International Accountant 121 by Association of International Accountants

INTERNATIONAL

ACCOUNTANT JANUARY/FEBRUARY 2022 ISSUE 121

Finding the right balance in financial reporting The brave new world of digital VAT collection Changing attitudes in family businesses The struggle for gender diversity in UK boardrooms

CONTENTS

In this issue Contributors 2 Meet the team

News and views

AIA news

FRC releases a three year plan for its transition to the ARGA AIA launches new scholarship programmes

businesses do to prepare for the brave new world of CTCs and digital VAT collection?

Christy Wilson (Katten Muchin Rosenman UK LLP) considers the UK government’s proposal to establish a re-domiciliation regime that is open to as broad a range of companies as possible.

8 Family businesses

Examinations 8 Preparing for online exams The transition to online examinations for AIA qualifications began several years ago, and its benefits have been underlined by Covid-19 pandemic. Dr Steven Wynne (Manchester Metropolitan University) writes on how to prepare for online exams, and the skills you will need to sit exams in this new format.

Changing attitudes As with any large, disruptive event, the Covid-19 pandemic has accelerated many pre-existing trends, as well as ushering in new changes (and challenges). Rebecca Durrant (Crowe) considers how family businesses are likely to undergo a shift in their mindset following their experiences of Covid-19.

Money laundering

Complex corporate structures Trust and company service providers (TCSPs) are at a high risk of being used for money laundering or terrorist financing. Whilst they can be used for legitimate business and investment activity, criminals may use them to add a layer of legitimacy to illegal transactions. David Potts (AIA) considers the money laundering risk they pose.

10 Financial statements

VAT 10 A brave new world Many countries are taking radical action to digitalise, modernise and enhance their tax collection systems. Christiaan Van der Valk (Sovos) believes that the future of VAT lies in continuous transaction controls. What should UK

Corporate re-domiciliation

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

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Your place of choice Re-domiciliation enables a company to change its place of incorporation to another jurisdiction, whilst maintaining its legal identity as a corporate body.

Editorial Information International Accountant, the bimonthly publication of the Association of International Accountants (AIA).

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

Finding the right balance Financial instruments are one of the most complex areas of financial reporting. Steve Collings (Leavitt Walmsley Associates Ltd) examines the problems that the distinction between a financial liability and equity can pose when preparing a financial statement.

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Gender diversity

Dates for your diary

An uphill struggle Board diversity is a demonstration of an organisation’s commitment to inclusion. Jackie Henry and Sharon Thorne (Deloitte) report that UK boardrooms are struggling to keep up with their European counterparts. Upcoming events

Technical 29 Global updates

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Editor’s welcome

Contributors to this issue

Editor’s welcome

CHRISTIAAN VAN DER VALK

As vice president for strategy at Sovos, Christiaan Van Der Valk leads research into trends in the market and tax legislation, determining business strategy and solutions that meet emerging trends. CHRISTY WILSON

Christy Wilson is a Tax Associate in the Transactional Tax Planning practice at Katten Muchin Rosenman UK LLP. She has undertaken pro-bono work for the National Centre for Domestic Violence. STEVE COLLINGS

he AIA has launched two scholarship pathways to support students with strong career aspirations in accountancy or audit by offering full financial assistance to candidates pursuing the AIA professional qualification. Five awards are available through the AIA Accountancy Scholarship UK, two of which are given with priority to applicants from lower socio-economic backgrounds to support the AIA’s commitment to Access Accountancy. A further five awards are available through the AIA Commonwealth Scholarship which is open to applicants from all Commonwealth countries, excluding the UK. The scholarship is part of the AIA’s aims as a Commonwealth Accredited Organisation to support education and the economy through financial education and professional skills. Both scholarships covers all course fees via AIA Achieve Academy, exemption fees and exam fees for the AIA professional qualification. The application deadline for Scholarships is 31 March 2022. Financial instruments are one of the most complex areas of financial reporting. In this issue of International

Rachel Rutherford Editor, IA

Accountant, we examine the problems that the distinction between a financial liability and equity can pose when preparing a financial statement (see page 16). With many countries taking radical action to digitalise, modernise and enhance their tax collection system, we consider the role of continuous transaction controls in the future for VAT (see page 10). Elsewhere, we look at the money laundering risk of complex corporate structures, in particular trust and company service providers. Whilst they can be used for legitimate business and investment activity, criminals may use them to add a layer of legitimacy to illegal transactions (see page 22). We examine the impact that Covid-19 has had on family firms, and how they are likely to have experienced a change in their approach to business (see page 14), and we also consider the UK government’s proposal to establish a re-domiciliation regime that is open to as broad a range of companies as possible (see page 20). Finally, we assess why UK boardrooms are struggling to keep up with their European counterparts in terms of gender diversity (see page 26).

Steve Collings, FMAAT FCCA is the audit and technical partner at Leavitt Walmsley Associates Ltd, where he trained and qualified. In 2010, Steve became a Fellow of the ACCA. DAVID POTTS

David Potts is director of operations at the AIA, and is responsible for maintaining its international recognition and implementing its regulatory strategies and annual review cycle. JACKIE HENRY

Jackie Henry is lead partner for Deloitte in Northern Ireland and UK and Purpose lead for the consulting business, with over 30 years’ experience of supporting change in Northern Ireland. REBECCA DURRANT

Rebecca Durrant is National Head of Private Clients at Crowe, advising individuals on all aspects of the tax system with a view to wealth protection. ISSUE 121 | AIAWORLDWIDE.COM

News REGULATIONS

VAT

FRC releases a three year plan to transition to ARGA The FRC has published its three year plan for 2022 to 2225. The plan acknowledges the FRC’s continued commitment to being an effective and transparent regulator, as it prepares to transition to the Audit, Reporting and Governance Authority. It contains a detailed breakdown of intended expenditure for 2022/23 and a summary of the expected trajectory of overall costs and headcount for the following two years. As the FRC awaits the government response to its consultation, “Restoring trust in audit and corporate governance”, its planning assumes that the FRC will be granted regulatory powers and funding on a statutory footing during the three year period covered by this plan. The plan therefore reflects the FRC’s views and expectations on the likely operational impact of the change in the FRC’s status. Sir Jonathan Thompson, FRC CEO, said: “2021 was another year of exceptional change for the FRC and all our stakeholders. We developed a comprehensive supervision approach to support a better understanding of our audit quality and saw pleasing traction with a new approach to audit firm supervision. We continued to set a high bar with a rigorous review process to determine the first signatories to the Stewardship Code. Our work with stakeholders continues and we have seen record engagement levels with our online webinars and roundtables about key BAU and reform agendas. “It’s been pleasing to see the FRC lead on providing guidance and insights on expectations for corporate reporting, audit, accounting, actuarial and governance

Sir Jonathan Thompson, CEO of the FRC

throughout the year. Our three year plan will build on our approach so far and we will continue to strengthen our corporate services support during the period of growth – from recruitment and training, to finance systems and risk management.” In setting out this plan, the FRC has considered how, and when, it will need to increase the capacity to adapt to new powers and responsibilities. In 2022/23, overall costs are expected to increase by £9.1 million. The FRC anticipates similar growth in 2023/24, when it expects ARGA to be created and the first year of statutory funding, followed by a period of stability and consolidation from 2025 onwards. The 2022/23 Strategy and Plan and Budget consultation will run until 1 March 2022. Respondents should submit their comments to FRC.Plan.Budget@frc.org.uk by close of business on that date.

EU launches ‘VAT in the Digital Age’ consultation The idea of a single EU VAT return for non-established businesses is one step closer to reality with the release of the European Commission’s public consultation on ‘VAT in the Digital Age’. The European Commission’s action plan for fair and simple taxation underlines the need to reflect on how tax authorities can use technology to fight tax fraud and benefit businesses, and on whether the current VAT rules are adapted to doing business in the digital age. The action plan announces a legislative proposal for 2022 on “VAT in the digital age”, which will cover: ● VAT reporting obligations and e-invoicing; ● VAT treatment of the platform economy; and ● single EU VAT registration. The changes outlined in the consultation will have a real impact on businesses selling to the EU. The consultation seeks views on whether the current VAT rules are adapted to the digital age, and on how digital technology can be used both to help member states fight VAT fraud and to benefit businesses. Read the full consultation on the AIA website, under Consultations.

TECHNOLOGY

Government launches Help to Grow: Digital Help to Grow: Digital is a UK-wide government backed scheme that aims to help businesses choose, buy and adopt digital technologies that will help deliver growth. The Help to Grow: Digital scheme offers businesses: ● free, impartial advice and guidance about what digital technology is best suited to your business and how it can boost your AIAWORLDWIDE.COM | ISSUE 121

business’ performance; and ● targeted financial support, if your business is eligible, worth up to £5,000 towards the costs of buying approved digital technologies. Digital technology can help to: ● organise business activities more efficiently, including automatically generating invoices and helping to track spend;

● improve reach to new customers though data collection that helps understand a potential customer’s wants and needs; and ● make work smarter and more flexible by using automation to reduce administration, and storing information in one central location. Find out more information at: helptogrow.campaign.gov.uk

News SINGAPORE

Singapore likely to increase carbon tax in 2022 Budget Singapore’s Minister of Finance, Lawrence Wong, has said revealed that an increase in carbon tax is likely in the 2022 Budget. Replying to a question posed in parliament on the government’s ongoing consultations on carbon tax reform, Mr Wong said: “Our agencies have been consulting the public on the carbon tax review over the past six months, as part of engagements under the Singapore Green Plan 2030. The conversations have touched on the need for a higher carbon tax and the trade-offs involved in our green transition. In the lead-up to Budget 2022, the public can also provide their feedback through platforms such as REACH and the People’s Association. “The Government is engaging businesses on the potential impact of a higher carbon tax, and how we can support them in the shift towards lower-carbon operations and pursuit of green growth opportunities. We are also speaking to other stakeholders such as environment groups on the green transition. “Feedback received from these consultations will be taken into consideration in the carbon tax review. The government will announce the revised post-2023 carbon tax level at Budget 2022.” Singapore implemented a carbon tax in 2019. It is applied without exception to all sectors including energy-intensive and trade-exposed sectors.

INSOLVENCY

Crackdown on directors who dissolve companies to evade debts

Rogue directors who dissolve their companies and avoid paying liabilities to staff, creditors and the taxpayer can now be disqualified from being a director. The Insolvency Service has been granted new powers to tackle unfit directors who dissolve companies to avoid paying their liabilities. The new legislation extends the Insolvency Service’s powers, on behalf of the Business Secretary, to investigate and disqualify company directors who abuse the company dissolution process. The Rating (Coronavirus) and Directors Disqualification (Dissolved Companies) Act will also help to tackle directors dissolving companies to avoid repaying government backed loans put in place to support businesses during the Coronavirus pandemic. Business Secretary Kwasi Kwarteng said: “We want the UK to be the best place in the world to do business and we have provided

unprecedented support to businesses to help them through the pandemic. “These new powers will curb those rogue directors who seek to avoid paying back their debts, including government loans provided to support businesses and save jobs. Government is committed to tackle those who seek to leave the British taxpayer out of pocket by abusing the Covid financial support that has been so vital to businesses.” The Insolvency Service has powers to investigate directors of companies that enter a form of insolvency, including administration and liquidation. The Insolvency Service may also be instructed to investigate live companies where there is evidence of wrongdoing. This Act extends those investigatory powers to directors of dissolved companies and if misconduct is found, directors can face sanctions including being disqualified as a company director for up to 15 years or, in the most serious of cases, prosecution.

Administrative Region. Under the theme “Navigating the Next Normal towards a Sustainable Future”, the forum is conducted in a virtual format this year due to the latest developments of the Covid-19 pandemic situation. Chief Executive Carrie Lam delivered an address to open the forum, followed by keynote speeches by mainland government officials, including Chinese People’s Political Consultative Conference Subcommittee for Economic Affairs

Chairman, former China Banking Regulatory Commission Chairman, and former China Securities Regulatory Commission Chairman Shang Fulin. Addressing the opening session this morning, Mrs Lam pointed out that the forum, through pooling the insight and intelligence of high-profile speakers from around the world, aimed to shed light on how the world could better prepare itself and build a sustainable future amid such uncertainties as extreme weathers, pandemic outbreaks, geopolitical tensions and diverging fiscal and monetary policies worldwide.

BUSINESS OPPORTUNITIES

Asian Financial Forum The 15th Asian Financial Forum has taken place, where leaders in government, finance and business from over 80 countries and regions met to exchange insights and explore business and investment opportunities. Co-organised by the Hong Kong government and the Trade Development Council, the two-day forum also kick-started celebrations for the 25th Anniversary of the Establishment of the Hong Kong Special

ISSUE 121 | AIAWORLDWIDE.COM

News

AIA

NEWS SCHOLARSHIP PROGRAMME

STUDY PROVIDER

AIA signs new study provider agreement with Illumin IT in Mauritius AIA is delighted to have signed anew study provider agreement with Illumin IT in Mauritius allowing prospective students a new avenue to obtain the AIA professional qualification. AIA study providers are educational institutions which are approved to teach AIA qualifications and adhere to high academic and teaching standards to give students the best experience and preparation for success. DISCIPLINARY COMMITTEE

Disciplinary Committee Outcomes 1 September 2021 Disciplinary Committee Outcomes: Mr Derek Martin Williamson (UK) Mr Williamson was excluded from membership and fined £7,500 for breach of Regulation 15.3 of the Regulations: Public Practice, in the AIA Constitution, and failing to undertake adequate customer due diligence measures to meet the requirements of Regulation 28 of the UK Money Laundering Regulations 2017. AIAWORLDWIDE.COM | ISSUE 121

AIA launches new scholarships programmes AIA is delighted to announce the launch of two new scholarship programmes to support students with strong career aspirations in accountancy or audit to obtain the AIA professional qualification with full financial assistance.

AIA Accountancy Scholarship UK

Five awards are available through the AIA Accountancy Scholarship UK, two of which are given with priority to applicants from lower socio-economic backgrounds to support the AIA’s commitment to Access Accountancy. This award covers all course fees via AIA Achieve Academy, exemption fees and exam fees for the AIA professional qualification on either the accountancy or audit route.

AIA Commonwealth Scholarship

The AIA Commonwealth Scholarship offers a further five awards and is open to applicants from all Commonwealth countries, excluding the UK. The scholarship is part of the AIA’s aims as a Commonwealth Accredited Organisation to support education and the economy through financial education and professional skills. This award also covers all course fees via AIA Achieve Academy, exemption fees and exam fees for the AIA professional qualification. The scholarship programme provides a great opportunity for fully funded learning and we encourage applications from a diverse range of candidates.

As part of the application process, applicants are asked to submit a short essay on one of two questions: “What would this scholarship mean to you?” or “Why is a career in accountancy important to you?” Successful applicants will have a clear view of how they will develop their future career and the difference they want to make to the accountancy profession. The deadline for applications is 31 March 2022. Rachel Rutherford, AIA Director of Policy and Public Affairs, said: “We want to contribute to long-lasting change in the global accountancy profession by helping students from under-represented groups reach their career goals. This scholarship represents one of the steps that AIA is taking to develop financial education and provide students with a real chance to fulfil their potential.” Find out more at: www.aiaworldwide.com/scholarships

News

AIA Examiners’ Conference 2022 The AIA’s annual Examiners’ Conference took place on 21 January 2022 as a virtual event. This year the conference brought together the AIA’s expert academic exam team, as well as regulators and stakeholders focusing on how we’ve adapted and overcome the disruption caused by Covid-19, and how we are future-proofing AIA qualifications to deliver accountants with tomorrow’s skills today. Throughout the day, delegates heard from: ● Tracey Wilson, a senior lecturer in accounting and finance at Newcastle University, on “The impact of Covid-19 on financial reporting”; ● Christopher Cowton, Professor at the Institute of Business Ethics, on “Creating ethical accountants”; and ● Teerooven Soobaroyen, Professor of Accounting at the University of Essex, on Developments in corporate governance, audit and sustainability. Breakout sessions provided an opportunity for the exam team to discuss the topics within the framework of the AIA’s professional qualification and make suggestions for changes where appropriate. AIA President, Shahram Moallemi, said: “The Examiners’ Conference allowed delegates to hear from subject leaders on a variety of topics which may impact the provision of professional education within the accountancy sector, as well as exchange experiences in group discussions on key areas such as green finance, ethics and audit reform. “The changes, challenges and rewards of AIA’s digital transformation to online learning and assessment were also discussed as AIA continues to develop online tools and resources to deliver the highest standards of professional education.”

RESOURCES

New AIA online resources: HMRC HMRC supports agents through a wide range of communication channels and services. Effectively accessing information needed to support your clients can improve efficiency and reduce time in securing answers to queries. This new resource page outlines channels to effectively engage and source information and achieve answers to queries from HMRC, as well as routes to assist in strengthening and improving the service to agents. To access HMRC resources, login to My AIA and access the Guidance and Resources menu.

SOCIAL MEDIA

Let’s connect! We use social media to connect with our members, students and other stakeholders. Join us on your favourite social media channels to find the latest news, events, insights and offers from AIA. Facebook: @AIAworldwide LinkedIn: @Association_of_ International_Accountants Twitter: @AIA1928

AGENT CODES

Approved documentary evidence for registering HMRC agent codes

EVENT

Several AIA Members in Practice have received requests from HMRC when applying for agent codes that documentary evidence should be supplied of AIA membership. We are pleased to confirm that members in

good standing with a valid practising certificate may simply provide a copy of their certificate to HMRC’s agent team and this will be accepted as appropriate documentary evidence as part of the application. ISSUE 121 | AIAWORLDWIDE.COM

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EXAMINATIONS

Preparing for online exams Dr Steven Wynne shares his advice on how to prepare for online exams, and the skills you will need to sit exams in this new format.

he transition to online examinations for AIA qualifications is a process that began several years ago, and its benefits have been underlined by the events of the Covid-19 pandemic. The flexibility provided by computer-based examinations has increased the degree of accessibility and adaptability in the examination process. However, it is important to recognise that online examinations do possess their own unique features and formats, and that it is important to prepare for online examinations in a systematic manner. Once you have registered for an examination, the AIA will contact you with guidance on taking an online examination. It is important that you read the guidance notes for setting up your computer for online examinations. This article offers advice regarding the three key phases of engagement in the online examination process: the preparation phase; the implementation phase; and the final self-review phase.

Before the online examination: preparation phase

As with any examination, it is important to prepare prior to sitting your online examination. 8

As with any examination, it is important to prepare prior to sitting your online examination. The preparation phase has both an academic and an administrative dimension. From an academic, or subject-knowledge, perspective, it is important that you create a study schedule that helps to ensure that all required topics are identified and revised prior to examination. The components of your study schedule can be identified by inspecting the relevant examination syllabus, accessing the learning materials and consulting with tutors. Once a study schedule has been devised, you can support your own progress through the schedule by creating a revision routine that allows you the time and space to attempt practice questions and access other learning materials such as the AIA Achieve Academy lecture, workshops and textbooks.

The administrative dimension of the preparation phase relates to your understanding of the structure and procedures that need to be followed when you access the online, computerbased examination. Before sitting the online examination, it is important to familiarise yourself with the format of your examination – how many questions will you be required to answer, and how much time you should be allocating to each question. This may vary from examination to examination: accessing mock examinations will help to ensure that you know what to expect in your examination. It is also advisable to consider the relative weighting given to particular topics and techniques in your examination, and the extent to which the examination paper will require computational or discursive responses.

During the online examination: implementation phase

When the online examination commences, you should ensure that you apply good practice in your approach to answering questions. In the computer-based environment, you will be providing responses in word processing documents or on spreadsheets. Your answers should be clear and logically ordered, and supporting workings should be included. The computer-based platform provides an opportunity to present your answers with clarity and precision ISSUE 121 | AIAWORLDWIDE.COM

©Getty images/iStockphoto

Dr Steven Wynne FCA Senior Lecturer, Manchester Metropolitan University

EXAMINATIONS everything (you don’t need to score 100% to pass the exam). It is always better to respond to a question than leave the answer template blank – even if you are unsure of the answer. However, if you are not able to respond at that a given moment, do not dwell too long on the question and risk inefficient use of your time. You can return to complete unanswered questions later in the examination. Indeed, the online, computerbased platform supports and facilitates this form of flexibility. I would also encourage you to consider how to maximise the effectiveness and efficiency of your answers to discursive questions. There are two techniques that are useful in this respect. Firstly, relate your answers to the question scenario. Phrases such as “in this company”, or “in this particular situation” can aid in focusing your responses on the details of the scenario, and can help to demonstrate how you have applied your knowledge. These forms of phrases can also act to signal to the marker where in your answer you are demonstrating such application skills. Secondly, do ensure that you support your analyses with evidence or reasons. Marks are awarded for breadth and depth of content. Using “reason indicators” in your answer such as “this is because” or “the reason for this is” allows you to construct ‘reasoned arguments’ that communicate your ability to write in depth.

After the online examination – it is important to maximise this benefit as it can effectively signal to the examination marker where each element of the answer is provided. As with all examinations, you need to monitor the time spent on each question to ensure that each question is allocated an appropriate interval of effort. This allocation of time should also allow for proofreading, checking and review of your responses. It should also – and this is critical – include time to read the question, and in particular the requirements of the question before you attempt an answer. Read the scenario to understand and evaluate it for its relevance to the question requirements. Use the pre-prepared answer sheets in the computer-based platform to summarise points that relate to your intended response – these points can then be expanded upon as you craft the final version of your answer. Once you have made your initial notes, return to the requirement and read it again to ensure you have understood what you are expected to provide in your response. This will ensure that you answer the precise requirements of the question set, and that you do not miss any part of any question (and hence that you do not miss the opportunity to gain marks). Ensure that you attempt all the questions in the examination. Do note the word “attempt” – it is important to attempt everything, not to finish AIAWORLDWIDE.COM | ISSUE 121

The completion of your online examination is not the endpoint of the learning process. While you await the marking of the examination to be undertaken, you can reflect on how you think you performed in the examination. This self-reflection will, of course, focus on content and technical aspects of the examination questions, but it can also extend to reflection on learning outcomes that relate to your preparation or approach. You might consider how wellprepared you were, and how this was reflected in your experience of the examination. You might also reflect on how you managed the allocation of time, and how familiar you were with the software and tools at your disposal. In engaging in this reflection, you may be able to carry forward valuable insights into the preparation phase of your next examination.

In conclusion

Author bio

Dr Steven Wynne is a senior lecturer at Manchester Metropolitan University, where his teaching focuses on corporate finance and wealth managemen

The move to an online examination environment offers a range of benefits to students, including flexibility and the capacity for examination responses to be presented with clarity and precision. Success in online examinations builds upon the core principle of preparation – both in terms of subject knowledge and familiarity with the structure and format of the examination. In addition, students need to become familiar with the online, computer-based platform via engagement with mock examinations and wider question practice. ●

VAT

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VAT

A brave new world Christiaan Van der Valk believes that the future of VAT lies in continuous transaction controls, and that businesses should start preparing now.

n 2019, EU countries lost €134 billion in VAT revenues to tax fraud and inadequate tax collection systems. Meanwhile, the UK’s preliminary estimate of the 2020 to 2021 VAT gap is £9.8 billion. The EU estimates that if current trends continue, it will take 13 years to eradicate the VAT gap within its jurisdiction. Given these startling figures, it’s no surprise that many countries are taking radical action to digitalise, modernise and enhance their tax collection systems. One key way that governments can gain greater visibility into companies’ transactions and tax liabilities is by adopting continuous transaction controls (CTCs). Let’s take a closer look at how CTCs work, and which European countries are adopting them. We’ll also examine what UK businesses should do to prepare for the brave new world of CTCs and digital VAT collection.

Which countries have already adopted CTCs?

An introduction to CTCs

In short, CTCs require businesses to share detailed transactional data with tax administrations in real or near real-time, affecting their e-invoicing and e-reporting obligations. CTCs are based on the electronic submission of transactional data from a taxpayer’s systems to a platform approved by their country’s tax administration. This submission typically happens just before, during or immediately after sellers and buyers have exchanged data. One popular CTC model requires an invoice to be cleared by the tax authority before it can be issued or paid. This not only gives tax authorities increased visibility into transactions, but enables them to assert a degree of operational control. In addition to supporting tax enforcement, CTCs generate enormous amounts of economic data, which can be invaluable for informing fiscal and economic policy.

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Author bio

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

Though the move towards CTCs is a global trend, no two tax authority’s requirements are the same. Instead, there’s a diverse range of legal frameworks and constantly evolving specifications. On a global level, Latin America was an early adopter of CTCs back in the 2000s. Unlike Europe, where the emphasis has been on transposing legacy paper-based processes and compliance concepts to the digital environment, many Latin American countries were able to leapfrog such methods and put in place entirely new systems. Countries including Argentina, Brazil, Chile, Peru and Mexico now have stable mandatory control infrastructures in place. Within Europe, Italy can be considered a trailblazer. With one of the largest VAT gaps in the EU, it was the first European country to extend a clearance e-invoicing model for all B2B VAT transactions back in January 2019. Currently, Italy’s regulation encompasses domestic transactions between Italian residents or businesses. From mid-2022, Italian businesses will also be required to send crossborder transactional data to the country’s tax authority through the same mechanism. As of 1 January 2022, Poland joined Italy in implementing a similar e-invoicing arrangement, with a single centralised national system for e-invoices, on a voluntary basis. Issuing and receiving all invoices via this system will become compulsory in 2023. Poland has made admirable progress in reducing its VAT gap in the last decade. After hovering around 25% between 2012 and 2015, its VAT gap had lessened to just 10% in 2020 – making it one of the EU’s three top performers in terms of VAT gap reduction. The country’s new e-invoicing system is expected to further reduce this figure.

©Getty images/iStockphoto

Christiaan Van der Valk VP of Strategy and Regulatory, Sovos

VAT

The digitalisation of tax is inevitable, whether it happens in one year or ten. But how your business approaches this is a matter of mindset.

Hot on Poland’s heels is France. The French government recently announced a staged implementation of mandatory B2B e-invoicing clearance and e-reporting obligations. From 1 July 2024, all companies headquartered or established in France will have to accept e-invoices through the country’s CTC system. Issuing e-invoices and e-reporting will also become mandatory for the largest enterprises. Then, from 1 January 2025, the same obligations will apply to some 8,000 mid-sized companies, and from the following year to the country’s remaining four million SMEs. Looking forward, we can expect more countries across Europe and beyond to implement CTCs. For instance, the new German government has announced its ambition to tackle VAT fraud through the introduction of CTCs; and several countries in Eastern Europe (such as Romania, Bulgaria, Slovenia, Slovakia and Serbia) have announced similar plans or already begun the implementation of them.

What does this mean for businesses based in the United Kingdom?

First and foremost, it cannot be stressed enough that the future of VAT is digital. In fact, it’s likely that the vast majority of countries that have VAT, GST or similar indirect taxes will have adopted CTCs, either fully or partially, by 2030. The UK, along with countries in Scandinavia, is likely to be one of the last in Europe to do so. However, the UK’s Making Tax Digital (MTD) initiative, which came into place on 1 April 2019, is a step in this direction. MTD rules require VAT-registered businesses with a taxable turnover above £85,000 to keep digital records of invoices and use software to submit their VAT returns. From April 2022, VAT-registered businesses with a taxable turnover below £85,000 will also be required to follow MTD rules. In order to better prepare for the digital tax world of the future, smart UK businesses should start by simplifying how they handle transactional data. Currently, many businesses use multiple data sources and still rely too much on manual processes. This simply won’t be feasible when tax authorities start demanding an increasing quantity of data in real-time. It will be critical to ensure that all SaaS and internal business applications that process tax-relevant data be prepared to communicate live document flows to tax administrations in a consistent and controllable manner. Secondly, when it comes to CTCs, UK businesses operating in Europe should keep abreast of relevant legislative changes on the continent. To inform organisational planning and digitalisation programmes, it’s crucial for businesses to maintain a holistic understanding of the evolution of CTCs and their use by tax administrations. Looking at the scope of Italy’s

domestic e-invoicing clearance mandate – which we can reasonably expect to be echoed throughout the bloc, due to a derogation granted by the EU council – it’s reasonable to expect that all businesses paying tax in a particular country will need to comply with CTCs imposed by the tax authority. For many multinational businesses, ensuring compliance across all jurisdictions where CTCs are implemented presents a significant challenge. Until recently, many have treated indirect taxes like VAT as a regional concern, procuring separate local solutions bundling business and compliance functionality for each geography. The paradigm shift in digital taxation quickly makes this approach counterproductive. First, CTC regimes often start with simple invoicing rules but then they tend to snowball into comprehensive coverage of physical and financial supply chain and customer data. By letting the need for compliance drive the procurement of business systems in each country, multinational companies effectively paint themselves into a corner from which a global digital transformation becomes unachievable. Secondly, adopting multiple standalone systems to connect to government platforms means giving critical business processes and data to diverse local software companies which are often inexperienced and not optimised for the needs of larger international businesses. These insights are driving some corporations to adopt a strategy of decoupling compliance from business functionality via a modern integration approach. This allows the business applications that a company needs to seamlessly share data with governments as and when needed via a loosely coupled single global VAT compliance solution. This has several key benefits. Firstly, by opting for a more efficient and scalable solution, businesses can significantly reduce their overall VAT compliance costs and save valuable employee time. Secondly, centralisation enables leaders to make better strategic decisions, as it unlocks data insights across all regions at both aggregate and granular levels. Last but not least, given the complexity of VAT legislation across regions, and the speed with which it is now changing, a single solution gives businesses peace of mind as they grow and scale. Overall, the digitalisation of VAT in your jurisdiction is inevitable – whether it happens in one year or ten. But how your business approaches this is a question of mindset. To ensure the most favourable outcome, finance leaders should view reforms as an opportunity, rather than an obstacle – presenting them with the chance to enhance and streamline their financial systems. As with all change, preparation is crucial to success. Multinational businesses should ensure they allocate enough time and resources to plan strategically. ● ISSUE 121 | AIAWORLDWIDE.COM

FAMILY BUSINESSES

Changing attitudes Rebecca Durrant considers how family businesses are likely to undergo a shift in their mindset following their experiences of Covid-19.

s with any large, disruptive event, the Covid-19 pandemic has accelerated many pre-existing trends, as well as ushering in new changes (and challenges). This is clear to see in the increased adoption and availability of a variety of technological tools and data sources. But, while innovation has been key to survival throughout the pandemic, some of the biggest changes have been to mindset and priorities for the future. The more longstanding family businesses will perhaps be no stranger to the impact of a pandemic (with their experiences of Spanish influenza in 1918). However, there’s no denying that Covid-19, along with government response measures, has had a large impact on many aspects of people’s lives, including attitudes to risk and bold decision making.

Give me space

There seems little doubt that the pandemic has reshaped the lives of individuals and refocused many people’s objectives and priorities. In terms of demand for personal living space, estate agents have spoken of families looking to leave cities such as London and take larger £1 million plus properties in towns in the home counties. These can satisfy an increased demand for home office working, periodic home schooling and gardens for children. This view was supported by Land Registry data for transactions in the first half of 2021, which showed that more such homes were sold outside London than in it. For those who cannot easily move, perhaps due to stamp duty land tax – a tax on moving home – there has been a

©Getty images/iStockphoto

Rebecca Durrant Partner and National Head of Private Clients, Crowe

After some broad swings, GDP is on the road to recovery, but the evidence of economic scarring from the pandemic remains. Data from the Office for National Statistics indicates that average wages seem to be on a 3.5% to 4.9% growth trajectory, even after allowing for Covid-19 related distortions, with some sectors seeing more than this. UK decision makers who lead in family and owner-managed businesses need to consider how their businesses remain fit for purpose.

ISSUE 121 | AIAWORLDWIDE.COM

FAMILY BUSINESSES resurgence in “home improvements”, as families look to make better use of available space. As anyone who lives near a railway station knows, in our post-pandemic world remarkably few individuals appear willing to travel on public transport into the main conurbations. It has been widely reported in the press that certain sectors, such as banking, were the first to encourage their employees to return to the office but hesitancy still remains. Employers have been obliged to rapidly implement major technological change, allowing their employees to deliver skills in ways which are much more agile in terms of when and where work is performed. People have adjusted wardrobes, and what was traditionally viewed as formal working attire is an increasingly rare sight.

Digital dinosaurs making way for the tech savvy

There is a sense that we may be on the cusp of further major technological or societal disruption and this brings fresh business challenges. Businesses have had to adapt to survive the pandemic so far and the pace of change only seems to be increasing. For digital dinosaurs, this future is probably best tackled by the younger generations, and we are seeing family businesses increasingly willing to address the challenge of succession and generational transition. The pandemic has made everyone pause and reassess what’s important and family businesses are no exception. In the past, family members may have grown into roles as much out of a sense of duty as expertise. Now, however, there will be many family businesses that reflect on the purpose of the business, the skill sets needed to make it a success and whether they exist within the family, as well as the family’s motivation to fill these roles. This can lead to family businesses contemplating a sale, where this might have been unthinkable in the past, or maybe some mechanism that drives expert non-family management to take the business forward with the family becoming the “private equity investor”. The ability of a family business to survive such a change can determine its longevity; it is that longevity which frequently sets some family businesses apart from differently capitalised competitors. Longstanding family business owners who have been reluctant to think about or discuss retirement plans or inheritance tax have now been given a clear sense of their own mortality. Many want to take advice on family wealth and succession planning to protect themselves and their families for the future. For the advisory community, this means providing support as a family counsellor rather than tax planning, which may come later. The tax advice is simply a foundation to build on to support their goals.

The leap into retirement

New business structures, such as employee ownership trusts, have also helped business AIAWORLDWIDE.COM | ISSUE 121

owners to make the jump to retirement. Under the rules, a controlling interest in the company must be sold to a trust whose object is to act in the interests of the employees. It is a highly tax-efficient exit for the owner. The hope is that the company’s success will continue in the hands of a board of trustees who will be highly motivated to succeed. Indeed, we have seen heightened interest in trusts, and an increased number of transactions, though it remains to be seen whether trustees can make effective management decisions to run these companies profitably. While Covid-19 has impacted employment prospects for many of the younger generation, it has also acted as a catalyst for those towards the end of their working careers to re-evaluate their retirement plans. For some in the more mature age group, lockdown has afforded the chance to take a look at traditional day-to-day spending and ask some big work/life balance questions, such as exchanging unutilised gym memberships, competitive holidays and high-spend eating habits in favour of culture, learning and gourmet home cooking. Those who have lost work may have had to delay retirement. Others, through the experience of the pandemic, may have come to realise that they can in fact afford to retire early with the children leaving home and with an opportunity to enjoy life while fit and active. We are helping family clients to achieve their transition from one generation to the other and retirement goals. We have seen leaders in the family seek advice to understand their options to transition and the cost implications of doing this, whether it be tax, legal, banking or valuation related. Even in property-focused family businesses, where the costs of transactions and generational transfer are high compared to trading businesses, owners contemplating large impending inheritance taxes have shown themselves willing to contemplate lifetime disposals. This triggers tax charges in order to release the funds necessary to move the main property portfolio now, rather than waiting for death. Large transactions such as these need to be handled with care but once transition is fully achieved, the new ownership structure allows the majority of the portfolio to be managed and protected for the second generation and beyond. Structures such as trusts and investment companies also permit better control of income flows. It is clear that the pandemic has affected families and their attitudes to business significantly. While innovation has been key to survival throughout the pandemic, some of the biggest changes have been to mindset and priorities for the future. For instance, some entrepreneurial family businesses were excited to expand pre Covid-19 but now want to completely rethink their plans. This has meant more consolidation of the business, including preparation for sale and succession, moving away from the 16 hour days spent running a business to a better work/life balance and family time. Strategic thinking is more important now than ever. ●

Author bio

Rebecca Durrant is a Partner and National Head of Private Clients at audit, tax, risk and advisory firm, Crowe.

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FINANCIAL STATEMENTS

ISSUE 121 | AIAWORLDWIDE.COM

FINANCIAL STATEMENTS

Finding the right balance Steve Collings examines the problems that the distinction between a financial liability and equity can pose when preparing a financial statement. Steve Collings Partner, Leavitt Walmsley Associates Ltd

inancial instruments are one of the most complex areas of financial reporting. In some larger firms, there are dedicated teams of professionals whose sole job is to deal with the accounting issues related to financial instruments. Over the years, the complexity of financial instruments has increased, largely due to the more complex way in which entities conduct their business. One of the areas that can sometimes pose problems for preparers of financial statements is the distinction between a financial liability and equity. FRS 102: The Financial Reporting Standard applicable in the UK and Republic of Ireland deals with this for us in Section 22 Liabilities and equity. Broadly, among other things, this sets out the requirements for classifying financial instruments as either liabilities or equity and sets out the accounting treatment for compound financial instruments.

Essential definitions

It is important, at the outset, to understand how “equity” and “financial liability” are defined in the Glossary to FRS 102: AIAWORLDWIDE.COM | ISSUE 121

Example 1: Treatment of preference shares

Sunnie Ltd wishes to raise finance to expand its operations. It has applied to its bank for finance, but the bank has asked for a commitment from existing shareholders. Sunnie has therefore undertaken an issue of ordinary and preference shares. The preference shares are redeemable in 15 years’ time, but the terms of the contract do not require mandatory dividends to be paid on them. The terms of the preference share issue give rise to an obligation to pay out cash to the preference shareholders in 15 years’ time to redeem the shares. This cash outflow is unavoidable and therefore the preference shares are treated as a liability in the financial statements. There is no time limit on when the shares must be redeemed by – if there is any redemption feature, the preference shares are treated as a financial liability. The ordinary shares are presented as equity in Sunnie’s balance sheet, which will need to be split between ordinary share capital and share premium.* For example, if 10,000 ordinary £1 shares are issued at £1.50 each, £10,000 is shown as an addition to ordinary share capital and £5,000 is taken to share premium to comply with the requirements of company law. * Note that some jurisdictions do not recognise a share premium account, so regard to local legislation will need to be followed to ascertain the correct presentation. Entities in the UK will need to split shares issued at a premium between ordinary share capital and share premium.

FINANCIAL STATEMENTS Example 2: Preference shares treated as equity

Morley Ltd issues preference shares which bear a 4% discretionary non‑cumulative dividend. The terms of the preference share issue are that the directors of Morley Ltd can decide whether a dividend will be paid on the preference shares at each reporting date, together with the value of that dividend, and the preference shares do not have to be redeemed in the future. Included in the terms of the preference share issue is a “dividend pusher” clause. This states that if the directors of Morley Ltd declare a dividend to the ordinary shareholders, a dividend must be paid to the preference shareholders. Dividends on ordinary shares are paid at the discretion of Morley Ltd; hence the ordinary shares are equity. It follows that the dividends on the preference shares are also at the discretion of the entity, as they can be avoided if the company does not pay a dividend on the ordinary shares. In addition, the preference shares do not contain a redemption feature. Consequently, the preference shares are treated as equity.

“Equity” is defined as: “The residual interest in the assets of the entity after deducting all its liabilities.” A “financial liability” is defined as: “Any liability that is: a. a contractual obligation: 1. to deliver cash or another financial asset to another entity; or 2. to exchange financial assets or financial liabilities with another entity under conditions that are potentially unfavourable to the entity; or b. a contract that will or may be settled in the entity’s own equity instruments and is: a. a non-derivative for which the entity is or may be obliged to deliver a variable number of the entity’s own equity instruments; or b. a derivative that will or may be settled other than by the exchange of a fixed amount of cash or another financial asset for a fixed number of the entity’s own equity instruments. For this purpose the entity’s own equity instruments do not include instruments that are themselves contracts for the future receipt or delivery of the entity’s own equity instruments.” The correct distinction between equity and a financial liability is crucial. Any misinterpretation will be misleading and can distort key ratios, such as the gearing ratio and current ratio. This can result in problems with investors and financiers (such as the bank) if they spot the error. Auditors will be particularly interested in obtaining assurance that a financial liability has been treated correctly as liabilities are usually tested for understatement during the course of an audit. When establishing whether a financial instrument is equity or debt (or even a mixture of both, as we will see later in the article), the

key principle is to consider whether the terms of the contract involve the borrower having an obligation to transfer cash or other assets to the lender. If you refer to the definition of a financial liability, you will see that the definition refers to a “contractual obligation” and a “contract”. Therefore, where there is a contractual obligation to deliver cash or other assets to the lender at any time in the future, the instrument (or part thereof) is a financial liability. The definition of a financial liability means that transactions such as bank loans and redeemable directors’ loans meet the definition of a financial liability. Transactions such as corporation tax payments and VAT payments do not meet the definition of a financial liability because these arise due to legislative requirements; they are not contractual obligations as there is no contract in place, so they are not treated as financial liabilities. Instead, they are dealt with in FRS 102 Section 29 Income Tax.

Dividends on ordinary shares are paid at the discretion of the company. There is no mandatory requirement for the company to pay dividends on ordinary shares, or to transfer other assets, to the shareholders.

Ordinary shares are generally always treated as equity. Dividends on ordinary shares are paid at the discretion of the company and hence there is no mandatory requirement for the company to pay dividends on ordinary shares, or to transfer other assets, to the shareholders. The fact that the cash outflow (the dividend) or the buyback of such shares is discretionary on the part of the company means that ordinary shares are recorded as equity in the balance sheet. Preference shares, on the other hand, require more analysis. Preference shares which contain a mandatory requirement to pay a dividend, or which are redeemable in the future, are treated as a financial liability. This is because the entity cannot avoid making a payment to the holder of the instrument. Keep in mind that a mandatory dividend is sufficient to make preference shares a liability, as the instrument’s value will derive from the mandatory dividend income stream. Dividends paid on preference shares that are classified as financial liabilities are presented as finance costs in profit or loss. They are not treated in the same way as dividends paid to ordinary shareholders, which are presented as a deduction from retained earnings rather than as an expense in profit or loss. This distinction is critical because if dividends paid on preference shares are presented in the same way as dividends paid to ordinary shareholders, finance costs will be understated and dividends paid will be overstated. This could lead to some very awkward questions being asked by ordinary shareholders and/or financiers. When a preference share does not contain a mandatory redemption feature, and does not require mandatory dividends to be paid, then it is classed as equity. Examples 1 and 2 show how preference shares can be treated differently depending on the terms of the issue. ISSUE 121 | AIAWORLDWIDE.COM

FINANCIAL STATEMENTS Example 3: Convertible bond

On 1 April 2021, an 8% convertible bond was issued with a nominal value of £600,000. It is redeemable on 31 March 2025 at par, or it may be converted into equity shares at the option of the holder. An equivalent loan note without the conversion option would carry interest at 10%. Interest of £48,000 (£600,000 x 8%) has already been paid and has been included within interest payable and similar expenses in profit or loss. Present value rates are as follows:

The journals to record this transaction in year 1 are:

End of year

The profit and loss account currently recognises year 1 interest of £48,000 which is the coupon rate that has been paid to the lender. An equivalent loan without the conversion option would carry interest at 10%, which is the rate that the cash flows in the bond have been discounted at in the table above. The present value of the debt portion is £561,912 and at 10%, interest would be £56,191. Hence, additional interest of £8,191 (£56,191 less £48,000) will need to be recognised as follows:

10%

0.926

0.909

0.857

0.826

0.794

0.751

0.735

0.683

The first step is calculating the liability to be included in the financial statements. The second step is determining the amount of equity that is to be included. To calculate these values, the cash flows are discounted using the 10% discount factors. You must use the rate that would apply to an equivalent loan note without the conversion option to comply with the requirements of FRS 102 para 22.13. Do not use the 8% discount rates because this is the coupon rate of the convertible bond that includes the conversion option. Year

8% interest (£600k x 8%)

10% factor

Present value

Cr Financial liability (loan)

561,912

Cr Equity

38,088

£ Dr Interest payable and similar expenses

8,191

Cr Financial liability (loan)

8,191

The liability portion (£561,912) will be accounted for under the amortised cost method per FRS 102 Section 11 Basic Financial Instruments as follows: Interest at Closing 10% balance

561,912

(48,000)

56,191

570,103

(48,000)

57,010

579,113

(600,000)

579,113

(48,000)

57,911

589,024

38,088

589,024

(648,000)

58,976*

0.909

43,632

48,000

0.826

39,648

48,000

0.751

36,048

648,000

0.683

442,584

Equity portion

600,000

Cash flow

48,000

Proceeds

Dr Cash at bank

Opening balance

Liability portion

561,912

Note, in year 4 the cash flow includes the redemption of the capital of £600,000.

Year

*rounded

As you can see from these examples, it is important that a careful analysis of the terms of a preference share issue is undertaken to ensure they are treated correctly in the financial statements. Any misinterpretation or oversight can lead to the financial statements being materially misstated.

The liability component must always be determined first. This is because the definition of equity (refer to the start of the article) is the residual interest in the assets of the entity after deducting all its liabilities.

Convertible debt

This article has examined some of the crucial concepts contained in FRS 102 Section 22 Liabilities and Equity but has not examined the entire section. It is important that preparers dealing with the issue of financial liabilities and equity understand the key concepts to avoid any errors creeping into the financial statements thus risking a m-aterial misstatement. ●

Convertible debt is a “compound financial instrument”. Such an instrument contains a mixture of both liability and equity. FRS 102 para 22.13 states that when convertible debt or a similar compound instrument is issued, the entity must allocate the proceeds between the liability component and the equity component. AIAWORLDWIDE.COM | ISSUE 121

Conclusion

Author bio

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

CORPORATE RE-DOMICILIATION

Your place of choice? Christy Wilson considers the UK government’s proposal to establish a re‑domiciliation regime that is open to as broad a range of companies as possible.

Christy Wilson Tax Associate, Katten Muchin Rosenman UK LLP

e-domiciliation enables a company to change its place of incorporation to another jurisdiction, whilst maintaining its legal identity as a corporate body. The main advantage of this process is that it gives companies maximum continuity over business operations and reduces administrative complexity compared to other routes of relocation and re-incorporation. Currently, it is not possible for a non-UK company to re-domicile in the UK. However, the UK government launched a consultation on 27 October 2021 asking for views on the introduction of a re-domiciliation process to the UK. The thought is that re-domiciliation might increase the UK’s attractiveness and availability as a destination in which to locate business and this should in turn increase UK investment. Approximately 50 jurisdictions across the world already have some form of re-domiciliation (be that inward, outward or both ways).

UK proposal

The government would like to establish a re‑domiciliation regime that is open to as broad a range of companies and corporate bodies as possible. 20

The government would like to establish a re‑domiciliation regime that is open to as broad a range of companies and corporate bodies as possible. Re-domiciled companies will have to abide by the same rules and standards as any other UK incorporated companies, and authorisation from the FCA or any other regulatory body may be required. The consultation suggests that an incoming company will need to set out a transfer case in which it must confirm that it meets the following eligibility criteria: ● authorisation from departing country; ● corporate form; ● directors of good standing; ● application poses no national security risks and is not contrary to public interest; ● registration fee;

● reporting evidence; ● solvency; and ● wider impact (i.e. the full legal and economic impacts of the transfer and the implications on shareholders, etc.). The government is also considering outward re-domiciliation. This would enable UK incorporated companies to shift their place of domicile to a different jurisdiction. It is broadly the norm for countries to have both inward and outward re-domiciliation (e.g. New Zealand, Canada, Portugal, Luxembourg and Switzerland), although Singapore, Hong Kong and Ireland only offer inward re-domiciliation. The government needs to consider the potential economic consequences of allowing outward re-domiciliation. Potential conditions are: ● standardised exit fee; ● high requirements for shareholder approval; ● minimum length of operation in the UK; ● fees and payments made; and ● settlement of any legal disputes.

Tax considerations

A key concern for the government is to ensure that any re-domiciliation regime does not ISSUE 121 | AIAWORLDWIDE.COM

CORPORATE RE-DOMICILIATION corporation tax, unless and until it is treated as non-UK resident by virtue of any double tax agreement. When companies migrate their residence to the UK, assets that are brought into the UK corporation tax net are brought in at their market value if the migration is from an EU country. The government is considering whether those rules should be expanded to migrations from non-EU jurisdictions as well. Otherwise, assets would be brought in at different values depending on their previous jurisdiction of domicile.

©Getty images/iStockphoto

Re-domiciliation in Hong Kong and Singapore

have unintended tax avoidance consequences. For example, there is a risk that the instances of loss importation would increase by virtue of re‑domiciliation. Companies are treated as UK resident for corporation tax purposes if they are incorporated in the UK or if their place of central management and control is exercised in the UK (subject to being treated as non-UK resident by virtue of a double tax agreement). For a company that re-domiciles in the UK, the government is considering whether legislation should ensure that, subject to any double tax agreement, the company will: ● be treated as UK resident by virtue of the re‑domiciliation; or ● only be treated as UK resident if central management and control is exercised in the UK. For a company that re-domiciles out of the UK, the government is considering whether legislation should be introduced which ensures that it will: ● cease to be UK resident by virtue of the re‑domiciliation (subject to central management and control being outside the UK); or ● continue to be treated as UK resident and so continue to be within the charge to UK AIAWORLDWIDE.COM | ISSUE 121

Recently, Hong Kong introduced their re‑domiciliation regime, which is not particularly restrictive in terms of eligibility requirements. A foreign fund that wishes to re-domicile in Hong Kong must provide certain factual company information (e.g. details of directors, investment managers, etc.) when making its application and there is also a solvency requirement. The registration of foreign funds in Hong Kong does not amount to a transfer, or change in beneficial ownership, and so no additional stamp duty will be incurred. In Singapore, there are more prescriptive eligibility requirements. For example, only companies of a particular size may re-domicile: ● the value of the foreign corporate entity’s total assets must exceed $10 million; ● the annual revenue of the foreign corporate entity must exceed $10 million; or ● the foreign corporate entity must have more than 50 employees. The UK government proposal has not mentioned any size requirements and is intended to be open to lots of different companies; therefore, it is unlikely to follow a Singaporean route in this respect. The other Singaporean requirements are largely focused on the financial and legal status of the company. There are also a number of conditions that a company must satisfy in order to show that it is solvent and sufficiently profitable in order to relocate to Singapore.

Conclusion

Author bio

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

It makes sense for the UK government to consider the introduction of a re-domiciliation process, especially in order to remain competitive in the international financial market. The UK government has the benefit of reviewing the re-domiciliation regimes across the world and cherry-picking elements from each that achieve the UK’s desired outcome. Perhaps the most interesting of the proposed eligibility criteria is the requirement for the incoming company to explain the “wider impact” of its move. This is a much more evaluative concept and it would be intriguing to see how legal and financial reasons for relocation might be assessed. ●

MONEY LAUNDERING

Complex corporate structures David Potts considers the money laundering risk for trust or company service providers David Potts Director of Operations, AIA

he International Consortium of Investigative Journalists and 95 media partners recently explored 13.4 million leaked files from a combination of offshore service providers and the company registries of some of the world’s most secretive countries (see bit.ly/3GPEPtT). The Paradise Papers files expose offshore holdings of political leaders and their financiers, as well as household-name companies that reduce taxes through transactions conducted in secret. Financial deals of billionaires and celebrities are also revealed in the documents. Many investigations into money laundering can lead to complex corporate structures. Trust and company service providers (TCSPs) are at a high risk of being used for money laundering or terrorist financing, because trusts and companies can be used to: ● obscure the beneficial ownership and control of assets and wealth; ● create and control multiple legal entities at a relatively low cost; ● create complex and opaque structures; ● operate across multiple jurisdictions; and ● avoid tax or duties. Whilst trusts and companies can be used for legitimate business and investment activity, criminals may use them to add a layer of legitimacy to illegal transactions. If your firm provides any service as a TCSP, you must be supervised under the United Kingdom or Republic of Ireland Money Laundering Regulations respectively and be in full compliance with the requirements outlined in this article.

Is my firm a TCSP?

A trust or company service provider is any firm or sole practitioner whose business is to: ● form companies or other legal persons; ● provide a registered office, business address, correspondence address, administrative

address for a company, partnership, other legal person or arrangement; or ● act or arrange for another person to act as a: a. director or secretary of a company; b. partner (or in a similar position) for other legal persons; c. trustee of an express trust or similar legal arrangement; or d. nominee shareholder for another person, unless the other person is a company listed on a regulated market which is subject to acceptable disclosure requirements. A person is still considered to be a TCSP provider even if these services are provided incidentally to other accountancy services, or they are provided infrequently or on a one-off basis. ISSUE 121 | AIAWORLDWIDE.COM

MONEY LAUNDERING Key money laundering risk documentation

UK National Risk Assessment: bit.ly/3ImL48M ROI National Risk Assessment: bit.ly/3AoiSzt Financial Action Task Force Risk-Based Approach for TCSPs: bit.ly/3GP7HSJ

Further guidance and resources

See www.aiaworldwide.com/my-aia/aml/ tcsp-risk/ for guidance which covers: ● responsibilities of senior managers; ● risk assessment, policies, controls and procedures; ● customer due diligence; ● reporting suspicious activity; ● record keeping; ● staff awareness; and ● trust or company service providers risk indicators. There is also a high risk when a new client approaches a firm for a one-off company formation, with no ongoing services required. Accountancy sector firms that offer registered office or nominee directorships are also at risk of exploitation as those services can enable the concealment of beneficial ownership. By creating structures that disguise the ownership of assets, the accountant may be either wittingly or unwittingly involved in “integration” of the illicit funds into the legitimate economy. The complexity of services highlights the need for a robust assessment of the money laundering and terrorist financing risks faced by a firm offering TCSP work so that policies, procedures, and initial and ongoing client due diligence measures can mitigate these risks. This risk-based approach is central to an effective fight economic crime. AIA’s extensive guidance aims to support TCSPs in the design of effective measures to manage their money laundering risks when establishing or maintaining business relationships. TCSPs must identify and verify beneficial ownership information and implement appropriate CDD measures.

Risks of acting as a TCSP

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Red flags of money laundering

Author bio

David Potts is director of operations at the AIA.

©Getty images/iStockphoto

The UK National Risk Assessment for Money Laundering and Terrorist Financing 2020 (NRA) identifies company formation and associated trust and company services as being among the highest risk services provided by the accountancy sector. The NRA also assesses there to be a high risk that UK partnerships and companies will be abused for money laundering. They can be used to enable the laundering of millions of pounds, conceal the ownership of criminal assets, and facilitate the movement of money to jurisdictions with high levels of secrecy. The risk is highest when coupled with other high-risk services or high-risk factors, such as a client in a high-risk country.

Many of the red flags raised in TCSP work are common to other areas of activity; e.g. being involved in work which the firm does not understand, does not make sense, has no underlying commercial rationale or is unnecessarily complex. Red flags that are more specific to TCSP work include where the client wants or appears to seek: ● to involve a pre-existing entity for a transaction, without adequate explanation, which may facilitate a transaction chain appearing to be going through more wellestablished and seemingly lower-risk entities than is the case, as well as adding additional layers of complexity;

MONEY LAUNDERING TCSP risk characteristics TCSP Activity Higher risk characteristics

Lower risk characteristics

Company formation

Wholesale type sales; sale of ready-made off the shelf companies; supply to offshore intermediaries

Retail sale to UK-based ownermanagers; formation to order; supply to UK intermediaries

Director services

Confidentiality to protect identity of actual owner or controlling interests; acting for multiple companies with common owners

Used as an administrative tool acting until all legal requirements are completed and the company is handed to the customer; neutral party to provide separation from interested parties, say, during merger negotiations

Company secretarial services

Services to companies with Provision of services to PLCs; non-UK beneficial owners provision of services to large private companies with multiple shareholders/subsidiaries, and so on

Shareholder services

Providing a degree of confidentiality to the actual owner or controlling interest of the company

Administrative purposes during the formation period and transferred when sold; management purposes – investment houses and stockbrokers may hold shares for discretionary portfolios

Virtual office provision

Minimal face-to-face contact; regular forwarding of large volumes of mail; multiple addresses supplied to same and or connected businesses; supply to offshore intermediaries

Regular contact with customer(s), physical collection of mail by known person(s); sole contact address; uses premises for meetings with clients

Trust services Where settlor, beneficiary or other person(s) have significant control over the assets and or income of the trust; when the source of the trust funds is not clear

Operate independently of the settlor; services to low-risk trusts when source of funds is clear, disabled persons, life interest, charities, share schemes and company pension funds

Multiple services

Short-term arrangements while management structures are put in place, providing services to UK-based owner-managed businesses

When a company is relying on a TCSP to provide multiple services as a longterm arrangement with little commercial basis, or a TCSP is being used to place layers between the company and the beneficial owners, and/ or is providing services to offshore beneficial owners and/or intermediaries

For further in-depth discussion on these risk characteristics see www.aiaworldwide.com/my-aia/aml/tcsp-risk/

● to involve entities in a jurisdiction that is known to have rules and requirements that might facilitate anonymity or opacity; ● to use entities that involve multiple countries that are unconnected with the client or the transaction with no legitimate reason; ● to create or use an entity type that is noted to provide greater opacity or secrecy without a legitimate reason, e.g. Scottish Limited Partnerships; ● to take any action which might disguise the actual controlling party of an entity, e.g. to use family relationships to add an apparent layer of separation between the actual controller of assets and either the trustee(s) or beneficiaries of a trust; ● to use or in any way involve a structure that has bearer shares; and ● loans involving entities in the client’s control are frequently paid back before the set term of the loan agreement, which may suggest that the loan was not needed and the transaction was a cover for transferring funds to complicate the ownership of the funds.

Registering as a TCSP

The Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (MLR 2017)(UK) and the Criminal Justice (Money Laundering and Terrorist Financing) Act 2010 (as amended) (ROI) require all businesses acting as trust or TCSPs be registered. MLR 2017 requires that before any firm or sole practitioner can act as a TCSP in the United Kingdom, they must be included on HMRC’s register of TCSPs. However, no contact with HMRC is needed by AIA supervised firms to complete this registration and we will undertake this on your behalf. Members in the Republic of Ireland supervised by AIA may undertake TCSP work so long as this is declared in advance and confirmed by AIA. If you intend to undertake TCSP work you must confirm this with AIA via aml@aiaworldwide.com in advance of undertaking any work. For more information on registration see www.aiaworldwide.com/my-aia/aml/tcsp-risk/ tcsp-faqs/ ●

Recorded webinar: Money laundering risk for TCSPs

This informative webinar explores practical approaches that firms can take to efficiently identify key risks to accountancy firms acting as TCSPs, including emerging threats and trends. This webinar will help supervised firms ensure they maintain policies and procedures which meet regulatory requirements and best practice, appropriate and proportionate for their size and activities. See bit.ly/3r4eT88 ISSUE 121 | AIAWORLDWIDE.COM

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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. © 2021 LexisNexis SA-1221-021 The information in this document is current as of December 2021 and is subject to change without notice.

GENDER DIVERSITY

An uphill struggle Jackie Henry and Sharon Thorne report that UK boardrooms are struggling to keep up with their European counterparts. Jackie Henry Managing partner, People and purpose, Deloitte UK Sharon Thorne Deloitte Global Board Chair

G Author bio

Jackie Henry is lead partner for Deloitte in Northern Ireland and UK people and Purpose lead for the consulting business.

Author bio

Sharon Thorne is the Chair of the Deloitte Global Board of Directors.

ender diversity in UK boardrooms is lagging behind European counterparts with only 30.1% of company seats held by women in the UK. According to a new global report by Deloitte, “Women in the boardroom: A global perspective”, women leaders on the continent boast the largest share of global boardroom seats, led by France (43.2%), followed by Norway (42.4%) and Italy (36.6%). The UK entered the top 10 global ranking, moving from 13th to 9th place since the report was last published in 2019. However, despite the 7.4% increase of women holding UK board seats, the UK’s boardroom diversity lags behind six European countries, as well as New Zealand and South Africa. Board diversity is a demonstration of an organisation’s commitment to inclusion. Whilst the number of board seats held by those identifying as women in the UK is moving in the right direction, the UK is still a long way behind its European neighbours with leaders France only 6.8% short of gender parity. UK businesses need to be even more proactive in taking diversity targets seriously, improving disclosure and more transparent reporting.

The “Women in the boardroom: A global perspective” report is based on global, regional and country analysis based on a dataset covering 10,493 companies in 51 countries – more than 176,340 directorships – spanning Asia Pacific, the Americas, and EMEA. Only active directorships and committee memberships were considered in the analysis. The UK dataset is part of the global report and a total of 509 UK companies were analysed. The total board seats (counting duplicates) for the UK is 4,416. Not counting duplicates, the number of unique directors studied is 3,900.

Gender parity

This report, which was published in collaboration with the 30% Club, demonstrates slow progress towards gender parity globally with just one in five (19.7%) boardroom seats held by women – a 2.8% increase since 2019. At this pace, the world could expect to reach near parity in 2045, more than 20 years from now, but the UK could realise gender parity as soon as 2027 if the progress of the last two years continues at the same pace. ISSUE 121 | AIAWORLDWIDE.COM

GENDER DIVERSITY Impact of diverse leadership

Deloitte’s global research analysed data from 10,493 companies in 51 countries and revealed a positive correlation between women CEO leadership and board diversity. Companies with women CEOs have significantly more women on their boards than those run by men – 33.5% versus 19.4% respectively. The statistics are similar for companies with women chairs – 30.8% women on boards versus 19.4% respectively. The inverse is true as well, with gender diverse boards more likely to appoint a woman CEO and board chair. We know that leadership sets the tone for the rest of the business. Increased ethnic minority and all-gender participation at every level are vital if businesses want to have a truly inclusive culture. There are other important dimensions of diversity that government, regulators, businesses and investors should consider, including LGBTQ+, disability, neurodiversity and socio-economic background. To achieve the strongest company boards we need a diversity of thought and experience – and that will only be possible by developing an inclusive pipeline of talent. While it’s heartening to see that the world continues to make progress towards achieving gender parity, with the exception of a few countries, overall progress remains slow and uneven. The pandemic has dented efforts to achieve equality, making it even more important to move past discussion and take concrete actions to ensure inclusion within and beyond the boardroom including gender, ethnic and racial diversity among other characteristics. Increasing the number of women on boards is only the first step on a larger journey.

UK boards

The proportion of women on FTSE 100 boards has tripled in the past 12 years. In 2010, FTSE 100 boards were made up of just 12% of women, but this has now grown to 36.2%. There are 15 women board chairs in the FTSE 100 and eight CEOs; an increase of just one since 2019. The average age of women on boards in the UK is 56.8 years, while the average age for a woman chair is 60.1 – more than four years younger than their male counterparts (64.3). The report also found the average tenure for women on boards in the UK decreased from 4.1 years to 3.6 years since the last report published in 2019.

Percentage of board seats held by women by geography: Top 20 2021

Percentage

2019

Percentage

France*

43.2

Norway

41.0

Norway*

42.4

France

37.2

Italy*

36.6

Sweden

33.3

Belgium*

34.9

Finland

31.9

Sweden

34.7

New Zealand

31.5

Finland

32.7

Belgium

30.5

New Zealand 31.9

Italy

29.3

South Africa

31.8

South Africa

26.4

30.1

Germany

26.2

Denmark

29.6

Australia

25.4

Australia

29.6

Denmark

25.4

Germany*

28.9

Netherlands

23.0

Netherlands*

28.6

22.7

Austria*

28.2

Canada

21.4

Canada

27.8

Israel

21.0

Ireland

27.0

Malaysia

20.6

Spain*

26.3

Nigeria

20.0

Malaysia

24.0

Ireland

19.9

USA

23.9

Austria

19.7

Portugal*

23.3

Spain

19.2

*Indicates the presence of a national quota or quota-equivalent for all or certain listed companies. AIAWORLDWIDE.COM | ISSUE 121

The 30% Club

Ranking

Commenting on its key findings, Ann Cairns, global chair of the 30% Club said: “With the FTSE 100 on the brink of attaining 40% women in board roles, I am encouraged by Deloitte’s finding that UK parity could be reached by 2027. “People often ask why the 30% Club is not the 50% Club, given that our aim is parity. I think this report answers that question. We are still far from the 30% tipping point in many geographies.” She added: “One of the report’s most interesting findings is the real balance that female leaders bring. If women CEOs can have more balanced boards, there’s no reason that male CEOs can’t. Finally, on the stretch, this speaks to the fact that women have a harder time being appointed if they don’t have previous board experience. Chairs and CEOs should be encouraged to give women their first board seat. “There is plenty of talent out there who would make great directors. This is very true for people of colour too, many of whom would welcome the chance to make a significant contribution at the top of the corporate world but remain significantly underrepresented.” ●

Events UPCOMING WEBINARS

Digital marketing fundamentals: a strategy for online success 22 February 2022 Time: 10.30am – 11.30am Speaker: Antony Worsley Online presence and digital marketing have grown significantly during the pandemic and for many these have become their primary means of customer engagement. This has seen businesses take technological leaps forward in the last 12 months that may have otherwise taken them five years. With so much uncertainty, it is important that businesses have a diverse marketing strategy that can adapt to changing market conditions. Developing an online strategy will be vital to future growth and development. Crypto accounting 24 February 2022 Time: 10.30am – 11.30am Speaker: Jason Steedman ACCA This webinar will look at the problems and the solutions of crypto accounting with specific focus on the following areas: ● a brief overview of crypto assets, what they are and how they are taxed; ● current HMRC landscape of crypto tax compliance; ● summary of challenges facing taxpayers and accountants; ● complex matters: staking, NFTs, gaming and mining; and ● an overview of current solutions and upcoming developments.

These areas should give delegates an understanding of the key factors to consider when investing in or working with crypto, and the challenges faced and skill sets required when trying to record and advise on crypto activity. Tax changes 2022 17 March 2022 Time: 10.30 – 11.30 Speaker: Aiden Corcoran Join guest speaker Aiden Corcoran from AIA strategic partner GoSimple Tax for a session providing members with an overview on the tax changes to be aware of for the new tax year. During the webinar Aiden will cover:

● ● ● ●

key changes and initiatives for 2022; digital recording and planning; overview of GoSimpleTax; and an open Q&A session.

Can you prove your firm is not playing a part in money laundering? 24 March 2022 Time: 10.30 – 11.30 Speaker: Richard Simms Richard will discuss the enormity of the world-wide money laundering problem – why accountants need to help and how they can effectively do this. Is it worth risking your livelihood, your reputation, a substantial fine, a criminal record or up to 14 years in jail for not being fully aware of your obligations? Richard will cover: ● how money laundering are risks evolving; ● why accountants are important to anti-money laundering; ● how your firm achieves AML regulatory success; ● the dangers of mis-marketing; ● what you need to look out for; and ● real life risks for accountants. Visit www.aiaworldwide.com/events for more information and registration

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 verifiablae 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

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

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Technical INTERNATIONAL

IFAC charts the way forward for assurance of sustainability information The International Federation of Accountants (IFAC) has published its vision for high-quality assurance of sustainability information – calling out best practices identified during its year-long, global engagement campaign related to the State of Play in Sustainability Assurance. This vision addresses the importance of global standards, regulation that supports decision-useful disclosure, and the value of an interconnected approach to sustainability and financial information reporting and assurance. “In order to be trusted, sustainability disclosure must be subject to high-quality, independent, external assurance,” said IFAC CEO Kevin Dancey. “Sustainability information must take its rightful place in the corporate reporting

INTERNATIONAL CPA Canada, ICAS, IESBA and IFAC release second publication in series exploring ethics in an era of complexity and digital change As technology advances and the world becomes more complex, the professional accountant’s skills and competencies, underpinned by ethics and recognising their public interest responsibility, are critical in navigating new challenges and opportunities in the profession. To help accountants and stakeholders better understand these topics, the Chartered Professional Accountants of Canada (CPA Canada), the Institute of Chartered Accountants of Scotland (ICAS), the International Ethics Standards Board for Accountants (IESBA) and the International Federation of Accountants (IFAC) have released “Technology is a double-edged sword with both opportunities and challenges for the accountancy profession”, the second in a four-part thought leadership series examining the professional accountant’s role in a new technological era. The publication examines the impact of rapid technological change and the AIAWORLDWIDE.COM | ISSUE 121

ecosystem and stakeholder confidence must be on par with financial reporting. Given the announcement of the International Sustainability Standards Board, the publication of a Climate Prototype, and IOSCO’s continued support for the initiative, it’s an appropriate time for regulators and authorities to put sustainability assurance on the agenda, as already proposed in the EU’s Corporate Sustainability Reporting Directive. We urge IFAC member organisations to promote high-quality reporting and assurance through discussions with policymakers, regulators, investors and other stakeholders.” As a harmonised, global reporting system for reporting sustainability information takes shape, based on the Building Blocks Approach, emerging regulatory frameworks

importance of ethical leadership from the lens of the professional accountant. It also provides practical guidance to both professional accountants and professional accountancy organisations. “Technology is a double-edged sword with both opportunities and challenges for the accountancy profession” follows “Complexity and the professional accountant: Practical guidance for ethical decision-making”, the first publication in the series, and builds off a collaborative exploratory paper and global roundtable event called Ethical Leadership in an Era of Complexity and Digital Change, which CPA Canada, ICAS and IFAC jointly hosted earlier in 2021. The third and fourth publications in the series will focus on identifying and mitigating bias and mis-/dis-information, and mindset and enabling skills. The publication is available on the IFAC Knowledge Gateway and the IESBA’s webpage Technology: Ethics & Independence Considerations.

IASB provides transition option to insurers applying IFRS 17 The International Accounting Standards Board (IASB) has issued a narrow-

should be designed to promote robust, decision-useful disclosure and disincentivise a compliancebased approach to both reporting and assurance. Aligning sustainability disclosure with financial reporting and connecting sustainability assurance engagements with financial statement audits will maximise value to reporting entities and their stakeholders. High-quality, global standards – for reporting, assurance and ethical professional conduct – play a key role in meeting this objective and in avoiding unnecessary costs and reduced comparability and consistency that result from regulatory fragmentation. Read more about IFAC’s support for global sustainability-related standard on the IFAC website.

scope amendment to the transition requirements in IFRS 17 Insurance Contracts, providing insurers with an option aimed at improving the usefulness of information to investors on initial application of the new Standard. The amendment relates to insurers’ transition to the new Standard only – it does not affect any other requirements in IFRS 17. IFRS 17 and IFRS 9 Financial Instruments have different transition requirements. For some insurers, these differences can cause temporary accounting mismatches between financial assets and insurance contract liabilities in the comparative information they present in their financial statements when applying IFRS 17 and IFRS 9 for the first time. The amendment will help insurers to avoid these temporary accounting mismatches and therefore will improve the usefulness of comparative information for investors. It does this by providing insurers with an option for the presentation of comparative information about financial assets. IFRS 17, including this amendment, is effective for annual reporting periods starting on or after 1 January 2023.

Technical UK AND IRELAND The pandemic has reinforced the need for a positive corporate culture linked to purpose Aligning culture with purpose, values and strategy can strengthen a company’s business model, help to better manage resources and be more equipped to face future challenges, according to a new report issued by the FRC. “Creating positive culture – opportunities and challenges” builds on the FRC’s work to promote corporate culture as an essential element of good governance. It follows on from “Corporate culture and the role of boards in 2016”, the revised UK Corporate Governance Code and the Guidance on Board Effectiveness. The report finds that the pandemic has challenged the resilience and agility of companies, with many having to swiftly adapt their strategy, business model and ways of working. There have been changes in stakeholder and investor priorities. There is now a strong emphasis on the importance of environmental, social and governance (ESG) matters, particularly for the workforce and investors, but also other stakeholders. Areas such as wellbeing, flexible working and working constructively with stakeholders are now seen as more important than ever. Leadership on culture should come from the top, through actions and attitudes, but the workforce must feel engaged and able to contribute. Everyone has a role to play: the board should ensure that the organisation’s culture is aligned with purpose, values and strategy; the CEO is responsible for embedding culture throughout the company; and managers, properly empowered and supported, are critical to achieving culture change. Assessment and monitoring of culture are important. Without clear and timely follow-up actions and feeding back to workers and other stakeholders, companies can be accused of “culture washing”, leading to the loss of trust – the biggest barrier to driving positive culture. Sir Jonathan Thompson, FRC CEO, said: “As a regulator, we believe that by putting greater emphasis on creating and maintaining a positive culture, companies will boost their competitiveness, improving their ability to achieve sustainable success. More open and insightful reporting in this area will also lead to improved access to both capital and talent. The government’s proposed reforms set out in the BEIS White Paper,

“Restoring trust in audit and corporate governance”, is a vital next step in ensuring that all stakeholders have trust in the quality of corporate governance, reporting and audit.”

FRC consultation on annual review of FRS 101 The FRC has issued FRED 79 FRS 101 Reduced Disclosure Framework – 2021/22 cycle, which proposes no amendments to FRS 101 as a result of its latest annual review. Comments on FRED 79 are requested by 1 March 2022. The consultation is available on the FRC website.

IAASA has published a consultation paper on its proposals to adopt SIRS (Ireland) IAASA has published a Consultation Paper on its proposals to adopt Standards for Investment Reporting (Ireland) (SIRs (Ireland)). ● SIR (Ireland) 1000: Investment Reporting Standards Applicable to all Engagements in Connection with an Investment Circular; ● SIR (Ireland) 2000: Investment Reporting Standards Applicable to Public Reporting Engagements on Historical Financial Information; ● SIR (Ireland) 3000: Investment Reporting Standards Applicable to Public Reporting Engagements on Profit Forecasts; ● SIR (Ireland) 4000: Investment Reporting Standards Applicable to Public Reporting Engagements on Pro Forma Financial Information; ● SIR (Ireland) 5000: Investment Reporting Standards Applicable to Public Reporting Engagements on Financial Information Reconciliations under the Listing Rules; and ● SIR (Ireland) 6000: Investment Reporting Standards Applicable to Public Reporting Engagements on Quantified Financial Benefits Statements. The purpose of this consultation paper is to obtain the views of stakeholders with regard to IAASA’s proposals to adopt the SIRs (Ireland). The consultation paper and the six proposed SIRs (Ireland) are available on the IAASA website. The proposed effective date of the SIRs (Ireland) is for reporting accountant engagements commencing on or after 15 September 2022.

IAASA publishes Information Note “Applying IFRS 9 Financial Instruments – Expected Credit Losses” IFRS 9 Financial Instruments, which sets out an impairment model based on an expected credit loss (ECL) model for financial instruments, became effective in 2018. Since its first application, IAASA has examined how banks have applied the key judgments in IFRS 9. IAASA’s Information Note is based on observed trends in the application of IFRS 9 by banks and, in particular, since the start of the Covid-19 pandemic. The key messages in the Information Note are: ● Users of banks’ financial reports should carefully review and analyse the totality of ECL information disclosed by banks and, in particular, information about material postmodel adjustments (management overlays), judgments surrounding significant increase in credit risk, and changes to forward looking information, ECL allowances and ECL sensitivity. ● IAASA encourages banks to provide more entity-specific and granular quantitative and qualitative expected credit loss information to users of their reports. ● IAASA encourages banks to strive for further improvements to the level of transparency for the topics identified in the Information Note. ● IAASA expects that as Covid-19 pandemic relief measures and supports are withdrawn (and the longer-term impact of the pandemic on banks’ ECLs become more apparent) additional disclosures and greater transparency of these impacts on ECLs will be disclosed in banks’ financial reports.

Revocation of the recognition of The Institute of Chartered Accountants of Scotland (ICAS) Pursuant to its powers under section 931(4) of the Companies Act 2014, the Irish Auditing and Accounting Supervisory Authority has decided to revoke the recognition of the Institute of Chartered Accountants of Scotland (ICAS) granted under section 930 of the Act with effect from 22 December 2021. This means that ICAS may no longer authorise individuals or firms as ISSUE 121 | AIAWORLDWIDE.COM

Technical statutory auditors in Ireland or undertake any audit related regulatory functions. This decision follows the application by the ICAS to the Authority for revocation of its recognition. By virtue of the revocation of its recognition, ICAS is no longer a prescribed accountancy body under the Act and therefore no longer comes under the remit of the Authority.

ASIA PACIFIC MASB issues a narrow-scope amendment to MFRS 17 Insurance Contracts The Malaysian Accounting Standards Board (MASB) has issued an initial application of MFRS 17 and MFRS 9 – Comparative Information (Amendment to MFRS 17 Insurance Contracts). The amendment is a word-for-word initial application of IFRS 17 and IFRS 9 – Comparative Information (Amendment to IFRS 17 Insurance Contracts) issued by the International Accounting Standards Board (IASB). The amendment relates to the transition requirements of MFRS 17 only – it does not affect any other requirements of the Standard. In view of the different transition requirements in MFRS 17 and MFRS 9 Financial Instruments, this can cause temporary accounting mismatches between financial assets and insurance contract liabilities in the comparative information presented on initial application of MFRS 17 and MFRS 9. The amendment will help insurers to avoid these temporary accounting mismatches by providing insurers with an option for the presentation of comparative information about financial assets as if the classification and measurement requirements of MFRS 9 had been applied to that financial asset. MFRS 17, including this amendment, is effective for annual reporting periods beginning on or after 1 January 2023.

Room for improvement in the quality of Financial Statements prepared by Singapore listed companies for audits The latest study commissioned by the Accounting and Corporate Regulatory Authority (ACRA) reveals that there is room for improvement in the quality of financial statements prepared AIAWORLDWIDE.COM | ISSUE 121

by some Singapore-listed companies for audits. Conducted by Associate Professor Themin Suwardy from Singapore Management University and Dr Lim Chu Yeong from the Nanyang Technological University, the study analysed the proposed audit adjustments made by auditors to the financial statements of 412 Singapore-listed companies from 2018 to 2020. In addition, the study surveyed close to 280 audit committee chairs and heads of finance of these companies to gather their views on the effectiveness of their companies’ finance functions. Responsibility over the preparation of financial statements lies with the company. Under the Companies Act, company directors are responsible to table a set of audited financial statements to shareholders at the annual general meeting. Commonly known as a financial statements audit, the auditor is to carry out an objective examination of the company’s financial statements and express an opinion as to whether the financial statements are prepared in all material aspects, in accordance with the relevant accounting standards. As part of the financial statements audit, audit adjustments may be proposed by the auditor to correct misstatements in the financial statements. Analysing the proposed audit adjustments thus provides insights into the quality of financial statements prepared by the company, allowing the company’s directors, management and finance team to identify gaps and ways to improve their financial reporting process. Some of the key findings of the study on 1,236 financial statements of 412 Singapore-listed companies over the three years are as follows: Auditors continue to play a key role in upholding financial reporting quality Between 2018 to 2020, auditors proposed 22,051 audit adjustments amounting to $78,670 million for the 412 listed companies under the study. About $67,079 million or 85% of these proposed adjustments were primarily to correct factual or misclassification errors in the financial statements. These proposed adjustments also amounted to an overall reduction in net income of $1,148 million in the financial statements over the three years. The extent and impact of the audit adjustments proposed to correct the financial statements underscores the key role that auditors continue to play

in upholding financial reporting quality. Nevertheless, the high occurrence of factual and misclassification errors highlights the need for companies to review the financial reporting process and controls with the objective of improving the quality of financial statements. Some companies have issues finalising their accounts for audit More than a third (36%) of proposed audit adjustments were “late client adjustments”; i.e. they were identified by the companies themselves during the course of the audit. About 80% of these late client adjustments relate to factual or misclassification adjustments. This suggests a weakness in the financial statements preparation process. Companies should consider investments in digital solutions and automation of financial processes to minimise errors and improve the efficiency of financial year-end reporting processes. A minority of companies accounted for most of the proposed audit adjustments Over the three-year period, there were 165 sets of financial statements from 87 companies with more than $100 million worth of audit adjustments proposed by the auditors. Collectively, these financial statements accounted for $62,262 million (or close to 80%) of the proposed audit adjustments in this study. Out of these 165 financial statements, 28 companies had over $100 million of proposed adjustments every year during the three-year period, accounting for nearly 50% of the total proposed audit adjustments. The persistently high level of adjustments each year is indicative of an over-reliance by these companies on the auditor to produce a proper set of financial statements. Audit committees and management in these companies should place greater scrutiny over these audit adjustments and take prompt actions to address their root causes. On the findings of the study, ACRA’s Chief Executive, Mr Ong Khiaw Hong commented: “The study shows that there is room to further strengthen the finance functions of companies in Singapore to improve the preparation of financial statements. ACRA will work with professional bodies and other stakeholders in the financial reporting eco-system to help companies raise their accounting capabilities and provide guidance on areas they should pay

Technical attention to. We will also continue to focus our monitoring and enforcement efforts on companies with higher risks of financial misstatements.” Associate Professor Suwardy and Dr Lim said: “This study provides analysis of audit adjustments from multiple dimensions. It highlights the efforts involved in upholding financial reporting integrity. We are pleased to have contributed to this study that provides beneficial insights to all financial reporting stakeholders.”

UNITED STATES FASB proposes to enhance transparency around supplier finance programmes The Financial Accounting Standards Board (FASB) issued a proposed Accounting Standards Update (ASU) intended to help investors and other allocators of capital better consider the effect of supplier finance programmes on a buyer’s working capital, liquidity and cash flows. Stakeholders are encouraged to review and provide comment on the proposed ASU by 21 March 2022. The proposed ASU would affect buyers that use supplier finance programmes in connection with the purchase of goods and services. Supplier finance programmes allow a buyer to offer its suppliers the option to be paid by a third party in advance of an invoice due date, based on invoices that the buyer has confirmed as valid. These transactions are also commonly known as reverse factoring, payables finance or structured payables arrangements. Stakeholders have observed that there is a lack of transparency about supplier finance programmes because:

● there are no explicit disclosure requirements in Generally Accepted Accounting Principles (GAAP) for those programmes; and ● a buyer may present obligations covered by those programmes in the same balance sheet line item as accounts payable or in another balance sheet line item depending on the facts and circumstances of the arrangement. The proposal would address these issues by requiring the buyer in a supplier finance programme to disclose sufficient information about the programme to allow an investor to understand the programme’s nature, activity during the period, changes from period to period and potential magnitude. These disclosures would include the key terms of the programme, as well as the obligation amount that the buyer has confirmed as valid to the third party that is outstanding at the end of the reporting period, a rollforward of that amount, and a description of where that amount is presented in the balance sheet. The proposed ASU is available at www.fasb.org.

FASB issues two new chapters of its Conceptual Framework The Financial Accounting Standards Board (FASB) has issued two new chapters of its Conceptual Framework. The Conceptual Framework is a body of interrelated objectives and fundamentals that provides the FASB with a foundation for setting standards and concepts for it to use as tools for resolving accounting and reporting questions. A Statement of Financial Accounting Concepts is non‑authoritative and does not establish or change generally accepted accounting standards.

“The new chapters of the FASB’s Conceptual Framework address two important areas of financial reporting: financial statement elements and presentation,” stated FASB Chair Richard R. Jones. “They enhance our Conceptual Framework, which is a tool for the Board to use in setting standards that improve the understandability of information entities provide to existing and potential investors, lenders, donors, and other resource providers.” FASB Concepts Statement No. 8, Conceptual Framework for Financial Reporting – Chapter 4, Elements of Financial Statements, defines elements of financial statements to be applied in developing standards for both businesses and not-for-profit entities. These elements provide a foundation for information that is relevant to the objective of financial reporting – namely, to provide financial information about the reporting entity that is useful to existing and potential investors, lenders and other creditors in making decisions about providing resources to the entity. Chapter 4 supersedes Concepts Statement No. 6, Elements of Financial Statements. FASB Concepts Statement No. 8, Conceptual Framework for Financial Reporting – Chapter 7, Presentation, identifies factors for the Board to consider when deciding how items should be displayed on the financial statements. The Board will assign priority to the factors based on the item being evaluated for presentation purposes. The priority of the factors would be determined in the context of best meeting the objective of financial reporting. Chapter 7 supersedes portions of Concepts Statement No. 5, Recognition and Measurement in Financial Statements of Business Enterprises. The new chapters are available on the FASB website.

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International Accountant 121