International Accountant 122

INTERNATIONAL

ACCOUNTANT MARCH/APRIL 2022 ISSUE 122

Can the business protection tax stabilise the energy sector?

Mandated digitisation for VAT reporting How to repay the Covid-19 bounce back loan The thorny issue of goodwill: indicators of impairment

CONTENTS

In this issue Contributors 2 Meet the team

News and views

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Customs easement to help Ukraine aid exports

AIA news

a compulsory Consolidated Financial Statement question, typically worth 35 marks and taking up a scheduled 63 minutes of your allocated three-hour exam period.

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5

Financial sanctions measures in relation to Russia

Government backed loans

8 VAT processes

Students 8 Exam technique The new Developments in Auditing and Assurance paper was set for the first time in November and then aims to extend and deepen the student’s understanding of auditing and auditing techniques. This article offers some suggestions for how you can improve your exam technique.

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The transition to real time reporting Many governments are evaluating and implementing innovative VAT and general fiscal law enforcement models based on mandatory data transmission by businesses source systems. Christiaan Van der Valk (Sovos) considers global government mandated digitisation for VAT reporting, including continuous transaction controls.

Consolidation questions David Oakes (AIA moderator) considers how to approach “Financial Accounting & Reporting 2” consolidation questions.

Your performance in this demanding examination paper will largely depend upon how you perform in Question 1,

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A stop gap protection In an attempt to stabilise the energy sector, the government has introduced a new temporary tax to deter investors in energy supply businesses from using the company’s assets for their own benefit. Christy Wilson (Katten Muchin Rosenman UK LLP) asks whether a new public interest business protection tax can stabilise the energy sector.

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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Goodwill 25

Energy sector Students 12

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Can you bounce back?

In 2021, the Department for Business, Energy and Industrial Strategy estimated that 37% of bounce back loans (or £17 billion) issued to assist businesses during Covid-19 would not be repaid – mostly because the businesses concerned would not survive over the longer term. Richard Simms (FA Simms & Partners) examines how to help a client if they are struggling to repay a government backed loan.

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+44 (0)191 493 0277 www.aiaworldwide.com

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Subscribe to International Accountant subscriptions@aiaworldwide.com

Get the details right After initial recognition at cost, goodwill must then be subsequently amortised on a systematic basis over its useful life. Steve Collings (Leavitt Walmsley Associates Ltd) examines the thorny issue of goodwill and how it must be reviewed to identify if there are indicators of impairment.

Dates for your diary Upcoming events

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Technical 29 Global updates

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Editor’s welcome

Contributors to this issue

Editor’s Welcome

RICHARD SIMMS

Richard Simms is the managing director of FA Simms & Partners. He is a chartered accountant, licensed insolvency practitioner and anti-money laundering expert. Much of his time is spent advising clients with regards to financial problem resolution.

CHRISTIAAN VAN DER VALK

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he UK and many other countries have imposed a number of economic sanctions on Russia and Belarus. These recent measures are directly relevant to both members in business and practice, as well as to those working in the charity and Not for Profit sector.

AIA expects firms to have established systems and controls to counter the risk that they might be used to further financial crime, including compliance with financial sanctions obligations.

Members should also consider their ethical obligations in relation to the sanctions regime and we will update guidance on this matter as the situation develops.

With the AIA exams only a few weeks away, we have commissioned two articles for students preparing for their professional qualification exams.

The first contains vital information on exam technique for students sitting the Developments in Auditing and Assurance paper; and the second covers how to approach ‘Financial Accounting & Reporting 2’ consolidation questions.

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Rachel Rutherford Editor, IA

We will also be providing more articles for students on the student section of the AIA website and through AIA Achieve Academy, as students approach this vital period in their revision schedule.

Elsewhere in this issue, we examine global trends in tax. Many governments are evaluating and implementing innovative VAT enforcement models, and our article on VAT processes specifically looks at digitisation for VAT reporting.

We also review FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland, which deals with the issue of goodwill in Section 19 Business Combinations and Goodwill. We consider the subjective nature of goodwill, and how it must be reviewed to identify if there are indicators of impairment.

We also look at the new Public Interest Business Protection Tax (PIBPT), which the government introduced in an attempt to stabilise the energy sector and deter investors in energy supply businesses from using the company’s assets for their own benefit.

As vice president for strategy at Sovos, Christiaan Van Der Valk leads research into trends in the market and tax legislation. His insight and expertise are instrumental in determining business strategy and when to buy, build or partner to create solutions that meet emerging trends. Christiaan’s philosophy is that companies should embrace the role of pioneer, rather than shy away from it.

CHRISTY WILSON

Christy Wilson is a Tax Associate in the Transactional Tax Planning practice at Katten Muchin Rosenman UK LLP. She completed her training contract at Dentons in September 2020 and has been involved in pro-bono projects for the National Centre for Domestic Violence.

STEVE COLLINGS

Steve Collings, FMAAT FCCA is the audit and technical partner at Leavitt Walmsley Associates Ltd, where he trained and qualified. He became a member of the AAT in 2001 and qualified as a Chartered Certified Accountant in 2005 In 2010, Steve became a Fellow of the ACCA. ISSUE 122 | AIAWORLDWIDE.COM

News UKRAINE

IRELAND

Customs easement to help Ukraine aid exports

© Getty images/iStockphoto

Moving aid and donations to the people of Ukraine will be made easier thanks to a customs easement, the UK government has announced.

The simplification of customs processes will apply to goods intended to support those affected by the humanitarian crisis in Ukraine which are exported from Great Britain. Provided that the goods are not exported to, or through, Russia or Belarus, then these simplified processes apply to qualifying goods regardless of the destination to allow maximum flexibility to get aid to where the need is greatest.

The government still recommends that organisations and people who would like to help donate cash through trusted charities and aid organisations, rather than donating goods. Cash can be transferred quickly to areas where it is needed, and individuals and aid organisations can use it to buy what is most needed.

However, businesses, charities and community organisations sending aid from British ports will be able to make a customs declaration by speaking

Record employment in international financial services in Ireland

to customs officers or simply by the act of driving through a port. They will no longer need to complete and submit electronic customs declarations to HMRC before exporting these goods, and smaller movements will not need to use the Goods Vehicle Movement Service to pass through ports where it is in operation.

The easement will also remove other customs formalities, such as needing to notify HMRC when the goods have been exported.

Speaking at the launch of the Ireland for Finance Action Plan for 2022, Minister of State for Financial Services, Credit Unions and Insurance, Seán Fleming TD, has welcomed the record level of employment in international financial services firms in Ireland.

The new Action Plan for 2022 has a sharper focus than recent years with 11 priority measures that were developed in partnership with industry to be delivered across five key themes: ● sustainable finance; ● fintech and digital finance; ● diversity and talent; ● regionalisation and promotion; and ● operating environment.

Seán Fleming TD stated: “I welcome the news that there are over 52,800 people working across the country in international financial services, a new record high for the sector in Ireland. The resilience that the industry demonstrated in 2020 and 2021 made further growth possible and the results from last year give us an even stronger platform for the future.”

LEGISLATION

New measures to tackle corrupt elites and dirty money become law The UK’s new Economic Crime (Transparency and Enforcement) Act 2022 received Royal Assent on 15 March, following an expedited passage through Parliament.

Introduced following Russia’s invasion of Ukraine, the new legislation will mean that the government can move more quickly to impose sanctions against oligarchs already designated by our allies, as well as intensifying our sanctions enforcement. The Foreign Secretary will continue to set out further sanctions made possible by our new powers.

A new Register of Overseas Entities, requiring those behind foreign companies which own UK property to reveal their identities, will also be created under the Act. Entities that refuse to reveal their “beneficial owner” will face tough restrictions on selling the property and AIAWORLDWIDE.COM | ISSUE 122

those who break the rules could face a fine of up to £2,500 per day or up to five years in prison. This will be a valuable tool for law enforcement agencies in investigating suspicious wealth. Companies House will now begin work to implement the register as quickly as possible, working closely with the UK’s three land registries.

Any foreign company selling properties between 28 February and the full implementation of the register will also be required to submit their details at the point of sale.

Reforms to Unexplained Wealth Orders (UWOs) will remove key barriers to their use, increasing time available to law enforcement to review material provided in response to a UWO and protecting them from incurring substantial legal costs if they act reasonably in a case that is ultimately unsuccessful.

Furthermore, UWOs will be more effective against those who hold property in the UK via trusts and other complex ownership structures. The government has also committed to publishing an annual report on their use.

Chancellor of the Exchequer Rishi Sunak said: “Our Economic Crime Act will enable us to crack down harder and faster on dirty money and those who support Putin and his regime. We are using all of our financial might to send a clear message to the Kremlin that this criminal venture will end in total failure.”

These measures form part of a wider package of legislative proposals to tackle illicit finance which will be introduced in Parliament in the coming months, including reforming Companies House and introducing new powers to seize crypto assets more easily.

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News SECURITY

SINGAPORE

SEC awards approximately $14 million to whistleblower

Singapore’s Minister for Finance Lawrence Wong delivered the Singapore Government’s Budget Statement for Financial Year 2022 on 18 February 2022.

Against a backdrop of ongoing difficulties relating to Covid-19, which is continuing to impact the country both economically and personally, Budget 2022 charts a new way forward. It was delivered as a first step in strengthening Singapore’s position in a post-pandemic world.

Budget 2022 sets out key plans to: ● invest in new capabilities; ● advance the green transition; ● introduce measures aimed at creating a fairer society; and ● develop a fairer and more resilient revenue structure.

Full details of Budget 2022 are at: www.singaporebudget.gov.sg.

© Getty images/iStockphoto

© Getty images/iStockphoto

Singapore Budget 2022

The US Securities and Exchange Commission (SEC) has announced an award of about $14 million to a whistleblower who published an online report exposing an ongoing fraud.

The whistleblower, who days later shared the same information with the SEC and was persistent in reaching out to the staff, prompted the opening of an investigation which resulted in a successful enforcement action and the return of millions of dollars to harmed investors.

“Whistleblowers can play a critical role in an investigation,” said Creola Kelly, Chief of the SEC’s Office of the Whistleblower. “Here, the whistleblower posted a research report online outlining the allegations against the company and its officer and also, importantly, took expeditious steps to provide this information to the Commission. This case demonstrates the importance of whistleblowers reporting directly to the

SEC so that the agency can promptly investigate allegations of wrongdoing.”

The SEC has awarded approximately $1.2 billion to 249 individuals since issuing its first award in 2012. All payments are made out of an investor protection fund established by Congress that is financed entirely through monetary sanctions paid to the SEC by securities law violators. No money has been taken or withheld from harmed investors to pay whistleblower awards. Whistleblowers may be eligible for an award when they voluntarily provide the SEC with original, timely and credible information that leads to a successful enforcement action.

Whistleblower awards can range from 10% to 30% of the money collected when the monetary sanctions exceed $1 million.

As set forth in the Dodd-Frank Act, the SEC protects the confidentiality of whistleblowers and does not disclose information that could reveal a whistleblower’s identity.

required to comply with laws stipulating that audit firms must be locally owned and independent.

KPMG will also leave Belarus. A spokesperson for KPMG International said: “We believe we have a responsibility, along with other global businesses, to respond to the Russian government’s ongoing military attack on Ukraine. As a result, our Russia and Belarus firms will leave the KPMG network.

“KPMG has over 4,500 people in

Russia and Belarus, and ending our working relationship with them, many of whom have been a part of KPMG for many decades, is incredibly difficult.

This decision is not about them – it is a consequence of the actions of the Russian government. We are a purposeled and values-driven organisation that believes in doing the right thing. We will seek to do all we can to ensure we provide transitional support for former colleagues impacted by this decision.”

RUSSIA

Big 4 accounting firms leave Russia The Big 4 accountancy firms – PwC, KPMG, EY, and Deloitte – have announced that they will no longer operate in Russia amid the ongoing attacks on Ukraine.

PwC, KPMG, and EY are global networks of individual firms that are separate legal entities, a structure

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News

AIA

NEWS PARTNERS

AIA announces new partners STUDENTS

AIA collaborates with selected partners to offer a wide range of additional tools and services to save members time and money, helping them to grow their business and those of their clients.

In the last few weeks, AIA is pleased to have welcomed three new strategic partners: ● Airwallex: a global banking services provider: This new partnership will provide AIA members with the opportunity of operating without borders and restrictions with easy access to global accounts, transfers © Getty images/iStockphoto

AIA study texts launches on a new interactive platform

AIA study texts, supplied by BPP Learning Media, will be launched on a new interactive platform, offering students a better learning experience.

The new platform is VitalSource, a premium global ebook provider, which has improved search and annotation features and includes new features such as read aloud.

The platform is faster, more reliable and is more user friendly.

AIA learning materials will be transferred to the new system shortly with no additional costs.

AIA will be in touch with all students before the transfer completes with further details and access information.

AIAWORLDWIDE.COM | ISSUE 122

and FX, payment acceptance and borderless cards. ● Pixafusion Marketing Agency: This new exclusive partnership between AIA and Pixafusion will provide members with brand, marketing and advertising solutions at competitive member rates. ● Penfold: a pension provider: This latest exclusive agreement will provide self-employed and freelance AIA members with the opportunity to invest in a bespoke powerful, flexible pension.

TRUST

AIA Educational & Benevolent Trust The AIA Educational & Benevolent Trust has two main purposes: to provide funding to support educational development in the accountancy profession; and to make a meaningful difference to AIA members who have fallen on tough times.

The Trust is registered with the Charity Commission for England and Wales, registration number 1118333.

The income for the Trust comes almost exclusively from donations from AIA members.

You can donate directly at aiaworldwide.enthuse.com. You can also choose to donate to the AIA Educational & Benevolent Trust through purchases from Amazon.

Shop at smile.amazon.co.uk and raise a donation to the AIA Educational & Benevolent Trust, at no cost to you. Same products, same prices, same service.

Applying for assistance

If you wish to apply for assistance through the AIA Educational & Benevolent Trust, you can download an application form from the AIA website.

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News FINANCIAL SANCTIONS

Financial sanctions measures in relation to Russia

© Getty images/iStockphoto

Following the United Kingdom Prime Minister’s statement to the House of Commons on 22 February 2022, the UK has announced a tranche of sanctions on Russia. The full details of the measures are available on the Foreign, Commonwealth and Development Office website. If you require a licence to permit any activity which would otherwise be prohibited by sanctions regulations, you must contact the relevant department.

We expect firms to have established systems and controls to counter the risk that they might be used to further financial crime, including compliance with financial sanctions obligations.

Where the AIA identifies failings in financial crime systems and controls, we can impose restrictions and/or take enforcement action. Additionally, the Office of Financial Sanctions Implementation (OFSI) has the power to levy civil monetary penalties for breaches of financial sanctions and works with law enforcement for the most egregious cases where criminal prosecution may be considered.

Firms should screen current and new clients against the UK Sanctions List to meet these new sanctions measures

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and screen against the OFSI list of asset freeze targets for financial sanctions obligations. You are legally obliged to report to the OFSI at the earliest opportunity if: ● you know or suspect that a breach of financial sanctions has occurred; ● a person you are dealing with, directly or indirectly, is a designated person; ● you hold any frozen assets; and ● knowledge or suspicion of these come to you while conducting your business.

Our expectations of firms’ systems and controls in relation to compliance with financial sanctions are set out in AML Guidance for the Accountancy Sector (AMLGAS). Where clients give rise to concerns about sanctions evasion or money laundering, you should also consider your obligations to report to the UK Financial Intelligence Unit (UKFIU) at the National Crime Agency (NCA) under the Proceeds of Crime Act 2002.

For further details on financial sanctions, you should contact OFSI or, for trade and export sanctions, you should contact the Department for International Trade’s Economic Control

Joint Unit. Applications must be made in advance of any business agreement or transaction taking place.

Republic of Ireland/European Union

Financial sanctions emanate from the UN and the EU and are contained in sanctions lists. All natural and legal persons are obliged to comply with financial sanctions and can do so by monitoring the EU and UN lists and taking appropriate action as required.

The consolidated lists and further guidance are available at bit.ly/35ZbnUR and bit.ly/3Jnoeyw.

Firms should be aware that these sanctions are subject to change and should maintain up to date screening processes.

David Potts, AIA Director of Operations and MLRO, said: “In a rapidly changing environment AIA expects its supervised firms to maintain robust sanctions screening controls and consider obligations to report suspicious activity. As a professional supervisory body, we will continue to carefully monitor developing sanctions guidance and update members as appropriate.”

ISSUE 122 | AIAWORLDWIDE.COM

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STUDENTS

Exam technique Some suggestions for how you can improve your exam technique for the paper “Developments in Auditing and Assurance”.

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he new Developments in Auditing and Assurance paper was set for the first time in November. The paper has changed somewhat from the old Paper 15 Professional Accountant in construct and emphasis, although the content is broadly similar and the key factors leading to success in the paper apply.

The new examination is building on the Principles of Governance and Audit paper from the Professional 1 level and the other related elements of the Foundation level and then aims to extend and deepen the student’s understanding of auditing and auditing techniques.

The examination therefore explores auditing and assurance procedures to consider more challenging reporting areas and issues. It examines and critiques current practices and explores emerging and future developments in auditing and assurance.

In addition to providing a thorough professional grounding in audit, other assurance areas are also discussed, applying audit techniques to emerging areas.

The specific aims are to develop and examine the candidate’s ability to: 1. present, discuss and critique advanced auditing approaches and techniques; 2. demonstrate how these can be applied in different situations mainly (but not only) in relation to financial statement audits; and 3. discuss and critique developments in auditing and accountability.

(Note that wider aspects of accountability are also covered within this paper.)

What does this mean in practice?

The paper is examining your ability to analyse issues and then develop appropriate audit or other responses, as well as demonstrating your ability to critically appraise current practice and future developments.

To enable the examiner to test these skills, the Developments in Auditing and Assurance paper is based around a complex real-world scenario from which audit and assurance issues arise.

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The paper is split into three questions, all of which are compulsory, and which may or may not always relate to the same scenario. The first question, worth 50% of the marks, will always be based on this scenario.

The remainder of this article is aiming to help students to prepare for this first unseen practice scenario-based question.

Key skills

The key skill that you are being assessed on within this question is the ability to apply your professional knowledge and skills to the specific issues arising in the audit/assurance engagement described.

To maximise your marks, you must address the specific issues in the scenario against relevant professional auditing standards or professional codes or quality guidance, and illustrate that you appreciate the key risks and problems within the issue.

Nature of the scenario

The scenario will give details of an entity subject to an audit or assurance assignment. Students will be asked to place themselves within a professional service team – usually as the audit manager or engagement partner – and to respond to the issues raised from this practical perspective.

Always these topics represent the audit of an ISSUE 122 | AIAWORLDWIDE.COM

STUDENTS to extract the key issues is advised! Credit will be given in the answers if students include additional understanding from their own studies but there will be sufficient information given in the scenario to explore the issues in depth.

Examination approach

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Using the scenario

The exam has a duration of three hours, plus 15 minutes reading time. As all the questions are compulsory, this time is for you to slowly read the information in the scenario and to read the three questions to understand the issues that you are required to consider in your responses.

Obtaining an understanding of the scenario

Your preliminary analysis of the scenario should always apply the indicators of problems in ISA 315 Identifying the Risks of Material Uncertainty (revised) and ISA 570 Going Concern.

© Getty images/iStockphoto

accounting estimate and therefore you should be applying the ideas of ISA 540 Audit of Accounting Estimates (revised), reflecting the move by IFAC to embed increased professional scepticism and evidence of management challenge in the work done.

They also always require an ability to assess risk and management bias within the context that the entity is operating and for the specific accounting balance or issue being explored, and to appreciate the impact that the context in which the entity operates has upon these risks. This is assessing your ability to identify risks and develop appropriate responses in the professional assignment.

The examiner tries to ensure that the issues examined are as relevant as possible and will therefore contextualise the entity in challenges that are contemporary and should be familiar to the student. The examiner also will ensure that the entity described is in a business that most students should be able to relate to. All the detailed information that students require to analyse risks and understand the unique problems facing the entity will be detailed in the scenario – and so some diligent reading initially

The key weakness in answers is a lack of detailed development of the issues and this may reflect some lack of detailed reading of the scenario or a lack of detailed knowledge of the relevant standards being examined. Whilst lack of knowledge can only be resolved by detailed preparation (and I deal with some tips below) lack of application can be resolved by exam technique.

As the paper is 70% application and 20% evaluation and synthesis rather than knowledge recall, your answers must reflect this. To this end, the examiner advises students to ensure that they understand the key issues in accounting standards, auditing standards, professional codes, quality standards, etc. and then apply these 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.

The examiners’ main observation on the performance of most papers in prior sittings of both Developments in Auditing and Assurance and Paper 15 concerned the lack of depth that students brought to their answers. Where students did have a grasp of the issues under consideration, they often failed to develop the discussion to show their application to the case in the question. You need to make explicit links between the professional requirements applicable to the issue and the issue as described. Side headings are useful. You can either structure the answer around the individual issues within the question that are applicable or against the sections of the standard/code you are using to determine your professional response – but only include those sections that are relevant!

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STUDENTS A useful checklist to ensure that you have identified key issues would be that extracted from “Obtaining an understanding of the entity and its environment, the applicable financial reporting framework and the entity’s system of internal control”.

The following side headings will help you to identify the key issues: a. The following aspects of the entity and its environment: i. the entity’s organisational structure, ownership and governance, and its business model, including the extent to which the business model integrates the use of IT (Ref: para A56‒ A67); ii. industry, regulatory and other external factors (Ref: para A68‒A73); and iii. the measures used, internally and externally, to assess the entity’s financial performance (Ref: para A74‒A81). b. The applicable financial reporting framework, and the entity’s accounting policies and the reasons for any changes thereto (Ref: para A82‒A84). c. How inherent risk factors affect susceptibility of assertions to misstatement and the degree to which they do so, in the preparation of the financial statements in accordance with the applicable financial reporting.

Extracted from ISA 315 Identifying the Risks of Material Uncertainty (revised) The end of the standard also gives detailed checklists on considerations for the understanding of an entity and its business model; and understanding of ● inherent risk models; ● the system of internal control; ● an entity’s internal audit function; ● IT; and ● general IT controls.

If you have a good working knowledge of the details of this standard, you will have good working templates for analysing any assurance/audit engagement – and hence any Developments in Auditing and Assurance scenario.

Understanding the questions

You must also ensure that you understand what the overall context is for the question. To that end ensure you identify the following: ● What role have you been assigned (engagement partner, audit manager, ethic partner, etc.)? ● What sort of firm are you working for? Is it an international LLP? Does it have a lot of offices nationally or internationally? ● Are there any issues with staff changes? Are there any indicators of problems with quality or competence of the staff? ● Are there any development issues in the light of new standards or practices?

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● What aspect of the engagement does each sub part of the question require you to address? And how do the issues you have identified in your planning relate to and affect these? ● Are any specific accounting standards or issues being explored in the question? ● What are the issues in applying those standards in practice and what issues in the question may make these difficult? Is there management bias?

How will it potentially affect the way in which the accounting estimates are treated?

If the question asks for specific guidance on the conduct of the audit work – be as specific as possible around the evidence that you will obtain – and link this into the ideas from ISA 500 Audit Evidence and ISA 540 Audit of Accounting Estimates (revised) Be aware that the paper is focusing more on complex issues and your ability to synthesise information, which means that you will be potentially pulling information from a lot of sources in the question and from a lot of different auditing and accounting and other professional standards. This reflects the real world of a working auditor – it is rare to get a real-life problem which nicely sits in only one aspect of accounting or auditing!

Writing your answer

Having identified the issues from the scenario and decided upon the correct response for the question, write the answer clearly showing the link between the two. As stated above side headings are useful to structure the answer and clearly demonstrate the links between professional standards and how this applies to the issue you are addressing. ● Ensure that you address the specific requirements of the question. ● Use side headings, including introduction and conclusion or recommendations (depending upon the requirements) to sign post the marker around the answer. ● Use full sentences not bullet points.

Concluding thoughts on examination technique

The Developments in Auditing and Assurance paper is not designed to trip you up or to trick you. The examiner has written a scenario that allows you to show your professional knowledge and skills and that you have the necessary competence to be in charge of an audit or assurance assignment in the real world. Whilst the exam cannot cover all aspects of an assignment, and the context and the specific issues being examined will change between each sitting, the paper is testing your ability to act professionally and so all papers will require your ability to demonstrate the fundamental skills and knowledge of an auditor. ● ISSUE 122 | AIAWORLDWIDE.COM

STUDENTS

Consolidation questions David Oakes considers how to approach “Financial Accounting & Reporting 2” consolidation questions.

David Oakes AIA moderator

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our performance in this demanding examination paper will largely depend upon how you perform in Question 1, a compulsory Consolidated Financial Statement question, typically worth 35 marks and taking up a scheduled 63 minutes of your allocated three-hour exam period.

The question will demand knowledge of consolidation techniques far beyond the basic level knowledge you obtained in studying for “Financial Accounting & Reporting 1”.

Typically, consolidation examination questions will cover one or more of the following areas: ● complex groups; ● changes in group structure; ● foreign currency subsidiaries; and ● group statements of cash flow.

We are going to focus in this article on how to approach such a question, using the May 2021 examination question as our base.

Consolidated Statement of Profit or Loss

From such a sketch, we can conclude that as far as the year to 31 December 2020 is concerned, we need to consolidate Amber (parent) and Coral (sub) for the entire year, Jade (sub) for six months (prior to disposal), and Onyx (associate using the equity method) for nine months.

The time apportionment of Jade will apply to each of the (six) line items in the Profit or Loss and OCI. The one line consolidation of the associate is also time apportioned so it is important that these key details are picked up before you start tackling numbers in your statement.

So the basic “recipe” for the six lines in the Profit or Loss will be:

The main part of this question was a requirement to produce a Consolidated Statement of Profit or Loss (25 marks) and the scenario was fairly detailed.

There were four group companies: ● a parent (Amber); ● a subsidiary (Coral); ● a sub-subsidiary (Jade), which was disposed of Amber + Coral + 6/12 Jade. half way through the financial year; and ● an associate company (Onyx), which had been This basic recipe applied across the six lines acquired in two stages – a financial investment in would pick up good basic (easy) marks and an earlier year upgraded to associate classification represent a good way to start your answer. More part way through the current year. demanding calculations can be completed later and the results added to your statement. Show Identification of this group structure with the make-up of each line item as a calculation relevant dates is an important part of tackling the in brackets underneath the line item in question question and it is useful (if not vital) to produce a (see below). Also, don’t forget proper headings in sketch of the group structure (see Box 1). the statement itself.

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STUDENTS

Finally, when preparing workings make sure that you number them and give them a title. The cross referencing of these workings to your final answers makes life much easier for markers in terms of awarding you well deserved marks for the workings you have done.

Let us begin then by doing the “recipe” for the Consolidated Statement of Profit or Loss. Some of these line items will be final, others will need further adjustments.

We can then turn to some of the other relatively straightforward adjustments required.

Amber: Consolidated statement of profit or loss for the year ended 31 December 2020 ($m) Revenue: 4,500 + 3,600 + (6/12 x 2,500) Cost of sales: 3,600 + 3,100 + (6/12 x 2,300) Gross profit Other operating income: 90 + 40 + (6/12 x 20) Operating expenses: 420 + 480 + (6/12 x 180) Group profit on disposal of subsidiary Re-measurement gain on equity investments Finance costs: 60 + 40 + (6/12 x 30) Share of associate’s profit Profit before taxation Taxation: 110 + 4 + (6/12 x 2)

W2 inter-company trading

This is a common adjustment in consolidation questions, and particularly pertinent for a P&L. Basic principles are to eliminate the full value of the trading from both revenue and cost of sales, but to then add back the value of unrealised profit in closing inventory to the cost of sales figure.

Details were in note 4. The goods were sold at a mark-up of 25% and the formula for dealing with such a calculation is:

W1 Group structure (year-end 31 December 2020)

Amber 1 Jan 2018 80%

Onyx 1 Jan 19: 15% + 1 Apr 20: 20%

Coral 1 Jan 2019 70% to 30 June 2020 Jade

Effective interest Group: 80% x 70% = 56% NCI: 44% (balance)

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1 Apr 20 = 35% Associate

Selling price x mark up % / 100 + mark Up % x Unsold % Adjustments: Eliminate trading = Dr Revenue $20m Cr Cost of Sales $20m.

Unrealised Profit = $20m x 25/125 x 25% = $1m = Dr Cost of Sales.

W3 Other income

©Getty images/iStockphoto

Box 1: W1 Group structure (year-end 31 December 2020)

This line item required one simple adjustment to eliminate the Coral profit on disposal of shares figure of $10m which needs to be calculated from a group perspective and shown separately.

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STUDENTS W4 Re-measurement gain on equity investment

This is a fairly quick and easy adjustment from note 3. In connection with the Investment in Associates figure for the SFP, we need to restate the value of the original 15% investment in Onyx. Amber originally paid $3m, but the fair value at the date of the increase in the investment was $4.5m. So we report the increase as a re-measurement gain in the P/L:

Coral $m Consideration + NCI share of net assets

37.0

Coral: $40m x 20%

8.0

W5 Operating expenses

The easy adjustment here will be additional depreciation based on the fair value adjustments to PPE. The fair value adjustment is based on the given figure of $40m for net assets less share capital ($10m) and retained earnings ($15m) = $15m fair value adjustment. The remaining useful life was stated as 10 years so $15m/10 years = an extra expense of $1.5m pa.

W6 Share of associate’s profit

The equity method for associates merely needs the inclusion of the parent’s share of the associate’s profit after tax for the period for which the associate has been in the group.

Here time-apportionment is required so: 9/12 x $20m x 35% = $5.3m.

More easy marks!

We have now picked up most of the easy marks in the question but there are still three more difficult figures to be included in the P/L: ● the impairment of goodwill in Coral; ● the group profit on the disposal of Jade; and ● the attribution of the final profit figure to the parent and the non-controlling interest.

The other key question requirement was to calculate some key numbers from the statement of financial position as at 31 December 2020, and these are key group calculations which you must be able to perform. In terms of easy marks, it is perhaps worth looking at some of these next!

W7 SFP goodwill at 31.12.2020

You will always need to calculate goodwill in any consolidations question, so let us do the calculations for both subsidiaries before we go much further! We are using the partial method which means a share of net assets for the noncontrolling interest figure and all impairment losses are borne by the parent.

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40.0*

Jade: £30m x 44%

13.2

Less net assets at acquisition

(40)

(30)

5.0

23.2

Goodwill at acquisition

($4.5m – $3m) = $1.5m and we include the $4.5m as part of the cost of our Investment in Associate.

Jade $m

*(Coral paid $50m: group share 80%)

W8 SFP Investment in Associate at 31.12.2020

This is a relatively easy calculation. We begin with the cost of the 20% shareholding ($6m). We then add on the fair value of the original 15% holding at the date of acquiring the additional 20% ($4.5m) – see W4. We finish with the usual equity accounting approach of adding on the group share of post-acquisition profits of the Associate:

So:

(35% x $20m x 9/12) = $5.3m (W6) $6m + $4.5m + $5.3m = $15.8m

Time for the hard marks!

We can then turn to the harder calculations in the question. You may not be able to get these completely right but you can still pick up lots of marks by attempting them with clear workings.

W9 Group profit on disposal of subsidiary (Jade)

This is worth a substantial amount of marks in the context of this question and is a working that you need to learn! The essential formula for a group disposal calculation is as follows: Proceeds

X

Less: Net assets at disposal date

X

Goodwill at acquisition

X

Less NCI at disposal date

(X) X

Group profit or loss on disposal

X

The proceeds figure has been given ($60m).

The net assets at disposal date will be the fair value of net assets at acquisition ($30m) plus the increase in retained earnings to the disposal date:

So:

(20 + (8 x 6/12) – 10) = $14m $30m + $14m = £44m

The goodwill figures were calculated earlier W7.

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STUDENTS Finally, the NCI at disposal date can be calculated by adding the NCI share of increased retained earnings (see above) to the opening balance: ($13.2m (W7) + (44% x $14m) = $19.4m So the disposal calculation is:

(10)

Add group profit on disposal

12.2

---

Adjusted subsidiary profit

15.7

4.0

NIC %

20% 44%

NCI share $m

Proceeds

60.0

Net assets at disposal date

44.0

Goodwill at acquisition

23.2 (19.4) 47.8

Group profit or loss on disposal

12.2

W10 Impairment loss on goodwill

This is relevant to Coral and is prompted by the information supplied regarding the recoverable amount for that subsidiary.

This will be a combination of the four group companies and requires a coming together of all of our workings so far.

Amber $m

Coral $m

Jade $m

505.0

46.0

24.0

Fair value depreciation (W10)

(4.5)

Coral profit on disposal of Jade shares (W3)

(10.0)

Group profit on disposal of Jade shares (W9)

12.2

Less: 3 years’ fair value depreciation: ($15m / 10y x 3y) W5

(4.5) 66.5 6.3 72.8

Recoverable amount (per question)

W12 Retained earnings SFP at 31.12.2020

40.0 31.0

Notional goodwill: $5.0m (W7) x 100/80

That completes all the workings for the Consolidated Statement of Profit or Loss. The final statement is shown at the end of this article.

The final two outstanding figures from the Statement of Financial Position can now be calculated.

At 31.12.20/Disposal date

Increase in post-acquisition retained earnings: ($30m + $16m – $15m)

67.8

1.8

*($8m x 6/12)

$m Net assets at 31.12.2020 Fair value of net assets at 1.1.2018

3.1

$m

Less:

Less NCI at disposal date

Less company profit on disposal

Re-measurement gain (W4)

1.5

Unrealised profit (W2)

Gross goodwill impairment loss

5.0

Share of associate income (W6)

Group share of goodwill impairment loss: 80% x $5.0m

4.0

Pre-acquisition retained earnings

(1.0) 5.3 (15.0)

(10.0)

27.7

14.0

Group share: Coral: 80% x 27.7

W11 Profit for the year attributable to non-controlling interest

We need a figure here for both subsidiaries, even though Jade has been disposed of by year-end.

Coral $m

Jade $m

Profit for year whilst a sub:

16.0

4.0*

Fair value depreciation ($15m/10y)

(1.5)

Unrealised profit on inventory AIAWORLDWIDE.COM | ISSUE 122

(1)

Jade: 56% x 14.0 Less: impairment loss (W10)

22.2 7.8

(4.0) 537.8

W13 SFP Non-controlling interest at 31.12.2020

The only NCI remaining is that of Coral (Jade has been disposed of).

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STUDENTS

£m

Group profit on disposal of subsidiary (W9)

12.2

NCI at acquisition 1.1.2018 (W7)

8.0

NCI share of retained earnings 2019 & 2020 ($30m – $15m) x 20%

Re-measurement gain on equity investment (W4)

3.0

Operating expenses 420 + 480 + (6/12 x 180) + 1.5 (W5) + 4 (W10)

(995.5)

Finance costs 60 + 40 + (6/12 x 30)

(115.0)

Less fair value adjustments for 2019 & 2020 (0.6) ($15m / 10y) x 2 x 20% Plus share of profit for 2021 (W11)

3.1 13.5

$m

Cost of sales 3,600 + 3,100 + (6/12 x 2,300) – 20(W2) + 1(W2) Gross profit Other income 90 + 40 + (6/12 x 20) - 10 (W3)

Profit before taxation Profit after taxation

Amber: Consolidated statement of profit or loss for the year ended 31 December 2020 Revenue 4,500 + 3,600 + (6/12 x 2,500) – 20(W2)

Share of associate’s profit (20 x 9/12 x 35%) W6 Taxation 110 + 4 + (6/12 x 2)

And finally…

1.5

5.3 537.5 (115.0) 422.5

Attributable to: Owners of the parent

417.6

Non-controlling interest 3.1 + 1.8 (W11)

4.9 422.5

9,330.0 (7,831.0) 1,499.0 130.0

This article should give you some clarity on how to tackle these demanding consolidated questions and how to maximise your ability to earn vital marks. ●

Tolley®Guidance Our experts guide you through the latest developments in tax, explaining the implications and what workflow actions are needed for you and your clients.

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VAT PROCESSES

The transition to real time reporting

Christiaan Van der Valk considers global government mandated digitisation for VAT reporting, including continuous transaction controls.

T

he first decade of the new millennium saw governments globally test the waters of new e-invoicing models. During the last decade, continuous transaction controls (CTCs) and e-accounting initially swept across Latin America to improve tax collection.

Digitisation of tax administration and private sector VAT processes had long lagged behind general business and government practice – because of the strict nature of VAT regulation and nervousness about the auditability of electronic data. Today, many governments are evaluating and implementing innovative VAT and general fiscal law enforcement models based on mandatory data transmission by businesses source systems.

Continuous transaction controls

CTCs encompass a variety of requirements AIAWORLDWIDE.COM | ISSUE 122

for e-invoices and similar transaction documents to be sent to – and often pre‑approved by – the tax administration in real time or near-real time as part of the communication process between suppliers and buyers. Jurisdictions that already have CTCs in place have shown not only improvements in VAT collection, but also greater digital resilience. The global health crisis armed governments with established CTC programmes with all the evidence needed to argue that rapid digitisation was essential to a modern economy where tax is paid as due and policies can be varied flexibly based on advanced data analytics.

Digitising tax reporting processes has allowed early innovators to reduce VAT gaps and eased the burden of traditional reporting methods on administrative staff. While CTC introduction has not always been easy on businesses, many

©Getty images/iStockphoto

Christiaan Van der Valk VP of Strategy and Regulatory, Sovos

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VAT PROCESSES of which had to migrate to new systems and processes to comply, all this points towards the rapid development of real-time economies over the next decade. Tax will become a continuous activity powered by automation, as global legislators work towards reducing any obstacles that prohibit the secure collection and legitimate use of data across businesses, markets and governments.

Although it carries global benefits, tax digitisation happens at a local level, bringing a range of compliance challenges for businesses operating across multiple markets. In the coming years, developing the knowledge and technological capabilities to adapt to these regulatory changes as they happen will be critical for any business.

So, how can businesses implement the right strategy to remain agile in the face of coming tax transformations?

Understanding the VAT challenge and the digital solution

While VAT concerns all parties involved in the supply chain, only businesses can deduct their input tax – the VAT incurred during the supply of goods and services. Therefore, VAT requirements concerning invoicing typically only apply to businesses. Invoices are a key source for governments to determine the indirect taxes owed to them, with private companies playing the role of tax collector through their own self-assessment.

VAT contributes over 30% of all public revenue for nearly all the world’s trading nations, so while businesses are required to self-report their tax obligations, it’s necessary for authorities to audit and control business transactions. Despite this, fraud and mismanagement often mean that governments collect less VAT than is owed. This is commonly referred to as the VAT gap.

The ongoing health crisis has hurt economies and governments across the globe are therefore now placing greater focus than ever on reducing their VAT gap.

In Europe, the annual VAT gap is approximately €140 billion, increasing to €164 billion in 2020 due to Covid-19. So, many governments are realising that more effective measures through structural changes are needed to improve how VAT is regulated and enforced.

Existing VAT reporting in many EU member states is becoming more granular and more frequent. Many are quickly evolving towards real-time controls with or without electronic invoice mandates.

In January 2019, Italy became the first EU country to introduce mandatory e-invoicing

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Although it carries global benefits, tax digitisation happens at a local level, bringing a range of compliance challenges.

through a data exchange platform previously used for public procurement messaging. Spain was an early adopter of the CTC reporting method. Since 2017, all companies have been required to report inbound and outbound invoices within four days. However, new plans are now in discussion to make B2B invoicing mandatory.

Meanwhile, in Hungary, suppliers have had to report their sales invoices above a minimum threshold in real time since 2018 and they can now, together with their customers, decide to exchange their invoices using the tax administration real-time reporting platform.

Across Europe and other regions, the past two years have highlighted the need for more accurate and real-time e-invoicing systems to help reduce the VAT gap – enabling governments to recoup tax owed and drive economic recovery. Next, let’s look at four major trends in VAT digitisation.

The four megatrends in VAT digitisation The swift adoption of new tax legislation places new demands on businesses and their IT systems to send sales and supply chain data in real time. And with unrestricted access to company transaction data and financial ledgers, tax authorities and other government entities now have extraordinary insight into companies’ operations across the entire economy.

In many ways pioneered by Latin America, the rest of the world is now also digitising VAT in the following four areas.

Trend 1: Adoption of CTC models is accelerating

After introducing CTCs in the early 2000s, many countries in Latin America now have a stable system in place, requiring a significant amount of data from invoices, transport documents and other key transaction data.

Europe and other regions took a different path, starting with legal acceptance of electronic invoices with voluntary adoption in the early 2000s to now swiftly moving to ISSUE 122 | AIAWORLDWIDE.COM

VAT PROCESSES approaches more closely resembling the Latin American CTC systems.

However, the problem for many global businesses is that all these countries are adopting different variations on the CTC theme – making it increasingly difficult for companies to know the rules and compliance requirements for each tax regime and arm themselves with the legal monitoring and technical tools needed to stay compliant.

Trend 2: The rise of destination taxability for cross-border transactions Cross-border online sales of low-value goods or digital services to consumers in other countries for a long time escaped VAT collection altogether. Governments for years simply considered the volume of such transactions to be too low to invest in fiscal enforcement measures.

Meanwhile, however, the volume of cross border e-commerce has increased significantly.

Therefore, tax administrations are looking to implement measures to apply indirect tax to the trade of goods and services in the country of consumption.

Many OECD and G20 countries have recently adopted rules for the VAT treatment of B2C supplies from abroad. While a big focus has been on cross-border digital services, others have also introduced elaborate programmes for low-value consignments. Europe, for example, in 2021 introduced its One-Stop-Shop (OSS) platform which aims to facilitate reporting for taxable persons and their representatives or intermediaries.

Trend 3: Tax authority dependency on the availability and performance of online services

With the introduction of CTCs, many tax administrations have created a major dependency on the availability and performance of digital government platforms to receive and sometimes approve massive amounts of economic transactions. The failure of these CTC systems would have a significant negative effect on the economy and citizens’ well-being. What’s more, having placed VAT reporting and remittance obligations on nonestablished vendors of goods and services to local consumers, governments are facing new administrative and systems challenges.

Digital transformation is a massive undertaking, so to ease the burden over the past decade governments have found ways of distributing responsibilities to third parties – often companies that already process transactions for large amounts of taxpayers.

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An example of this is the EU’s e-commerce package, which contains far-reaching assumptions that e-commerce marketplaces, rather than individual vendors, in certain cases are responsible for VAT. This way, the tax authorities can focus on one easily identifiable party rather than a large number of taxable persons with varying degrees of administrative capability.

However, tax administrations piggybacking on natural aggregators to support digitisation is not limited to B2C transactions. Over a decade ago, Mexico pioneered the PAC model for CTCs. This concept of accrediting or obligating B2B technology vendors that already manage business transactions has since become popular in many countries.

Trend 4: E-accounting and e-assessment The move towards CTCs has revolutionised

To ease the burden of digital transformation, governments have found ways of distributing responsibilities to third parties.

the decades-old routine of VAT compliance.

However, tax administrations aren’t just interested in transactional data from businesses. They also want to have detailed insight into taxpayers’ accounting data.

Until recently, this need to consult a company’s core data was met through the instrument of onsite audits. But tax administrations have now developed sophisticated software tools to e-audit businesses’ ERP and accounting systems.

To make this even more powerful, standardisation of business data can play a major role. A growing number of tax administrations are therefore relying on the OECD’s Standard Audit File for Tax (SAF-T) specifications and guidelines.

With these four trends in mind, we can be sure that the pace of global VAT digitisation will continue to accelerate. For more detailed analysis of global tax developments, Sovos’ annual “Trends report” aims to condense recent regulatory, business and technological developments in this area into an accessible format (see bit.ly/349aB6P). ●

Author bio

Christiaan Van der Valk is VP of Strategy and Regulatory at Sovos, where he leads research into trends in the market and tax legislation.

19

PUBLIC INTEREST BUSINESS PROTECTION

A stop gap protection Christy Wilson asks whether a new public interest business protection tax can stabilise the energy sector.

Christy Wilson Tax Associate, Katten Muchin Rosenman UK LLP

O

ver the last few months, numerous energy supply companies have gone under.

In an attempt to stabilise the energy sector, the government has introduced a new temporary tax to deter investors in energy supply businesses from using the company’s assets for their own benefit. This new tax is the public interest business protection tax (PIBPT).

The introduction of PIBPT means that investors in public interest companies, including energy supply businesses, may face a tax of 75% where the company’s assets are used for the benefit of the shareholders, and as a result this accelerates the collapse of said public interest business.

When will PIBPT apply?

PIBPT will apply to the following situations: ● A person holds an asset for the purposes of it being used for the benefit of a public interest business carried on by the person. ● Steps are taken by the person that result in the asset not being used for the benefit of the public interest business. ● The steps taken materially contribute to the public interest business going into special measures or materially contributes to a significant increase in the costs of that business. ● The person was aware (or ought to have been aware) that taking the steps would result in the business entering special measures or a significant increase in the costs of that business.

Author bio

Christy Wilson is a tax associate in the Transactional Tax Planning practice at Katten Muchin Rosenman UK LLP.

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The government has outlined that the new tax will last from 28 January 2022 to 28 January 2023, but the government can extend the tax until 2025.

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PUBLIC INTEREST BUSINESS PROTECTION Who will be liable?

Although the person who is taking the steps referred to above is principally liable for paying the tax, any companies associated with the principal taxpayer will also be jointly and severally liable.

The timeframe for making a PIBPT return is very short compared to other taxes. The deadline for a PIBPT return, which is done by self-assessment, is 30 days, with the tax being payable within 15 days after. In contrast, corporation tax is payable quarterly for large and very large companies but for other companies it is not due until nine months after the end of the company’s accounting period and the tax return does not have to be filed until 12 months after the end of the accounting period.

The current market

In recent months, the price of gas and electricity has significantly increased. Usually, this would leave companies that have hedged their costs generally neutral. However, these price increases have meant that the companies that have entered into futures contracts are now holding a valuable asset, as the opportunity to buy energy at the lower fixed price contract is not available to the person purchasing energy in the market now.

Whenever an energy supply company goes insolvent, its customers will be transferred to a new supplier. However, the new supplier will not have the benefit of futures contracts for the new customers and so will have to pay large amounts to supply the new customers with energy. If a new supplier cannot be appointed, the original supply company will be placed into a Special Administration Scheme. The government will need to make funds available to the Special Administration Scheme to help them supply their new customers; as such, this creates additional costs for the government.

As energy supply companies often use another company in the same group to hold assets, this other company is able to realise the value in the assets and distribute the resulting profits to its investors, rather than using the assets for the benefit of the energy supply company.

©Getty images/iStockphoto

Who will be affected by PIBPT?

In the legislation, a public interest business is defined as being either: ● an energy supply business; or ● a business of a description specified in regulations made by the Treasury.

Although the tax is aimed at the energy sector, could the tax apply to other sectors in the future?

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Given the legislative definition of public interest business, it would be possible to add other types of business via regulation.

There have been many instances in the past (including in the financial sector) where employees have been left without wages or pensions, consequently requiring a government bail-out, even though the company’s shareholders were able to make a profit.

The energy sector is currently the focus of attention due to the corporate structures frequently adopted in order to protect shareholder investment and returns. However, while other sectors may not use exactly the same structure, the results can be the same. By only targeting the energy sector, this suggests that the government only sees the process of gaining a profit from a failing business as an issue within the energy industry, when arguably this is a wider problem within other public interest entities.

The key reason for the initial introduction of the public interest business protection tax is to regain stability in the energy sector.

How long will the PIBPT be here?

The key reason for the initial introduction of the PIBPT is to regain stability in the energy sector after the sector has endured a number of energy supplier insolvencies. The tax is being introduced to prevent shareholders from cashing out on failing businesses and hopefully this tax will have the desired effect as a deterrent.

What, though, will happen the day after the tax ends on 28 January 2023 (or 2025, if the government chooses to extend the tax)? It could be argued that the energy market will be hit with even greater volatility, as investors have been forced to put their winding-up plans on hold for the year.

Conclusion

The PIBPT could be the answer we’re looking for to stabilise the energy sector. It will be interesting to see how the new tax changes the behaviour of investors. If a tax such as this one really does change investor behaviour, could we see a similar tax model being used in other sectors? Of course, as PIBPT is only a temporary measure, a key concern is what happens the day after the tax comes to its scheduled end. ●

21

GOVERNMENT BACKED LOANS

Can you bounce back?

Richard Simms examines how to help a client if they are struggling to repay a government backed loan.

Richard Simms Managing director, FA Simms & Partners

I

n early 2020, the government established three main schemes to provide loans to businesses affected by the coronavirus pandemic: ● the Coronavirus Business Interruption Loan Scheme; ● the Coronavirus Larger Business Interruption Loan Scheme; and ● the Bounce Back Loan Scheme.

By 31 May 2021, the three schemes had disbursed over £79 billion through loans and similar facilities. The Bounce Back Loan Scheme accounted for over 93% of loans made and almost 60% of funds disbursed. Quick and easy to obtain, about a quarter of all businesses in the UK took out a bounce back loan.

But concerns have grown about potential losses and fraud around these schemes, particularly within the Bounce Back Loan Scheme.

In 2021, the Department for Business, Energy and Industrial Strategy (BEIS) estimated that 37% of bounce back loans (or £17 billion) would not be repaid – mostly because the businesses concerned would not survive over the longer term. Furthermore, the BEIS estimated that 11% of funds (£4.9 billion) would be lost to “fraud and error”.

As a result, significant “after the event” effort is being made by the government to recover funds obtained dishonestly.

How can a bounce back loan be used?

Guidance from the British Business Bank states that “the loan will only be used to provide economic benefit to the business”. The provision

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ISSUE 122 | AIAWORLDWIDE.COM

GOVERNMENT BACKED LOANS

In 2021, the BEIS estimated that 37% of bounce back loans (equivalent to £17 billion) would not be repaid.

bounce back loan might be too much pressure for your client.

If they can’t repay a bounce back loan, company directors should seriously consider taking advice from a regulated professional regarding the options for their company. In some situations, a company liquidation may be the only option.

By going through a company liquidation process, the money that a company owes is settled, as far as possible, from any value in the company and its assets. The outstanding amounts are left unpaid.

Does a liquidator of a company need to investigate the reasons for failure of a company?

A number of agencies have been tasked with identifying the dishonest use of bounce back loans. The government has set aside £32 million to go towards its “enhanced” counter-fraud operations, and a further £67 million for administrative costs of the scheme until 2024/25.

There has also been publicity surrounding police raids on individuals who were accused of bounce back loan fraud.

Alongside the government, banks and regulated professionals will also be expected to look out for the dishonest use of bounce back loans. In addition to upholding their professional ethics, there is a requirement under anti-money laundering laws for suspected illegal activity to be reported immediately to the government.

In the case of an insolvent company, the liquidator (who must be a licensed insolvency practitioner) is legally bound to review the activities of the company and decide if one or more of the directors is responsible for its failure.

The pandemic has taken us into new territory as licensed insolvency practitioners. Supporting business owners who are forced to close their company through no fault of their own is surprisingly common. Multiple businesses facing the same issue at the same time is unprecedented, however.

As insolvency practitioners, we have needed to apply insolvency law and guidance to a set of circumstances that definitely weren’t foreseen at the time the guidance was prepared. A mixture of knowledge, experience and common sense has had to be applied to each individual company situation to make a distinction between directors who have acted dishonestly and those who have been simply unfortunate and now can’t repay a bounce back loan.

What if a client can’t repay their bounce back loan?

Is striking a company off at Companies House an alternative to liquidation?

Whose role is it to check if a bounce back loan has been used correctly?

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©Getty images/iStockphoto

of working capital is an example given. The Bank’s guidance goes on to explain that a bounce back loan is not for personal purposes.

Martin Lewis, founder of website moneysavingexpert.com, asked the Treasury to elaborate on this and included the reply in the “Martin’s Analysis” section of his website. Lewis confirms that he received written information from the Treasury confirming that supporting income was an acceptable use of the loan and indeed that obtaining a loan for that purpose was possible. I refer to this as useful background rather than as definitive guidance.

Alongside the above, R3 (the trade association for the UK restructuring and insolvency community) has published a useful set of FAQs around the Bounce Back Loan Scheme. These are for reference only. While they cannot be relied on as formal guidance, answers include the statement that if “they used the Bounce Back Loan Scheme monies to draw funds for reasonable living expenses at a rate similar or lower to that of pre-pandemic, then it would be difficult to justify taking action against the director”.

The references above are part of multiple factors that must be used to determine whether a bounce back loan has been obtained or used dishonestly.

Directors who close their company down through a dissolution process to avoid paying staff wages, suppliers and Covid-19 loans are being targeted

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GOVERNMENT BACKED LOANS by the Insolvency Service. The government has enacted legislation boosting the Insolvency Service’s ability to investigate suspected wrongdoing and disqualify directors found to have abused the system. The new rules mean that directors looking to close down their company must tread very carefully indeed.

The Insolvency Service has for many years had the power to investigate directors of companies that enter any form of insolvency.

The new powers explained

The Insolvency Service has for many years had the power to investigate directors of companies that enter any form of insolvency, including administration and liquidation.

The new legislation – The Rating (Coronavirus) and Directors Disqualification (Dissolved Companies) Act 2021 – extends those investigatory powers to directors of dissolved companies. If any misconduct is found, directors face sanctions, including being disqualified as a company director for up to 15 years or, in the most serious cases, prosecution. The Act received Royal Assent in December 2021.

As well as enabling the Insolvency Service to investigate the directors of dissolved companies, the Act introduces another significant change – that there is no need to restore a company before an investigation can take place. Previously, the dissolved company under investigation would have to be restored to the register at Companies House, a time-consuming and cumbersome process.

Now, in effect, the Insolvency Service can begin any investigation straight away. Added to that, the Business Secretary will also be able to apply to the court for an order to require a former director of a dissolved company, who has been disqualified, to pay compensation to creditors who have lost out due to their fraudulent behaviour.

Why the new powers?

Author bio

Richard Simms is the managing director of FA Simms & Partners. Much of his time is spent advising clients with regards to financial problem resolution.

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Dissolution is a quick and easy way of removing a company from the Companies House register and is far cheaper than a more formal insolvency process. However, one of the conditions is that the company must not have traded in the three months previous to dissolution. If this condition is ignored, then the company’s directors will face being banned as a director of any company going forward.

The new Act is the government’s response to concerns raised that the dissolution process was being misused as a method of fraudulently avoiding repayment of government-backed loans given to business to support them during the Covid-19 pandemic.

Added to this, there were perennial concerns that directors can opt to dissolve a company along with all its liabilities and then go on to set up a new company that carries on the same business but without those liabilities – a so-called “phoenix” company.

Avoiding the pitfalls

As already stated, seeking the help of a licensed insolvency practitioner should be the first step your client should takes if they have debts in a company and are thinking of dissolving it, or are considering a more formal insolvency process such as a company voluntary arrangement (CVA) or even liquidation.

This is especially important if the company has been the recipient of government loans designed to protect firms from the effects of the pandemic, such as the Bounce Back Loan Scheme and the Coronavirus Business Interruption Loan Scheme.

Directors of companies at risk of insolvency, who are considering whether to opt for dissolution or liquidation, need to be made aware of the risks of inadvertently misusing the dissolution procedure. Ultimately, the new Act gives a company’s creditors, including the government, greater redress when it comes to recovering monies owed to them.

Business Secretary Kwasi Kwarteng summed up the new Act: “These new powers will curb those rogue directors who seek to avoid paying back their debts, including government loans provided to support businesses and save jobs.

Government is committed to tackle those who seek to leave the British taxpayer out of pocket by abusing the Covid financial support that has been so vital to businesses.”

What’s the answer?

There is no single answer. Our advice is always tailored to the individual circumstances of a business. Similarly, if we have to investigate a company as part of our role as insolvency practitioners, each situation is judged on its own merits.

We would like company directors to understand that if they simply cannot repay their government backed loan, help is out there. They definitely won’t be the first to have to consider the options for their company’s future. It must also be remembered that a business which would be viable without debts may be able to consider a restart through a formal insolvency process. ● ISSUE 122 | AIAWORLDWIDE.COM

GOODWILL

Get the details right

Steve Collings examines the thorny issue of goodwill and how it must be reviewed to identify if there are indicators of impairment.

Steve Collings Partner, Leavitt Walmsley Associates Ltd

F

RS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland deals with the issue of goodwill in Section 19 Business Combinations and Goodwill. Goodwill has always been a somewhat “thorny” issue due mostly to its subjective nature. Debates on the topic have never really met with consensus; for example, under UK GAAP, goodwill must be amortised, whereas under IFRS it is tested for impairment at each reporting date instead.

Goodwill is defined in the Glossary to FRS 102 as: “Future economic benefits arising from assets that are not capable of being individually identified and separately recognised.”

Goodwill usually arises in a business combination; i.e. when a parent entity acquires a subsidiary. At the date of acquisition, a fair value exercise of the subsidiary’s net assets is carried out and is compared to the purchase consideration, with the resulting excess being treated as goodwill (or negative goodwill as the case may be in a bargain purchase).

Internally generated goodwill can never be recognised on the balance sheet, and this

AIAWORLDWIDE.COM | ISSUE 122

is clearly set out in FRS 102 para 18.8C(f).

In addition, The Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008 (SI 2008/410) Sch 1 Note 3 only permits goodwill to be recognised when it has been acquired for valuable consideration. (See Note 2 in The Small Companies and Groups (Accounts and Directors’ Report) Regulations 2008 (SI 2008/409) Sch 1.)

Positive goodwill

Positive goodwill arises when the cost of a business combination exceeds the net assets acquired. FRS 102 para 19.22 states: “The acquirer shall, at the acquisition date: a. recognise goodwill acquired in a business combination as an asset; and b. initially measure that goodwill at its cost, being the excess of the cost of the business combination over the acquirer’s interest in the net amount of the identifiable assets, liabilities and contingent liabilities recognised and measured in accordance with paragraphs 19.15 to 19.15C.” After initial recognition at cost, goodwill must then be subsequently amortised on a systematic basis over its useful life. There is no option under UK GAAP to assign an indefinite useful life to goodwill. This is notably different than under IFRS 3 Business Combinations, which does not permit goodwill amortisation; instead entities preparing financial statements under IFRS are required

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GOODWILL Example: Impairment loss of goodwill with non-controlling interest Warrington Ltd acquired 80% of the net assets of Wolves Ltd on 15 January 2020 (which is the date of acquisition) for £340,000. At the date of acquisition, the fair value of Wolves’ net assets and contingent liabilities was £300,000. £’000 Fair value of net assets and contingent liabilities

300

Goodwill (see below)

100

NCI (£300k x 20%)

60

Goodwill Cost of investment Net assets acquired (£300k x 80%) Goodwill on acquisition

340 (240) 100

Part of the £200,000 recoverable amount belongs to the non-controlling interest. FRS 102 para 27.26 requires the carrying value of Wolves to be notionally adjusted by the goodwill attributable to the non-controlling interest. Once this has been done, the notionally adjusted goodwill is included in the net assets of the subsidiary and compared to recoverable amount to determine the value of the impairment write down for goodwill as follows: £’000 Goodwill (£100k x 4/5)

80

Unrecognised NCI share of goodwill*

20

Gross carrying value of net assets

300

Depreciation

(30) 270

Notionally adjusted carrying value At the year end 31 December 2021, the finance director carried out an impairment test on the subsidiary and established a fair value of £200,000 for the cash-generating unit as a whole. Wolves’ assets are being depreciated over their useful lives of ten years with £nil residual value at the end of this useful life. Goodwill is amortised on a five-year, straight-line basis.

£’000

370

Recoverable amount

(200)

Impairment loss

170

*Goodwill attributable to the parent’s interest of 80% was £100,000, so goodwill attributable to the NCI is 0.25 of 80%, hence £25,000. At the end of the year it is £20,000 (£25,000 x 4/5).

Carrying value of CGU Impairment £’000 £’000 Goodwill belonging to parent

80

Gross value of identifiable assets

300

Depreciation

(30) 270

Carrying value Recoverable amount Impairment loss in the parent

Postimpairment £’000

(80)

-

(70)

200

350 (200) 150

(150)

Proof: Total impairment loss as notionally adjusted

170

Unrecognised NCI share of goodwill Impairment loss in the parent

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ISSUE 122 | AIAWORLDWIDE.COM

GOODWILL to test goodwill for impairment at each reporting date. Under IFRS, there is an accounting policy choice available to measure the non-controlling interests’ share of goodwill at fair value. This is not permitted under UK GAAP. Goodwill is usually amortised on a straight‑line basis over its useful life. FRS 102 states that in exceptional cases where an entity is unable to make a reliable estimate of the useful life of goodwill, that life must not exceed ten years.

FRS 102 uses the phrase “in exceptional cases”; hence the expectation is that in most cases management will be able to reliably estimate the useful life of goodwill and hence the cap is only expected to be used in a minority of cases. When management are unable to reliably estimate the useful life of goodwill, the amortisation period cannot be longer than ten years, but it can be shorter.

Impairment of goodwill

As with all other assets, goodwill must be reviewed at each reporting date to identify if there are indicators of impairment. Where there are indicators of impairment, an impairment test must be carried out which involves establishing a recoverable amount and comparing this recoverable amount to carrying amount to determine the value of any impairment. FRS 102 s 27 Impairment of Assets deals with the issue of asset impairment. Additional impairment requirements in respect of goodwill are in paras 27.24 to 27.27.

FRS 102 confirms that goodwill, on its own, cannot be sold. It does not create cash flows to an entity which are independent of the cash flows of other assets. Consequently, the fair value of goodwill cannot be measured directly so it must be derived from the fair value of the cash-generating unit to which the goodwill forms part.

For non-wholly owned subsidiaries, i.e. where there is a non-controlling interest, part of the recoverable amount of the cash-generating unit will belong to the non-controlling interest.

FRS 102 para 27.26 requires the carrying amount of that unit to be notionally adjusted before being compared to recoverable amount.

This is done by grossing up the carrying amount of goodwill which is allocated to the unit to include goodwill that belongs to the noncontrolling interest.

The notionally adjusted goodwill is then compared with the cash-generating unit’s recoverable amount to determine the value of any write down.

FRS 102 states that an impairment loss for a cash-generating unit is allocated in the following order: first to goodwill; then to the other assets of the unit pro rata on the basis of the carrying amount of each asset in the CGU. Once an impairment loss on goodwill has been recognised, it cannot be reversed in a subsequent accounting period (FRS 102 para 27.28). This is consistent with the prohibition in company law (SI 2008/409 and SI 2008/410, Sch 1, para 20(1A)).

As with all other assets, goodwill must be reviewed at each reporting date to identify if there are indicators of impairment.

Conclusion

Goodwill lends itself to a degree of subjectivity and it is important that preparers understand the detail of FRS 102 s 18 Intangible assets other than goodwill (which deals with the amortisation aspects of goodwill) and s 19.

Goodwill amortisation should only be amortised using the cap of ten years when management are unable to reliably estimate the useful life of goodwill. Impairment losses on goodwill cannot be reversed in a subsequent accounting period and there are some technical aspects that need careful consideration which have been examined above where goodwill impairment is concerned. ●

Author bio

Steve Collings is the audit and technical partner at Leavitt Walmsley Associates Ltd.

Tolley®Library Complete coverage of UK tax and accountancy information trusted by tax professionals for over 100 years. TolleyLibrary gives you online access to all the tax and accountancy information your organisation could need.

THE DEFINITIVE SOURCE

Browse: • consolidated UK tax legislation • accountancy standards and principles • UK tax cases • commentary and analysis from our in-house experts Always up to date, always accurate and always simple to use.

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of tax research AIAWORLDWIDE.COM | ISSUE 122

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EVENTS UPCOMING WEBINARS

How to prepare for a monitoring review *Members Only Event* 17 April 2022 Time: 12:30pm – 1.30pm Speaker: David Potts, AIA Director of Operations AIA works in the public interest to ensure our members are appropriately regulated for the work that they carry out.

Fundamental to this work is monitoring the compliance of members in practice with the money laundering regulations (MLR) in the United Kingdom and Republic of Ireland respectively, and our own Public Practice Regulations.

This webinar is essential viewing, whether you are selected for an onsite monitoring visit, desktop monitoring review or AML compliance review.

The webinar will explain: ● how you should prepare for a monitoring review; ● what happens during a review; ● what happens when your review has been completed; ● how to make the most of your review; and ● top issues emerging from monitoring and supervision activity.

Risk management: why do accountants need to care? | Malaysia 27 April 2022 Time: 6pm – 7pm Speaker: Dr Lan Nguyen, Multimedia University This webinar will provide basic knowledge about risk management that accountants should know. Topics that will be covered during the talk are as follows: ● basic concepts of risk and uncertainty; ● risk management: its role for businesses; ● risk management process; and ● risk management tools and techniques.

AML compliance obligations of CPAs and TCSPs | Hong Kong 27 April 2022 Time: 12:30pm – 1:30pm

Speaker: Stephen Chan, Head of Risk and Chairman of the Risk Management Committee, BDO Fee: $50 for AIA members; $100 for non-members Language: Chinese (Supplemented with English PPT) In this webinar, guest speaker, Stephen Chan will cover the “tips and pitfalls” in complying with the current AML legal and regulatory requirements imposed on CPAs and TCSPs, and the forthcoming new AML requirements.

Other specific areas covered will include: ● key AML legislation in Hong Kong; ● HKICPA/Companies Registry AML Guidelines; ● client due diligence (CDD) requirements; ● name screening requirements;

● Suspicious Transaction Reporting (STR); and ● forthcoming new AML requirements.

Health and Social Care Levy 17 May 2022 Time: 2:30pm – 3:30pm Speaker: Mathew Akrigg, Policy and Research Officer, CIPP This session will look at the Health and Social Care Levy, one of the biggest changes to payroll processes in the UK for some time.

The session will look at the changes that have been implemented from the beginning of the 2022/23 tax year, why they have been implemented in the way they have and explore the way this has impacted payroll. Are there any learning opportunities from the issues that have arisen, particularly around employee financial wellbeing and education? And are there any options available to use to mitigate costs, both for employees and employers, while also supporting financial wellbeing.

We must also look to 2023/24 when the Health and Social Care Levy will be separated from National Insurance. We still have a lot of unanswered questions before the new tax year, so what do we still need to know, what can we do to prepare and what are the implication of having the levy separated from National Insurance contributions?

You can find further information and register for these events at www.aiaworldwide.com/events

CPD ON DEMAND Have you missed out on AIA’s recent CPD Webinars?

Our on demand content is delivered by industry experts and leading professionals, giving you the flexibility to learn and develop your skills where and when suits you best.

Each webinar is worth one verifiable CPD unit and can be purchased through the AIA shop.

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The following content is available now: ● How to be an ethical accountant ● Intellectual property ● MTD for Income Tax ● IFRS: current Key Issues ● How the accounting profession has changed in the last 12 months ● Pension update

● How to guide your clients through uncertain times ● International estates and succession: pre and post death ● Irish tax update Login to your AIA online account and choose “Shop” from the MyAIA menu.

ISSUE 122 | AIAWORLDWIDE.COM

Technical INTERNATIONAL

IFAC welcomes European Commission efforts to enhance corporate reporting The International Federation of Accountants (IFAC), which comprises 180 member and associate organisations and represents over 3 million professional accountants globally, welcomes the opportunity to provide input into the European Commission’s work to enhance corporate reporting – including a focus on corporate governance, statutory audit and supervisory aspects of the ecosystem that delivers relevant, reliable and comparable information to stakeholders.

As the voice of the global accountancy profession, IFAC understands the crucial role that auditors, as well as professional accountants more broadly, play in

INTERNATIONAL New IFAC digital platform assists public sector transition from cash to accrual accounting: Pathways to Accrual To contribute to and promote the development, adoption and implementation of high quality international standards, the International Federation of Accountants (IFAC) launched a new digital platform, Pathways to Accrual, providing a central access point to resources helpful for governments and other public sector entities planning and undertaking a transition from cash to accrual accounting, including adopting and implementing International Public Sector Accounting Standards (IPSAS).

Pathways to Accrual builds upon the work of the International Public Sector Accounting Standards Board (IPSASB)’s Study 14, Transition to the Accrual Basis of Accounting: Guidance for Governments and Government Entities, with updated content and a modernised presentation with easier navigation.

To equip public sector entities with the tools necessary for a carefully AIAWORLDWIDE.COM | ISSUE 122

high quality corporate reporting.

But no matter how skilled or wellresourced, auditors alone cannot overcome significant shortcomings in other key areas of the reporting ecosystem – especially the role of directors, audit committees and those charged with governance.

IFAC believes that global standards promote global methodologies, which lead to enhanced and more consistent quality in both reporting and assurance. It supports high quality, globally applicable standards for financial reporting developed by the IASB, sustainability disclosure developed by the ISSB, and audit and assurance developed by the IAASB, as well as the IESBA International considered and smooth transition, Pathways to Accrual: ● outlines the benefits and implications of adopting and implementing accrual accounting, including IPSAS; ● lays out the fundamentals to quality public financial management (PFM), essential for effective and efficient delivery of public services, transparent public finances, and trust between government and citizens; ● explores multiple transition pathways for incremental implementation of accrual; ● identifies the main tasks associated with recognition of assets, liabilities, revenues and expenses, including issues and challenges associated with the identification of, as well as measurement of, those elements in financial statements; ● gives practical suggestions, guidance and case studies based on the experience of other entities and jurisdictions; and ● provides links to other useful guidance and resources to help entities make the best decisions for their unique circumstances.

The platform was developed by IFAC with content provided by the

Code of Ethics. It also believes that audit firms are best placed to provide not only audits of financial statements but also assurance on sustainability disclosures.

IFAC CEO Kevin Dancey said: “Corporate governance, audit and supervision have historically focused on financial statement reporting for investors and other providers of capital. But now that sustainabilityrelated disclosure is becoming mainstream, this information must also be high quality and trustworthy.

The accountancy profession, with its responsibility to act in the public interest, has an essential role to play in this evolution of corporate reporting.”

Chartered Institute of Public Finance and Accountancy (CIPFA) and feedback from the International Public Sector Standards Board (IPSASB) and international community stakeholders.

“The benefits are clear: accrual accounting improves transparency, decision making and accountability in the public sector, but the path forward is less apparent,” said IFAC CEO Kevin Dancey. “Pathways to Accrual will help accountants and public sector entities seize the opportunity of transitioning to accrual accounting by equipping them with the tools necessary to forge their own unique paths towards sound public financial management.”

“There is significant accrual adoption and implementation activity underway across all regions of the world,” said Ian Carruthers, International Public Sector Accounting Standards Board (IPSASB) Chair. “By 2025, 50% of the jurisdictions in the 2021 International Public Sector Accountability Index are forecast to report on accrual basis, and Pathways to Accrual will be instrumental in supporting both these transitions and the many others planned for subsequent years.”

Explore the platform at: https://pathways.ifac.org.

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Technical IFRS Foundation agrees Memoranda of Understanding to establish ISSB presence in Frankfurt, marking first step towards a global footprint The Trustees of the IFRS Foundation have signed Memoranda of Understandings (MoU) with German public and private sector institutions to formalise the partnerships and funding arrangements required to establish the presence of the International Sustainability Standards Board (ISSB) in Frankfurt.

The MoU mark a key first step towards establishing the ISSB’s global, multi-location presence to support its broad stakeholder base, as announced during the COP26 climate conference in November 2021. The MoU set out the Foundation’s commitment to establish an ISSB office in Frankfurt. The Frankfurt office will provide the seat of the Board and the office of the ISSB Chair. The office will provide key support functions for the ISSB, including the hosting of board meetings, and will act as a hub for the Europe, Middle East and Africa (EMEA) region.

The signing of the two MOU – one with public sector institutions and the other with private sector institutions – took place in conjunction with a meeting of the IFRS Foundation Trustees on 1-3 March 2022. The trustees are responsible for the governance of the International Accounting Standards Board (IASB) and the International Sustainability Standards Board.

The signatories to the MoU with the public sector institutions are the Federal Government of the Federal Republic of Germany and the Government of the State of Hessen, the Cities of Frankfurt am Main and Eschborn. The signatories to the MoU with the private sector organisations are Deutsches Aktieninstitut e.V., Deutsches Rechnungslegungs Standards Committee e.V., Frankfurt Main Finance e.V., Institut der Wirtschaftsprüfer in Deutschland e.V. and Wirtschaftsförderung Frankfurt GmbH. The trustees previously announced that Montreal will also host key functions of the ISSB and will act as a hub for the Americas region, enabling close

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cooperation with the San Francisco office. (The Value Reporting Foundation (VRF) has headquarters in San Francisco, and the consolidation of the VRF into the IFRS Foundation is expected to be completed by 30 June 2022.)

Arrangements for the ISSB’s Asia-Oceania presence are also being advanced.

Erkki Liikanen, Chair of the IFRS Foundation Trustees, said: “The formalisation of our collaboration with public and private institutions in Germany will enable us to establish the ISSB’s Frankfurt office, which – together with Montreal – will host key functions and facilitate engagement and cooperation with regional stakeholders.”

Emmanuel Faber, Chair of the ISSB, said: “Creating a permanent presence in Frankfurt, and soon in Montreal, are important steps on the path to building our global multi-location model. These offices will serve key roles as the ISSB begins its ambitious programme of work.

We have much to do.”

UK AND IRELAND FRC encouraged by investors embracing the spirit of the UK Stewardship Code The FRC has published an updated list of signatories to the UK Stewardship Code. This now includes successful applicants who submitted their report at the end of October 2021. The FRC received 105 applications, which was substantially more than expected, of which 74 were successful. This takes the number of signatories to 199, up from 125 in September, including asset managers with £33 trillion in global assets under management, up from £21 trillion in September. It is a positive sign that so many investors and service providers want to demonstrate their commitment to effective stewardship.

There was an encouraging level of applications from organisations that were previously unsuccessful. Many have addressed the feedback given by the FRC and have provided better quality reporting of their stewardship activities. In November 2021, the FRC published Effective Stewardship

Reporting: Examples from 2021 and expectations for 2022, which contained guidance on good practice reporting.

The FRC encourages all signatories and applicants to read this for information on how to improve critical areas of reporting, including reporting on market-wide and systemic risks, non-listed equity, outcomes and engagement.

Mark Babington, Executive Director of Regulatory Standards, said: “We are pleased that many previously unsuccessful organisations have provided stronger and better tailored explanations on how they apply the Code to more effectively demonstrate their stewardship activity and outcomes. We commend those that have embraced the spirit of the Code and responded to our feedback by substantially reviewing their approach to provide clear, comprehensive and outcome-based reporting.”

Following wide engagement with stakeholders, the FRC has decided not to differentiate (or tier) signatories to the Code from 2022. Asset owners, investment consultants and investment managers felt that the standard to become a Stewardship Code signatory is already high and that the FRC should focus on encouraging more of the market to reach this standard. The deadline for submitting annual stewardship reports and any new applications will be 30 April 2022.

FRC consults on revised guidance for recognising key audit partners for local audit The Financial Reporting Council (FRC) has issued a consultation on proposed changes to its statutory guidance to the Recognised Supervisory Bodies (RSBs) on the recognition of key audit partners for local audit.

The changes have been proposed to address a recommendation made by Sir Tony Redmond in his review of local audit, published in November 2020, to address the issue of capacity in this market.

The FRC plans to consult for four weeks and will issue a feedback statement addressing the comments it receives ahead of publishing its revised guidance. The new guidance will apply to all applications received by the RSBs ISSUE 122 | AIAWORLDWIDE.COM

Technical after its publication. Comments on the consultation are invited by 28 March 2022. The FRC expects to finalise its revised guidance by Spring 2022. The consultation is available on the FRC website.

Guidance: Auditor climate related reporting responsibilities under ISA (UK) 720 The FRC has published a new FRC Staff Guidance, Auditor responsibilities under ISA (UK) 720 in respect of climate related reporting by companies required by the Financial Conduct Authority.

This staff guidance also includes a brief reminder of auditor’s responsibilities under ISA (UK) 720 in respect of the company’s Streamlined Energy and Carbon Reporting (SECR) disclosures.

Increasingly, auditors have requested guidance from the FRC, in respect of their specific responsibilities under ISA (UK) 720, following the introduction of TCFD aligned climate-related disclosure requirements for listed companies by the Financial Conduct Authority (FCA).

In the FRC’s ESG Statement of Intent, published in July 2021, FRC stated that it will monitor the need for guidance on ESG-related matters and issue audit and assurance guidance at the national level as appropriate. The guidance note is designed to address this commitment.

IAASA publishes reports on the quality assurance review of firms that audit public-interest entities IAASA has published its 2021 quality assurance review report in respect of seven firms that perform statutory audits of public-interest entities in Ireland.

The reports summarise IAASA’s assessment of areas of each firms’ system of quality control and include any findings and recommendations made by IAASA to the firm. The reports also summarise the results arising from IAASA’s inspection of a sample of audits of public-interest entities performed by each firm, including the grades assigned to the audits inspected and any key recommendations made to the firm.

The report is available at: www.iaasa.ie AIAWORLDWIDE.COM | ISSUE 122

ASIA PACIFIC Updated guidance on the conduct of general meetings amid evolving Covid-19 situation ACRA, the Monetary Authority of Singapore (MAS) and Singapore Exchange Regulation (SGX RegCo) have updated the checklist which guides issuers and non-listed entities on the conduct of general meetings under the Covid-19 (Temporary Measures) (Alternative Arrangements for Meetings for Companies, Variable Capital Companies, Business Trusts, Unit Trusts and Debenture Holders) Order 2020 (Meetings Order).

The Order allows entities to hold general meetings via electronic means amid the Covid-19 situation, and will continue to be in force until revoked or amended by the Ministry of Law. Issuers conducting their general meetings under the Meetings Order must now follow the practices set out in the Regulator’s Column titled “What SGX RegCo expects on the conduct of general meetings amid the ongoing COVID-19 situation”, published by SGX RegCo on 16 December 2021. Issuers which do not utilise both real-time remote electronic voting and real-time electronic communication at their general meetings must incorporate the practices summarised below, when conducting meetings under the Meetings Order: 1. Organise a virtual information session for certain corporate actions prior to the general meeting.

2. When organising any virtual information session, issuers are encouraged to send their notice of general meeting to shareholders at least 21 calendar days before the general meeting.

3. After the publication of the notice of general meeting, shareholders should be allowed at least seven calendar days to submit their questions.

4. All substantial and relevant questions received from shareholders prior to a general meeting, should be publicly addressed by the Board of Directors and/or management at least: a. 48 hours prior to the closing date and time for the submitting of the proxy forms, if the notice of

general meeting is to be sent to shareholders at least 14 calendar days before the meeting; and b. 72 hours prior to the closing date and time for the submitting of the proxy forms, if the notice of general meeting is to be sent to shareholders at least 21 calendar days before the meeting.

EUROPE ESMA prioritises the fight against greenwashing in its new sustainable finance roadmap The European Securities and Markets Authority (ESMA), the EU’s securities markets regulator, has published its Sustainable Finance Roadmap 20222024 (Roadmap). ESMA identifies three priorities for its sustainable finance work: ● tackling greenwashing and promoting transparency; ● building National Competent Authorities’ (NCAs) and ESMA’s capacities in the sustainable finance field; and ● monitoring, assessing and analysing ESG markets and risks.

ESMA is actively contributing to the development of the sustainable finance rulebook and to its consistent application and supervision by taking the necessary measures to promote investor protection across the EU. ESMA also engages in risk assessment and market monitoring activities focusing on potential financial stability risks stemming from ESG factors.

Building on ESMA’s 2020 Strategy on Sustainable Finance, the Roadmap sets out ESMA’s deliverables on sustainable finance and how they will be implemented over the next three years.

The Roadmap will serve as a practical tool to ensure that ESMA delivers on the wide array of sustainable finance tasks across several sectors in a coordinated way.

Verena Ross, Chair, said: “Advancing the sustainability agenda is crucial for ESMA, particularly as investor preferences shift to environmentally friendly financial products and the European Union strives to meet its

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Technical commitments on tackling climate change The Roadmap is a milestone for our sustainable finance work, identifying the priority work we will do to ensure that ESMA and national supervisors take ambitious action on priority sustainable finance issues.”

Roadmap priorities The Roadmap sets three priorities for ESMA’s sustainable finance activities in the period from 2022 to 2024: ● Tackling greenwashing and promoting transparency: The combination of growing demand for ESG investments and rapidly evolving markets creates room for greenwashing. Greenwashing is a complex and multifaceted issue which takes various forms, has different causes and has potential to detrimentally impact investors looking to make sustainable investments.

Investigating this issue, defining its fundamental features and addressing it with coordinated action across multiple sectors, finding common solutions across the EU, will be key to safeguarding investors. ● Building NCAs’ and ESMA’s capacities: The growing importance of sustainable finance requires NCAs and ESMA to further develop skills beyond their traditional areas of focus to understand and address the supervisory implications of new regulation and of novel market practices in this area. ESMA will help build its, and NCAs’, capacity on sustainable finance through a multi-year training programme and through facilitating the active sharing of supervisory experiences among NCAs. These efforts will also contribute to creating effective and consistent supervision in the area of sustainable finance. ● Monitoring, assessing and analysing ESG markets and risks: The objective is to identify emerging trends, risks and vulnerabilities that can have a high impact on investor protection and on financial markets stability.

ESMA will leverage on its data analysis capabilities to support its, and NCAs’, supervisory work and to promote a convergent approach among NCAs. ESMA will undertake specific activities such as climate

32

scenario analysis for investment funds, CCP stress testing and the establishment of common methodologies for climate-related risk analysis together with other public bodies.

ESMA will address its three priorities with a comprehensive list of actions across the following sectors: investment management, investment services, issuers’ disclosure and governance, benchmarks, credit and ESG ratings, trading and post-trading and financial innovation. Several of these actions will also contribute to fulfilling the European Commission’s 2021 Renewed Sustainable Finance Strategy.

ESMA finds shortcomings in supervision of cross-border investment activities and issues specific recommendations to CySEC The European Securities and Markets Authority (ESMA), the EU’s securities markets regulator, is publishing its peer review report on the supervision of cross-border activities of investment firms. With this peer review, ESMA is also issuing Article 16 recommendations to the Cyprus Securities and Exchange Commission (CySEC), the first time ESMA has issued such recommendations to a National Competent Authority (NCA).

ESMA identifies in the peer review the need for home NCAs to significantly improve their approach in the authorisation, ongoing supervision and enforcement work, relating to investment firm’s cross border activities. This includes calibrating their supervisory work to the nature, scale and complexity of those firms’ cross-border activities and the risks they pose.

Verena Ross, Chair, said: “Effective supervision of cross-border activities by home NCAs is crucial to ensure that retail clients benefit from the same level of protection regardless of where the firm providing those activities is based.

As we strive to develop an effective European capital market, and retail investors increasingly access investment opportunities across the EU, ensuring investor protection and the proper

functioning of the single market is a key mission for ESMA and NCAs. The recommendations set out in today’s reports aim to significantly reinforce the cross-border supervisory framework.

ESMA, in also making recommendations under Article 16, shows it will use its full toolkit to promote effective and consistent high-quality supervision.”

Summary of findings ESMA, based on the peer review findings, identified that home NCAs’ supervision is not sufficiently effective when it comes to their firms’ crossborder activities. NCAs covered by the peer review did not specifically, adequately and structurally consider firms’ cross-border activities in their supervision. In particular, NCAs did not sufficiently identify, assess and monitor the risks related to firms’ cross-border activities or take supervisory actions to effectively address those risks.

Out of the six jurisdictions covered in the peer review, Cyprus had the highest level of outgoing cross-border activities, and by far the highest number of complaints relating to firms’ crossborder activities and of requests from other NCAs relating to Cypriot firms’ cross-border activities. A large number of Cypriot firms pose a high risk of investor detriment, due to the frequent provision of services involving speculative products, with aggressive marketing behaviour. ESMA identified that CySEC’s supervisory activities have overall proven insufficient at addressing the risks posed

by Cypriot firms’ cross-border services.

ESMA identified that overall, home NCAs appear to have established adequate processes in relation to the passport notifications and in the context of cooperation. The peer review also revealed satisfactory results on the activities carried out by host NCAs. Next steps ESMA expects to carry out a followup assessment in two years to review the level of improvements achieved considering the findings and recommendations of the peer review report. Following the Article 16 recommendations, CySEC has two months to inform ESMA whether it complies/intends to comply with the recommendations.

ISSUE 122 | AIAWORLDWIDE.COM