International Accountant 105 by Association of International Accountants

INTERNATIONAL

ACCOUNTANT

MAY/JUNE 2019

ISSUE 105

How to balance your client relationships Red flags of money laundering The actuarial implications of IFRS 17

VAT compliance in the EU

CONTENTS

In this issue Contributors 2

Meet the team

Business management

Modernising the client experience Jennifer Warawa (Sage Group) explores how accountancy firms can evolve to improve the services they offer.

24 VAT

Digitisation 14 News and views

AIA news

KPMG UK restructures audit business

VAT compliance in the UK Rob Janering (Accordance VAT) explores the impact of real time reporting and digitisation on VAT compliance in the EU.

AIA receives recognition from Hong Kong Polytechnic University Foundation

Financial reporting

Actuarial implications of IFRS 17 Dieter Van der Stock (Moodyâ&#x20AC;&#x2122;s Analytics) explains how IFRS 17 will call for greater integration of actuarial and accounting systems.

Achieve 7 Important questions Our interactive distance learning programme designed with AIA students in mind.

8 Money laundering

Reporting the red flags David Potts (AIA) explains how members can recognise and act upon the red flags of money laundering.

18 Exam support

Current issues in auditing A study guidance article on the more advanced areas of auditing practice examined on Paper 15 Professional Practice (Auditing).

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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Professional services

Collaborating with clients How can accounting firms ease the biggest pains of collaborating with clients? Andrew Filev (Wrike) explores.

Dates for your diary 29 Upcoming events

Technical 30

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Editor’s welcome

Contributors to this issue

Editor’s welcome

JENNIFER WARAWA

Jennifer Warawa is the EVP of partners, accountants and alliances at Sage. She has led the group since 2017. Previously she led various product roles and served as Sage’s EVP of product markets. She began her career at Sage as the director of partner programmes in 2008. ROB JANERING

IA takes a leading role in developing best practice in relation to compliance, combining robust internal measures to support members in their role and taking a firm hand in combating criminality. We continue to work in the public interest to highlight to members the threat of money laundering, promote professional and ethical business practices and instil a sense of responsibility in tackling financial crime. Accountancy professionals are targeted for their skills and services, which can provide a cloak of legitimacy to illicit cash; accountants have a crucial role to play in protecting the economy and wider society. On page 18, we feature an article highlighting the “red flags” of money laundering which offers guidance on risk assessment, recognising suspicious activity and when and how to report it. To add an addition level of oversight and scrutiny, AIA has formed the Regulatory Oversight Committee, which will take responsibility for the AIA’s framework for regulating Members in Practice and report directly to the Council. This committee, as well as those committees that interact with the disciplinary process, are looking for new members.

Rachel Rutherford Editor, IA

If you would like further information or are interested in joining any of these committees, please send your CV and details of any relevant experience to council@aiaworldwide.com. The accountancy and finance profession is ever changing, but it would seem never more rapidly than right now. Developments in legislation, advancements in technology and the broader regulatory regime are having a very real impact on the day to day lives of accountants. In this issue, we look at IFRS 17 and how its implementation is creating significant operational challenges relating to data, processes, modelling, governance and auditability. Similarly, changes relating to VAT compliance are in full flow and many businesses, especially those operating within the EU, must consider the impact and adapt rapidly to the changes. Read more on page 14. With so many changes to deal with, it is important also to remember the importance of the client relationship and, in the last of her series of articles for International Accountant, Jennifer Warawa explores how to enhance the client experience by adapting to frequent change and build strong relationships that will be sustained long-term.

Rob Janering is an experienced VAT consultant with 10 years’ experience working in indirect tax. At Accordance, Rob works within the consulting team to provide cross-border supply advice and detailed reviews on clients’ existing and new business activities. ANDREW FILEV

Andrew Filev founded Wrike in 2006 to face the challenges in scaling due to the limitations of email and spreadsheets. His vision is to provide modern work teams with collaboration tools that make them more productive than they thought possible. DIETER VAN DER STOCK

Dieter Van der Stock is an IFRS subject matter expert, and manages the accounting aspects in the delivery of Moody’s Analytics RiskIntegrity IFRS 17 solution for insurers. He has over 25 years’ experience in financial software. DAVID POTTS

David Potts is director of operations at the AIA, and is responsible for maintaining AIA’s international recognition and implementing the professional body’s regulatory strategies and an annual review cycle. ISSUE 105 | AIAWORLDWIDE.COM

News AUDIT

Bill Michael, Chairman, KPMG

●● New executive structure ●● Creation of Audit Executive Committee

KPMG UK has announced a new executive structure and enhanced governance of its audit business, which will take effect from 1 June 2019. The new structure will introduce more separate performance management and governance of the firm’s audit practice, with a primary focus on driving quality.

We have already introduced new performance management rules for our auditors, and were the first company to implement a ban on providing non-audit services to the FTSE 350 companies we audit.” The changes will see KPMG create a new Audit Executive Committee, which will assume executive responsibility for the audit business’s performance management, risk management and controls. These changes do not mark the separation of KPMG UK’s audit practice AIAWORLDWIDE.COM | ISSUE 105

from the rest of the firm but will deliver on many of the recommendations proposed by the CMA and the BEIS Select Committee in their recent reports on the profession. The creation of the Audit Executive Committee is part of a new executive committee structure being introduced at KPMG, which will enable management decisions to be made faster by the people closest to the firm’s people, clients and stakeholders. The firm’s current UK Executive Committee will be reshaped to form a core Executive Leadership Team, consisting of an Executive Board and a Clients and Markets Executive, supported by Operations, Risk and Audit Executive Committees. Bill Michael, Chairman and Senior Partner at KPMG in the UK, said: “We are committed to establishing a more transparent operating model that effectively demonstrates the conduct and execution of our public interest responsibilities. We have already introduced new performance management rules for our auditors, within which audit quality is the primary objective, and were the first to implement a ban on providing nonaudit services to FTSE 350 companies we audit. “I would also like to take this opportunity to thank Philip Davidson and Iain Moffatt for their invaluable contributions to KPMG.”

UK encouraged to look at Hong Kong for business opportunities British enterprises are encouraged to leverage on Hong Kong’s unique advantages to tap into the opportunities brought by the Belt and Road Initiative and the Guangdong-Hong Kong-Macao Greater Bay Area (Greater Bay Area) development, the Secretary for Commerce and Economic Development, Mr Edward Yau, said at a roundtable discussion at the Asia House in London. Mr Yau said that Hong Kong practises free market economy and provides a level playing field for all business players, irrespective of their origins. UK businesses which set foot in Hong Kong are open to a wealth of advantages and opportunities, he said, ranging from the liberalisation and facilitation measures provided under the free trade agreements forged between Hong Kong and its trading partners, to the enormous business opportunities along the Belt and Road and in the Greater Bay Area. On the Belt and Road Initiative, Mr Yau highlighted three main areas that Hong Kong could contribute, namely financing, professional services and a strong position in trade and logistics.

Source: Brand Hong Kong

KPMG UK restructures audit business

HONG KONG

News VAT FRAUD

InBrief Greek parliament approves VAT cuts The Greek government has announced that parliament has approved legislation reducing the rate of value-added tax on food and energy. The new rates are effective from 20 May 2019. The VAT rate for basic food and certain drinks has been cut from 24% to 13%. In addition, VAT on supplies of energy to domestic and business customers, including gas and electricity, has been lowered from 13% to 6%. Simplifying everyday tax for smaller businesses A new Office of Tax Simplification report calls on government to prioritise action to address longstanding concerns about the experience of smaller businesses. Small businesses make up over 99% of all the 5.7 million businesses in the UK, employ 12.9 million people and pay over £205 billion in tax. This report explores for the first time the tax challenges faced by businesses by reference to the stages a developing small business might go through in its engagement with the tax system. Several longstanding concerns have emerged which, as the economy and the world of work continue to evolve, it is especially important that the government prioritises. The report contains major recommendations in five areas and other smaller suggestions for improving HMRC processes. The UK’s PAYE system is the UK’s major tax collection system. It brings in about 40% of total tax receipts – some £200 billion. It has been transformed over the last decade, with the introduction of an integrated national system and the provision of real time information by employers. PAYE system problems lead to significant costs for businesses, agents, employees and HMRC. There are around 350,000 duplicate employment records, and around 5% of returns are received late. The current system does not handle the fluidity of the modern workplace very well, in relation to changes of job midmonth or individuals holding multiple jobs or concurrent employment and self-employment.

EU launches new system for tackling VAT fraud ●● New Transaction Network Analysis tool ●● Closer anti-fraud cooperation

The European Commission has announced the launch of the Transaction Network Analysis (TNA) tool, a new system to enable EU member states to rapidly exchange and jointly process VAT data. Tax Commissioner Pierre Moscovici said: “Criminal VAT fraud is one of the major issues facing our public finances today and its eradication should be a top priority for EU governments. This new tool will increase the speed at which authorities can uncover and act on suspicious activity.” The system, which became available for use on 15

May 2019, allows member states fast and easy access to cross-border transactions information, enabling them to act quickly when potential VAT fraud is spotted. The Commission also hopes that the TNA will allow for closer cooperation between the EU’s network of antifraud experts (Eurofisc) when jointly analysing information, with the aim of ensuring that VAT carousel fraud can be detected and intercepted as fast and effectively as possible. Eurofisc officials will be able to cross-check information with criminal records, databases, and information held by Europol and the EU’s anti-fraud agency and to coordinate cross-border investigations.

BREXIT

Breakdown of Brexit talks leaves small business on edge Speaking after crossparty Brexit talks broke down, National Chairman of the Federation of Small Businesses (FSB) Mike Cherry said: “Nearly Mike Cherry two months after we were supposed to leave the EU, we find ourselves no closer to a solution to this political mess. The breakdown of cross-party talks is just another chapter in what is becoming a litany of failures during the Brexit process. When small businesses asked for leadership, pragmatism and pace

in delivering a pro-business deal, politicians responded by offering more of the same. “More of the same just doesn’t cut it for our small firms anymore. They are the ones dealing with the realities of this mess – planning decisions cancelled, investment stalled and growth going backwards. “Ongoing uncertainty is damaging the economy, holding back productivity and battering small business confidence. We simply cannot see this continue through to the end of October.” ISSUE 105 | AIAWORLDWIDE.COM

AIA News

AIA

NEWS REGULATORY REFORM

Reform of the FRC gathers pace

AIA receives recognition from Hong Kong Polytechnic University Foundation AIA has been recognised as a member of the Hong Kong Polytechnic University (PolyU) Foundation in acknowledgment of its commitment to financial education and its partnership with the university over many years. AIA and Hong Kong Polytechnic University have a longstanding working relationship built on mutual trust and shared values, working in partnership to develop and nurture talented students in the field of accountancy. KS Jong, an AIA Council Member who attended the reception, said: “It is a great pleasure to represent AIA and celebrate the close working relationship which we have built over many years with the university, and we look forward to working together in the future to support students within the financial sector.” AIAWORLDWIDE.COM | ISSUE 105

outlining serious competition concerns and proposing changes to legislation to improve the audit sector for the benefit of savers and investors. AIA will shortly be submitting its response to the government’s consultation on the recommendations, which give an opportunity to reform the sector’s regulation and improve transparency and independence. It’s important to ensure that the government gets the framework surrounding the creation of the new audit regulator correct, which means continuing to engage with regulated professional bodies, users of accounts, regulated firms and business stakeholders. Since the FRC’s independent review was announced, AIA has provided evidence and worked with the review. We will engage and work on behalf of our members as the process continues.

Micha Theiner/Cityam/Shutterstock

HONG KONG

Speaking at a New City Agenda event held in the Houses of Parliament on 16 May 2019, Sir John Kingman, the author of the independent review of the Financial Reporting Council (FRC), set out the broad range of 83 recommendations contained within the report and his expectations of future reform to implement the review. Stressing that the job of any new regulator should not be to prevent corporate failure, Sir John noted that the Secretary of State for Business, the Rt Hon Greg Clark MP, had welcomed the report and given broad support to the recommendations made. The outcome of the report will be closely linked to Sir Donald Brydon’s independent review of the quality and effectiveness of audit and that of the Competition and Markets Authority, which has published an update paper

Sir John Kingman

AIA News MEMBER BENEFITS

MONEY LAUNDERING

AIA partners offer new support services

AIA strengthens AML compliance oversight

George Josephakis

AIA partners PTP Limited, Six Forward and HMCA provide added value to members with partner benefits and offers. PTP Limited offers a range of training and practice support products to help accountants help their clients. PTP provides resources including PTP Online, PTP Seminars, In-house Courses and Practice Support. It also has its flagship products, TAXtv and AccountingTV, which are delivered in a unique discussion style TV programme and available for download every month. PTP offers AIA members a 15% discount. Six Forward are full capital allowances service specialists, more specifically specialising in advice for clients with commercial property. Six

Forward has over 250 UK accountancy firms using its services which maximise opportunities and minimise risk. It offers AIA members a 20% fee share, or a 20% fee reduction for clients. Hospital & Medical Care Association (HMCA) provides AIA members and their families with a range of medical health cover and other related products which are only available to members of professional and trade associations, and not to the general public. Products include Medical Car Plan, Dental Plan, Income Protection Plan, and HMCA Single and Multi-trip Travel. HMCA offers a range of discounts to AIA members. A full list of member benefits is available at http://www.aiaworldwide. com/member-benefits-offers.

ACCOUNTING EXCELLENCE AWARDS

AIA council member shortlisted at Awards Congratulations once again go to AIA Council Member, Gloria Murray of Murray Associates for being shortlisted in the Top 5 Practice Pioneers in the Accounting Excellence Awards 2019. Gloria is director and senior accountant at Murray Associates, and has over 23 years’ experience of helping small business owners. The Practice Pioneer Awards are awarded to individuals who have really impressed the judges with their exciting innovations and successes in the accounting profession. Now in their ninth year, the awards are presented by AccountingWeb with the aim of recognising brilliance and innovation across the British accounting profession, and will take place on 12 September at The Brewery London. Commenting upon the shortlisting, Gloria said: “I’m so excited to be shortlisted as a Practice Pioneer in the

Accounting Excellence Awards this year. When I set up my practice it was my intention Gloria Murray to do things differently and give more to clients than the bog-standard accountancy services. So, it’s great to get even more recognition of what I do following on from my previous UK Awards.” Philip Turnbull, AIA Chief Executive added: “Gloria is a truly inspirational figure who continually strives for excellence with innovative approaches which aim to add-value for her clients. It is a pleasure to work alongside her on AIA business, and see first-hand her pioneering approach within the accountancy sector. I wish Gloria the best of luck for the awards.”

Jackie Harvey

The new AIA Regulatory Oversight Committee is charged with ensuring that the AIA maintains its compliance with the Money Laundering Regulations 2017 and adding a level of oversight and scrutiny in line with best practice. The Committee will report directly to Council, taking responsibility for the appropriateness of the framework for AIA’s internal regulation of Members in Practice. The Practice Compliance Committee is empowered to deal with all matters concerning the monitoring of the compliance of members and firms in their public practice with the Association’s articles, as well as bye-laws, regulations and relevant accounting and auditing standards, regulatory and legal requirements and the Code of Ethics. The new Regulatory Oversight Committee will review the risk assessment, supervision and compliance work of the AIA and will also ensure that appropriate action is taken against relevant persons when necessary where they have failed to meet their anti-money laundering obligations. AIA Council member George Josephakis, the chair of the committee, has over 25 years’ experience in accounting, auditing and anti-money laundering across Europe. He will be joined by Dr. Jackie Harvey, Professor of Financial Management and Director of Business Research at Newcastle Business School and one of the authors of The Critical Handbook of Money Laundering, which analyses international anti-money laundering frameworks implemented over the last 30 years. The committee is completed by the inclusion of AIA and lay members. If you are interested in joining this Committee, please send a copy of your CV and any relevant experience to council@aiaworldwide.com for further information. ISSUE 105 | AIAWORLDWIDE.COM

ACHIEVE

Important questions for all AIA students

s an AIA student, are you aware that you need to sit exams in every May and November exam session? If not, you are now! As an AIA student you are obligated to undertake exams during every May and November exam session. Have you booked onto the next exam session taking place in November? If not, don’t panic as there is still plenty of time for you to book your place and start the revision process. Do you feel confident in passing your upcoming accountancy exams? Can you remain motivated to study sufficiently in the run up to the November exams? Are you able to maintain a healthy work/life balance in the lead up to the November exams? If you are sitting there shaking your head or perhaps starting to come out in a cold sweat at the prospect of undertaking exams, take a breath and relax. We have the perfect solution… Here at AIA, we work closely with thousands of students from around the globe on their journey towards becoming a qualified accountant. We appreciate that studying for professional exams is a serious and often daunting undertaking – which frequently comes at a time when you are trying to maintain a healthy balance between your home life and work commitments. So to make this process easier and assist students in attaining their study goals, whilst also crucially maintaining a healthy work/life balance, the AIA – in collaboration with leading publisher of study materials for professional exams, BPP Learning Media – developed “Achieve”, an interactive distance learning programme created specifically for AIA students. The Achieve programme has been designed with affordability and flexibility in mind. It intends to alleviate unwanted study planning stresses, and provide a variety of resources to optimise your chances of exam success. It will help to guide your learning and provide access to advice, support and feedback from a specialist team of e-tutors, ensuring that you consistently get the maximum benefit from your study. The programme will also offer you mock exams with written feedback, tutor marked practice questions, free to attend webinars, a course e-book and more.

AIAWORLDWIDE.COM | ISSUE 105

Our interactive distance learning programme has been designed specifically with AIA students in mind.

e-Tutors

As an Achieve student, you will have access to 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

Practice makes perfect, so the programme offers you the opportunity to sit up to four practice questions during each study period. These practice questions are designed to test and reinforce your knowledge at key intervals during the programme. Each practice 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

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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.

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 of these tools will undoubtedly enhance your chances of exam success, whilst your personalised study planner will allow you to maintain that healthy work/life balance you have only previously wished for in the lead up to your professional exams. Achieve also offers an exclusive interactive discussion forum, which will help you to continually stay motivated by communicating with fellow students and accessing supplementary study information. Enrolment onto the Achieve programme for the AIA November 2019 exams is now open, so don’t delay: become an Achieve student today.

EXAM SUPPORT

Current issues in auditing

istockphoto/bymuratdeniz

Writing to go here n-caption Photography to go here n-caption

A study guidance article on the more advanced areas of auditing practice which are examined on Paper 15 Professional Practice (Auditing).

s highlighted to students in the last study guidance article, within the syllabus for Paper 15 Professional Practice (Auditing) is section 15.5 Current and Professional Issues and Pronouncements. It states in this section of the syllabus that: â&#x20AC;&#x153;Candidates are expected to keep abreast with the latest developments in professional issues, decisions of legal cases, changes in legislation and issuance of audit and accounting pronouncements that will affect processes, strategies and legal implications of audit assignments and evaluation services and the profession.â&#x20AC;? It is re-emphasised to students that this topic is weighted at 20%. It is therefore as important as topic 15.1 Regulatory Issues and Professional Practices; and only 5% less important than 15.2 Statutory Audit and Other Evaluation, and 15.3 Audit Strategy and Process. It is therefore of continued concern to the examiner that students do not appear to be adequately prepared in this

area. Following past exam performance, it would appear that candidates are expecting this topic to be examined as a discrete question which they can choose to avoid, rather than as a requirement to contextualise other aspects of the syllabus around the emergent concerns for the profession in a more embedded manner. To this end, the AIA has produced the following support for candidates preparing for the November 2019 exam sitting of Paper 15, highlighting a number of emerging issues which they should ensure familiarity with. This article is not intended to be exhaustive but should signpost candidates towards their wider professional reading. Students should also be familiar with the specific more advanced areas of auditing practice that are only examined on Paper 15. Past exam sittings exposed limited understanding of both the audit of segmental reports and the audit of related party transactions. A diligent review of the detailed syllabus for Paper 15 should highlight these specific technical concerns. ISSUE 105 | AIAWORLDWIDE.COM

EXAM SUPPORT Students are also reminded that Paper 15 is 90% application rather than knowledge recall and that their answers must reflect this. To this end, the students are advised to ensure that they understand the key issues in accounting standards and auditing standards, codes, etc. and then apply this to the question diligently. Reiterating the question does not score marks and merely stating the theory without application also results in a very low mark.

Key accounting standards

The most significant changes to accounting standards in recent days relate to both IFRS 16 Leases and IFRS 15 Revenue Recognition, as they create significant new accounting judgments around the lease classification and revenue, and create additional subjectivity in both aspects of accounting. As new standards which are more complex and often not compatible with previous practice, the risk of error in application and the possibility for management bias being reflected in the estimates is significant. Both standards also require additional disclosure, which needs to be balanced and meaningful to enable users of the financial statements to understand the impact of assumptions on the figures. Although IFRS 16 is not mandatory as yet, companies should be preparing for this impact on their accounting systems and decision making and it is a key area for the audit committee. For the detailed support notes regarding IFRS 15, students are referred to the previous article from the examiner in April 2017. For IFRS 16 Leases, the key change is the reclassification of leases from operating leases recognised in the income statement to finance leases recognised in the statement of financial position with the resultant non-current asset recognition and consequent depreciation. This raises a number of subjective areas for the audit; namely, the valuation and impairment of non-current assets (already recognised as a challenging area of high subjectivity), and the valuation of the lease and the recognition of its costs through the income statement. Students are advised to ensure that they understand the key issues in IFRS 16 and so could advise audit clients on the need to prepare for the standard, or to explore how they would audit the resulting figures should the company have adopted the standard. Another accounting policy that has been causing problems for regulators relates to IAS 19 Employee Benefits. As with IFRS 8 Segmental Reporting, this standard poses challenges to the auditor around the audit of the disclosure notes that result. IAS 19 Employee Benefits requires a company to disclose information that describes how its defined benefit plans may affect the amount, timing and uncertainty of the Parthenon’s future cash flows. Additional disclosure may also be required to meet the overarching objectives of AIAWORLDWIDE.COM | ISSUE 105

Paper 15 is 90% application rather than knowledge recall and answers must reflect this. Stating the theory without application results in a low mark.”

ensuring that users have an understanding of the risk that the pension costs and cash payments may change in the future. IAS 19 requires companies to provide information about the expected impact of their defined benefit pension schemes on future cash flows by disclosing details of: ●● the funding arrangements; ●● the expected contributions for the next year; and ●● the maturity profile of the defined benefit obligations. The key issue for the auditor is whether the disclosure communicates the facts in such a way as to explain the risks clearly, as this is the core objective of the standard. This therefore increases the need for professional judgment and skepticism.

Developments in auditing standards Audit of accounting estimates

The problems with ISA 540 and the development of the new auditing standard around this remain of key concern to the international regulators and to IFAC. As Paper 15 is examining advanced audit issues, accounting estimates arising from complex accounting will frequently be examined. Consequently, students are referred to the revision notes at bit.ly/30bDgl2 and should ensure they understand the problems of the audit of accounting estimates in practice and how the standard aims to resolve these. They should be able to apply this to any case study or scenario presented in the examination. A revision to ISA 540 – the audit of accounting estimates – was issued in December 2018. This highlights the difficulty for the auditor in gaining sufficient appropriate evidence regarding the appropriateness of complex accounting judgments, especially as accounting standards reflect more complex issues. Whilst the specific aspects of the new standard are beyond the scope of the current examination, candidates may find some elements most helpful in appreciating best practice in their audit approaches: the discussions around the problems with current practice and suggestions on additional work around risk; the work required where the issue is complex; the need for specialist support; and the need for professional skepticism.

Developments in audit practice Data analytics

A key emerging trend in internal and external audit is the use of data analytics to generate core analysis to highlight anomalies in the integrity of the accounting data. Students should ensure that they have explored the role of data analytics, and its strengths and limitations in practice for both internal and external auditors, in their wider reading.

EXAM SUPPORT

Audit reporting

Students are reminded that audit reporting is another core area of the syllabus and that it extends more widely than the conventional audit report. The development of the extended audit report in the UK has influenced international audit reports and students should be familiar with this. However, the last diet revealed very limited appreciation of the importance of the Key Audit Matters in the audit report and students should ensure that all aspects of this syllabus are explored, including the role of reporting in assurance engagements and reporting on summary financial statements. ISA 720 The Auditor’s Responsibilities relating to Other Information was revised in June 2016 and its impacts are starting to be seen in the current cycle of audit reporting. Under ISA 720, the auditor is responsible to ensure that other information included in the audited financial statements is not materially inconsistent with either the financial statements or their understanding of the entity’s position from their knowledge of the business gained during the audit. This relates to all of the narrative information issued by the reporting entity and covers all of the material issued before the audit report. This supports the ethical requirement that the auditor avoids being knowingly associated with information that is either materially false or misleading. It is particularly focused on the need to make the auditor’s comment on the extended disclosure requirements for directors around risk and viability statements. The standard requires that the auditor specifically reviews and comments upon: a. the directors’ confirmation in the annual report that they have carried out a robust assessment of the principal risks facing the entity, including those that would threaten its business model, future performance, solvency or liquidity; b. the disclosures in the annual report that describe those risks and explain how they are being managed or mitigated; and c. the directors’ explanation in the annual report as to how they have assessed the prospects of the entity, over what period they have done so and why they consider that period to be appropriate; and their statement as to whether they have a reasonable expectation that the entity will be able to continue in operation and meet its liabilities as they fall due over the period of their assessment, including any related disclosures drawing attention to any necessary qualifications or assumptions. ISA 720 Auditors’ Responsibilities Relating to Other Information 2016 This raises an interesting issue within the idea of the expectation gap, as the auditor’s requirement to comment has been operationalised as a statement that the auditors have reviewed the issues detailed above and have nothing

DEBENHAM’S AUDIT REPORT Going concern In accordance with ISAs (UK) we report as follows: Reporting obligation We are required to report if we have anything material to add or draw attention to in respect of the directors’ statement in the financial statements about whether the directors considered it appropriate to adopt the going concern basis of accounting in preparing the financial statements and the directors’ identification of any material uncertainties to the group’s and the company’s ability to continue as a going concern over a period of at least 12 months from the date of approval of the financial statements. Outcome We have nothing material to add or to draw attention to. However, because not all future events or conditions can be predicted, this statement is not a guarantee as to the group’s and company’s ability to continue as a going concern. We are required to report if the directors’ statement relating to going concern in accordance with Listing Rule 9.8.6R (3) is materially inconsistent with our knowledge obtained in the audit. Extracted from the Audit Report – Debenhams Annual Report 2018 (bit.ly/30cAziX), accessed 17th March 2019 material to add or draw attention to. For example, the Debenhams Audit Report for 2018 is set out in the box above. Other presentations seen in practice include the style shown in the Principal Risks and Viability Statement shown opposite. The directors must ensure that the annual report, taken as a whole, is fair, balanced and understandable, and provides the necessary information for shareholders to assess the group’s position, performance, business model and strategy. In an examination context, the narrative information around risk reporting or going concern assessment, or other information issued with the financial statements, may not be accurate and students should be prepared to develop an appropriately worded report.

Sustainability reporting and assurance

The UN Sustainable Development Goals are being used as a framework by investors to assess the exposure of companies to risks to their ability to sustainably create value within the organisation. This is linking into the developments of integrated reporting and the recent report by the Task Force for Climate Based Financial Disclosure. Policy makers within governments and regulators are also looking to these goals to drive the future direction of sustainability in companies. Within this framework, the sustainability accounting standards and other sustainable measures are developing and the former were issued at the end of 2018. This is creating a significant market ISSUE 105 | AIAWORLDWIDE.COM

EXAM SUPPORT

opportunity for sustainability assurance, as the standards provide a key framework against which corporate sustainable reporting can be assured. The approach of the professional practice to such an assignment is the same as any other assurance assignment. It consists of initially identifying the subject matter for the engagement, the interested parties who may be using this information, and the standards against which the assurance would be carried out must be explored and clarified. This process is essential to clarify the real risk areas in the assurance assignment, to understand the concerns of the company and to understand what assurance is seeking to achieve. A key idea for the auditor providing assurance against new sustainability standards is the idea of what would render the information useful. In common with all other information for decision making, this would reflect the ideas of appropriate standards of relevance, completeness, reliability, neutrality and understandability. This debate mirrors other debates around quality reporting, including narrative reporting, risk reporting and KPI reporting, whereby there are challenges in ensuring that the information is fairly represented, unbiased, consistent and transparent. The ideas from the FRC in its “Cutting the clutter” publication may help this wider issue to be appreciated. (See bit.ly/2PKO0V0; bit.ly/1eu42N0; and bit.ly/1QUafwm.)

Professional practice issues Focus on audit quality

This IFAC framework (see bit.ly/2JgsZKH) provides a comprehensive overview of the factors driving audit quality at an engagement, firm and national level. It reiterates much of previous guidance but contextualises the ideas within the debate around the increasing focus on public interest.

Audit quality policies in audit firms

“Historically most firms only identify a relatively small proportion of audits requiring significant improvement, which is a smaller proportion than we find through our own reviews. Where we are able to make direct comparisons, we do find instances where our monitoring has identified required improvements that have not been identified by the firm’s reviews or have been treated as less significant. Our 2016 to 2019 strategy is to ensure that our AQR activities support firms achieving further improvements in audit quality and that by the end of the strategy period, at least 90% of FTSE 350 audits will require no more than limited improvements as assessed by our monitoring. We would expect the firms’ own monitoring programmes to be as robust and challenging as our own. Strengthening the firms’ own monitoring will result in more

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PRINCIPAL RISKS AND VIABILITY STATEMENT Based solely on reading the directors’ statements and considering whether they were consistent with the knowledge we obtained in the course of the audit, including the knowledge obtained in the evaluation of the directors’ assessment of the group’s and the company’s ability to continue as a going concern, we are required to state whether we have anything material to add or draw attention to in relation to: ●● the disclosures that describe the principal risks and explain how they are being managed or mitigated; ●● the directors’ confirmation that they have carried out a robust assessment of the principal risks facing the group, including those that would threaten its business model, future performance, solvency or liquidity; and ●● the directors’ explanation as to how they have assessed the prospects of the group, over what period they have done so and why they consider that period to be appropriate; and their statement as to whether they have a reasonable expectation that the group will be able to continue in operation and meet its liabilities as they fall due over the period of their assessment, including any related disclosures drawing attention to any necessary qualifications or assumptions. We are also required to report whether the directors’ statement relating to the prospects of the group required is materially inconsistent with our knowledge obtained in the audit. We draw to the attention of the members of the group the following: We have nothing material to add or to draw to the attention of the members in respect of the principal risks and viability statement. challenging and robust outcomes supporting the firms’ culture of promoting audit quality and better equip audit teams to achieve the standards required.” Financial Reporting Council (2016) “Firms’ Audit Quality Monitoring”. In the UK, there is evidence that audit firm quality procedures are not as robust as the regulator might prefer and there is also evidence that the audit firms have a tendency to underestimate problems with their own work. This is not entirely unexpected as subconscious bias will tend to mean that auditors who work within a specific audit culture will not be able to appreciate its weaknesses and it is very difficult for an audit firm to be objective about its own quality. However, there is an increased focus from IFAC and national regulators on firm audit quality policies and the monitoring of such.

IES 8 Professional Competence for Engagement Partners

IES 8 Professional Competence for Engagement Partners responsible for statutory audits of financial statements (revised) has

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applied since July 2016. This responds to the risk that as engagement partner work becomes more specialised, it is possible that they are not up to date in all aspects of current technical developments. As their practice administrative duties increase, it is also tempting to delegate the specialist CPD to other members of the firm. This then renders their knowledge insufficient to support the complex evaluation of audit evidence to come to an appropriate audit opinion. As the engagement partner review supporting the development of this opinion is a critical function of the audit, audit quality can only be assured where professional competence is assured. This becomes a specific issue where the audit partner is rotated as part of the maintenance of independence or as a client business becomes increasingly specialised. As part of the firm’s policies on audit quality, there must be safeguards to ensure the professional competence of partners.

Professional judgment: IFAC Exposure Draft 17 Professional Judgment – Emphasis on Understanding Facts and Circumstances

Professional judgment remains another key area of professional and regulatory concern and, in the light of the raft of recent audit scandals, this concern is unlikely to wane. IFAC has released an exposure draft seeking to clarify issues within this judgment and has stated that: “Professional judgment involves the application of training, knowledge and experience taking into account the nature and scope of the professional activity being undertaken. When exercising professional judgment, it is important that the professional accountant obtains a sufficient understanding of the facts and circumstances known to the accountant to identify, evaluate and address threats to compliance with the fundamental principles.” Students should ensure that they are familiar with the debate around professional judgment and the ED 17 in their wider reading to contextualise the emerging debates around auditor conduct.

Exercise of Professional Judgment 120.5

A1: Professional judgment involves the application of training, knowledge and experience taking into account the nature and scope of the professional activity being undertaken. When exercising professional judgment, it is important that the professional accountant obtains a sufficient understanding of the facts and circumstances known to the accountant to identify, evaluate and address threats to compliance with the fundamental principles. In obtaining this understanding, the accountant might consider, among other matters, whether:

The ongoing audit scandals continue to challenge the claim that the audit profession is acting in the public interest, and ethical standards will remain a key area.”

●● there is an inconsistency between the known facts and circumstances and the accountant’s expectations; ●● the information provides a reasonable basis on which to reach a conclusion; ●● other reasonable conclusions could be drawn from the information being considered; ●● the accountant’s own preconception or bias might be affecting the accountant’s judgment; and ●● the accountant’s own expertise and experience are sufficient, or whether there is a need to consult with others with relevant expertise or experience.

Reasonable and Informed Third Party 120.5 A2A1: The reasonable and informed third party test is a consideration by the professional accountant about whether the same conclusions would likely be reached by another party. Such consideration is made from the perspective of a reasonable and informed third party, who weighs all the relevant facts and circumstances that the accountant knows, or could reasonably be expected to know, at the time the conclusions are made. The reasonable and informed third party does not need to be an accountant, but would possess the relevant knowledge and experience to understand and evaluate the appropriateness of the accountant’s conclusions in an impartial manner. Proposed Application Material Relating to: ●● Professional Skepticism – Linkage with the Fundamental Principles; and ●● Professional Judgment – Emphasis on Understanding Facts and Circumstances. Exposure Draft 17. © May 2017 by the International Federation of Accountants (IFAC). All rights reserved. Used with permission of IFAC. Permission is granted to make copies of this work to achieve maximum exposure and feedback.

Professional skepticism

Professional skepticism continues to be an ongoing issue. The FRC in the UK regards the poor application of professional skepticism as core to compromising the ability of the auditor to robustly challenge management judgment and therefore a significant contributor to recent audit failures. IFAC is currently reviewing its guidance on professional skepticism in order to meet public expectations (see bit.ly/2E2tiJ9) and ICAEW has recently published a really helpful and practical insight into professional skepticism in the practice (see bit.ly/2YnhDMD). This highlights some of the core challenges that compromise the ability of an auditor to maintain a skeptical mindset, including time pressure and a lack of situational context. As boards face faster reporting deadlines, time ISSUE 105 | AIAWORLDWIDE.COM

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within the audit firm, including those individuals placed at the disposal of or under the control of the firm; and ●● greater emphasis placed on the risks to independence posed where the auditor acts as an advocate of management, although this requirement is somewhat mitigated for small entity audits.

pressure is increasing. As audit clients become more complex and audit teams work against deadlines without really becoming immersed in the business, commercial factors seem to be conspiring to make being skeptical more difficult. An understanding and appreciation of the developing debate around skepticism is important to ensure that this final paper in audit embeds this critical skill area in students.

The third party test for independence

Developments in international ethical standards

Importantly, consideration of whether the ethical outcomes of independence, integrity and objectivity have been met should be evaluated by reference to the perspective of an objective, reasonable and informed third party.

The ongoing audit scandals continue to challenge the claim that the audit profession is acting in the public interest, and therefore developments in ethical standards will remain a key area of emerging practice. Students are reminded that much of the professional practice discussion is informed by ethical considerations. The detail of the IFAC Code of Ethics relating to professional accountants in public practice is therefore highly relevant and the link to the section supporting this within the code is given below. There was some evidence of familiarity with section 280 in the last exam but many answers lacked depth which may indicate lack of real familiarity with the code. There is a new ethical standard applicable to the UK audit of financial statements for periods commencing on or after 17 June 2016. This reflects the requirements of IFAC and others. In the UK, the response of the regulator FRC to the IAASB and EU Audit Regulation and Directive, which affect all statutory audits, can be summarised as: ●● independence of the auditor extended to include the third-party test; ●● broader personal independence requirements which now cover a wider range of individuals

IFAC CODE OF ETHICS 2017 Part B: Professional accountants in public practice Section

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200: Introduction

1117

210: Professional Appointment

1123

220: Conflicts of Interest

1127

230: Second Opinions

1129

240: Fees and Other Types of Remuneration

1130

250: Marketing Professional Services

1133

260: Gifts and Hospitality

1134

270: Custody of Client Assets

1135

280: Objectivity – All Services

1136

290: Independence – Assurance Engagements

1137

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“The firm, as well as each covered person, is required to be independent in the performance (conduct and determination of the outcome) of the engagement. Complete freedom from threats to integrity and objectivity, even taking into account safeguards, is not feasible, for example, as a result of the influence that the directors and management of a responsible entity have over the appointment and remuneration of the firm where (as in the case of an audit) that entity is the engaging party. Accordingly, independence not being compromised (which is the test to be applied in evaluating the likely consequences of conditions and relationships that may create threats to integrity and objectivity) is not whether the firm considers that the integrity and objectivity of the firm, its partners and staff and any other covered persons is impaired, but is whether there is freedom from threats to integrity and objectivity, taking into account safeguards applied, at a level where it is probable (more likely than not) that an objective, reasonable and informed third party would not conclude that integrity or objectivity (and therefore independence) is compromised. This is identified more concisely in Parts A and B of this Ethical Standard as a level at which independence is not compromised.” Financial Reporting Council Ethics Standard (Revised) 2016 This represents a shift in the ideas of independence and reflects a need for the profession to be seen to improve its service to the public interest. In the EU, there are now mandatory requirements for auditors to be rotated to ensure that audit tenure does not exceed 20 years. Although there has been wide debate in the auditing profession and academic community around the impact of compulsory rotation on audit quality and the increased risks of audit failure in the first year of an audit, there does seem to be some evidence from recent auditing scandals that long tenure does lead to a familiarity threat and reduced ability to see problems. ●

Digitisation

VAT compliance in the EU Rob Janering explores the impact of real time reporting and digitisation on VAT compliance in the EU.

Rob Janering Associate Director, Accordance VAT

VAT

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Digitisation

t the time of writing this article, there has been a flurry of stories published that detail how Europe is continuing to struggle with the “VAT gap”. The VAT gap represents the difference between expected VAT receipts and what is actually received. On latest estimates, its value is around €150 billion with at least a third being lost to fraud. The EU has made reducing the VAT gap one of its primary objectives and to this end there are a number of projects underway to achieve that. This includes the introduction of a VAT mini one stop shop (MOSS) in 2021; a fundamental change to the rules for B2B intracommunity movements of goods from summer 2022; and the quick fixes from January 2021. However, whilst all these actions will help to reduce the gap, many EU member states are taking unilateral actions of their own. The availability of new, emerging technologies is facilitating this, and consequently the landscape surrounding VAT compliance is beginning to change at a rapid pace. Businesses will find it almost impossible to avoid being impacted, so the need to manage and adapt to the new environment will be crucial. Because there are so many changes happening at once, we’ve broken them down and given a short explanation below of each one.

VAT is unique in that although its burden ultimately falls on the end consumer, it is the supplier of the goods or services that has to collect and remit the tax.”

Transactional reporting

VAT is unique in that although its burden ultimately falls on the end consumer, it is the supplier of the goods or services that has to collect and remit the tax. Historically, though, tax authorities have only received information about the VAT collected by businesses when periodic VAT returns are submitted. These are often received on a monthly or sometimes quarterly basis, some time after the relevant transactions have taken place. The information displayed in these returns is also limited with respect to allowing the tax authorities visibility as to whether the amount of VAT declared is correct. For instance, the UK VAT return has just nine boxes to complete, with two of those reserved to show the total sales and purchases made. Other EU member states have more complex detailed returns to complete, but the level of information shared usually ends at a breakdown showing the value of supplies made subject to different VAT rates. To combat these shortcomings, many tax authorities have added a requirement to submit transactional records which show details of the supplies made, such as descriptions, values and VAT treatment applied. Visibility of these records allows the tax authority to be much better informed and allow it to challenge incorrect AIAWORLDWIDE.COM | ISSUE 105

tax treatments. It also allows tax authorities to compare the data provided by the supplier and the customer in a transaction, to see if it is consistent. Previously, this would not have happened unless a tax inspector visited the business or records were requested as part of an audit. The methodology of choice to do this across Europe appears to be via the Standard Audit File for Tax (SAF-T), an OECD conceived creation. Poland, Portugal, Luxembourg and Austria are just a few of the nations that require businesses to submit these records. However, the issue for business is that at the moment most of these SAF-T requirements have different properties. The information that Poland requests is therefore not consistent with, say, that which Portugal wants to see. And on top of that, the entities required to submit the files also differ across countries with the obligations applying to all businesses in some locations but restricted in others. All of this creates complications and a lack of certainty for business. The EU is reportedly looking to create a standardised SAF-T but at this point in time, there are no details on that and it’s not clear what power it would have to enforce its adoption. Therefore, the challenge for business is to ensure that different reports can be created that meet all the different requirements; and also that the submission of these is managed in a competent way to remain compliant.

Real time reporting

Author bio

At Accordance, Rob Janering is Associate Director at Accordance VAT. He works within the consulting team providing cross-border supply advice, detailed reviews on existing and new business activities and practical solutions to clients’ businesses.

Real time reporting (RTR) is an evolution of transactional reporting, in that it requires the submission of information relating to individual supplies. However, the point that differentiates RTR is that instead of supplying the information on a monthly or quarterly basis, it must be submitted in or close to real time. For example, Spain implemented the Immediate Supply of Information (SII) obligation in the middle of 2017, which requires information to be submitted within four days. In Hungary, though, the timescale is to report the transaction immediately (at the time the invoice is issued) and this also must be done without human intervention. Greece is likely to be the next member state to make RTR obligations. Unfortunately, however, there is an inconsistency in approach as to how member states must comply with the rules: Spain requires all businesses subject to revenue thresholds to comply, whilst for Hungary it is restricted to established businesses. It was in South America where RTR was first developed and hence it’s no surprise that Spain was an early EU adopter of the process. The advantage it gives to tax authorities is that transactions can be monitored as they happen and thus errors or mistakes picked up more quickly

Digitisation

when compared to receiving periodical reports. This can be done with greater efficiency because some of the reports include details of both supplier and recipient, allowing for comparisons to be made. Given that VAT is a transactional tax being accounted for all the time, this is very important to help with the battle against fraud and reduce the VAT gap. The downside for business is that RTR requires an investment in new technology and processes. In Spain, it’s enough to access a portal which can connect with the tax authority and, if automation of reports is not possible, have someone manually create and upload them. In Hungary, though, the need to submit information and have no human intervention means that business software and systems must be able to run the required reports, format them and then communicate that to the tax authority. In both countries, non-compliance can lead to significant financial penalties.

E-invoicing

Another South American invention is e-invoicing. This differentiates itself from the two other types of reports described above because it requires a business to submit details of its transactions to the tax authority ahead of the supply taking place. The tax authority verifies the transaction and then, if satisfied, issues the VAT invoice to the recipient on behalf of the supplier.

T A V

Real time reporting is an evolution of transactional reporting, as information relating to individual supplies is to be submitted in or close to real time.”

This method means that the tax authority can effectively act as an adjudicator before the supply takes place and ensure that the right tax treatment is applied. It eradicates the need to adjust any errors because, in theory, they should not happen. It also gives visibility on the tax payable and repayable in real time, which helps the tax authority to manage its fiscal position. At the moment, many EU member states require e-invoicing to be applied when businesses make supplies to public bodies. However, Italy and Hungary have rolled the obligation on to supplies made between businesses with Hungary, adding an approval number to the system which the recipient needs in order to deduct any VAT costs. This helps to push compliance because, if that does not happen, VAT costs will be irrecoverable. This requires the supplier to access a tax authority managed central portal and ensure that transactional information can be uploaded to verify and help create the invoice. In that respect, it is similar to RTR and hence creates the same obligations to understand and better manage transactions. The pressure to do this is increased, though, because getting it wrong will lead to financial penalties and non-issue of the invoice, which could prevent customers from paying.

Conclusion

VAT compliance is only going in one direction, but this shouldn’t be seen as a negative or problem by businesses. Digitisation, when harnessed properly, can bring real benefits. For example: ●● In the UK, HMRC’s requirement that businesses stop filing VAT returns by manually filling in boxes but instead via an automated API link should reduce errors. For instance, transposition errors could lead to overpayments of VAT or amounts being erroneously claimed for, which then require time and effort to explain. ●● A review of the VAT treatment applied to sales and purchases, to ensure that transactional data is correct, will give certainty that the correct amounts are being declared and recovered. If this has not been right in the past, then opportunities might exist to charge lower, more competitive prices or to increase VAT recovery and reduce overall costs. ●● To meet the growing demands of tax authorities, businesses will need to make some investments. Whether this is a review of data flows, checks on the VAT treatment or the purchase of new software, meeting the new compliance obligations will help to ensure that costly penalties and tax audits are minimised, whilst benefits are accrued to the business. Embracing this new future won’t be easy but doing so will make the process far easier than it might be. ● ISSUE 105 | AIAWORLDWIDE.COM

MONEY LAUNDERING

Reporting the red flags David Potts explains how members can recognise and act upon the red flags of money laundering. David Potts Director of Operations, AIA

s a professional supervisory body under Schedule 1 of the Money Laundering Regulations 2017, the Association of International Accountants (AIA) has a responsibility to educate and inform our members alongside enforcing the requirements. Accountancy professionals are targeted for their skills and services, which can provide a cloak of legitimacy to illicit cash. Accountants have a crucial role to play in protecting the economy and wider society by submitting suspicious activity reports (SARs).

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MONEY LAUNDERING

Accountants have a crucial role to play in protecting the economy and wider society by submitting Suspicious Activity Reports.”

Money laundering isn’t always obvious, but the consequences can be severe. This article outlines and reinforces how accountants can: ● use due diligence to detect suspicious activity; ● recognise the “red flags” of money laundering; ● report suspicious activity; and ● seek further advice and guidance.

Customer due diligence

Due diligence should form part of a firm’s risk assessment. It’s important to: ● identify your client; ● verify your client’s identity; ● gather information on the purpose and intended nature of your business relationship; ● apply enhanced due diligence where appropriate; and ● have ongoing monitoring for longstanding clients. Requesting this information, recording it and reviewing it periodically is a relevant requirement and will support your efforts to spot suspicious activity.

Recognising suspicious activity

It is the responsibility of accountants to make anti-money laundering (AML) measures a key priority to minimise the reputational and legal risks of unwitting involvement with criminals. Reporting knowledge or suspicion of money laundering is a legal requirement and all relevant employees should be trained on reporting their concerns to the firm’s money laundering reporting officer (MLRO). By flagging up your suspicions you’re playing a key role in tackling criminality. Know the indicators and be on alert for them when dealing with new and existing clients. But what should you be looking for? The following pointers are guides to activities that could relate to money laundering and they should inform accountants’ risk assessments of their clients. ● Transactions: Are transactions unusual because of their size, frequency or the manner of their execution, in relation to the client’s known business type?

Author bio

David Potts is AIA director of operations and is responsible for maintaining AIA’s international recognition and regulatory strategies.

AIAWORLDWIDE.COM | ISSUE 105

● Assets: Does it appear that a client’s assets are inconsistent with their known legitimate income? ● Identity: Has the client taken steps to hide their identity, or is the beneficial owner difficult to identify?

MONEY LAUNDERING

● Political status: Is the client engaged in unusual private business given that they hold a prominent public title or function? Or do they have ties to an individual of this nature? ● Geographic area: Is the collateral provided, such as property, located in a high-risk country, or are the clients or parties to the transaction native to or resident in a high-risk country? ● Structures: Are there complex or illogical business structures that make it unclear who is conducting a transaction or purchase? ● Resources: Are a client’s funds made up of a disproportionate amount of private funding or cash, in relation to their socioeconomic profile? ● Behaviour: Is the client behaving oddly in either a personal or a public capacity, given the nature of their role in the business? Or do they have links to people acting oddly?

The online system through the NCA website (nationalcrimeagency.gov.uk) provides instant acknowledgement and a reference number.

A defence against money laundering can be requested from the NCA where a reporter has a suspicion that property they intend to deal with is in some way criminal.”

● Documents: Are information or documents being withheld by the client or their representative, or do they appear to be falsified? ● Choice of professional: Have you, or other professionals who are involved, been instructed at a distance, asked to act outside of your usual speciality, or offered an unusually high fee?

Beware ‘tipping off’

A tipping off offence is committed when a person in the regulated sector discloses that a SAR has been made; and an investigation into allegations of money laundering is underway (or being contemplated). The consequences of tipping off include a maximum of five years’ imprisonment and/or a fine. Accountants should take extreme care when communicating with clients. See section 333 of the Proceeds of Crime Act (POCA) 2002 and contact your professional body for more information.

Defence against money laundering

A defence against money laundering (DAML) can be requested from the NCA where a reporter has a suspicion that property they intend to deal with is in some way criminal, and that by dealing with it they risk committing one of the principal money laundering offences under POCA 2002. A person does not commit one of those offences if they have received “appropriate consent” from the NCA. You can read official guidance from the NCA concerning DAML SARs (see bit.ly/2DWHWBK). Your SAR might not start an investigation, but when combined with other information may be a vital piece of the jigsaw.

Submitting good quality SARs

Red flags such as those highlighted here might not mean anything in isolation but taken together they can provide a strong indication of money laundering.

Good quality SARs help prevent and detect crime, including spotting new trends and patterns. But SARs can only be useful if they follow standard rules: ● include full name, date of birth, occupation and addresses; ● give information on any account numbers; ● use SARs glossary codes; ● include clear descriptions of reasons for suspicion; ● if you don’t have information for any field use “UNKNOWN”; and ● everyone benefits if the information you submit is correct.

Reporting suspicious activity

If there is enough to constitute a suspicion of money laundering, a SAR must be submitted to the National Crime Agency (NCA).

Next steps and further information

❯

Anti-Money Laundering Compliance Software AIA provides AML Compliance software for every member in practice (see bit.ly/2JvvtlW)

● Review guidance from your AML supervisor. ● Read Anti-Money Laundering Guidance for the Accountancy Sector. ● For more information on SARs consult the UK Financial Intelligence Unit (UKFIU), the task force that receives, analyses and distributes financial intelligence gathered from SARs. ● Subscribe to HM Treasury email alerts. ● Review Financial Action Task Force high-risk jurisdiction guidance. ● ISSUE 105 | AIAWORLDWIDE.COM

BUSINESS MANAGEMENT

istockphoto/SergeyNivens

Modernising the client experience

Jennifer Warawa explores how accountancy firms can evolve to improve the services they offer.

Jennifer Warawa Executive VP of Partners, Accountants and Alliances, Sage

Author bio

Jennifer Warawa is Executive VP of Partners, Accountants and Alliances at The Sage Group, responsible for leading Sageâ&#x20AC;&#x2122;s portfolio of accounting products.Â

he world of accounting is rapidly changing. From the increasingly prominent role of technology, to shifting client requirements and the need to provide an expanded range of services, transformation is everywhere. And as the accounting profession evolves and matures, so too must the way in which firms do business, enabling them to keep pace with their competitors and meet client requirements. With a multi-generational client base, accounting firms are under more pressure than ever before to find their niche and provide value. Ultimately, clients are in search of firms that provide a best-in-class experience, in addition to standard bookkeeping services. In order to meet evolving demands, accounting firms ISSUE 105 | AIAWORLDWIDE.COM

BUSINESS MANAGEMENT

As the accounting profession evolves and matures, so too must the way in which firms do business, enabling them to keep pace with their competitors.”

audits and bookkeeping, accounting firms must now also provide personalised and engaging client experiences. To move from transactional relationships to strategic partnerships, firms should implement the following pillars: Hire diverse skill sets: To build a strong relationship with clients, your firm will need a wider range of skill sets. Hire outside of the traditional accountants skillset and get creative thinkers, strong communicators, tech innovators and project managers on board. The more varied your workforce, the better prepared you are to meet evolving client needs. Understand the client journey: When it comes to clients, attitudes towards accountants are changing. The Sage 2018 Practice of Now report highlights that 83% of clients expect more in terms of services and resources than they did five years ago. Rather than just focusing on the bottom line, firms should promote the importance of understanding the client’s journey, building trust and communicating regularly. Personalise: The modern client wants to be able to choose how quickly they will have access to the knowledge their accountant holds and the different types of services they receive. By providing a tiered set of services – such as offering additional business development consultancy for higher paying clients – the client can choose which they want, resulting in a personalised service and a positive experience. Deliver indispensable services: Firms must create a culture focused on efficiency, modernising legacy processes that are taking up too much time and holding accountants back from doing their job – such as manual data entry. To truly transform services, firms must focus on the quality of the work and the value derived from it, rather than just the number of hours put into each project.

must increase their focus on building strong relationships through a connection with the firm’s brand. This requires a shift in the company culture and mindset that will take time and seniorlevel support to implement. Here are the key considerations for building customer relationships to future-proof your firm.

The client experience

Firms must start by creating a culture centred around evolving client needs. It’s time to forge a deeper relationship with clients by building a forward-looking brand and delivering the experiences clients now demand. According to research from Salesforce, 81% of business buyers believe the experience a company provides is as important as its products and services. Rather than focusing solely on annual AIAWORLDWIDE.COM | ISSUE 105

Ultimately, accounting firms should strive to become part of their clients’ business – an essential partner in daily operations. By doing so, your firm will be able to build profitable, long-term relationships, evolving alongside client needs.

Don’t stand still

The secret to building and maintaining strong client relationships is to prepare for frequent change. Needs are constantly evolving, and that’s okay. Just remember to check in with employees and clients on a regular basis and redefine relationships as those needs evolve. While bookkeeping and number crunching will always be at the heart of what we do as accountants, the client experience is what sets leading firms apart. Push your firm to innovate, embrace technology and deliver the best-in-class service that clients have come to expect. ●

FINANCIAL REPORTING

istockphoto/bernie_photo

The actuarial implications of IFRS 17 Dieter Van der Stock explains how IFRS 17 will call for greater integration of actuarial and accounting systems.

nternational Financial Reporting Standard (IFRS) 17 for insurance contracts becomes effective for insurers and reinsurers on 1 January 2022. An accounting driven standard, IFRS 17 requires greater integration of actuarial and accounting systems, creating significant operational challenges related to data, processes, modelling, governance and auditability. Understanding the actuarial implications of IFRS 17 is a major challenge in its own right. Turning the calculations into a consistent accounting framework requires accountants familiar with the specific technical details of IFRS 17. This article examines one essential undertaking: designing an appropriate chart of accounts and posting logic.

Dieter Van der Stock Director – Product Manager IFRS 17, Moody’s Analytics

The chart of accounts

The chart of accounts must either supplement a thick general ledger with the required accounts to produce a financial statement in accordance with IFRS 17, or be the cornerstone of an IFRS 17 subledger that will complement a thin general ledger. A suitable account numbering system should at the very least: ●● distinguish between portfolios and direct versus reinsurance business; ●● classify insurance liabilities according to IFRS

Author bio

Dieter Van der Stock is Director – Product Manager IFRS 17 at Moody’s Analytics, specialising in IFRS 17 and other financial reporting standards.

17 measurement approach; ●● segregate accounting policy via profit and loss (P&L) or other comprehensive income (OCI); ●● isolate the different components of an insurance liability or asset, such as fulfilment cash flows, risk adjustment and the contractual service margin (CSM); ●● group components belonging to the liability for remaining coverage and those belonging to liability for incurred claims; and ●● isolate the different types of movements (changed to a group of contracts induced by new business, experience variance, assumption changes, interest accretion, foreign exchange impact, and so on). This design is not only a matter of classification, but also calls for decisions on how to meet all of the IFRS 17 disclosure requirements. You could analyse movements through the net income statement and OCI, but how do you segregate movements that stay on the balance sheet, such as between the present value of fulfilment cash flows and the CSM?

Design of the posting logic

A comprehensive chart of accounts is a good start, but the bigger challenge lies in the design of the posting logic, which must automate the ISSUE 105 | AIAWORLDWIDE.COM

FINANCIAL REPORTING translation of the actuarial calculations into the appropriate debit and credit journal entries. On the balance sheet, you need to account for the carrying amount of every group of insurance contracts into its distinct components: present value of cash flows; risk adjustment; and CSM. In addition, to meet IFRS 17 disclosure requirements, you must consider the same numbers from an alternative view. This involves breaking them down into the liability for remaining coverage, excluding the loss component, plus the loss component on one hand and the liability for incurred claims on the other hand.

Changes to the components

At every reporting period, you must isolate changes to each of these components according to their origin. For example, new business in a non-onerous group increases the CSM, as you will be expecting additional premium cash flows out of it. After deducting expected claims and the risk adjustment, you need to keep the CSM largely on the balance sheet. Only across time will you gradually release tranches of the CSM into revenue, on a par with the release of claims and expenses in each period. To make this happen, you must create journal entries to recognise the CSM as a liability and, subsequently, to amortise it into revenue. Additionally, different types of changes will affect all the moving parts of your group at reporting time. For example, when you update the mortality tables for a group of life insurance policies, you require journal entries that separate the impact of these non-financial assumption changes on these elements: ●● present value of cash flows segregated across premiums, claims and expenses; ●● risk adjustment, which you may have to recalculate; and ●● ultimately, the CSM, because your expected profits will be affected. Another example is that you must recalibrate your insurance liability components with adjustments to your actuals and expected. But you cannot treat all such adjustments using the same accounting logic; that is, a change in financial assumptions will not affect the CSM. It does have an impact on current service but not future service; hence, you need to post it directly into income or expense. For current service movements, you also must identify the split between insurance service and insurance finance. The insurance finance components include interest accretion and changes in discount rates. When a profitable group of contracts turns onerous, you need the posting logic to dissolve the CSM and recognise a loss component in expenses directly. Over time, you will not only account for the claims and expenses in the period, but will also gradually recognise some revenue as a reversal of previously posted losses. AIAWORLDWIDE.COM | ISSUE 105

Other factors

An accounting driven standard, IFRS 17 requires greater integration of actuarial and accounting systems, creating significant operational challenges.”

Another area of complexity is the treatment of foreign currencies, which is where IAS 21 comes into play. IFRS 17 requires you to apply a discount rate with characteristics that are consistent with your insurance contracts, also in terms of currency. But how do you discount in a multicurrency group of insurance contracts? Splitting the group into subgroups per currency is not always desirable and also not possible if the group contains individual policies with cash flows in more than one currency. One option to solve this issue would be to convert all cash flows of the group into a single currency. This might work where the FX impact is not very material, but for many businesses this is not the case. Thus, another option would be to apply, on a subgroup level, a discount rate on the cash flows per currency. This would be a more accurate approach but increases the complexity and introduces a number of important challenges. For example, at this subgroup level, you would have to remove the floor on the CSM and allow it to become negative. This is because onerousness is determined on a group level and not on a subgroup level. You also need to produce posting logic for the ultimate release of revenue and expense out of other comprehensive income into profit or loss, related to your accounting policy with respect to treatment of foreign exchange, disaggregation and reversals. Next, acquisition expenses are embedded in your liabilities and CSM. Hence, the recovery of acquisition expenses over time will also be embedded in the release of CSM in income and expense. However, you also want to report the amortisation and recovery of acquisition expenses separately in the income statement, which requires further calculations and accounting logic. Another major challenge is the investment component (especially in the variable fee approach, but also elsewhere). While actuaries will take care of its definition and calculation, accountants need to design the logic to define the actual investment component on a paid claim, and remove and extract it from investment and service expense to enable IFRS 17 compliant disclosure. A good practice would be to encapsulate the complexities of the IFRS 17 treatment of your insurance business in a sub-ledger solution, which inserts a journal into your general ledger and enables it to fill the IFRS 17 part of your financial reporting. In such a setup, you want a sub-ledger level period closure process, which includes recognising insurance profit or loss across the period, which you should do on the level of individual groups of insurance contracts. You should install controls and reconciliation checks to demonstrate that within the scope of your subledger, your books balance and your disclosures reconcile. To have all of your IFRS 17 calculations and accounting processes audit ready, your solution must register all process steps – as well as manual interventions (if any) – meticulously. ●

Collaborating with clients How can accounting firms ease the biggest pains of collaborating with clients? Andrew Filev explores.

istockphoto/peshkov

Andrew Filev Founder and CEO, Wrike

ISSUE 105 | AIAWORLDWIDE.COM

ompanies of all sizes are turning to the expertise of professional services providers more than ever before. In fact, the professional services industry is forecasted to grow by 5.4% by 2020, reaching almost $5 trillion, according to the Professional Services Market Global Report. This growth is sure to be welcomed by leaders in the professional services space, but given the capacity challenges presented by new clients, there are sure to be reservations. Delivering excellence in high volumes requires process, structure and agility. Most professionals today need tools to help them get through the day and deliver a positive experience for the client. And if the market is poised to grow, these tools will only become more important. Wrike’s report, “From Process to Automation: The Professional Services Work Management Benchmark Report,” surveyed those who work in the professional services industry, including accountants, to get an idea of the challenges they face on the ground every day. The survey reveals that accountants feel they are struggling with delivering projects on time, juggling a portfolio of clients simultaneously, and keeping projects on budget. It’s essential to understand the day to day challenges being faced by accountants, and the impact that they have on the quality of work being delivered to clients. Inefficient processes create mistakes and delays, and these can ultimately hurt your bottom line. These issues were cited as the leading causes of churn and frustration among clients. Missing a deadline with one client creates a domino effect that impacts the resources allocated to others. When accountants have to spend a lot of time on manual processes for resource management or rely upon last-generation collaboration tools like email to work with their teams, delays such as these are bound to happen. Let’s take a look at the more specific processes which accountants are still having to spend time on.

It’s essential to understand the day to day challenges being faced by accountants, and the impact these have on work quality.”

Accounts need a lifeline to meet their deadlines

Interestingly, over a quarter of respondents (28%) said keeping projects on track and hitting deadlines was their biggest struggle. Over two-fifths (41%) said most projects completed within the last year went over budget and/or past schedule and a similar amount said that projects are “sometimes” delayed (37%). When you consider that nearly a third (29%) said that projects going over budget or deadline cause the most churn or frustration among clients, you realise how big of an issue this is. Projects can’t go to plan if responsible teams aren’t aligned. The main reasons for misalignment amongst teams are: ●● conflicting priorities and not enough time to accomplish all projects on deadline (13%); ●● inaccurate planning, resource management and time allocation (13%); and ●● disorganisation within the team and no clear workflow processes in place (9%).

Low level tasks are killing high value time

According to Wrike’s research, nearly a third of accountants cite having too many projects and/or clients to manage effectively (32%) and managing different clients’ processes (30%) as their most prominent work challenge. This is compounded by the fact that they’re spending a lot of time on admin. A third of respondents (33%) said that they spend two to three hours tracking billing hours every week, and just over a third (36%) spend the same amount of time sending project update emails, generating status reports, or having status AIAWORLDWIDE.COM | ISSUE 105

update meetings each week. This is an incredible amount of time to spend on admin and could be why the majority (60%) report working more than eight hours a day, two to three times every week. It’s also astonishing that this much time is spent on tasks that can easily be automated. In fact, over a quarter (28%) say they could do double the amount of work every week if technology could automate the repetitive, administrative tasks of their job. Nearly a quarter (23%) said that automating administrative and/or repeatable tasks like status update notifications, project creation and task assignment would have the most significant positive impact on their team. These teams may be surprised to hear that the technology needed to do this already exists. It’s easy to implement, it’s not expensive, and some firms are already using it. It’s just a case of investing in it and, by default, investing in employees.

Author bio

Andrew Filev is the founder and CEO of Wrike, provider of popular social project management software with customers from 50+ countries. He is a seasoned software entrepreneur, project and product manager, and advisor to several fast-growing ventures.

These are all symptoms of poor resource management and project planning. Not only is this detrimental to client satisfaction, but it also causes employee burnout. The other reasons cited for delays create a direct correlation between an inability to kick off projects effectively and missing deadlines: 18% of accountants cited waiting for client feedback; 19% cited last-minute changes to requirements; and 15% cited unclear expectations from clients. Of course, these delays are sometimes beyond your control. But if you can communicate effectively with your client from the start, you’ll reduce the chances of it happening. According to the research, 54% of accountants use two or three tools to manage projects and communicate with their teams and clients. These

PROFESSIONAL SERVICES

tools may include email, spreadsheets and chat apps to name a few. Using too many tools can also make collaboration difficult because details can easily get lost across them causing miscommunication, delays and even more administrative work due to version control issues. As the old saying goes, “The best-laid plans of mice and men often go awry.” Even the most perfectly planned and resourced projects can be plagued by problems. Communication can break down and, without process in place, the actual results can diverge significantly from the plan. Execution is your ability to follow a plan, and ultimately execution is what sets you apart from your competitors.

To get serious, the first step is to streamline your systems into a single tool for sharing plans and collaborating with your team.”

Centralise planning and communication to stay aligned

If you want to get serious about time management, the first step is to streamline your systems into a single tool for sharing plans and collaborating with your team. Such a “single source of truth” will eliminate the admin work of manually consolidating notes across systems, and keeping all communication organised and in context. It should also be flexible enough to accommodate your diverse client projects.

Other easy to implement work management best practices to incorporate into your project workflow include: 1. Use templates and checklists to organise incoming work: Templates for success work. They help to organise all the elements of the project that need to be considered before you get started. 2. Implement project kick-off meetings: Meet with your client before you start working to make sure that you’re on the same page. 3. Use specific, effort-centric resource allocation: Try to allocate specific tasks to particular people with timeframes. 4. Break projects into tasks and subtasks: Most overriding larger tasks will have subtasks within them that need to be done. 5. Track projects in a timeline or calendar: Knowing what tasks are coming down the pipeline helps when prioritising, assigning and scheduling tasks. Completing client projects on time and with a high standard of excellence is critical to customer retention and your firm’s reputation. By improving your processes for work management and execution, you can keep your clients, and your team satisfied and coming back for more. ●

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ISSUE 105 | AIAWORLDWIDE.COM

Events FACE TO FACE

WWW.AIAWORLDWIDE.COM/EVENTS

IRELAND

11 June 2019 AML and VAT Conference Camden Court Hotel, Dublin 10.00 to 14.30

21 May 2019 Forensic Accounting Seminar The University of London, The Garden Halls, 1 Cartwright Gardens, London 18.00 to 20.30

10 September 2019 SME Conference The University of London, The Garden Halls, 1 Cartwright Gardens, London 09.00 to 15.30

23 May 2019 Forensic Accounting Seminar AC Hotel by Marriott, Salford Quays, Manchester 18.00 to 20.30

12 September 2019 SME Conference AC Hotel by Marriott, Salford Quays, Manchester 09.00 to 15.30

3 September 2019 Audit & Accounting Standards Conference Camden Court Hotel, Dublin 10.00 to 14.30

WEBINARS

21 June 2019 Charity Accounts 11.30 to 12.30

Audit and Accounting Standards Conference 3 September 2019 Camden Court Hotel, Dublin 10:00 to 14:30 Join us on 3 September at the Camden Court Hotel in Dublin to hear important updates and guidance from two key speakers on revenue audit and accounting standards. The morning session will cover revenue audit and be led by Jim Kelly from Grant Thornton. Further information on this session will be available at www. aiaaccountingstandards.com shortly. Robert Kirk, Professor of Financial Reporting at Ulster University, will take over for the afternoon session, with an update on accounting standards. The session will cover recent developments in both local and international accounting standards – particularly the new IFRS 16 Leases and the changes to FRS 102 introduced from 1 January 2019, as well as the recent development of implementing more simplified rules on small and micro company reporting in Ireland. Delegates will leave the session with a broad understanding of the significant changes in financial AIAWORLDWIDE.COM | ISSUE 105

reporting both internationally and locally. In addition they will have increased knowledge of where to access the information required to be adopted in order to apply the amended and new financial reporting standards. Additional benefits In addition to a highly informative and interactive presentations, delegates will also benefit from: ●● the opportunity to ask speakers direct questions and receive

expert advice; ●● networking opportunities with peers; ●● 5 CPD units and a certificate of attendance; and ●● lunch and refreshments provided.

Book now Book your place at this event by visiting www.aiaworldwide.com/events, or call us on +44 (191) 493 0282, quoting the reference below! £85.00 | AIA members (CPD780) £95.00 | Non-members (CPD781)

Technical INTERNATIONAL IPSASB seeks comments on measurement proposals The International Public Sector Accounting Standards Board (IPSASB) has released a consultation paper, “Measurement”, which addresses how measurement bases are determined in the public sector. The paper includes an illustrative exposure draft, “Measurement”, which shows what the IPSASB currently envisages a final pronouncement will comprise. This is the first time that the IPSASB has used such an approach, which is intended to provide a firm basis for constituent comments. The consultation paper lays out proposed guidance for measurement bases for the assets and liabilities most commonly used by public sector entities when applying IPSAS. It proposes the development of a single standard which will provide definitions and guidance on the main measurement bases, while other IPSAS will continue to provide guidance on which particular measurement basis is to be used. The consultation paper and exposure draft respond to: ●● the need to consider existing measurement requirements in the light of the measurement guidance in IPSASB’s conceptual framework; ●● that it is necessary to standardise usage of the term “fair value” within IPSASB’s literature following the issue of private sector guidance in IFRS 13; and ●● the need to provide guidance on difficult issues, such as borrowing costs and transactions costs. The final pronouncement will underpin the IPSASB’s approach to measurement for many years. It is therefore essential that the IPSASB hears the views of respondents on the preliminary views and the other matters raised for comment in this consultation paper. To access the consultation paper and its summary “At a glance” document, or to submit a comment, visit the IPSASB website at www.ipsasb.org. Comments on the consultation paper are requested by 30 September 2019.

Audits of less complex entities The International Auditing and Assurance Standards Board (IAASB) has

published a discussion paper, “Audits of less complex entities: exploring possible options to address the challenges in applying the International Standards on Auditing (ISAs)”.The IAASB seeks to further understand the challenges of using ISAs in audits of less complex entities – and views about possible actions to address these challenges. The IAASB recognises the global call for action to address issues of complexity, length, understandability, scalability and proportionality related to using the ISAs. Continuing the debate on these strategic issues, the discussion paper explores how the IAASB, and others, could further support auditors working in increasingly evolving environments. The IAASB welcomes input from all interested stakeholders as it charts an appropriate way forward. The consultation will remain open until 12 September 2019. French and Spanish translations will be available on the IAASB’s website in mid-May.

IASB proposes targeted amendments to IFRS Standards in response to IBOR reform The International Accounting Standards Board has published for public comment proposed changes to the old and new financial instruments Standards, IAS 39 and IFRS 9, in light of the reform of interest rate benchmarks such as interbank offer rates (IBORs). The board has proposed to amend IFRS 9 “Financial Instruments” and IAS 39 “Financial instruments: recognition and measurement” to provide relief from specific hedge accounting requirements that could have resulted in the discontinuation of hedge accounting solely due to the uncertainty arising from interest rate benchmark reform. IFRS Standards require companies to use forward looking information to apply hedge accounting. While interest rate benchmark reform is ongoing, uncertainty exists about when the current interest rate benchmarks will be replaced and with what interest rate. Without the proposed amendments, this uncertainty could result in a company having to discontinue hedge accounting solely because of the reform’s effect on its ability to make forward looking assessments. This, in turn, could result in reduced usefulness of the information in the financial statements for investors. The board is considering the accounting implications arising from

the reform in two stages. These proposed amendments relate to the effects of uncertainty in the period leading up to the replacement of interest rate benchmarks. As more information becomes available about the replacements, the board will assess the potential accounting implications of reform and determine whether to take further action. Proposed amendments to IFRS 9 and IAS 39 can be viewed in the exposure draft “Interest rate benchmark reform”. The comment deadline is 17 June 2019. The board aims to issue final amendments later in 2019.

IFRS foundation consults on proposed amendments to its Due Process Handbook The trustees of the IFRS Foundation are inviting stakeholder comment on proposed amendments to its “Due Process Handbook”, the procedural requirements followed by the International Accounting Standards Board and the IFRS Interpretations Committee. The Foundation Trustees’ Due Process Oversight Committee (DPOC) is responsible for overseeing the board and the Interpretations Committee’s compliance with the due process set out in the Handbook. The due process is based on three principles: transparency; full and fair consultation; and accountability. The trustees have reviewed the Handbook and proposed amendments to ensure it is up to date in light of the activities of the board and Interpretations Committee, remains fit for purpose and continues to reflect best practice. The main proposed changes are to: ●● update the procedures relating to the use of effects analysis – assessing the likely effects of a new or amended IFRS Standard – to ensure that they are consistent with current activities and make it clear that such analyses take place at all stages of the standard-setting process; and ●● clarify the role and status of agenda decisions by the Interpretations Committee and amend the Handbook to make agenda decisions a tool for the board. In addition, the proposed amendments aim to: clarify the categories of education material produced by the IFRS Foundation; refine the consultation requirements for adding ISSUE 105 | AIAWORLDWIDE.COM

Technical major projects to the board’s work plan; clarify the role of the IFRS Advisory Council; and clarify the processes for approving amendments to the IFRS Taxonomy and the DPOC’s role in overseeing the IFRS Taxonomy due process. The proposed amendments reflect responses to a stakeholder perception survey in 2017 that showed the Foundation’s due process is highly regarded but that some stakeholders question whether the due process could be made more efficient without having a negative impact on the quality of work. As a consequence of the proposed amendments to the Handbook regarding the Advisory Council, the trustees are also proposing a corresponding narrow-scope amendment to the IFRS Foundation’s constitution. View the consultation document at bit.ly/2YJFMx5. Comments are due by29 July 2019.

UK AND IRELAND Guide to help smaller listed companies improve financial reporting A new guide to help smaller listed and AIM quoted companies improve their financial reporting has been published by the FRC and ICAEW. The guide addresses issues raised by the FRC about the quality of financial reporting in this sector, and provides practical tips and questions for audit committees to consider, with a view to driving up the quality of smaller quoted company financial reporting. “Smaller listed and AIM quoted companies – a practical guide for audit committees on improving financial reporting” offers practical, cost-effective suggestions on how smaller quoted companies can improve the quality of their financial reporting. It suggests questions for audit committees to ask themselves and those associated with the financial reporting process, including the board, chief financial officer, finance team and external auditors. These questions are designed to encourage the smaller quoted companies to reflect on current practices and consider areas for improvement. High quality financial reporting can contribute to a strong and efficient economy by improving transparency and giving investors the ability to assess the financial integrity of a company and AIAWORLDWIDE.COM | ISSUE 105

hold management to account. However, for many smaller listed and AIM quoted companies, financial reporting is not always seen as a top tier issue. The guide is available from the FRC website.

Consultation on revising standards for investment reporting The Financial Reporting Council (FRC) has launched a consultation on revisions to the Standards for Investment Reporting (SIRs) 1000-5000 and on an exposure draft for a new SIR 6000 dealing with quantified financial benefits statements. The SIRs set requirements and provide guidance for reporting accountants carrying out reporting engagements on UK investment circulars. These engagements include private reporting, for example on working capital statements, as well as public reporting engagements on published financial information. SIR 1000 provides basic principles and procedures for all relevant engagements, and SIRs 20006000 provide additional principles and procedures for specific types of public reporting. Feedback and stakeholder outreach confirms that the work done by reporting accountants plays a vital part in the effective functioning of UK capital markets transactions, and new EU wide Prospectus Rules effective from July 2019 mean they need to be updated. The work carried out by reporting accountants is often closely related to the audit of financial statements, but has a specific purpose. The SIRs therefore exist to provide clarity about the expectations on those carrying out the work, and to help ensure consistent high quality work is performed. The FRC encourages feedback on all aspects of the consultation, but is particularly interested in hearing whether the proposed revisions provide a sound framework for the work carried out by reporting accountants and meets stakeholder expectations, including whether the current format of reporting is sufficiently transparent and informative about the opinions being given. The review anticipates changes in EU rules, with a new Prospectus Regulation ((EU) 2017/1129) being adopted on 14 June 2017 and due to be fully in force within the EU by July 2019. References to specific rules within the SIRs will need to be revised when the implementation of new rules in the UK is finalised. Comments on the consultation are due by 5pm on 26thJuly 2019.

Consultation paper proposal to revise ISA (Ireland) 570 IAASA has issued a consultation paper seeking the view of stakeholders regarding IAASA’s proposal to issue a revised version of ISA (Ireland) 570 “Going concern”. The accompanying “Exposure draft – Proposed ISA (Ireland) 570 (Revised)” can be accessed on the IAASA website. The changes proposed are in line with the changes that are proposed and currently under consultation by the Financial Reporting Council (FRC). IAASA supports the proposed amendments, noting their importance in supporting an enhanced focus by auditors on going concerns. IAASA believes that they represent an improvement to the current ISA (Ireland) 570 and will lead to improvements in audit quality. Stakeholders and interested parties are invited to provide responses by email only to submissions@iaasa.ie no later than 5pm on 28 June 2019.

IAASA publishes Information Note ‘Requirement to disclose disaggregated revenue’ IAASA has published an Information Note “Requirement to disclose disaggregated revenue” reminding companies of the requirement in IFRS 15 to disclose the disaggregation of revenue into categories that depict how revenue and cash flows are affected by economic factors. Those disclosures must provide sufficient information to enable users to understand the relationship between the disaggregated revenue and the revenue information that is disclosed for each operating segment. IAASA has observed that some companies have provided more disaggregated revenue information outside of the financial statements (e.g. in investor presentations or in management reports). IAASA has challenged those companies as to why further disaggregation of revenue was not provided within the notes to the financial statements. IAASA reminds directors and Audit Committees to consider the revenue information that is presented outside the financial statements when considering the presentation of “categories that depict how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors”.

Technical ASIA PACIFIC MASB: IFRIC agenda decisions On 18 December 2018, the Malaysian Accounting Standards Board (MASB) issued for public comment six tentative agenda decisions (TAD) published by the IFRS Interpretations Committee (IFRIC), including the TAD on IAS 23 “Borrowing costs” relating to over time transfer of constructed goods. In March 2019, the IFRIC considered, among others, the public comments on TAD – IAS 23 and concluded that the TAD shall be issued as an agenda decision. When IFRIC decides not to add an issue to its standard setting agenda, it will publish an agenda decision. The agenda decision explains why the IFRIC concludes that there is no need to amend or add to requirements in IFRS Standards after considering an application question. As explained in the IFRIC Updates (March 2019), an agenda decision might often result in explanatory material that provides new information that was not otherwise available and could not otherwise reasonably have been expected to be obtained. An entity might determine that it needs to change an accounting policy as a result of an agenda decision. The IASB expects that an entity would be entitled to sufficient time to make that determination and implement any change (for example, an entity may need to obtain new information or adapt its systems to implement a change). The MASB observed that non-private entities in the real estate industry might need to change their accounting policy as a result of the agenda decision on IAS 23. In ensuring consistent application of the Malaysian Financial Reporting Standards, which are word-for-word the IFRS Standards, the MASB has decided that an entity shall apply the change in accounting policy as a result of the agenda decision on IAS 23 “Borrowing Costs” to financial statements of annual periods beginning on or after 1 July 2020.

XBRL filing enhancements – new multi upload tool and latest version of BizFinx preparation tool released The latest version (v.2.7.0) of BizFinx preparation tool is now available for

download at theBizFinx portal. The key enhancements include: ●● a new option to select “Singapore Financial Reporting Standards (International)” [“SFRS(I)”] under “Type of accounting standard used to prepare financial statements”; and ●● a new feature to validate and upload XBRL files to the BizFinx server via API (application programming interface), without the need to logon to the BizFinx portal. All companies must file their financial statements in XBRL format using this latest version of the BizFinx preparation tool with effect from 1 September 2019. The exception is for companies preparing financial statements using SFRS(I) that must use this latest version of the BizFinx preparation tool with immediate effect.

UNITED STATES FASB issues targeted transition relief to institutions applying the credit losses standard The Financial Accounting Standards Board (FASB) has issued an Accounting Standards Update(ASU) that eases transition to the credit losses standard by providing the option to measure certain types of assets at fair value. Issued in 2016, the credit losses standard introduced the expected credit losses method for measuring credit losses on financial assets measured at amortised cost, replacing the previous incurred loss method. It also modified the accounting for availablefor-sale debt securities, which must be individually assessed for credit losses when fair value is less than the amortised cost basis. The new ASU allows an option for preparers to irrevocably elect the fair value option, on an instrument by instrument basis, for eligible financial assets measured at amortised cost basis upon adoption of the credit losses standard. This increases the comparability of financial statement information provided by institutions that otherwise would have reported similar financial instruments using different measurement methodologies, potentially decreasing costs for financial statement preparers while providing more useful information to investors and other users. For institutions that have not yet adopted the credit losses standard, the

new ASU will be effective when they implement the credit losses standard. For institutions that have already adopted the credit losses standard, the new ASU is effective for fiscal years beginning after 15 December 2019, including interim periods within those fiscal years. Early adoption is permitted in any interim period after the issuance of the new ASU as long as an institution has adopted the credit losses standard. The ASU is available at www.fasb.org.

FASB issues proposal to simplify accounting for income taxes The Financial Accounting Standards Board (FASB) has issued a proposed Accounting Standards Update (ASU) intended to reduce cost and complexity for the accounting for income taxes. Stakeholders are asked to comment on the proposal by 18 June 2019. The proposal would remove specific exceptions to the general principles in Topic 740 – Income taxes in generally accepted accounting principles (GAAP). The proposed ASU eliminates the need for an organisation to analyse whether the following apply in a given period: ●● exceptions to the incremental approach for intra-period tax allocation; ●● exceptions to accounting for basis differences when there are ownership changes in foreign investments; and ●● exceptions in interim period income tax accounting for year-to-date losses that exceed anticipated losses. The proposed ASU also would improve financial statement preparers’ application of income tax-related guidance and simplify GAAP for: ●● franchise taxes that are partially based on income; ●● transactions with a government that result in a step up in the tax basis of goodwill; ●● separate financial statements of legal entities that are not subject to tax; and ●● enacted changes in tax laws in interim periods. The proposed ASU would not create new accounting requirements not previously included in Topic 740. This is a part of the FASB’s Simplification Initiative to make improvements to accounting standards through a series of short term projects. The proposed ASU is available at www.fasb.org. ● ISSUE 105 | AIAWORLDWIDE.COM

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