASB) has issued a proposed Accounting Standards Update (ASU) that would clarify and improve areas of guidance related to the recently issued standards on credit losses, hedging, and recognition and measurement. Stakeholders are encouraged to review and provide comment on the proposal by 19 December 2018. “Since issuing the financial instruments standards, the FASB staff has been working with stakeholders to obtain feedback and address questions on the guidance,” noted FASB chairman Russell G. Golden. “Through these interactions, the FASB identified areas of the guidance that require clarification and correction. The amendments in the proposed ASU would address those areas.” The proposed ASU is part of the FASB’s ongoing agenda project focused on improving the FASB Accounting Standards Codification and correcting its unintended application. The proposed ASU is available at www.fasb.org.

TECHNICAL FASB issues narrow scope improvements to credit losses standard The Financial Accounting Standards Board (FASB) has issued an Accounting Standards Update (ASU) that amends the transition requirements and scope of the credit losses standard issued in 2016. First, the ASU mitigates transition complexity by requiring entities other than public business entities – including not-for-profit organisations and certain employee benefit plans – to implement it for fiscal years beginning after 15 December 2021, including interim periods within those fiscal years. This aligns the implementation date for their annual financial statements with the implementation date for their interim financial statements. Second, the ASU clarifies that receivables arising from operating leases are not within the scope of the credit losses standard, but rather should be accounted for in accordance with the leases standard. The effective date and transition

requirements are the same as the effective dates and transition requirements in the credit losses standard, as amended by the new ASU. More information is available at www.fasb.org.

FASB improves accounting for collaborative arrangements The Financial Accounting Standards Board (FASB) issued an Accounting Standards Update (ASU) that clarifies the interaction between the guidance for certain collaborative arrangements and the Revenue Recognition financial accounting and reporting standard. A collaborative arrangement is a contractual arrangement under which two or more parties actively participate in a joint operating activity and are exposed to significant risks and rewards that depend on the activity’s commercial success. The ASU provides guidance on how to assess whether certain transactions between collaborative arrangement participants should be

accounted for within the revenue recognition standard. The ASU also provides more comparability in the presentation of revenue for certain transactions between collaborative arrangement participants. It accomplishes this by allowing organisations to only present units of account in collaborative arrangements that are within the scope of the revenue recognition standard, together with revenue accounted for under the revenue recognition standard. The parts of the collaborative arrangement that are not in the scope of the revenue recognition standard should be presented separately from revenue accounted for under the revenue recognition standard. For public companies, the amendments in this ASU are effective for fiscal years beginning after 15 December 2019, and interim periods within those fiscal years. For all other organisations, the amendments are effective for fiscal years beginning after 15 December 2020, and interim periods within fiscal years beginning after 15 December 2021. Early adoption is permitted.

ISSUE 102 | AIAWORLDWIDE.COM

AN INTRODUCTION TO TOWERGATE BIB APPROVED INSURANCE PROVIDERS TO THE ASSOCIATION OF INTERNATIONAL ACCOUNTANTS

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