companyJULY/AUGUSTACCOUNTANTINTERNATIONAL2022ISSUE124TheheadacheofadministrationThetruecostofborrowing Shiningalightonchangemanagement Groupauditsacrossmulti-jurisdictions
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For accountants, change has taken many forms, most recently through the introduction of Making Tax Digital (MTD). Many accountants have had to face a continuous wave of change, head-on. Jim Scott (IRIS Software Group) considers how accountancy firms can embrace, conquer and manage change, including how to manage the ‘human’ element of change and how to optimise your promotion of change.
The true costs of borrowing Where an entity elects to capitalise borrowing costs, then it must do so consistently for a class of qualifying assets. Steve Collings (Leavitt Walmsley Associates Ltd.) examines how borrowing costs are recognised and measured under FRS 102, including how borrowings are used to construct an asset, issues relating to capitalisation and disclosure requirements.
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1AIAWORLDWIDE.COM | ISSUE124 CONTENTS Editorial InternationalInformationAccountant,thebimonthly publicationoftheAssociationof InternationalAccountants(AIA). InternationalAccountant Staithes3,TheWatermark, MetroRiverside,NewcastleUponTyne NE119SNUnitedKingdom +44(0)191493 www.aiaworldwide.com0277 AngelaEditorPartington E:angela.partington@lexisnexis.co.uk T:+44(0)2084011810 ForAdvertisingadvertising subscriptions@aiaworldwide.comInternationalSubscribeadvertisingsales@lexisnexis.co.ukopportunitiestoAccountant Designandproduction Sutton,TheQuadrantLexisNexis,House,Quadrant,SurreySM2
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Thisproductcomesfromsustainble forest AIAdoesnotguaranteetheaccuracy acceptresponsibility they 1465-5144 Copyright joins European Federation of SMEs 8 Taxation UK examination
AssociationofInternational Accountants In this issue Contributors 2 Meet the team Newsandviews 3 Legislation Day 2022: the initial draft clauses for the 2023 Finance Bill AIAnews 6 AIA
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The Taxation UK exam has a practical focus. In each question, students are put in a position in which a tax accountant might find themselves in the real world. To answer these scenario-based questions successfully, you must apply your tax knowledge to the particular facts of the scenario. You must be able to calculate different UK taxes; use the permitted tax tables; advise on practical aspects of tax; and recognise ethical issues when working on tax matters.
OpenBanking 16 The door to open banking We’re four years into the evolution of Open Banking, so now seems an opportune moment to take stock of its adoption. Rich Sutton (iwoca) and Nick Levine (chartered accountant) ask what Open Banking means in 2022, following a survey of over 200 accounting firms. They reveal a mixed picture on the awareness and use of Open Banking powered services. Managingchange 18 Shining a light on change management
The headache of administration Administrative tasks take management time away from revenue generating operations. Arranging and carrying out a meeting of shareholders or directors is a good example of an administrative task that can take a lot of time. Thomas Taylor (Net Lawman) explores how to take away the pain from company meetings by reducing company administration.
Audits 20 Group audits across multi-jurisdictions Group audits can be the most challenging audit engagements as the risk of the group auditor is significant. They require perfect planning with structured audit risk assessment throughout the group and multijurisdictional resource management in order to minimise the audit risk. Theo C Theodoulou (Kreston Global Audit Group) considers the challenges of inter country data gathering.
Accountants and Auditors for
Datesforyourdiary 28 Upcoming events Technical 29 Global updates 20
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THOMASTAYLOR Thomas advises Net Lawman on issues from accounting to business strategy. He started work at BDO Stoy Hayward before moving into private equity fund management.
JIMSCOTT Jim Scott is Managing Director for Accountancy at IRIS Software Group. He leads the accountancy offering, and focuses on accountancy, education and human capital management.
How can we reduce the headaches?
NICKLEVINE Nick Levine is a chartered accountant and journalist, with a particular interest in fintech. He was formerly the Head of Enterprise for ICAEW.
THEOCTHEODOULOU Theo Theodoulou is the Chairman of the Kreston Global Audit Group, and Director of Audit and Assurance, Kreston ITH. He is based in Cyprus.
toContributorsAIAWORLDWIDE.COMthisissue
Angela Partington Editor, IA STEVECOLLINGS Steve Collings, FMAAT FCCA is the audit and technical partner at Leavitt Walmsley Associates Ltd, where he trained and qualified. In 2010, he became an ACCA Fellow.
We are now four years into the evolution of Open Banking, and this is a good time to look into how it is impacting accountancy firms and their clients. Rich Sutton and Nick Levine write about a survey of over 200 accounting firms undertaken by iwoca (see page 16). Nearly half of accountancy firms (46%) are now regularly using one or many Open Banking solutions, but around a third are not. There is, unsurprisingly, a very strong correlation between whether or not accountancy practices are adopting this technology, and whether or not their clients do too. Trust issues and a lack of understanding play a much bigger role in any hesitancy than concerns about security, so accountants may need to play a bigger role in raising awareness.TheoTheodoulou takes a look at how to conduct group audits across multi-jurisdictions, which require detailed planning with structured risk assessment across the group (see page 20). And Thomas Taylor makes some suggestions for how to reduce the administrative burdens of arranging and carrying out meetings of shareholders or directors (see page 24). There are many ways in which we can reduce some of the potential headaches we all face. They all start by taking some time from our daily activities to review and reflect. And somehow these things always seem easier in the summer!
I hope you have all been enjoying the summer so far. Though it must be said that what we all hope will be a time for some rest and relaxation has been interrupted by an unprecedented heat wave, a hugely disturbing cost of living crisis, an imminent drought and yet another battle to see who will become our next primePerhapsminister.one frustrating thing that all of these issues have in common, though, is that we can do precisely nothing about any of them (unless you are one of the 200,000 Conservative party members being wooed by Liz Truss and Rishi Sunak). It may therefore be more useful to spend some time considering the things which are within our control and take stock of some of the issues affecting our businesses. There has been a good deal of change recently, including the introduction of Making Tax Digital, and Jim Scott believes that this is the time to ‘embrace, conquer and manage change’ (see page 18). As legislation is being rolled out and new tax reporting methods and requirements are introduced, accountants need to prepare for the inevitable. Yet at the end of 2021, 80% of accounting practices admitted to not having regular conversations with their clients about how best to implement these changes. Jim shares some valuable tips on the best way to deal with changes, and how to take a realistic approach.
RICHSUTTON Rich Sutton is Head of Accountant Relationships at small business lender iwoca, using technology to tackle the cost and complexity of traditional business finance.
FRCARGA welcomes the government’s response to its reform plans
● Large private companies’ corporate reporting and audit will be subject to the same scrutiny as that of listed companies.
accountancyshortageskillsin
Research by recruiters Search has revealed that 38% of accountancy and finance firms are struggling to make senior hires. Managers say that the average lead time to find a suitable candidate for a permanent role is 3.8 months. The three most desirable skills listed by accountancy firms searching for recruits are adaptability, self-management and teamwork.Theneed for specialised skills will create increased pay rates, as competition grows between organisations vying for talented recruits. Ed O’Connell, Managing Director of Accountancy and Finance at Search, predicts that financial and operational change specialists and specialist accountants will all see a sustained increase in demand as businesses look to evolve. The Search Skill Shortage Report investigates the degree of the skills shortage in the UK and examines the causes and consequent impact this is having on business across a range of sectors (see bit.ly/3oz4kIg).
● Directors will be held accountable for significant failures in their corporate reporting and audit-related duties, auditors will be held to high standards, and professional bodies will be subject to better oversight by ARGA, as well as needing to take action on their own behalf.
The Financial Reporting Council (FRC) has welcomed the government’s response to its consultation ‘Restoring trust in audit and corporate governance’, which sets out the next steps to reform the UK’s audit and corporate governance framework. It believes that these reforms, which it states have been ‘long awaited’, offer ‘a once in a generation opportunity to ensure corporate Britain upholds the highest standards of governance and protects those stakeholders who rely on high-quality reporting’.Legislation is required to ensure the new regulator – the Audit, Reporting and Governance Authority (ARGA) – has the powers it needs to hold to account those responsible for delivering improved standards of reporting and governance.TheFRCwill shortly be outlining an extensive work plan to advance reforms which can be developed through existing powers or on a voluntary basis. The main areas for development include making the necessary changes to standards and guidance; strengthening auditing and accounting standards; and determining the behavioural changes that will be expected for the markets.
The FRC’s CEO, Sir Jon Thompson said: ‘It was pleasing to see during the consultation process overwhelming stakeholder support for the creation of ARGA with strengthened powers to ensure investors, employees, pensioners and suppliers are better protected against the consequences of corporate failure.’ However, Thompson expressed regret that the government decided not to introduce a version of the SarbanesOxley reporting regime, stating that this was a missed opportunity to improve internal controls. The government’s response set out its intention to establish ARGA in order to implement high-quality regulation and high standards and encourage improvement by regulated entities and individuals. Other government plans include:
3AIAWORLDWIDE.COM | ISSUE124 NEWS
● Large companies will report in a more comprehensible way on their resilience and on how far their reporting is independently assured, which will provide more helpful information for the benefit of investors, suppliers, customers, workers and pensioners.
SeriousRECRUITMENT
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OECDPillarTwo:multinational top-uptax As was expected, the government has published draft legislation to implement the OECD’s Model Rules for Pillar Two in the UK. International consensus on the two-pillar solution was reached in October 2021 and the government consulted from January to April 2022 on rules to implement the framework in the UK. The rules represent the UK’s adoption of the income inclusion rule (IIR), one of the two charging mechanisms in the global base erosion rules (globe rules)
Researchanddevelopmenttax reliefreform
4 ISSUE124 | AIAWORLDWIDE.COM LegislationNEWS Day 2022
The initial draft clauses for the 2023 Finance Bill were published on 20 July 2022 and include more detail on previously announced proposals. The final contents of the Bill will be subject to confirmation at the next Budget ― which is likely to be this Autumn.
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The measure will introduce a new tax on UK parent entities within a multinational group, with the objective of ensuring that multinational enterprises operating within the UK pay a global minimum level of tax. A top-up tax will be charged on UK parent entities with nonUK subsidiaries, where the group’s profits arising in the subsidiaries’ jurisdiction are taxed at below the minimum rate of 15%. This will require the group to calculate its effective tax rate in each jurisdiction in order to determine whether the top-up tax will apply. A group will be within the scope of the rules when it has members in different countries and has global revenues above €750 million in at least two of the past four accounting periods. There are exclusions for entities that are typically exempt from corporation tax, such as pension funds and international organisations, as well as for investment funds and real estate investment vehicles. The measure will have effect for multinational enterprises with fiscal years beginning on or after 31 December 2023. At the time of the consultation, the government had intended to bring in the rules from 1 April 2023, but in June 2022 it was announced that, in response to reactions to the consultation, the government would delay implementation to December 2023. The consultation response includes some government comments on aspects of the two-pillar rules that are not covered by the draft legislation, including a note that there are strong arguments in favour of a UK domestic minimum tax – the government intends to continue to consider this although does not give a timetable. There is also an acknowledgement that there is still a significant amount of work to be carried out on the two-pillar rules at OECD level.
The government has published draft legislation providing for a number of changes to the research and development (R&D) tax reliefs for companies which will apply for accounting periods beginning on or after 1 April 2023. The changes apply to both the R&D expenditure credit (RDEC) and the scheme for small and medium enterprises (SMEs). Reforms to the reliefs were initially announced at Spring Budget 2021, when a consultation with stakeholders was carried out. Further details were then published at Autumn Budget 2021 and Spring Statement 2022Two new categories of expenditure qualifying for relief will be introduced. These are the costs of data licences and cloud computing services. A data licence is defined as one to access and use a collection of data services. Cloud computing services include providing access to, and maintenance of, remote data storage, operating systems, software platforms and hardware facilities. Amendments are also to be made to the patent box legislation, which applies the R&D definitions of qualifying expenditure in its calculations, to include data and cloud computing costs. Relief for subcontracted work and externally provided workers will be limited to focus on UK activity. Expenditure must either be ‘UK expenditure’ on R&D in the UK or ‘qualifying overseas expenditure’ undertaken outside the UK because the necessary conditions are not present in the UK due to geographical, environmental or social factors. Cost of the work and availability of workers are specifically excluded as factors.
All claims to R&D reliefs will have to be made digitally. Claims will have to include a breakdown of costs across the qualifying categories and provide a description of the R&D. A claim will have to be endorsed by a named senior company officer and will have to include details of any agent advising on the claim. Additionally, companies will be required to inform HMRC in advance that they intend to make a claim within six months of the end of the accounting period to which it relates by making an online ‘claim notification’. There will be an exception to the latter requirement for companies
The KPMG partner who led the audit of Carillion has been fined £250,000.
Doubletaxationreliefclaims: noextendedtimelimitclaimsin certaincircumstances The government is introducing new provisions for insertion in Finance Bill 2023, which are relevant to the taxation of foreign dividends before the UK’s introduction of the distribution exemption in 2009. Subject to exceptions, the new rules aim to ensure that no extended time limit claim for double tax relief under TIOPA 2010, s 79 or ICTA 1988, s 806(2) may be made on or after 20 July 2022 for a credit calculated by reference to a foreign nominal rate of tax. Exceptions to this new rule apply where the relevant accounting period to which the extended time limit claim applies is under enquiry (or in respect of which the enquiry window is still open), and where a tax assessment in relation to the relevant accounting period is subject to an appeal. Produced by Tolley
AIAWORLDWIDE.COM | 124 which have claimed in any of the three preceding accounting periods. Secondary legislation will detail the information to be included with a claim or a claim notification. Amendmentstoqualifyingasset holdingcompaniesregime
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KPMGTRIBUNAL fined £14.4 investigationfollowingmillion
The government is introducing amendments to the qualifying asset holding companies (QAHCs) regime which was introduced on 1 April 2022. The amendments are designed to enable a greater number of diversely held fund structures to be eligible for the QAHCs regime in a manner which is better aligned with the original scope of the regime.Thechanges include enabling a collective investment scheme which is a ‘parallel fund’ of a collective investment scheme which satisfies the genuine diversity of ownership condition to be treated as meeting the diversity of ownership condition for the purposes of the QAHCs regime. Broadly, a ‘parallel fund’ is one which is closely associated with another collective investment scheme and must satisfy conditions requiring investments in substantially the same assets, holding investments using the same companies on substantially the same terms and in the same ratios, and the management of the collective investment schemes to be substantially coordinated.Thechanges will also enable ‘aggregator funds’ to be treated as meeting the diversity of ownership condition for the purposes of the QAHCs regime. Broadly, an ‘aggregator fund’ is one in which each person and fund with an interest in the ‘aggregator fund’ meets the genuine diversity of ownership condition and where the management of the ‘aggregator fund’ and each of the funds with an interest in it is substantially coordinated. Transferpricing From April 2023, new transfer pricing documentation requirements for UK businesses are proposed. The clauses to be included in Draft Finance Bill 2023 were published as part of Legislation Day 2022, and aim to standardise the transfer pricing documentation used in the UK in accordance with the G20/ OECD Base Erosion and Profit Shifting (BEPS) Action Plan, specifically the Action 13 Final ReportWhilst the country-by-country reporting (CbCR) minimum standard has already been introduced in the UK, a standardised master file and local file has not. This has meant UK businesses have taken different approaches to their reporting, and this inconsistency has created a degree of uncertainty about the appropriate transfer pricing documentation that needs to be kept. A standardised format of master file and local file as well as a summary audit trail questionnaire document must, for accounting periods beginning on or after 1 April 2023, be kept and preserved by multinational enterprises (MNEs) within the CbCR regime. This proposal has previously been consulted on, with the response covered in the Tax Administration and Maintenance Day 2021 summary.Thedraft clauses insert a power to make regulations. These regulations (yet to be published in draft form) will specify the form and manner in which relevant transfer pricing records are kept and preserved, and they can refer to the OECD guidelines. Provisions for penalties for inaccurate record keeping are also included, as are new information powers for HMRC relating to these new transfer pricing records.
The FRC has announced sanctions against KPMG, a former KPMG partner and four former KPMG employees, following the findings of an independent disciplinary tribunal. As well as being fined £14.4 million, KPMG has been severely reprimanded and will pay £3.95 million in costs.
NEWS
KPMG admitted that it had misled regulators at the start of the FRC tribunal.
ISSUE
The allegations stated that KPMG had provided the FRC with ‘false and misleading information and documents’. These were provided when FRC audit quality reviews (AQR) were undertaken of KPMG’s audits of Carillion and Regenersis. KPMG staff were found to have created a ‘false or misleading’ audit papers and meeting minutes which it presented to the AQRs. KPMG has been ordered to appoint an independent reviewer to conduct a review to consider the effectiveness of its current AQR policies and procedures in supporting high quality engagement with the AQR inspectors. In its findings, the tribunal stated: ‘The seriousness of the misconduct that we have found proved scarcely needs explanation. Effective audits are essential to the financial system. Management and investors should be able to rely on the audited financial reports of the company in question. The purpose of AQRs is to assess and suggest improvements to the effectiveness of audits. The effectiveness of the regulation of auditors and audits depends on the accurate disclosure to the AQR Team of the work carried out by the auditor. Misleading the AQR undermines the effectiveness of its work.’
NEWSAIA
The AIA has been accepted to membership of the European Federation of Accountants and Auditors for SMEs (EFAA). An IFAC Network Partner, the EFAA is an umbrella organisation for 15 national accounting, auditing and tax advisor organisations. They collectively have over 380,000 individual members, mainly small and medium-sized practitioners (SMPs), including a significant number of sole practitioners, that provide a range of professional services (e.g. audit and assurance, accounting, bookkeeping, tax and business advice) primarily to SMEs within the EU and Europe as a whole. Formed in 1994, EFAA is a member of SMEunited and a founding member of the European Financial Reporting Advisory Group (EFRAG).
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AuditorsofEuropeanAIAMEMBERSHIPjoinstheFederationAccountantsandforSMEs
AIA President Shahram Moallemi said: ‘SMEs are the backbone of Europe’s economy and SMPs are their most important provider of compliance and advisory services. AIA looks forward to working with EFAA in supporting and promoting SMPs.’ EFAA President Salvador Marin said: ‘AIA is a natural fit for EFAA. Many of its members work in or as SMPs. We look forward to working with AIA to support and strengthen SMPs and their SME clients.’
SalvadorMarin(L),PhilipTurnbull,ShahramMoallemi
As a member of the European Federation of Accountants and Auditors for SMEs (EFAA), AIA was delighted to support the EFRAG-EFAA-SMEunited Joint Outreach on Draft EU Sustainability Reporting Standards (ESRS) Exposure Drafts on 8 July, where a speech was made by EFAA President Salvador Marin. As one of the 15 member organisations supporting a combined 370,000 members working as small and medium-sized accounting practices (SMPs) or in SMEs, it is vital that we come together on the topic of sustainability and in particular climate change. We must understand that it is undoubtedly one of the most important issues and challenges of ourSalvadortime. Marin said: ‘We welcome the Corporate Sustainability Reporting Directive’s embrace of SMEs. Sustainability is not just an indulgence of the large ‘Collectively,companies.SMEs account for the majority share of private sector sustainability impact. So they cannot, they must not, be left behind or ignored. Accordingly, EFAA welcomes the Corporate Sustainability Reporting Directive and its intent. And we welcome, in principle at least, the development of the EU Sustainability Reporting Standards.’However, to ultimately determine whether SMEs are currently ready to report under the EU Sustainability Reporting Standards, Salvador Marin has outlined several key observations to consider, including capacity, pace of change, prioritisation, and proportionality. Salvador Marin’s speech and key observations can be read in full at: bit.ly/3PJCvZp.AIAChiefExecutive, Philip Turnbull added: ‘When we take into consideration capacity, pace of change, prioritisation and proportionality, we wholeheartedly agree with the EFAA. The standards are clearly necessary, but it is our duty to be realistic and find a balance between excellence and the practicalities required by companies and society.’
AreSMES SMEs ready to report under ESRS?
EFAA
Think Tax. Think Tolley. RELX (UK) Limited, trading as LexisNexis®. Registered office 1-3 Strand London WC2N 5JR. Registered in England number 2746621. VAT Registered No. GB 730 8595 20. LexisNexis and the Knowledge Burst logo are registered trademarks of RELX Inc. © 2022 LexisNexis SA-0622-035. The information in this document is current as of June 2022 and is subject to change without notice.
The essential toolkit for INTERNATIONAL TAX
AIASINGAPORE Singapore Branch AGM 2022
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The AIA Hong Kong Branch 47th Annual General Meeting was held on Tuesday 21 June 2022 at 7:30pm at The Chinese Restaurant, Craigengower Cricket Club (CCC), 188 Wong Nai Chung Road, Happy Valley. During the AGM, five Executive Committee members were elected: Ms Chan Mei Mei, Mr Chiu Ho Man, Mr Hui Hon Chung, Dr Pun Ki Wai and Mr Tsui Chi Yuen. After the AGM, the first Executive Committee Meeting was held which elected the office bearers, consultants and co-opted members.
AIAHongKongBranchAGM
In the ever-evolving global tax landscape, international tax issues are an increasingly important focus for all UK tax advisers. Streamline your international tax processes with Tolley’s International Tax 2022-23 Set –fully updated for 2022 - an essential toolkit of complementary titles to advise your individual and corporate clients on their overseas tax position.
The AIA Singapore Branch 47th Annual General Meeting was held on Thursday 30 June 2022. During the AGM, the following members were elected/re-elected as office bearers: Tony Loke, Branch President; Lim Tai Mong and Thomas Ng, Vice Presidents; Jimmy Lee, Honorary Secretary; Joanne Wan, Honorary Treasurer; Yao Jie, Assistant Secretary; and Edward Chen, Assistant Treasurer.
Titles included in Tolley’s International Tax 2022-23 Set (also available separately): > Tolley’s Expatriate Tax Planning 2022-23
> Tolley’s International Tax Planning 2022-23 > Tolley’s Worldwide Tax Guide 2022-23 Also available: > Clarke’s Offshore Tax Planning 2022-23
7AIAWORLDWIDE.COM | ISSUE124 AIA NEWS HONG AIAKONGHong Kong Branch AGM 2022
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You may be presented with a computation that has been started or completed already, by a colleague or client. There will be some errors and your role as the tax expert in the scenario is then to prepare a new, correct computation. You will need to identify and correct the errors or omissions. These will often be common
has been written for candidates who are preparing to sit the Taxation UK exam in November 2022.
However, the exam is structured with many requirements which may sometimes break down the computation into different steps. In a single question, you may need to use your answer from one part when answering a subsequent part.
Taxation examinationUK
The Taxation UK exam has a practical focus. In each question, you are put in a position in which a tax accountant might find themselves in the real world. To answer these scenario-based questions successfully, you must apply your tax knowledge to the particular facts of the scenario. To be successful in this exam, you must be able to: ● calculate different UK taxes; ● use the permitted tax tables; ● advise on practical aspects of tax; and ● recognise ethical issues when working on tax matters.
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Computationlayoutandapproach
STUDENTSThisarticle
We look at corporation tax in Example 1: Calculating corporation tax. The computation of each tax has a different layout and approach. You should make sure you are confident in each approach and have practised working through it. Some devolved nations within the UK have slightly different taxes or rules – be careful to perform the right calculations for that location.
Pre-preparedcomputations
1.CalculatedifferentUKtaxes
Answers are predominantly numerical. You will be asked to calculate many different taxes or taxable amounts. Prepareandpractise When studying, make sure you are clear which rules relate to which tax, and to which entity –individuals, individuals acting in partnerships, or companies. Unsuccessful candidates often confuse taxes or entities. Test yourself by trying to list for a particular tax – who pays it, on what, at what rates, and what reliefs are available? The best way to learn, understand and apply the rules is to practise lots of questions. Merely reading the Workbook is not enough – you need a more active way to study. In the exam, you will be presented with blank pages for your answers, with no pro formas, so you must know how to approach the relevant computations without prompts.
2.Usethepermittedtaxtables
Example1:Calculatingcorporationtax
9AIAWORLDWIDE.COM | ISSUE124 STUDENTS
Prepareandpractise
During the exam itself, there will not be time to search for information that you have never looked for before. It might not even be included. The information is often given in a concise form, which you might not understand if the first time you read it is during the pressured environment of the exam. So, while studying, make a habit of using the tax tables. For each topic in your Workbook, check the tax tables to see what information is included and practise finding it. Administrationrules
The tax tables include much useful information about administrative obligations. For each tax, you might be asked when it should be paid or the relevant returns submitted (‘the reporting obligations’), or about the penalties for non‑compliance.
But not all calculations will be prompted by separate requirements –you need to identify those needed from the information in the scenario.
Taxratesandallowances
The tax tables give information on rates and allowances. If you have sufficiently practised tax calculations during your studies, you probably already know the rates and bands for most taxes, or can quickly check in the tables.
If asked when, you must always give a date, month and year (see Example 2: Using tax tables for inheritance tax). If you are typing the date in a spreadsheet cell, be careful that the British format of date/month/year is displayed.
mistakes. For example, a benefit that is exempt may be taxed in error. Remember the basic rules for the tax involved, and do not be misled by what has already been done. But not everything will be wrong – have the confidence to include correct figures, without change.
To pass the exam, you need to be able to use the published tax tables successfully. This is a skill which an accountant working in tax will use frequently in their everyday work. However, you need to prepare beforehand.
Example2:Usingtaxtablesforinheritancetax
The tax tables give information for ‘Chargeable transfers other than on death’ for various dates. For transfers between 1 October and 5 April – relevant here – the rule stated is ‘six months after end of month in which chargeable transfer is made’. But writing this as your answer would not be enough – you need to apply the rule to advise the client meaningfully; i.e. give a date. The answer is therefore ‘by 31 May 2022’. Take care to read the rule properly. A common mistake is to count six months, but not from the end of the month of the transfer.
The scenario may involve you working on corporation tax for a client. The corporation tax charge is the taxable total profits (TTP) multiplied by the corporation tax rate. So, you need to calculate the taxable total profits. You must show separately the different sources of income and gains which make up the taxable total profits. This might include trading profits, property income, non trading loan relationship income or gains. You might be asked to calculate some of these amounts in separate requirements. For example, you may be asked to calculate trading profits, requiring you to adjust a draft or accounting profits figure. Make sure that you label each adjustment, so the examiner can follow your workings. The requirement might include a specific instruction to demonstrate your treatment of each item. This means that if no adjustment is needed for a particular item, you need to show this with a label and an adjustment of zero. The examiner then knows you have thought about the treatment, rather than just left the item out. However, explanations are not required unless asked for.
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Take inheritance tax as an example. During your studies, find the information on due dates in the tax tables. Assume that a question then asks you to advise a client when to pay the lifetime tax payable on a transfer of cash into a trust on 18 November 2021.
When asked to calculate the corporation tax, collate all the elements of the taxable total profit, including any amounts calculated in earlier requirements, clearly labelling each. Don’t forget to calculate the tax itself, showing the rate you used.
● Study and practise applying the administrative rules for each tax: payment, reporting, penalties, etc.
● Study ethical matters relating to tax. Practise identifying issues and applying the guidelines.
The content of this article may be useful for candidates of future sittings but they should be aware that the specific tax rules change year on year.
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Keypointstoremember Beforetheexam
● Learn and practise the approach and layout for the computation of each tax.
As a tax accountant, you have duties to clients and to HMRC. This may lead to ethical issues. Ethics is tested in each exam.
The tax tables are particularly useful for calculating the taxes that vary slightly for the devolved nations; for example, those charged on the purchase of land and buildings. Check where the building is located and so which tax to calculate. You must then pick the correct rates and bands for that tax, depending on the building type (whether residential or not) and considering any other special rules. Listsandotherinformation
Duringtheexam
● Familiarise yourself with the information in the permitted tax tables.
● Practise lots of questions, under timed conditions. Don’t look at the model answers first.
Carefully read the requirement and make sure you answer the question asked. Too often, candidates’ answers suggest general wrong-doing but are not specific enough to score. If asked to identify fundamental principles or threats, give the proper terms and pick those relevant to the scenario – don’t list them all. If asked for actions, give actions, not merely a general discussion of the issue. Finally, don’t give contradictory answers to try to cover all possibilities. For example, if asked whether a client’s action is tax evasion, give a clear answer. Too many candidates state ‘it is tax evasion’ but then lose confidence and add more in case they are wrong such as ‘but it might not be’. Such hedged answers do not score marks.
● Read the requirement carefully, particularly the command word, and answer the question asked.
● Spend the appropriate amount of time on each requirement and then move on.
● Apply your knowledge and the information in the tax tables to the particular facts of the scenario.
● Remember that any attempt is better than none, so make sure you try every requirement.
● Develop your understanding of tax as a cost and a cash outflow by practising questions.
● Show workings and give labels so the examiner can understand and award follow-through marks.
4.Recogniseethicalissues
The tax tables include other useful information, including about reliefs and exemptions. This may help you to answer a requirement, but only if you know that the information is there. You may see a requirement asking about three or four different items, and their treatment. This may be a clue that the information is available in the tax tables. For example, the November 2021 exam listed three payments made by a partnership on behalf of employees. Candidates had to record whether each payment was charged to Class 1 secondary National Insurance Contributions (NIC), charged to Class 1A NIC or was not charged to NIC. The tax tables contain a list of ‘Common benefits subject to Class 1 or Class 1A’ which would have helped.
Finally, the costs of the fuel and NIC are allowable deductions for corporation tax, and so the overall cost of this proposal is reduced by the corporation tax saving on these costs.
● Example3:Thecostofataxablebenefit A requirement in the sample exam asked for a calculation of the cost to a company of providing private fuel to an employee using a company car. Think through the costs involved – for a start, the cost of the fuel itself. But providing private fuel is a taxable benefit, so another cost to the company, as the employer, is Class 1A NIC. So you need to calculate the taxable benefit and the Class 1A NIC thereon.
3.Adviseonthepracticalaspectsoftax Advising clients on their administrative obligations, as discussed above, is one practical aspect of tax tested extensively in the exam. Some narrative is needed in such answers but don’t give lengthy paragraphs. It is sufficient to give brief statements and the specific dates as explained above. You also need a practical understanding that tax is a cost to a business or individual. For example, you might be asked to calculate the cost of an action which includes tax, or the after-tax income of an individual. Tax computations are needed, but you need to work out which ones, and how to use them in an overall answer. These can be challenging questions (see Example 3: The cost of a taxable benefits) but take a moment to think through the practical scenario, and the taxes that might be involved. Don’t forget NIC. Even if you cannot work out a full answer, you may be able to perform some of the calculations and so score some marks. Remember that if you make no attempt, you will definitely score nothing. Label your calculations, so the examiner can follow your thoughtHowever,process.don’t spend too long on any requirement – if you are struggling, make an attempt and move on. You should allocate your time in the exam across requirements based on the number of marks available. You must attempt all requirements –there should be some easier marks on offer for each.
12 ISSUE124 | AIAWORLDWIDE.COM BORROWING COSTS SteveCollings Partner,LeavittWalmsleyAssociatesLtd The true costs of borrowing Steve Collings examines how borrowing costs are recognised and measured under FRS 102, including how borrowings are used to construct an asset, issues relating to capitalisation and disclosure requirements. images/iStockphotoGetty©
The term ‘qualifying asset’ is defined as: ‘An asset that necessarily takes a substantial period of time to get ready for its intended use or sale. Depending on the circumstances any of the following may be qualifying assets: a) inventories; b) manufacturing plants; c) power generation facilities; d) intangible assets; and e) investment properties Financial assets, and inventories that are produced over a short period of time, are not qualifying assets. Assets that are ready for their intended use or sale when acquired are not qualifying assets.’
The definition of a qualifying asset refers to an asset which ‘takes a substantial period of time to get ready for its intended use or sale’. The term ‘substantial period of time’ is not a defined term in FRS 102 and will involve the exercise of professional judgment. In practice, a substantial Example1:Borrowingandinterestreceived On 1 March 2021, Watson Ltd borrowed £5 million from its bank to finance the construction of a new office next door to its manufacturing plant. The terms of the contract with the building company state that they will receive three equal instalments over the construction phase, with the final instalment being paid on successful completion and signoff by the directors. The funds are being held in a deposit account which pays interest each month. Watson has a policy of capitalising borrowing costs as part of the cost of the new building.
Being interest received on funds borrowed to finance the new building period of time would not be a period shorter than 12 months. It would be unusual for an entity to capitalise borrowing costs where the period of construction is less than 12 months because of the work involved and the overall immaterial effect this may have on the financial statements. Management may also wish to assess the impact of borrowing costs on the entity’s corporation tax position as there may be restrictions which are allowable against tax. Specificborrowingsareusedtoconstruct anasset FRS 102 para 25.2A states that borrowing costs which are directly attributable to the acquisition, construction or production of a qualifying asset are those costs which the entity would have avoided had the expenditure on the qualifying asset not been made. In practice, where an entity is selfconstructing an asset, it is commonplace to take out specific borrowings to undertake the project where the entity has not already got access to the finance in the form of disposable income.
Cr: Bank loan X
FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland deals with borrowing costs in Section 25 ‘Borrowing costs’. The term ‘borrowing costs’ is defined in FRS 102 as: ‘Interest and other costs incurred by an entity in connection with the borrowing of funds.’
BORROWING COSTS
The financial statements of Watson Ltd should reflect the actual borrowing costs in respect of the £5 million bank loan received. Bank interest received is deducted from the borrowing costs capitalised, hence:Dr:Property, plant and equipment (asset under construction) X
An important point to note is that where a client incurs a loan arrangement fee, this fee is not capitalised as part of the cost of developing a qualifying asset. FRS 102 requires that any separately incurred transaction costs (such as loan arrangement fees) be debited to the loan account (i.e. the loan is initially recognised net of the transaction cost). The loan liability net of the arrangement fee is dealt with in accordance with FRS 102
Borrowing costs include: ● interest charges calculated using the effective interest method in Section 11 ‘Basic Financial Instruments’; ● finance charges in respect of a finance lease accounted for under Section 20 ‘Leases’; and ● exchange differences that have arisen from foreign currency borrowings to the extent that they are regarded as an adjustment to interest costs.
Recognitionandmeasurement
It is worth noting that for micro-entities choosing to report under FRS 105 The Financial Reporting Standard applicable to the Micro-entities Regime, all borrowing costs must be written off to profit or loss as they are incurred. There is no option under FRS 105 to capitalise such costs. There is an accounting policy choice available under FRS 102 which allows an entity to capitalise borrowing costs as part of the cost of the qualifying asset. Where an entity elects to capitalise borrowing costs, then it must do so consistently for a class of qualifying assets.
Cr: Property plant and equipment (asset under construction) X
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Being capitalised borrowing costs incurred during the period that would otherwise have been recorded in profit or loss Dr: Bank deposit account X
Section 11 ‘Basic Financial Instruments’; i.e. using the amortised cost method and effective interest rate. The interest expense that is calculated in accordance with FRS 102 Section 11 is capitalised, rather than written off to finance costs in profit or loss. Where specific borrowings are incurred on a project, management must determine the amount of borrowing costs that are eligible for capitalisation. This will be the actual borrowing costs incurred less any investment income
BORROWING COSTS (i.e. bank interest) received on the temporary investment of those borrowings. Generalborrowingsareusedtoconstruct anasset It may be the case that an entity which is constructing a qualifying asset will use general borrowings to fund the project, rather than incur specific borrowings. FRS 102 para 25.2C states that to the extent that funds applied to obtain a qualifying asset form part of the entity’s
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The total interest paid in the year is £6,130 and the borrowing costs eligible for capitalisation are £1,387. Therefore, the rule in para 25.2C which prohibits the amount of capitalised interest exceeding the amount of borrowing costs incurred during the period is not breached. If the amount eligible for capitalisation was higher than the amount of borrowing costs incurred, the amount capitalised in the period would be capped at the total amount of borrowing costs incurred in the period.
The capitalisation rate to be applied on the qualifying expenditure is calculated as follows: Total borrowing costs incurred in the period 6,130 x 100 = 8.76% Weighted average total borrowings 70,000
The interest capitalised in the year is calculated as follows: £ £16,000 x 5/12 x 8.76% 584 £20,000 x 3/12 x 8.76% 438 £25,000 x 2/12 x 8.76% 365 Interest to capitalise 1,387
Example2:Calculationofcapitalisationrateandinterestcapitalisedintheperiod During the year to 31 January 2022, Richardson Ltd commenced a property development, incurring the following expenses: £ September 2021 16,000 November 2021 20,000 December 2021 25,000
Richardson has a range of borrowings on which interest has been paid as follows: outstandingBalance£ Interestpaid£ 7 year loan at 9% 18,000 1,620 8 year loan at 8% 32,000 2,560 1 year loan 11,000 1,000 Bank overdraft (average) 9,000 950 70,000 6,130
Capitalisationrate
●
general borrowings, the amount of borrowing costs eligible for capitalisation are determined by applying a capitalisation rate to the expenditure on that asset. The amount of borrowing costs which an entity capitalises during a period must not exceed the amount of borrowing costs it incurred during that period Clearly, when an entity uses general borrowings to fund a qualifying asset, the amount of the borrowing costs which are eligible for capitalisation is not as clear cut as it would be had specific borrowings been incurred. The use of general borrowings where an entity has a policy of capitalisation of borrowing costs will create inherent complexities in determining the amounts eligible for capitalisation.
Example4:Legislativeissuesoutstanding On 10 June 2021, Revere Ltd completed the building of a new warehouse which it had funded by specific borrowings via a five-year bank loan. The company has a policy of capitalising borrowing costs.
Where an entity does not have an accounting policy of capitalising borrowing costs, no additional disclosure requirements are needed. Where the entity does have a policy of capitalising borrowing costs, it discloses: a) the amount of borrowing costs capitalised in the period; and b) the capitalisation rate used.
Disclosurerequirements
The Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008 Sch 1 para 27(3) requires the amount of interest included in the cost of an asset to be disclosed in a note to the financial statements. This is different than the requirements of FRS 102, which require disclosure of the amount of borrowing costs capitalised in the period. The Companies Act 2006 requires the cumulative amount of interest included in the cost of the asset to be disclosed.
The capitalisation rate used during an accounting period is the weighted average of rates applicable to the entity’s general borrowings which are outstanding during the period. Please note that any borrowings which relate to the construction of other qualifying assets (i.e. specific borrowings) must not be included in the capitalisation rate. The rule in FRS 102 para 25.2C which restricts the amount of borrowing costs capitalised if they exceed the amount of borrowing costs incurred may not pose a problem in an individual entity’s financial statements. Problems may, however, arise at group level where individual subsidiaries correctly capitalise borrowing costs, but in the consolidated financial statements, the total amount of borrowing costs capitalised may exceed the borrowing costs incurred for the group as a whole. This will necessitate a consolidation adjustment to reduce the amount of borrowing costs capitalised at group level.
The finance director is incorrect to continue capitalising borrowing costs during the period of suspension. FRS 102 para 25.2D(b) is specific that capitalisation must be suspended during extended periods where active development of the asset has paused.
The company must receive clearance from the Health and Safety Directorate before it can be used due to the nature of the products being stored in the warehouse. This clearance cannot be obtained under September 2022 due to a backlog of cases being handled by Health and Safety. The finance director is unsure whether to continue capitalising the borrowing costs which the company will incur in the months of June to SeptemberOrdinarily,2022.capitalisation will cease when substantially all the activities necessary to prepare the qualifying asset for its intended use are complete. However, when it is not possible to avoid a delay between physical completion and any consents required to use the asset, capitalisation of borrowing costs will continue to remain appropriate. This is because until the health and safety clearance is received, the asset cannot be regarded as ready for its intended use.
The period of capitalisation is outlined in FRS 102 paras 25.2D(a) to (c). FRS 102 para 25.2D requires an entity that capitalises its borrowing costs to: a) capitalise borrowing costs from the point it first incurs expenditure on the qualifying asset and undertakes activities to prepare the asset for its intended use or sale; b) suspend capitalisation during periods where active development is paused; and c) cease capitalisation when substantially all the activities necessary to prepare the qualifying asset for its intended use or sale are complete. In Example 4 above, the delay between physical completion of the asset and the point at which it is ready for intended use was due to formalities beyond the control of the company. Continued capitalisation of borrowing costs was therefore appropriate between the date of physical completion and clearance being received. If, on the other hand, the delay in physical completion is intentional rather than unavoidable, capitalisation of borrowing costs must cease.
Author bio SteveCollingsistheaudit andtechnicalpartner atLeavitt AssociatesWalmsleyLtd.
Example3:Constructionisstopped Harper Ltd is constructing a new building for use in its operations. It has taken out a bank loan to fund the project and incurs interest each month. The company has adopted a policy of capitalising the interest incurred on the borrowings as part of the cost of the building. In April, construction stopped because of an accident on the site. The period of suspension was four months and during that time the finance director continued to post the interest incurred on the borrowings to the cost of the new building.
BORROWING COSTS
Periodofcapitalisation
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Rich Sutton and Nick Levine ask what Open Banking means in 2022, following a survey of over 200 accounting firms.
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so when these respondents are factored in too, 58.5% are at least tinkering with related tools. It’s worthwhile noting that over 90% surveyed are using cloud accounting software (such as Xero, Quickbooks or Sage) in their practices, so it would be prudent to assume that the take-up of non-cloud firms will be lower. However, as the adoption of the cloud increases, traditional firms making the switch will likely incorporate Open Banking tools to maximise efficiency gains from automation. On the flipside of the coin, over a third of accountancy firms (34%) still are not using Open Banking. And the data suggests that if accountants
We’re four years into the evolution of Open Banking, so now seems an opportune moment to take stock of its adoption and look into whether accounting firms and their clients are embracing it. Open Banking’s introduction was greeted with fanfare by the fintech industry due to its promised benefits of users having more control over their data, alongside the competition this would open up in financial services for both consumers and businesses. However, this was countered by scaremongering from some, likely incumbent, financial institutions, raising concerns about security and how data could become misappropriated. iwoca’s Open Future Open Banking survey of over 200 accounting firms reveals a mixed picture on the awareness and use of Open Banking powered services (see details below). Nearly half of accounting respondents (46%) use Open Banking solutions, but there is less take up from clients (20% to 30%). The survey shows that Open Banking’s use is limited to a range of administration and compliance workflows but also suggests that firms are missing out on bolstering their advisory services with Open Banking enabled services. Accountants should take this opportunity to educate clients about how Open Banking can benefit their day-to-day compliance, as well as value-added advisory services. OpenBankingadoptionamongst accountants Nearly half of accountants (46%) regularly use one or many Open Banking solutions. A further 12.5% are testing one or two Open Banking solutions,
Author bio NickLevineis acharteredaccountant andjournalist,witha particularinterestin fintech.
Author bio RichSuttonisHeadof AccountantRelationships atsmallbusinesslender iwoca
Rich professionaladvisorCharteredNickRelationships,HeadSuttonofAccountantiwocaLevineaccountant,andfintech
The door to Open Banking
The majority of firms (85%) who are not using Open Banking, and whose clients aren’t using it either, are sole practitioners or working at firms with fewer than ten employees. These practices are perhaps prioritising the completion of client work over streamlining processes and therefore have not had the bandwidth to consider or implement Open Banking tools. This is a missed opportunity as these are precisely the firms that would see the greatest efficiency gains from the software. Accountantsneedtobuildconfidenceand awarenessofOpenBankingtoSMEs As the most trusted advisors to businesses, accountants play a key role in raising awareness of Open Banking. Adoption by clients is lagging behind accountants, with an average of 20% to 30% using Open Banking tools. A stumbling block to adoption is due to accountants not being proactive and discussing Open Banking with clients. 38% have a lack of confidence in doing so, as well as 48% of clients not having an interest in these conversations.
However, these user cases aren’t value-adding and are unlikely to excite businesses. Therefore, it isn’t all that surprising that clients tend not to be overly interested in Open Banking conversations. To better serve clients’ needs and engage them, we should look beyond compliance-based Open Banking tools and integrate solutions covering access to finance and cash flow forecasting. These tools allow unparalleled access to real-time data, enabling SMEs to access finance easily and quickly, as well as instant cash flow visibility – with accountants able to spot red flags early and provide advice on optimising working capital.
Conclusion The report outlines the steps needed to drive Open Banking adoption and enhance the value accountants can provide to small businesses.
iwoca’s Open Future Open Banking survey, consisting of responses from over 200 accounting firms, reveals a mixed picture on the awareness and use of Open Banking powered services (see bit.ly/3og5DLS).
OPEN BANKING don’t use it, their clients won’t either: 40% of small business clients don’t use Open Banking, and over 70% of these clients were from firms who don’t use the technology themselves. (Equally, 74% of accountants who do use open banking said most of their clients also use the technology.) The research identifies the key issues preventing a bigger adoption of Open Banking in accountancy practices as: 1. trust and interest from clients (48%); 2. lack of understanding/confidence from accountants (38%); 3. concerns over data security (34%); and 4. general distrust of the technology (24%).
First, there requires a change in attitudes whereby accountants show clients how Open Banking can benefit their businesses and demonstrate trust in their solutions, deploying use cases that are targeted at real problems firms face. Second, accountants must create significant competitive advantage by increasing efficiency, lowering costs and solving the problems that matter most.
Accountants must proactively highlight the benefits of Open Banking tools to clients. Software vendors and accounting trade bodies can support these conversations by providing accountants with educational collateral that articulates common user cases alongside benefits to end clients. Businesses must be convinced by the efficiencies and output of Open Banking, rather than it being framed as a blunt tool to solve their problems.
●
WhatisOpenBanking? Open Banking – the system to provide third-party access to financial data through the use of application programming interfaces (APIs) – is one of the biggest changes to financial software and management in decades. Consumers, businesses and their advisers are now able to share data with a level of ease and accuracy never before possible. Instead of business figures being siloed in accounts and ledgers, businesses can now use their live data to create actual value with greater visibility, automation and flexibility. Open Banking has the potential to revolutionise the way we move and manage money. It allows consumers to give merchants or service providers secure access to their financial information, or to authorise a payment directly from their bank. It provides secure and transparent information sharing for individuals and SMEs aiming to give customers greater control of their financial data and better value. Open Banking (openbanking.org.uk) is the Implementation Entity (OBIE) set up by the UK Competition and Markets Authority to create innovative technology, data standards and the governance structures enabling the UK to implement Open Banking. As of May 2022, it listed 335 regulated providers, 247 third party providers and 88 account providers in the UK.
images/iStockphotoGetty©
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Advisory:thenextfrontier At present, accountants primarily view Open Banking’s main benefits as boosting efficiencies for record-keeping. The data revealed that the most popular uses for Open Banking were bookkeeping (57%), accounts receivable (43%) and accounts payable (42%). Correspondingly, the most pressing issue for SME clients, according to the data, is record keeping and management information (73%). This proves the benefits for Open Banking in streamlining the data capture process via better integration with financial data sources.
accountants, change has taken many forms, most recently through the introduction of Making Tax Digital (MTD). This UK government vision for an effective and efficient digital tax system has meant that many accountants have had to face a continuous wave of change, Whetherhead-on.thisisdue to too much change too soon, or a lack of support and clarity, recent research shows that many firms are lagging behind in embracing the necessary digitisation to properly implement MTD practices (see bit.ly/3oAR6KU). Further, only 25% of accountancy practices feel that they have the right technology to support clients with the transition to MTD. It is most likely that this reluctance to embrace MTD is a result of human aversion to technological and digital change. In fact, when it comes to the intended outcomes of a change initiative, employee attitudes will determine whether it will sink or swim. So, what can be done to overcome this resistance to change?
With the rapid speed of digitisation, change has become a constant in many aspects of daily life. Yet while it is necessary and often encouraged so as to foster progress and innovation, some are hesitant to faceForit.
There are still some unanswered questions about MTD. At the end of last year, 80% of accountancy practices admitted to not having regular conversations with clients about how best to implement change. For this to be managed efficiently and correctly, with an easy and smooth transition, sufficient resources and knowledge tools are needed to allow individuals to properly familiarise and immerse themselves in the new processes.
Shining a light on change management
Gettoknowtheelephantintheroom One of the main barriers to the seamless adoption of a change initiative is the unknown. Gaps in knowledge around the change can result in a lack of preparedness to implement the necessary processes needed for the initiative. MTD requires a level of understanding that some don’t know they need and that others struggle to easily obtain. This change project is still in its early stages, and it remains as one of the biggest changes on every accountant’s mind. With new legislation being rolled out and new tax reporting methods and requirements, accountants are feeling the pressure to face this change whether they want to or not.
Jim ManagingScottDirectorforAccountancy, IRISSoftwareGroup JimScottconsidershowaccountancyfirmscan embrace,conquerandmanagechange.
images/iStockphotoGetty©
MANAGING CHANGE
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Take every opportunity to highlight and celebrate each success during the change process. This can help to alleviate people’s natural apprehension and shift the perception of the resistant few. Showcasing the benefits throughout the process can also increase adoption across the entire firm.
Creating change champions who can act as messengers and advocates for why the change should also be adopted can help to speed up the process of implementation. Arming these individuals with the knowledge to properly champion the change is crucial. They can get involved and become invested in the project and the tools given can help to nurture their understanding. Being realistic about change and accepting the fear can help to manage expectations and helps to better address the concerns and tackle them. Open communication gives a platform for staff to be honest about their hesitancies and overcome them. With increased pressure on accountants by MTD and other processes, technological change has the potential to alleviate and ease the working life. However, it should not be seen as the endall solution for struggling businesses. The right digital solution can help to drive productivity, if implemented and managed correctly. Change management can help to ease the adoption and acceptance of new change for those who are more resistant. With many questions surrounding MTD, and its new requirements, change will become an ever-present constant for accountants to endure.
With a change project, the primary goal is to communicate and work with those who are uncertain or against the change by using the awareness and desire methodology. Usually, this is needed for the small number of laggards who are against any form of change, as well as the majority in the middle that come around once the change has proven itself. Optimising the process of change can be achieved by implementing some small processes, systems and behaviours. It is important to spread the message and build a communication plan that incorporates frequent interaction within the firm. This is crucial in order to ensure that people are aware of the change, understand the reasoning and look forward to the benefits. The key is to relay messages about how the software or technology is changing, the practical daily benefits for staff and the timeline of the change.
Recent technological strides have resulted in modern software automating many aspects of what talented people currently do. Whilst the main driver of change in accountancy is technology, it is ultimately the people at the centre of the revolution that drive the adoption of new ways of working. These digital transformations require people, using the tools made available to them, to change and evolve how they think and operate. With 75% of the accountancy profession still being predominantly analogue in their operations pre-pandemic, swaying the people is crucial in successful digital transitions. Often, to make these projects successful, a tailored support strategy is needed, also known as change management.Therewillalways be individuals and groups that are nervous or resistant to accepting this change. This could either be a resistance to the change itself, the content of the change or the process of change – the way it is introduced and carried out. Research shows that even at the best of times, 74% of staff feel disconnected to what’s going on in a change project.
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● For information,further see IRIS’s report ‘What is keeping accountants awake at bit.ly/3oAR6KUfacingchallengesUncoveringnight?:thecurrentlyaccountants’at
Howtooptimiseyourpromotionofchange
Author bio JimScottistheManaging DirectorforAccountancy atIRISSoftwareGroupand isresponsibleforleading theaccountancyoffering.
Change management does not have to be a large initiative that is suddenly adopted by all accountants in one fell swoop. Instead, it should be woven into the culture to create an environment where incremental changes can be adopted easily and with little resistance. This allows accountants to change their habits and working methods to better serve their clients, at their own pace. In 2021, just over 4,000 new digital-savvy accounting firms entered the UK scene. With time-saving workflows and MTD in mind, it is these flexible and dynamic firms that will succeed in this fast-paced world. Shiningalightonchangemanagement When looking to implement change management, either as a one-off project or as a permanent cultural introduction, a crucial aspect is the psychology behind the change. For most change projects, organisations often start with creating a knowledge base, including resources and tools, and will jump straight to training staff on the new system and processes. However, prior to introducing new technology with new software training, behavioural change is needed. This can be achieved by addressing two crucial areas: awareness of change; and desire for Awarenesschange.istheneed to know why the change is happening, what’s in it for the accountants and what the risks are of not changing. By being able to answer these questions, people should come to understand the purpose for the change. Accountants need to feel like their input and concerns are being heard and considered. Once awareness is raised, desire for change can be built by showcasing the benefits, helping to ensure that people are eager to use the new tech when it’s ready. Transparency and open communication are key in fostering these and will aid the acceptance of the change. Only then can the training for new knowledge follow, to achieve the best results. The people involved need to have achieved enough awareness and desire to not resist the change and seek the knowledge needed for the change initiative.
Focusonmanagingthe‘human’element ofchange
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TheoCTheodoulou Chairman,KrestonGlobalAuditGroup
images/iStockphoto©Getty
Theo C Theodoulou considers the challenges of inter‑country data gathering, and how group auditors can engage with component auditors.
Group audits can be the most challenging audit engagements as the risk of the group auditor is significant. They require perfect planning with structured audit risk assessment throughout the group and multi-jurisdictional resource management in order to minimise the auditTherisk.importance of the various components and subsidiaries to the group audit opinion is determined by a risk assessment and their relevance at a group level.
Jurisdictionalchallenges
Group audits across jurisdictionsmulti‑
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Irrespective of whether or not group and component auditors are part of the same network, once the group auditor feels comfortable engaging with the component auditors, there are several jurisdictional obstacles that need to be assessed as part of the audit planning.Firstly, understanding the audit regulatory environment in each jurisdiction. For example, is the audit a statutory requirement or are there
Thegroupauditprocess Once a group auditor has established which components are relevant, it is essential to build good professional relationships, as the group audit process will require the input and collaboration of the component auditors. If the component auditors are not part of the same network, there will almost certainly be differences in the audit methodology and culture that need to be addressed. The main issues that are usually identified are the different methodologies in terms of calculating relevance (or ‘materiality’), audit risk assessment, sample size, substantive and analytical testing and even how the audit file is structured to reach to the auditPrioropinion.toassessing these differences, the group auditor needs to ensure that all component auditors comply with the ethical standards relevant to the group and are ultimately independent.Otherthan independence, the group auditor needs to be sure of the professional competence of the component auditors and to know that the work done will stand up to scrutiny. Of course, this will be more straightforward if the component auditors operate in a regulatory environment in which professional bodies and authorities monitor them regularly. Similarly, if component auditors are part of the same network, this gives additional assurance to the group auditor and potentially minimises the work required on ensuring independence and professional competency of the component auditor. This is especially the case if the network uses a common methodology amongst its member firms, as there will be a common understanding of what is expected by all auditors involved, thus reducing the administrative burden mentioned earlier.
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The consolidated financial statements are prepared on the basis that the group has a unified set of accounting standards. Where this is not the case, the retranslation of accounting standards by the management to match those of the parent company is another challenge that requires careful consideration when planning the group audit. The complexity of retranslation can cause delays, miscommunication and potentially lead to fundamental deficiencies in the group audit process. It is often the case that different jurisdictions have different reporting periods. Depending on the gap between the reporting date of the parent company and the component reporting date, this can create a significant obstacle which the group auditor needs to address. Depending on the gap, there might also be the need to re-audit certain financial periods of the component so as to provide the assurance the group auditor requires. This again requires planning ahead and efficient communication between the group and auditors of theLanguagecomponents.barrier is another key challenge that needs to be taken into consideration during audit planning. This will certainly delay the review process and potentially could lead to incorrect conclusions. Often the use of different languages in the preparation of audit working papers has also hidden costs for the group audits as there is a need for translation resulting in more time and cost for the engagement. It is therefore essential that language barriers are dealt with in advance.
Conclusion A group audit requires contemplation and skills from every individual involved, as well as the collection of appropriate and sufficient data. Furthermore, a group audit which involves many jurisdictions has its own complications due to multiplicity in operational modes and the conduct of the firms. These problems can be overcome only if the group audit properly implements a process and is able to manage the conflicts emerging within the team with respect to communication and other issues.
The post-Covid era has had both positive and negative impacts in the data gathering and review work of the group auditor.
Thereviewofworkanddata gatheringpost‑Covidisnow commonlydoneelectronically, leadingtocertainrisksand challengesthatthegroupauditor needstoforesee.
Where previously the group auditor would visit the component auditors in person to review their work and collect relevant audit data, the Covid era has made this much more challenging, creating obstacles and opportunities for the group audit review. Certainly, the in-person review simplifies the audit process review and it is much more efficient as most of the questions and requirements are solved instantly. It is commonly found that the review of work and data gathering post-Covid is now done electronically; therefore, there are certain risks and challenges that the group auditor needs to foresee and be able to manage. Data privacy is of paramount importance and creating a secure online remote environment where the group auditors can access and review the working paper of component auditors is essential. The IT infrastructure of the auditors involved, as well as the cybersecurity level of each auditor, are hard to align and therefore a common IT framework should be agreed well in advance.
The data privacy and access to audit data should also comply with each jurisdiction’s data privacy laws, such as the General Data Protection Regulation for the European Union.
The local financial reporting standards of each component are also important in assessing the risk and workload of the engagement. Where the parent company reports in a different accounting framework than that of its components, this creates both increased audit work and a significant increase in audit risk, especially where fundamental differences in the accounting treatment of key audit areas arise.
audit thresholds that need to be met? If certain components are not required by law to prepare audits, then this implies that component auditors will need to perform the audit from scratch, therefore increasing the workload and potentially failing to meet the deadlines of the audit engagement.
The group auditor therefore needs to be in a position to understand and comprehend the different data privacy rules in the jurisdictions where the components are involved and include relevant disclosures in the engagement letters.
Datagatheringandreview
The group auditor may also face obstacles in transferring large volumes of data online or accessing the audit data online, as certain jurisdictions have restrictions in exporting client data out of their country’s online ecosystem, which can create delays or even make the review process not possible.
● Author bio TheoCTheodoulouis ChairmanoftheKreston GlobalAuditGroup,and DirectorofAuditand Assurance,KrestonITH.
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Administrative tasks take management time away from revenue generating operations.Arranging and carrying out a meeting of shareholders or directors is a good example of an administrative task that can take a lot of time: finding a date when and place where all the parties can attend; issuing a formal notice of an agenda; and recording and circulating minutes, motions and Particularlyvotes.insmall companies, directors don’t follow the process fully, or at all. But that’s understandable if the process does not help nimble decision making. It is relatively straightforward, however, to take away much of the pain that meetings can bring. You can reduce the number of meetings that need to be held by delegating decision making power; and when they are required, you can change the legal process to make them easier to manage.Whilethis article has been written from a UK perspective, many of the changes are possible if the company is incorporated in other countries as well. Therisksinnotfollowingtherules Directors of small companies tend to be in their position because they are the owners or day-to-day decision makers, not because they are experienced administrators. Many are not aware of the breadth of their legal obligations, including to follow the correct procedure when making certain decisions. Others simply prioritise running the business over dealing with red tape.
I n legal and accounting textbooks, the requirements of company administration are often cited as one of the principal disadvantages of incorporating a business.
The headache administrationof
24 ISSUE124 | AIAWORLDWIDE.COM COMPANY ADMINISTRATION
ThomasTaylor Adviser,NetLawman Thomas Taylor explores how to take away the pain from company meetings by reducing company administration.
In a small company, not following the legal process precisely may not seem too important if the directors are also the shareholders and the management structure is small enough so that everyone is aware of what is happening in the business.However, the risk is that if the company becomes insolvent or some owners later sell, the directors leave themselves open to claims by a liquidator or new owners that they are in breach of their duties and therefore personally financially liable for the consequences of any decisions made outside of the correct process.
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COMPANY ADMINISTRATION
Articles of association tend to cover procedures for calling meetings of directors and shareholders and for voting at those meetings. The company should keep a copy of its articles. In case these are hard to pin down, they are also registered with the Registrar of Companies.
Wheretherulescanbefound Generally, the rules as to how a company should be run are contained in three documents, which are: ● the articles of association (sometimes known as the company’s constitution); ● the shareholders’ agreement; and ● the service agreements of the directors.
The default procedures are in place to protect stakeholders, ensuring that they are kept informed of company performance and that they have ample opportunity to exercise legal rights in respect of significant decisions. They also give protection to directors from claims of mismanagement of the company. So if the safeguards that the law provides by default seem excessive, the solution is not to turn a blind eye to them, but rather amend them so that they suit how the company is run. Additionally, the work involved in changing brings benefits. It strengthens the perception of common interest between shareholders, between board members themselves and between owners and directors. The inevitable agreement to be committed to a new set of processes brings with it a feeling of community and comfort with the views of each other.
A shareholders agreement sets out how the owners have agreed to vary their rights against each other in so far as possible under company law. It is likely to cover which decisions are to be made only between themselves (particularly those of importance to one or more of them) and which are to be delegated to the board of directors or individuals. In short, the agreement regulates who decides what.
images/iStockphotoGetty©
Rulesarebeneficial
3. In the shareholders’ agreement: The basis of voting can be simplified where the shareholders agree it should be. Instead of one share carrying one vote, a motion could be passed on the agreement of a certain proportion of attendees, regardless of their shareholdings. Or one person might have twice the number of votes of another, or none at all.
need to be more than a simple message stating how the director’s choice. Proxy voting is also possible (where a director or shareholder nominates someone else to vote in their place). This requires written notice conferring power, but the notice could be acceptable as an email message. If the meeting is one of shareholders and some shares are owned by more than one person, a vote of just one of them can be allowed.
However, if a meeting is called because of the need for a group to make decisions, it may be possible to reduce the number of them by delegating decision making power away from the group. The key is to define exactly what decisions can be made, and which can’t.
2. By changing the company’s articles: The chairperson of the meeting can be given powers to keep speakers on-topic. Shareholders with a holding over a certain percentage may have a right to be heard, but only if the subject matter is Meetingsrelevant.cantake place via video-conference. If a meeting location is required to be recorded, the location of one of the attendees can be used. Holding a meeting via video-conference has the obvious advantage that it is easier to find a time to meet Directorssooner.can be allowed to use written resolutions to vote, and the delivery of those resolutions can include by email (although we would advise only from authorised accounts such as their company email address). Voting by written resolution sounds formal, but it doesn’t
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Author bio ThomasTayloradvisesNet Lawmanonmanydifferent issues,fromaccountingto businessstrategy.
● There may or may not be a shareholders’ agreement. There is no legal requirement to have one, so they tend to be put in place only at times when the risks of not having a shareholder’s agreement are particularly apparent (usually at times when the ownership or management structure becomes likely to change, or before some of the owners make a large debt investment). It is a private document, so only shareholders will have a copy. A director’s service agreement should set the boundaries of individual director power, although it may do so by reference to another document that can be updated regularly. It is likely to describe job responsibilities and limitations that require agreement by other directors or by the shareholders. The company should keep a copy of each one. First,simplifyhowmeetingsareheld Both the meetings of the board of directors and of the shareholders can be made easier to carry out.
1.Regardless of the attendees, and without changing any legal text: The aim should be to reduce the business of the meeting to voting only. While a meeting can be a forum for debate before voting, in practice long discussions may cut into the time needed to vote on all motions. Or the debate may be sidetracked with the vote being deferred pending somethingProposalselse.should be circulated well in advance of the meeting so as to allow attendees the opportunity to satisfy themselves as how to vote beforehand. Decision makers should be given enough information to feel comfortable with how to vote, but the volume should be as concise as possible.
In small companies where owners tend to be managers, it is also important to consider whether a decision is made by someone in their role as shareholder or in their role as director. In either case, you would record the delegation of power to make that decision in a shareholders’ agreement, and if the decision maker is also a director, in their service agreement (or an appendix to it) as well. The better defined the limits of the power are, the less likely they are to be overstepped accidentally. If giving power to one person seems to be a step too far, you can also delegate to a committee. A smaller number of people with subject area expertise may be more able to make good decisions faster. Typically, the shareholders’ agreement would set out how committees are formed and run, although the articles may describe the rules for committees of directors. Insummary By removing the need for all owners or all directors to come together to decide on every aspect of managing the business, the need to call meetings frequently can be reduced. Managers can concentrate on running the business. When meetings are required, how they need to be held can be changed.
Thendelegatedecisionmakingsoasto reducetheneedformeetings Some meetings are necessary because some company business must be carried out at one.
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Happiness is an inside out job 5 October 2022 Time: 10.30 – 11.30
A practical discussion on the recent business and compliance trends of the payment industry | Hong Kong 26 August 2022 Time: 12.30 – 14.00 Growing demand for electronic payment systems has been observed in the past five years. Various electronic payment methods are emerging, making the industry increasingly competitive. Many local and overseas electronic payment solutions providers work hard in their innovative and smart city projects to seize global development opportunities. Moreover, with the increasing popularity of cashless payment, consumers have become more proficient in using electronic or mobile payment. So, the webinar’s presenters are trying to give a practical discussion on the current (and ongoing) business environment and compliance trends affecting the overall payment ecosystem and the business environment in the view of financial and budget planning and resource allocation as management planning. The future of cryptocurrency and buzzwords to look out for 29 September 2022 Time: 10.30 – 11.30
Speaker: Gordon Berry There is a lot of pressure right now on the Health Service to be able to provide a service for people suffering with mental health issues and, of course, with that comes pressure on funding. But it is our responsibility to take care of our own physical wellbeing and the same can be said for our mental wellbeing. Most people with a little bit of awareness can take control of their own mental health, their own wellbeing and ensure that future problems are minimised and that stress and anxiety take a back seat to happiness and wellbeing. A quick lesson in how to use self-hypnosis to empower yourself each and every day along with a number of tips on how to utilise it, will make the world of difference. You can find further information and register for these events www.aiaworldwide.com/eventsat
How do businesses ride the current storm?
25 August 2022 Time: 14.00 – 15.00
Speaker: Katharine Wooller, Head of Dacxi The third webinar in our series of cryptocurrency events, which will help demystify some of the buzzwords and jargon that you’ll be hearing more and more. What is DAO, Web 3, Metaverse, Tokenisation and Defi? We’ll help you understand by taking you through an entertaining and informative presentation which will be followed by an opportunity to pitch your questions. Katharine will also explain why crypto should be considered a part of any wealth building strategy, why your clients will expect you to understand crypto and how you can get access to free crypto education.
Speaker: Richard Simms, Managing Director, FA Simms Richard will help delegates understand how to identify a with when
EVENTSUPCOMINGWEBINARS
business
financial difficulties, when to seek help and what the business rescue options might be. The webinar will consider the current marketplace and look ahead to the future, as well as addressing the following questions: ● How can you identify
a client needs help? ● What options are available to businesses facing financial difficulties? ● How can you support your clients? ● What support is available to you and your clients from FA Simms? 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. 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. Advertise in the next issue of Contact: advertisingsales@lexisnexis.co.uk
The International Public Sector Accounting Standards Board (IPSASB) has released a consultation paper, ‘Natural resources’, which considers the issues relating to the recognition, measurement and presentation of natural resources by public sector entities. Natural resources are generally understood to be resources such as sunlight, air, water and land that exist without the actions of humankind. They account for a significant proportion of the economic resources in many jurisdictions. However, governments often lack sufficient information on the monetary value of natural resources, and as a result, grant rights to these resources without regard to financial and environmental sustainability, or intergenerational fairness.
‘The
Currently, there is no explicit International Public Sector Accounting Standard (IPSAS) guidance on accounting for natural resources in their original state. The IPSASB is now working to address this gap. The first phase of its work focuses on the financial reporting of tangible, naturally occurring resources, including subsoil resources, water and living resources, which are in their natural state. This consultation paper is the first project output, and considers whether natural resources can be recognised as assets in general purpose financial statements or should be disclosed in broader financial reports.
IESBAcommitstoreadyingglobal ethicsandindependencestandards insupportofsustainability reportingandassurance
BoardsINTERNATIONALof Directors have a critical governance role in enhancing confidence in integrated corporate reporting
assuranceconnectedreportingdeliverseriesintegratedthereportingsupportpreparedevelopedtheDancey,IRwillSustainabilityBoardInternationalFrameworkInternationalofannouncementFoundation’sonthefutureintegratedreportingandtheIntegratedReportingconfirmsthattheAccountingStandards(IASB)andInternationalStandardsBoard(ISSB)assumeresponsibilityfortheFrameworkfromJuly,’saidKevinIFACCEO.‘WithintheIFRSFoundation,FrameworkwillbefurthertohelpcompaniesanintegratedreportandconnectivitybetweentherequiredbytheIASBandISSB.ThisinstalmentofIFAC’sreportingassuranceshowshowdirectorscanconfidenceinintegratedthroughcoordinatedandinternalandexternalactivities.’
‘The issue of accounting for natural resources is important for the public sector in most jurisdictions. The recognition and measurement of natural resources impacts not only on financial reporting, but also potentially for many governments on policy decisions and public financial management,’ said IPSASB Chair Ian Carruthers. The IPSASB welcomes comments on all the matters discussed in this consultation paper by 17 October 2022. Feedback will guide the IPSASB in determining the approach to developing an Exposure Draft on the topic.
TheInternationalFederationof Accountants(IFAC)hasreleaseda secondinstalmentofitsintegrated reportingassuranceseries. Integratedreportinghasbeen adoptedasamarket-ledinitiative bythousandsofprivateandpublic sectororganisationsaroundthe worldtohelpthemunderstandand communicatetheirvaluecreation andperformancetoinvestorsand otherstakeholders. Toenhancetrustinintegrated corporatereporting,boardsneed tooverseetheintegrityofthe integratedreportandunderlying reportingprocess.Tohelpthem,IFAC hasworkedinpartnershipwiththe InstituteofInternalAuditors(IIA) todevelop‘ExecutingtheBoard’s GovernanceResponsibilityfor IntegratedReporting’,thesecond instalmentinIFAC’sintegrated reportingassuranceseries.It highlightshowboardsexecutetheir accountabilityresponsibilityfor integratedreportingandintegrated reportswiththecoordinationofall linesofgovernanceandthesupport ofinternalauditors. Boardresponsibilitystatements incorporatemultipleinternal assuranceactivitiesacrossalllines ofgovernanceandmanagement, andsupporttheintegrityofthe integratedreportandtheunderlying processes,systemsandinformation. Thisinstalmenthighlightsthe conceptsandtoolsneededto deliversuchstatements.Thesecan alsobeappliedtoregulatedforms ofmanagementcommentaryin manypartsoftheworld,including managementdiscussionand analysis,strategicreport,operating andfinancialreviewortheTask ForceonClimate-RelatedFinancial Disclosures. IFRS
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IPSASBINTERNATIONALlaunchesa
The International Ethics Standards Board for Accountants (IESBA) has unanimously resolved to take timely action to develop fit-for-purpose, globally applicable ethics and independence standards as a critical part of the infrastructure needed to support transparent, relevant and trustworthy sustainability reporting. This recognises the need to respond at pace to match the speed of transformation in the corporate reportingDemandlandscape.forsustainability information has risen substantially in recent years, and such information is increasingly used to support capital allocation or other decisions by investors, customers, employees and other stakeholders. It also recognises the essential role that ethics and independence play in the production, reporting and assurance of sustainability information.TheIESBA has tasked its recently established Sustainability Working
consultation paperonaccountingfornatural resources
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UKANDIRELAND FRCsetsoutnextstepsin transitiontonewregulator
IAASApublishesareportongood reputeforstatutoryauditorsand auditfirms
Newresearchshowspositive impactofrevisedStewardship Code New research commissioned by the Financial Reporting Council (FRC) has identified the positive impact the revised UK Stewardship Code has had on the practice and reporting of asset managers and owners. The research, which took evidence from 55 asset managers and owners, found that both groups are very positive about the impact of the Code and that there was strong evidence of material changes to practice in the areas of governance, resourcing, stewardship activities, outcomes and reporting. All organisations in the sample had undertaken some organisational restructuring to better integrate stewardship within their investment decision making, a new requirement of the Code. 96% of the respondents reported increases in the size of their stewardship teams since the introduction of the revised Code and noted opportunities for more formal career progression in stewardship. 77% said the quality of engagement was better because of the Code’s influence. Asset owners reported that the most significant way the Code has influenced their approach is that they now feel more empowered to monitor their investment managers. Respondents were also supportive of the Code’s contribution to industry-wide change, with some celebrating the Code’s focus on long-term goals for the investment community.TheFRC has been responsible for the UK Stewardship Code since December 2009. It was substantially revised in 2019 to include a wider definition of stewardship, applying to a range of asset classes and with a greater focus on stewardship activities and the outcomes of those activities. The FRC commissioned the independent research, carried out by a team of researchers from Minerva Analytics, the Durham University Business School and the Dickson Poon School of Law, King’s College London, to better understand the current stewardship practices of asset managers and asset owners and to assess the impact of the revised Code.
The Financial Reporting Council (FRC) has revised its guidance for the recognised supervisory bodies on the recognition of key audit partners for local audit. The revised guidance follows a public consultation to address a recommendation made by Sir Tony Redmond in his review of local audit. The review, which was published in November 2020, addressed the issue of capacity in this market. The accompanying feedback statement explains the FRC’s response to the comments received during the consultation period. The revised guidance applies to all applications received by the RSBs from 30 June 2022. A link to the full report is available at bit.ly/3PaRMCA.
The Irish Auditing and Accounting Supervisory Authority (IAASA) has published a report on good repute for statutory auditors and audit firms.
FRCissuesrevisedguidancefor recognisingkeyauditpartnersfor localaudit
The Financial Reporting Council (FRC) has published a position paper setting out the next steps to reform the UK’s audit and corporate governance framework.Thepaper follows the government response to the consultation on strengthening the UK’s corporate governance, corporate reporting and audit systems, including the creation of the Audit, Reporting and Governance Authority (ARGA) to replace the FRC. The document published builds on the areas of the government response that fall within the FRC’s remit, providing advanced clarity for stakeholders on how the work of reform will be delivered ahead of government legislation. That work includes revising existing codes, strengthening auditing and accounting standards, setting expectations to drive behavioural change ahead of statutory powers, and the development of guidance to address issues set out in the government response.Inparticular, the position paper sets out proposed changes to the UK Corporate Governance Code. This will provide a stronger framework for: ● reporting on the effectiveness of internal controls; ● board responsibilities for expanded sustainability and environmental, social and governance reporting; and ● new guidance on enhanced resilience statements and fraud reporting by directors.TheFRC’s CEO, Sir Jon Thompson said: ‘These long-awaited reforms are a once-in-a-generation opportunity to ensure corporate Britain upholds the highest standards of governance and protects those stakeholders who rely on high-quality reporting. While we await government legislation, the FRC is pressing ahead with those changes to standards and codes which will improve the UK’s audit and corporate governance framework and to lay the groundwork for the creation of ARGA.’
TECHNICAL Group to develop a strategic vision to guide the IESBA’s standard-setting actions in relation to sustainability reporting and assurance. The Working Group will prepare a project plan by December 2022 as a launchpad for commencement of standard-setting work soon after. This will proceed in tandem with the development of IFRS Sustainability Disclosure Standards by the International Sustainability Standards Board (ISSB), and sustainability-related International Standards on Assurance Engagements (ISAEs) by the International Auditing and Assurance Standards Board (IAASB). The IESBA recognises the importance of coordinating closely with the ISSB and IAASB so that coherent, mutually reinforcing building blocks of standards can be put in place around the same time to support the necessary regulatory infrastructure for sustainability reporting.
● Users of ESG ratings are typically contracting for these products on an investor-pays basis from several providers simultaneously. Their reasons for selecting several providers are to increase coverage, either by asset class or geographically, or in order to receive a different nature of ESG assessments. The most common shortcomings identified by the users were a lack of coverage of a specific industry or a type of entity, insufficient granularity of data, and a lack of transparency around methodologies used by ESG rating providers. However, the provision of ESG ratings on an issuer-pays basis was also evidenced and more prevalent than anticipated.
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The European Securities and Markets Authority (ESMA), the EU’s securities markets regulator, has published a letter to the European Commission providing its findings from the Call for Evidence to gather information on the market structure for ESG rating providers in the European Union. ESMA received a total of 154 responses and found 59 ESG rating providers currently active in the EU. The analysis of the responses further indicated several characteristics and trends as follows:
FASBissuesstandardtoimprove fairvalueguidanceforequity securities
ESMAEUROPEpublishesresultsofitsCall forEvidenceonESGratings
Topic 820, Fair Value Measurement, states that when measuring the fair value of an asset or a liability, a reporting entity should consider the characteristics of the asset or liability, including restrictions on the sale of the asset or liability, if a market participant also would take those
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The Financial Accounting Standards Board (FASB) has issued an Accounting Standards Update (ASU) that improves financial reporting for investors and other financial statement users by increasing the comparability of financial information across reporting entities that have investments in equity securities measured at fair value that are subject to contractual restrictions preventing the sale of those securities.
This report provides a summary of how the recognised accountancy bodies, which approve and supervise statutory auditors and audit firms in Ireland, consider the good repute of these parties. This report provides useful insights into the application of the legal requirement for good repute by considering: the definitions used for good repute; the evidence assessed to demonstrate good repute; and the escalation of matters where good repute may be compromised. The report demonstrates common ground, as well as differences arising in the approaches taken by the three recognised accountancy bodies regarding good repute. The results will inform IAASA in its development of Guidelines on Education and Licensing. It may also be useful to the bodies and to other readers of the report in providing information on different steps that can be adopted to ensure good repute assessments are as effective as possible.
● clear conditions for resolution and adequate safeguards in line with international standards; ● a broad range of proposed resolution tools providing authorities with flexibility to reach an optimal solution in any situation; and
● Entities covered by ESG ratings dedicate at least some level of resourcing to their interactions with ESG rating providers, although the amount largely depends on the size of the rated entity itself. Most respondents highlighted some degree of shortcoming in their interactions with the rating providers, most notably on the level of transparency as to the basis for the rating, the timing of feedback or the correction of Theerrors.feedback received is indicative of an immature but growing market which, following several years of consolidation, has seen the emergence of a small number of large non-EU headquartered providers. ESMA will continue supporting the EC in their assessment of the need for introducing regulatory safeguards for ESG ratings. EIOPAissuesastaffpaperonthe proposalforanInsuranceRecovery andResolutionDirective The European Insurance and Occupational Pensions Authority (EIOPA) has published a staff paper that provides an overview of the proposal for an Insurance Recovery and Resolution Directive (IRRD) put forward by the European Commission in September 2021. In its staff paper, EIOPA welcomes the proposal as it addresses all relevant building blocks of a recovery and resolution framework and focuses on cooperation and coordination among authorities. The paper outlines that the IRRD is a comprehensive framework taking into account the insurancespecific features. The main benefits of the proposed IRRD are: ● one single framework across the EU, which seeks to minimise the potential impact on policyholders and the stability of the system as a whole in case of insurance failure; ● preventive planning as a fundamental element of the framework with the underlying idea that crisis prevention is less expensive and more effective than crisis management; ● appointment of resolution authorities with specialised knowledge of the insurance undertaking and the resolution process;
The report on Good Repute for Statutory Auditors and Audit Firms is available at bit.ly/3AWBEQG.
● ESG rating providers: The structure of the market shows that there is a small number of very large non-EU providers, and a large number of significantly smaller EU entities. While the legal entities of respondents are spread out across almost half of the EU member states, a large number of these are clustered in a small number of member states.
UNITEDSTATES
● resolution colleges addressing the need for cooperation and coordination among authorities, which will ensure a successful resolution process, particularly in cross-border cases.
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ASIAPACIFIC HongKong:Moneylaundering reportpublished The latest issue of Hong Kong’s Money Laundering and Terrorist Financing Risk Assessment Report has been published. It examines the money laundering and terrorist financing threats and vulnerabilities facing various sectors in Hong Kong and the city as a whole, according to the requirements of the Financial Action Task Force, an inter-governmental body that sets international standards on combating such crimes. The latest report also for the first time assesses the risk of proliferation financing faced by Hong Kong. The government said that as an international financial centre, Hong Kong attaches great importance to safeguarding the integrity of its financial systems, adding that the city received positive recognition of its anti-money laundering and counter-terrorist financing regime from the task force in 2019. It said the risk assessment can help it to formulate informed policies to keep strengthening its work in antimoney laundering and counter-terrorist financing.
In particular, the government will introduce a proposal to the Legislative Council to amend the Anti-Money Laundering and Counter-Terrorist Financing Ordinance in order to introduce a licensing regime for virtual asset service providers and a registration regime for dealers in precious metals and stones.
ACRAandSGXRegCosetup aSustainabilityReporting AdvisoryCommitteetoadvance SustainabilityReportingfor Singapore The Accounting and Corporate Regulatory Authority (ACRA) and Singapore Exchange Regulation (SGX RegCo) have set up a Sustainability Reporting Advisory Committee (SRAC) to advise on a sustainability reporting roadmap for Singapore-incorporated companies. The Committee will provide inputs on the suitability of international sustainability reporting standards for implementation in Singapore.
During the FASB’s PIR of the credit losses standard, including a May 2021 roundtable, investors and other stakeholders questioned the relevance of the troubled debt restructuring (TDR) designation and the decision usefulness of disclosures about those modifications. Some noted that measurement of expected losses under the current expected credit loss (CECL) model already incorporates losses realised from restructurings that are TDRs and that relevant information for investors would be better conveyed through enhanced disclosures about certain modifications. The amendments in the new ASU eliminate the accounting guidance for TDRs by creditors that have adopted CECL, while enhancing disclosure requirements for certain loan refinancings and restructurings by creditors made to borrowers experiencing financial difficulty.
The disclosure of gross write-off information by year of origination was cited by numerous investors as an essential input to their analysis. To address this feedback, the amendments in the new ASU require that a public business entity disclose current-period gross write-offs by year of origination for financing receivables and net investment in leases. The ASU, including effective dates, is available at www.fasb.org.
The proposed amendment aims to mitigate the risks of the sectors and protect investors. The government said it will continue to monitor and respond to the risks with vigilance amidst the evolving international security landscape.
FASBexpandsdisclosuresand improvesaccountingrelatedtothe creditlossesstandard The Financial Accounting Standards Board (FASB) has issued an Accounting Standards Update (ASU) intended to improve the decision usefulness of information provided to investors about certain loan refinancings, restructurings, and write-offs. FASB Chair Richard R. Jones stated, ‘The new ASU responds to feedback we received from investors and other stakeholders during our extensive post-implementation review (PIR) of the credit losses standard. The amendments create a single model for loan modification accounting by creditors while providing improved loan modification and write-off disclosures.’
TECHNICAL characteristics into account. Key to that determination is the unit of account for the asset or liability being measured at fairSomevalue.stakeholders noted that Topic 820 contains conflicting guidance on what the unit of account is when measuring the fair value of an equity security. This has resulted in diversity in practice on whether the effects of a contractual restriction that prohibits the sale of an equity security should be considered in measuring that equity security’s fair value. To address this, the amendments in the ASU clarify that a contractual restriction on the sale of an equity security is not considered part of the unit of account of the equity security and, therefore, is not considered in measuring fair value. The ASU introduces new disclosure requirements to provide investors with information about the restriction, including the nature and remaining duration of the restriction. The ASU, including effective date and transition information, is available at www.fasb.org.
To address the risks identified, the government will focus on enhancing the legal and regulatory framework, strengthening risk-based supervision and partnerships, stepping up outreach and awareness-raising, and monitoring new and emerging risks, as well as strengthening law enforcement efforts and intelligence gathering capability.
ACRA and SGX RegCo are working on developing a roadmap for wider implementation of sustainability reporting for Singapore-incorporated companies, beyond SGX-listed companies. SGX RegCo has been progressively enhancing sustainability reporting for listed companies, including mandatory reporting since 2016 and the introduction of climate reporting from FY2022. The growing interest in environment, social and governance (ESG) issues globally has led to a call to provide greater transparency and assurance on companies’ ESG-related information which investors and other stakeholders can incorporate into their decision making.
