International Accountant 109 by Association of International Accountants

INTERNATIONAL

ACCOUNTANT

JANUARY/FEBRUARY 2020

ISSUE 109

Your skills can help NGOs around the world Brydon Review of audit quality Undergoing digital transformation

Keeping up your study momentum

CONTENTS

aiaworldwide.com

In this issue Contributors

Meet the team

Students

Current issues in auditing: part 1 Candidates must be fully prepared on the topic of current and professional issues in auditing, as reflected in the AIA’s May 2019 support paper.

Charities

Accounting for International Development Neil Jennings (AfID) explains how accountants and auditors can use their skills to provide pro bono or remunerated support to a broad range of non-profit organisations around the world.

Budget Webinar 2020 News and views

AIA news

The Double Taxation Dispute Resolution (EU) Regulations

AIA responds to Brydon Review

Rebrand

10 13 March 2020 | 11:30am-12:30pm

Our new look It has been a long time in the making, but we are delighted to share our new rebrand with you following its official launch on 3 February.

Join guest presenter Tim Keeley as he discusses the March 2020 Budget and how it will affect the accountancy industry. 10 US multinationals

Digital transformation

It pays to plan Miles Dean (Andersen Tax) asks how US multinationals must prepare when using the UK as a stepping stone to the wider world.

Achieve

Keeping the pace It’s important to keep your study momentum, so enrol on the AIA’s Achieve programme to get the maximum benefit from your study. Achieve provides the tools and resources for you to succeed and quickly enjoy the benefits of your expanding knowledge base.

Fixing the gaps Accountants undergoing digital transformation should know which gaps they are trying to fix, writes Jules Carman (Sage).

Audit review

Brydon Review of audit quality Steve Collings (Leavitt Walmsley Associates) asks how to tackle the expectation gap between what auditors do and what they are perceived to do.

Dates for your diary

Technical

Upcoming events Global updates Editorial Information International Accountant, the bimonthly publication of the Association of International Accountants (AIA).

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Editorâ&#x20AC;&#x2122;s wElcomE

contributors to this issue

Editorâ&#x20AC;&#x2122;s welcome

MILES DEAN

Miles Dean is the Head of International Tax at Andersen Tax. He advises privately held multinational companies and high net worth individuals on cross border tax issues. His focus is to forge lasting relationships with his clients and provide them with bespoke, commercially robust solutions. JULES CARMAN

s I write this, the UK has left the European Union after years of negotiation and wrangling. What this development will mean in terms of trade for businesses is yet to be decided, however. The consequences for finance professionals and how they should best advise their employers and clients therefore also remain uncertain. AIA will continue to provide resources, guidance and advice to members to assist them throughout the transition period and highlight the opportunities and changes that will inevitably occur. AIA has also officially launched its new brand and logo. Careful consideration has been taken throughout the rebrand process in order to not lose our identity; maintaining selected elements from our rich heritage, and at the same time amalgamating them in a vibrant new primary colour with a revitalised modern look, tone of voice and dynamic feel. We believe it better represents AIA and its global membership and will support us as we work towards our ambitious strategy for the future. See page 10 for further details.

Rachel Rutherford Editor, IA

In this issue, we examine the impact of the Brydon Review and what it means for the changing landscape of the audit profession, looking in particular at how to tackle the expectation gap between what auditors do and what they are perceived to do. The report makes 64 recommendations, of which perhaps the most significant is the development of a new auditing profession. The report states that auditing should have its own governing principles, qualifications and standards, rather than being an extension of the accounting profession. See page 24. Whatever results from these recommendations, the AIA is a Recognised Qualifying Body (RQB) for statutory auditors, and is committed to ensuring that auditors are trained to the highest possible standard and properly equipped to undertake their role. Having supported the work of Accounting for International Development for many years, we take a closer look at how accountants and auditors can use their skills to provide pro bono or remunerated support to a broad range of non-profit organisations around the world; and also consider the rapid digital transformation in the accountancy profession and how to identify areas to prioritise.

Jules Carman is head of digital transformation for accountancy at Sage. She is a member of the board of directors for the Information Technology Alliance. Her career includes building and executing on growth strategies for leading technology organisations to fuel revenue through expanded partnership agreements, technology integrations and new customer acquisitions. NEIL JENNINGS

Neil Jennings is the founder of Accounting for International Development, supporting a broad range of non-profit organisations globally. AfID was inspired by Neilâ&#x20AC;&#x2122;s volunteer assignment to support a small Rwandan NGO in 2007. By the end of 2009, 22 charities were on board and 14 assignments had been successfully completed in six developing countries. STEVE COLLINGS

Steve Collings, FMAAT FCCA is the audit and technical partner at Leavitt Walmsley Associates Ltd, chartered certified accountants and statutory auditors, where Steve trained and qualified. Steve specialises in auditing and financial reporting (UK GAAP and IFRS) and Solicitors Accounts Rules, as well as having an interest in taxation issues for small and medium-sized businesses. ISSUE 109 | AIAWORLDWIDE.COM

CRYPTOASSETS

FCA becomes AML and CTF supervisor of UK cryptoasset activities The Financial Conduct Authority (FCA) is now the anti-money laundering (AML) and counter terrorist financing (CTF) supervisor for businesses carrying out certain cryptoasset activities under the amended Money Laundering, Terrorist Financing and Transfer of Funds Regulations 2017 (MLRs). Any UK business conducting specific cryptoasset activities falls within scope of the regulations and will need to comply with their requirements. Amongst other things, the FCA requires cryptoasset businesses to: ● identify and assess the risks of money laundering and terrorist financing which their business is subject to; ● have policies, systems and controls to mitigate the risk of the business being used for the purposes of money laundering or terrorist financing; ● where appropriate to the size and nature of its business, appoint an individual who is a member of the board or senior management to be responsible for compliance with the MLRs; ● undertake customer due diligence when entering into a business relationship or occasional transactions; ● apply more intrusive due diligence, known as enhanced due diligence, when dealing with customers who may present a higher money laundering or terrorist finance risk. This includes customers who meet the definition of a politically exposed person; and ● undertake ongoing monitoring of all customers to ensure that transactions are consistent with the business’s knowledge of the customer and the customer’s business and risk profile. This is not an exhaustive list. More information can be found on the FCA’s webpage. It will proactively supervise firms’ compliance with the new regulations, and will take swift action where firms fall short of desired standards and cause risks to market integrity. AIAWORLDWIDE.COM | ISSUE 109

New businesses carrying out cryptoasset activity in scope of the MLRs must be registered with the FCA before conducting businesses. Existing businesses already conducting cryptoasset activity before 10 January 2020 may continue their business but will need to ensure their compliance with the MLRs with immediate effect. All existing businesses undertaking cryptoasset activities must be registered by January 2021. To ensure

this deadline is met, these businesses must submit a completed application for registration via Connect by June 2020. Existing Financial Services and Markets Act firms, e-money institutions or payment services businesses undertaking cryptoasset activity will also be required to apply for registration. For any queries regarding the new regime, email firm.queries@fca.org.uk.

EMPLOYMENT PRACTICES

Legislating the Double Taxation Dispute Resolution (EU) Regulations 2020 On 22 January, regulations were passed relating to resolving tax disputes arising from the interpretation and application of tax treaties between the UK and member states. The measure will apply to questions in dispute relating to income or capital earned in a tax year commencing on or after 1 January 2018. The regulations are likely to affect any person who is resident for tax purposes in a member state of the EU and whose taxation is directly affected by the interpretation and application of tax treaties between the UK and any other member state which results in double taxation for that person. The aim of this measure is to introduce a more effective and efficient framework for the resolution of tax disputes arising between the UK and other member states to ensure legal certainty and create a business friendly environment for investments in order to achieve fair and efficient tax systems across the EU. It builds on the United Kingdom’s network of bilateral tax treaties with other member states and on the existing Convention on the elimination of double taxation in connection with the adjustment of associated enterprise. The regulations provide a mechanism specifically for member states to resolve disputes where double taxation occurs as a result of an upward adjustment of profits by one member state in respect of a connected party transaction where the other enterprise is tax resident in another member state. Measuring the likely take up of this measure by businesses and individuals is challenging, as new cases will be triggered at the request of taxpayers inside and outside the UK. The two existing tax dispute resolution mechanisms (the Union Arbitration Convention and the UK’s network of bilateral tax treaties) will be unaffected by the introduction of this new measure. So, taxpayers may continue to use these pre-existing mechanisms in preference to the new measure. For more information, visit: bit.ly/2RGFAhz.

Poor mental health costs UK employers up to £45 billion a year

REGULATIONS

New analysis by Deloitte finds that poor mental health costs UK employers up to £45 billion each year. This is a rise of 16% since 2016 – an extra £6 billion a year. The research also looks at how employers can tackle this problem, finding that it pays to support employees’ mental health. With one in six workers experiencing a mental health problem at any one time, and stress thought to be responsible for almost half of working days lost in Britain due to health issues, the relationship between mental health and the workplace is a complex one. The research makes a positive case for employers investing in mental health, showing that for every £1 spent on supporting their people’s mental health, employers get on average £5 back on their investment in reduced presenteeism, absenteeism and staff turnover.

Analysis from “Mental health and employers: the case for refreshing investment” also looks at how employers can tackle this problem. It shows that higher return on investment can be achieved by early interventions, such as organisation-wide culture change and education, than by more in-depth support that may be needed at a later stage when a person is struggling. The latest research builds on work conducted by Deloitte in 2017 for the Stevenson-Farmer Review on workplace mental health, which calculated that poor mental health cost UK employers between £33 billion and £42 billion a year. Since then, Deloitte has found that there have been positive changes in workplaces, including greater openness in discussing mental health at work, in larger employers in particular, and more provision of support overall. ISSUE 109 | AIAWORLDWIDE.COM

NEws MALAYSIA

Hong Kong and Mexico sign investment pact

Malaysia Finance Act 2019 and other Amendment Acts published

HONG KONG

Secretary for Commerce and Economic Development Edward Yau has signed an investment promotion agreement to enhance investor confidence, expand investment flows and further strengthen Hong Kong-Mexico economic and trade ties. Mr Yau signed the Investment Promotion and Protection Agreement (IPPA) with Undersecretary of Foreign Trade at Mexico’s Ministry of Economy Luz María de la Mora Sánchez on the margins of the World Economic Forum (WEF) Annual Meeting in Davos. Under the agreement, the two governments will provide each other’s investors with fair, equitable and non-discriminatory treatment of their AIAWORLDWIDE.COM | ISSUE 109

investments, compensation in the event of expropriation of investments and the right to free transfers abroad of investments and returns. It also provides for settlement of investment disputes under internationally accepted rules. “An IPPA enables investors of the two parties to enjoy corresponding protection of their investments in the host economies, and thus enhance investors’ confidence in making investments abroad,” Mr Yau said. “Hong Kong has been making dedicated efforts to expand its network of IPPAs in order to enhance twoway investment flows and boost our economy.”

Malaysia’s Finance Act 2019 (Act 823) was published in the Federal Gazette on 31 December 2019, which includes certain measures of the 2020 Budget and others. The Finance Act 2019 also includes amendments to the Sales Tax Act for the introduction of the Approved Major Exporter Scheme. The scheme provides an exemption for qualifying persons from the payment of sales tax that may be charged and levied on taxable goods imported, transported from designated areas or special areas, or purchased from a registered manufacturer, under certain circumstances. Further to the Finance Act 2019, Malaysia has also published the Income Tax (Amendment) Act 2019 and the Petroleum (Income Tax) Amendment Act 2019. Both Acts include similar amendments concerning the hearing of appeals by Special Commissioners and new rules on appeals to the Higher Court regarding questions of law in proceedings before the Special Commissioners. The measures generally apply from year of assessment 2020, although the changed penalty for amended returns and the seven-year limit for requesting an appeal extension are effective specifically from 1 January 2020 and the Approved Major Exporter Scheme will apply from a date to be appointed by notification in the Gazette.

AIA

NEWS AUDIT

MONEY LAUNDERING

Fifth Anti-Money Laundering Directive comes into force The Fifth Anti-Money Laundering Directive (5MLD) has come into force and introduces the requirement for “obliged entities”, including the Association of International Accountants (AIA) Members in Practice, to report certain information discrepancies to Companies House. From 10 January 2020, all obliged entities must tell Companies House if there’s a discrepancy between the information that they hold about a beneficial owner and information on the Companies House people with significant control (PSC) register. The requirement extends to any obliged entity required to carry out customer due diligence under anti-money laundering regulations. Amendments to the regulations also include: ● requirements to collect proof of registration for entities; ● the requirement to inform Companies House of any discrepancies; and ● changes to client due diligence and enhanced due diligence. The accountancy sector is currently drafting updated guidance on the regulations, which will then require HM Treasury approval before being released to members. For further information go to: https://bit.ly/2GuE2kx.

As a Recognised Qualifying Body (RQB) for statutory auditors, the Association of International Accountants (AIA) is committed to ensuring that auditors are trained to the highest possible standard and properly equipped to undertake their important role. It is vital for the public interest function that audit demonstrates more than just compliance with laws and rules. The UK government-backed review has called for the creation of an independent audit profession with a revised purpose to increase confidence and prevent unnecessary corporate failures. It also highlights improvements that recognised bodies can make to the training of auditors. AIA will work to incorporate them into its recognised qualifications and training. Sir Donald Brydon, appointed in January 2019 to review the quality and effectiveness of audit, has proposed substantial changes to the sector in the United Kingdom, including strengthened standards for auditors, more responsibilities for company directors and additional powers for shareholders and stakeholders to influence audit. The Brydon Review is the last of four reviews, including the Kingman Review to reform the Financial Reporting Council (FRC), to publish its recommendations and marks out a path for reform. The Review considered how the audit process and product could be developed to better serve the needs of users and the wider public interest. It proposes a new definition of the purpose of audit, as well as the creation of a new “standalone and transparent” profession. The final published report makes 64 recommendations and includes: ● a redefinition of audit and its purpose to reflect the public interest; ● the creation of a standalone and transparent audit profession; ● clarification that auditors should

AIA responds to Brydon Review

● ● ● ●

seek to find corporate fraud and a requirement they are educated in forensic accounting and fraud detection; improved auditor transparency; new powers for shareholders to influence audit; additional reporting requirements for directors; and a responsibility for directors to explain the actions they have taken to prevent material fraud and to report on internal controls.

The recommendations are aimed primarily at the audit of Public Interest Entities (listed companies, and credit and insurance firms) in accordance with the Review’s terms of reference. AIA chief executive Philip Turnbull said: “Responsibility and accountability are central to the success of the Review and the future of the audit profession and we will continue to work to improve and maintain confidence in the audit process and in the information for which they have responsibility to report, including the financial statements.” ISSUE 109 | AIAWORLDWIDE.COM

AIA NEws CONFERENCE COMMITTEES

AIA Examiner Conference 2020: The New Professional Qualification

The AIA’s Examiner Conference which took place on 24 January 2020, brought together AIA’s academic team – representatives from over 20 leading UK universities – tutors, regulators, and online learning and assessment partners to discuss the final stages of the new AIA professional qualification, due to launch later this year. The new professional qualification has been produced following extensive research into the financial skills sector and has resulted in an innovative new qualification format that provides a pathway to qualify as a professional accountant or statutory auditor with exceptional support services that come from being an AIA member. This new nationally and internationally recognised qualification supports progressive career development across all finance roles and, with the introduction of a new ethics module, places professional ethics at its heart. The conference included a workshop on computer-based exams, giving examiners the opportunity to see how AIA’s assessment software is used from both the exam-setting and candidate’s perspective and for the first time see the new qualification in conjunction with its learning materials, student support facilities and testing mechanisms. AIAWORLDWIDE.COM | ISSUE 109

Les Bradley, AIA President, said: “2020 is set to be a monumental year for the AIA as it launches both its new professional qualification and brand. Our academic team have worked tirelessly to produce an exceptional new professional qualification that will prepare students with the skills and abilities to become world-class accountants and I look forward to welcoming them at the AIA Examiner Conference. Embarking on a professional qualification is the first step in a very rewarding career and as AIA President I have seen the real benefits of AIA membership in providing the most in-demand skills for accountants throughout the world.” AIA Chief Examiner Philip Shrives added: “With the impending launch of the new AIA professional qualification, the 2020 AIA Examiner Conference is a critical event where, after years of research and development, examiners and moderators will see the real impact of their contributions on the next stage of the AIA’s development.” There were also presentations on the Brydon Review and the recommendations that aim to improve the quality and effectiveness of audit and a review of the economy from a national and regional perspective from the Bank of England.

AIA committee member recruitment AIA is looking for accountants in practice and lay members of other professions to join the teams helping to ensure that our members always conduct their businesses in a professional manner and act in the best interest of the general public. The combination of accountants and lay members on our committees helps to maintain a balanced view.

what does it involve?

As a member of one of the disciplinary committees, you play an integral part in supporting AIA in maintaining the highest professional standards and ethical conduct expected of a professional accountant. Successful applicants may be in receipt of information of a sensitive nature and must therefore be able to sign a confidentiality agreement and adhere to AIA’s strict Equality and Diversity policy. Meetings are held on an ad hoc basis and can be either in person or by video conference. Emailed correspondence may also be used. Membership of the Disciplinary Committees is non remunerated although reasonable expenses will be paid.

Next step

To express an interest in becoming part of the process, please send your CV and any questions you might have to: council@aiaworldwide.com.

AIA NEws EDUCATION

Accelerating access to the accountancy profession is one of AIA’s main strategic goals and we are working with our partners throughout the world to reduce inequality and gender inequality in education. AIA President Les Bradley said: “AIA wholeheartedly supports the Global Campaign for Education and through its own initiatives works to support education as a basic human right. “Education is a key component in delivering economic growth, reducing poverty and increasing health and wellbeing. Therefore, it is vital that we recognise that by providing a strong educational foundation we support growth in many other areas. AIA works to ensure that everyone has an equal chance of accessing the accountancy profession based on merit, not background and is a member of Access Accountancy, which aims to deliver real change and welcome talented and ambitious young people

AIA supports International Day of Education

to the profession from all backgrounds, supporting social mobility. “Outside the UK, AIA’s work as an Accredited Commonwealth Organisation seeks to promote the professionalisation of youth

work by supporting youth work education and training and setting competency standards throughout the Commonwealth and we will continue to use our knowledge and influence to deliver education for all.”

MENTAL HEALTH

AIA signs Time to Change Employer Pledge

AIA has signed the Time to Change Employer Pledge and agreed to an Employer Action Plan that puts best practice interventions and policies in place to help staff work in ways that promote a positive mental wellbeing. The Time to Change Employer Pledge is a commitment to change the way we all think and act about mental health in the workplace and operates to end mental health discrimination. AIA will be implementing an approach that combines additional resources, information

and guidance with training to help tackle mental health stigma, as well as introducing initiatives that support mental health and wellbeing. Philip Turnbull, AIA chief executive, said: “Our employees are our greatest asset, and we’re committed to creating and nurturing a workplace culture that allows our people to thrive. A key part of our strategy is to create a safe, welcoming environment for our employees, where they feel empowered, listened to and that they can make a difference. “Raising awareness of mental health issues and breaking down the stigma of talking about mental health at work is essential to achieving this goal and we’re fully committed to Time to Change and implementing our Employer Action Plan.” ISSUE 109 | AIAWORLDWIDE.COM

GET TO THE BOTTOM OF TAX

Tolley®Library Find the answers you need from sources you trust. Tolley®Library gives you quick and easy online access to the UK’s largest and most trusted source of accountancy and tax information. Get more than 100 years of experience and information (including Tolley, Butterworths, Simon’s and De Voil), the latest news, detailed expert commentary or a judgement from the archives. Our comprehensive online library puts our wealth of knowledge and expertise at your fingertips.

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REBRAND

Our new look It’s all a matter of style…

So, the question you may well be asking is: what has changed and what remains the same?

Colour

Most noticeably the colour. The green is now gone and has been replaced with a vibrant red. As a long-established worldwide association with a network of accountants in 80 countries globally, we had the challenge of developing a crossculturally appropriate colour palette. Simplicity is therefore key, which is why the primary palette has been limited to three colours: red, black and white. The world today places ever greater value on the visual, thanks to the rise and inﬂuence of social media and the ubiquity of screens in our digital age. AIA’s aim is for the brand to always look its best across all channels, meaning the consistent and appropriate application of colour. It deﬁnes us as an Association, dictates mood and helps us communicate our brand ethos.

Aside from the colour change, we felt strongly that the logo maintained its primary characteristics; the instantly recognisable shield and griffin. These longstanding visual facets of our logo come from our original charter, albeit with a makeover to give them a fresher and more modern look and feel. We understand the importance of our heritage, so we are proud to keep this symbol of our deeply engrained and rich history.

Strapline

t has been a long time in the making, but we are now delighted to share our new rebrand with you following its official launch on 3 February. Careful consideration has been taken throughout the rebrand process in order to not lose our identity; consciously maintaining selected brand elements from our rich heritage, and at the same time amalgamating them in a vibrant new primary colour with a revitalised modern look, tone of voice and dynamic feel. We strongly believe in our new brand and we envisage it being with us through to our next major milestone – our 100th anniversary in 2028! Throughout the process, we have worked on the philosophy that change is good, but never to the detriment of what we have grown and nurtured over many, many years. “Our brand is an integral part of the Association’s marketing and development strategy and a signiﬁcant part of how we interact with our members, students and other key stakeholders. In order to remain at the forefront of the accountancy profession, we must continually strive to be dynamic, creative and progressive in all that we do in order to provide our key stakeholders with the service they expect and deserve. There are exciting times ahead and our rebrand is a signiﬁcant step on our ongoing journey.” Philip Turnbull, AIA Chief Executive

Logo

Our strapline – “Creating World Class Accountants” – will continue to be used in the majority of our external communications, as an inspirational statement that expresses what we continually strive to achieve. The strapline continues to underpin our brand philosophy and supports our brand values.

Typeface

Typefaces are at the core of every visual identity, and ours is no different. Consistency is the essence of branding, and using the correct typeface is a crucial part of this. For this reason, we have decided to use Nunito Sans, which is a modern and freely available typeface. It also has the benefit of similar typefaces for our global markets, such as China.

Tone of voice

An important factor in any rebrand is tone of voice. This is how we communicate, and part of our unique personality as an Association, which manifests itself in every contact and situation with people both internally and externally. Our values and personality bring an emotional richness to the AIA brand and are reﬂected in our tone of voice. When communicating, we will always look to follow these simple principles:

We strongly believe in our new brand and we envisage it being with us through to our next major milestone – our 100th anniversary in 2028!”

● ● ● ● ● ●

Be Empowering Be Informative Be Clear Be Professional Be Enthusiastic Be Consistent

What’s next?

We all operate in fast paced, technologically advanced environments where we have an expectation to access information very quickly and with minimum fuss. Therefore, as an Association it is essential that we follow this ethos; so, next up later in 2020 we will be completely redeveloping our website. Our main goal will be to ensure that our members, students and partners can work with us in the most convenient, responsive and straightforward manner possible. We will achieve this by making it easier for all of our stakeholders to navigate to tailored services and relevant offerings on a platform which will support our vision for growth in the coming years. ● ISSUE 109 | AIAWORLDWIDE.COM

ACHIEVE

It’s important to keep your study momentum going in 2020.

e are now well into 2020, so there is a very real chance that all of that New Year study enthusiasm has started to wane slightly. Sound familiar? Well, first of all, don’t panic. You aren’t the first and certainly won’t be the last student to have these thoughts and feelings. Life as a student can be a roller coaster of emotions. In the times when your motivation may be falling, we appreciate how difficult it can be to pick up your study materials and revise for upcoming exams. So, if you are struggling to cope with revision, or finding the exams a little more difficult than you expected, then Achieve is the programme for you. Achieve is the AIA’s interactive distance learning programme designed and developed specifically for AIA students in collaboration with leading publisher of study materials for professional exams, BPP Learning Media. Achieve provides the tools and resources for you to succeed and quickly enjoy the benefits of your expanding knowledge base. Achieve guides your learning and provides you with access to e-books, feedback, advice and support from a specialist team of e-tutors, ensuring that you

consistently get the maximum benefit from your study. Choose to enrol onto the Achieve programme today and you will take the first step on the road to planning for your own exam success. Upon enrolment, you will receive an individual study planner tailored to meet your needs, an example of which can be seen opposite. Each individual study plan is designed to help you effectively plan your study and revision time, allowing time for practice questions and a mock exam. The AIA are so confident in the Achieve programme helping you deliver the exam results you desire that we also offer the “AIA Pass Pledge”. This pledge states that if you fail your exam, we will offer you a free exam entry to resit the paper at the next exam session.* Start your Achieve programme today, and achieve the success you deserve in the upcoming May exams. Alternatively, if you feel you require a little extra revision time, look to enrol onto Achieve for the November 2020 exams. For further information, contact the AIA Study Support Team by emailing achieve@aiaworldwide.com *In order to be eligible for the “AIA Pass Pledge”, you must submit your practice questions on time and achieve 45 marks or more in your mock exam. ● ISSUE 109 | AIAWORLDWIDE.COM

Keeping the pace

ACHIEVE Personal Study Planner (Example for November Exam Session) Paper 10: Business Management

Use your personal study planner alongside your exam timetable to plan the dates in order to complete each study period. Each study period should take approximately two and a half hours to complete.

Study Period

Topic

Due Date

Study Period

Topic

Due Date

The organisation of work and the role of management

1 May

Individuals, groups and teams

18 July

Effective leadership

10 May

Marketing

27 July

Strategic planning and management by objectives

16 May

Production

4 August

Internal analysis

25 May

Practice Questions 2 – issued

17 August

Environmental analysis

2 June

Budget planning and control

8 August

Organisation structure

6 June

Organisation information and requirements

15 August

Organisation culture

12 June

The impact of IT on work practices

21 August

Practice Questions 1 – issued 22 June.

Make sure you have returned Practice Questions 2 by 24 August.

Strategic human resources management

20 June

Management control

28 August

Employee appraisal, development and training

26 June

Implementing change

5 September

Make sure you have returned Practice Questions 1 by 29 June.

Ethical considerations

13 September

Motivation and managing diversity 3 July

International trade and globalisation

21 September

Interpersonal and communication skills

Global strategy

25 September

Checkpoint 1

13 July

Practice Questions 3 – issued 5 October. Make sure you have returned Practice Questions 3 by 12 October.

Checkpoint 2 Mock Exam issued 20 October. Make sure it is returned by 27 October. AIAWORLDWIDE.COM | ISSUE 109

STUDENTS

Current issues in auditing: part 1 Candidates must be fully prepared on the topic of current and professional issues in auditing, as reflected in the AIA’s May 2019 support paper.

examined as a discrete question which they can choose to avoid, rather than as a requirement to contextualise other aspects of the syllabus around the emergent concerns for the profession in a more embedded manner. To this end, the AIA has produced the following support for candidates preparing for the May 2020 sitting of Paper 15, highlighting a number of emerging issues which they should ensure familiarity with. This article is not intended to be exhaustive but should signpost candidates towards their wider professional reading. Students should also be familiar with the specific more advanced areas of auditing practice that are only examined on Paper 15. The last sitting again exposed limited understanding of both the audit of segmental reports and the audit of related party transactions. A diligent review of the detailed syllabus for Paper 15 should highlight these specific technical concerns. Students are also reminded that Paper 15 is 90% application rather than knowledge recall and that their answers must reflect this. To this end, the examiner advises students to ensure that they understand the key issues in accounting standards and auditing standards, codes, etc. and then apply this to the question diligently. Reiterating the question does not score marks and merely stating the theory without application also results in a very low mark.

s highlighted to students in the last study guidance article, within the syllabus for Paper 15 Professional Practice (Auditing) is section 15.5 Current and Professional Issues and Pronouncements. It states in this section of the syllabus that: “Candidates are expected to keep abreast with the latest developments in professional issues, decisions of legal cases, changes in legislation and issuance of audit and accounting pronouncements that will affect processes, strategies and legal implications of audit assignments and evaluation services and the profession.” I re-emphasise to students that this topic is weighted at 20% and is therefore as important as topic 15.1 Regulatory Issues and Professional Practices; and only 5% less important than 15.2 Statutory Audit and Other Evaluation and 15.3 Audit Strategy and Process. It is therefore of continued concern to the examiner that students do not appear to be adequately prepared in this area. Following the performance on the November 2019 paper, the examiner continues to feel that candidates are expecting this topic to be

ISSUE 109 | AIAWORLDWIDE.COM

STUDENTS The examiner’s main observation on the performance of both papers in 2020 concerned the lack of depth that students brought to their answers. Where students did have a grasp of the issues under consideration, they often failed to develop the discussion to show their application to the case in the question.

Key accounting standards

The most significant changes to accounting standards in recent days relate to both IFRS 16 Leases and IFRS 15 Revenue Recognition, as they create significant new accounting judgments around the lease classification and revenue, and create additional subjectivity in both aspects of accounting. As new standards which are more complex and often not compatible with previous practice, the risk of error in application and the possibility for management bias being reflected in the estimates is significant. Both standards have also required additional disclosure, which needs to be balanced and meaningful to enable users of the financial statements to understand the impact of assumptions on the figures. IFRS 16 is now mandatory and students should be familiar with the treatment required. One key area related to both of the standards which is causing concern to the IASB relates to the treatment of onerous contracts. This will require amendments to IAS 37 Provisions, Contingent Liabilities and Contingent Assets, which are expected in the first half of 2020. These will attempt to resolve the issue of which costs should be included in determining the cost of fulfilling a contract for the purpose of determining whether it should be considered onerous. For IFRS 16 Leases, students should be aware of the reclassification of leases from operating leases recognised in the income statement to finance leases recognised in the statement of financial position with the resultant non-current asset recognition and consequent depreciation. This raises a number of subjective areas for the audit; namely, the valuation and impairment of non-current assets (already recognised as a challenging area of high subjectivity) and the valuation of the lease and the recognition of its costs through the income statement. Students are advised to ensure that they understand the key issues in IFRS 16 and so could explore how they would audit the resulting figures.

Developments in auditing standards: audit of accounting estimates

Following the review of IFRS 3 Business Combinations in 2015, the IASB has been reviewing four significant areas of concern within this accounting area; namely: ● the effectiveness and complexity of testing goodwill and impairment; ● the issues around accounting for goodwill subsequent to its initial recognition; ● the identification and fair value measurement of intangible assets; and ● the information regarding the subsequent performance of the acquiree. AIAWORLDWIDE.COM | ISSUE 109

These issues relate to areas of concern to auditors where professional judgment is key. The Discussion Paper will be published in February 2020 and the findings are outwith the syllabus for the final two sittings of Paper 15; however, a familiarity with the problems raised in the debate do represent an area that students should be familiar with. Therefore, students should focus some attention around why accounting in these areas is problematic and how the auditor may find it difficult to find persuasive evidence to support the director’s assertions.

Developments in audit practice: data analytics and ethics

A key emerging trend in internal and external audit is the use of data analytics to generate core analysis to highlight anomalies in the integrity of the accounting data. Students should ensure that they have explored the role of data analytics, its strengths and limitations in practice for both internal and external auditors in their wider reading. At the time of writing, the IESBA Technology Working Group is exploring the impact of big data, blockchain, data analytics, etc. on the ethics of the auditor but this will not report until mid 2020 and therefore is an emerging issue. However, the IESBA issued an ED Proposed Revisions to the Code to Promote the Role and Mindset Expected of Professional Accountants in July 2019, which aims to identify opportunities to emphasise and reinforce the mindset and behavioural characteristics expected of professional accountants in business and in public practice. This is discussed in more depth in the professional judgment section, which will be published in the next issue of International Accountant.

A key emerging trend in internal and external audit is the use of data analytics to highlight anomalies in the the integrity of the accounting data.”

Audit reporting

Students are reminded that audit reporting is another core area of the syllabus and that it extends more widely than the conventional audit report. The development of the extended audit report in the UK has influenced international audit reports and students should be familiar with this. There do, however, remain weaknesses in reporting and the Brydon Review recommends the following areas for improvement: ● Create continuity between successive audit reports. ● Provide greater transparency over differing estimations, perhaps disclosing graduated findings. ● Call out inconsistencies in information made public. ● Reference external negative signals and how they have informed the audit. ISA 720 The Auditor’s Responsibilities relating to Other Information was revised in June 2016 and its impacts are starting to be seen in the current cycle of audit reporting. Under ISA 720, the auditor is responsible for ensuring that other information included in the audited financial statements is not materially inconsistent with either the financial statements or their understanding of the entity’s

STUDENTS

This raises an interesting issue within the idea of the expectation gap, as the auditor’s requirement to comment has been operationalised as a statement that the auditors have reviewed the issues detailed above and have nothing material to add or draw attention to. The Brydon Review further proposes a Resilience Statement [which] would replace the existing Going Concern and Viability Statements: ● The short term reporting component of the statement would incorporate the existing going concern assessment, but with enhanced transparency, including the disclosure of material uncertainties that could impact on the company as a going concern before any mitigating action has been taken into account. ● The medium term component would be a more robust and transparent version of the existing Viability Statement. This component of the Resilience Statement should include stress testing of various scenarios that could threaten the company’s business model, drawing on existing models currently used by the Prudential Regulation Authority for financial services companies. ● The long term component would provide an opportunity for directors to set out how they are positioning the business strategically to address the risks of, for example, climate change and other potential existential threats.

The directors must ensure that the Annual Report is fair, balanced and understandable, and provides the necessary information for shareholders to assess the group’s position.”

❯

position from their knowledge of the business gained during the audit. This relates to all of the narrative information issued by the reporting entity and covers all of the material issued before the audit report. This supports the ethical requirement that the auditor avoids being knowingly associated with information that is either materially false or misleading. It is particularly focused at the need to make the auditor’s comment on the extended disclosure requirements for directors around risk and viability statements. The standard requires that the auditor specifically reviews and comments upon: a) the directors’ confirmation in the annual report that they have carried out a robust assessment of the principal risks facing the entity, including those that would threaten its business model, future performance, solvency or liquidity; b) the disclosures in the annual report that describe those risks and explain how they are being managed or mitigated; and c) the directors’ explanation in the annual report as to how they have assessed the prospects of the entity, over what period they have done so and why they consider that period to be appropriate, and their statement as to whether they have a reasonable expectation that the entity will be able to continue in operation and meet its liabilities as they fall due over the period of their assessment, including any related disclosures drawing attention to any necessary qualifications or assumptions. ISA 720 Auditors’ Responsibilities Relating to Other Information 2016

www.sasb.org/ standards-overview/ download-current-standards

www.globalreporting.org/ information/sustainabilityreporting/Pages/default.aspx www.fsb-tcfd.org

These suggestions highlight current areas of concern in reporting and students should be familiar with these. The directors must ensure that the Annual Report, taken as a whole, is fair, balanced and understandable, and provides the necessary information for shareholders to assess the group’s position, performance, business model and strategy. In an examination context, the narrative information around risk reporting or going concern assessment, or other information issued with the financial statements, may not be accurate and students should be prepared to develop an appropriately worded report.

Sustainability reporting and assurance

The UN Sustainable Development Goals are being used as a framework by investors to assess the exposure of companies to risks to their ability to sustainably create value within the organisation. This is linking into the developments of Integrated Reporting and the recent report by the Task Force for Climate Based Financial Disclosure. Policy makers within governments and regulators are also looking to these goals to drive the future direction of sustainability in companies. Within this framework, the Sustainability Accounting Standards and other sustainable measures are developing and the former were issued at the end of 2018. The 2017 recommendations of the Financial Stability Board (FSB) “Task Force for Climate Related Disclosures”, which seek to establish a framework for an organisation’s disclosures “that will help financial market participants understand their climate risk”, were widely adopted in the 2018 corporate reports. This is creating a significant market opportunity for sustainability assurance and sustainability consultancy as the standards provide a key framework against which corporate sustainable reporting can be assured. The approach of the professional practice to such an assignment is the same as any other assurance assignment. It consists of initially identifying the subject matter for the engagement, the interested parties who may be using this information, and the standards against which the assurance would be carried out must be explored and clarified. This process is essential to clarify the real risk areas in the assurance assignment, to understand the concerns of the company and to understand what assurance is seeking to achieve. A key idea for the auditor providing assurance against new sustainability standards is the idea of what would render the information useful. In common with all other information for decision making, this would reflect the ideas of appropriate standards of relevance, completeness, reliability, neutrality and understandability. This debate mirrors other debates around quality reporting, including narrative reporting, risk reporting and KPI reporting, whereby there are challenges in ensuring that the information is fairly represented, unbiased, consistent and transparent and the ideas from the FRC in their Cutting the Clutter publication may help this wider issue to be appreciated.● ISSUE 109 | AIAWORLDWIDE.COM

US MULTINATIONALS

It pays to plan Miles Dean asks how US multinationals must prepare when using the UK as a stepping stone to the wider world.

s Benjamin Franklin once said, â&#x20AC;&#x153;ByÂ failing to prepare, you are preparing to fail.â&#x20AC;? For many US headquartered multinationals, the UK is a natural stepping stone or launchpad to the wider world. Language, culture and a pro-business tax regime all make the UK a natural home. Despite these obvious advantages, however, various aspects of the UK tax regime can create significant problems for US corporates that enter the UK without undertaking proper detailed planning in advance.

1. UK corporate tax residence

A US corporation that exercises its central management and control in the UK will become UK tax resident and subject to UK corporation tax at 19% on its worldwide income and gains. Central management and control is determined by reference to UK case law and is the place where decisions about the strategic policy and direction of the corporation are taken. These decisions can generally be distinguished from decisions of a more day to day, operational nature.

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Miles Dean Head of International Tax, Andersen Tax

It is not uncommon for US groups to have personnel based in the UK that are involved in the strategic decision making process. UK case law on central management and control is (relatively) taxpayer friendly. With careful adherence to a management framework (in terms of the types of decisions that business managers and senior executives may take in and outside the UK), this risk can be managed. It should be noted, however, that unwinding historic arrangements where central management and control is in the UK can give rise to separate tax risks that need careful consideration (i.e. to ensure a UK exit tax charge does not inadvertently arise).

2. Permanent establishment risk

A foreign corporation that does not exercise central management and control in the UK can still be exposed to UK corporation tax where it has a UK permanent establishment. A UK permanent establishment will arise where the foreign corporation:

US MULTINATIONALS ● has a dependent agent that habitually concludes contracts in the UK on its behalf, even if the formal signing of the contracts takes place outside the UK; or ● has a fixed place in the UK at its disposal (e.g. office premises, client’s premises, home office) through which it carries on profit generating activity by persons taking instructions from the foreign corporation. It is even more common for US groups to have expanded into the UK (or other EU jurisdictions) without formally establishing themselves here. Where a foreign corporation breaches the permanent establishment thresholds, it must register with HMRC and determine what proportion of its profi ts arise from the UK trade, on which it must pay UK corporation tax. Where a US corporation has a branch in the UK, it is required to disclose its full financial statements to Companies House (a public register), not just the proportion of profi ts attributable to its UK branch. Where the US corporation has employees working in the UK, it must operate a UK payroll, including the payment of employer’s NICs at 13.1%. Such US companies are often also UK VAT non-compliant, having failed to register or apply the tax correctly to the supply of goods and services.

3. Hybrids and other mismatches

The UK introduced the hybrids and other mismatches rules in 2016, applying not only to hybrid instruments or entities, but to multinational companies and permanent establishments that give rise to deduction/ non-inclusion cases (e.g. where a jurisdiction exempts the profits of a foreign branch). Nonetheless, many US headquartered groups have not considered how the rules apply to their UK operations because the focus is more often than not on getting the business started, rather than dealing with the practicalities. The rules are complex and are accompanied by over 300 pages of HMRC guidance. From 1 January 2020, the rest of the EU will have implemented the same rules.

4. Diverted profits tax and the compliance facility

Author bio

Miles Dean is the Head of International Tax at Andersen Tax. He advises privately held multinational companies and high net worth individuals on cross border tax issues.

The diverted profits tax (DPT) rules were introduced in 2015 and apply only to large organisations. (A group will not be large where it has fewer than 250 employees and its turnover is below €50m or its balance sheet assets are below €43m.) The DPT will apply in two cases: 1. where a UK corporation (or UK branch of a foreign corporation) uses entities or transactions that lack economic substance to exploit tax mismatches (e.g. through payments to low or no tax territories); or

Various aspects of the UK tax regime can create signiﬁcant problems for US corporates that enter the UK without detailed planning.” 2. where a foreign corporation takes steps to ensure that it is not trading in the UK through a PE. If cases 1 or 2 apply, the relevant corporation tax deduction is denied and the increase in UK profi ts will be taxable at the punitive DPT rate of 25% (as compared to the UK corporation tax rate of 19%). Where case 2 applies, the foreign corporation will be deemed to have a UK permanent establishment. The determination of a deemed permanent establishment and allocation of profi ts thereto is determined by HMRC through a rigorous analysis of the facts and commercial drivers behind the structure. Typical arrangements to which the DPT applies include: ● limited risk distributors/service providers; ● toll or contract manufacturing arrangements; ● contract R&D arrangements; and ● the fragmentation within the same UK corporation or different UK entities of valuable integrated functions into standalone functions that are priced individually as low value-adding functions. Many groups (and tax advisers) consider that if a group has its transfer pricing correct, then a DPT charge can be mitigated. Broadly, this is true; however, the issue is that HMRC considers many groups, using: ● the above listed arrangements; ● price transactions on an incorrect fact pattern (e.g. where the facts in the transfer pricing report differ to what happens on the ground); or ● price transactions which are not consistent with the OECD transfer pricing guidelines (e.g. where there is over reliance on transfer pricing policies predicated on the assumption of risk and legal ownership of assets and insufficient weight to the location of the control functions or the contribution of those control functions in relation to assets and risks). HMRC has reported that it has found groups to be seriously delinquent in recent DPT enquiries and warned that it will launch further investigations. It has consequently ISSUE 109 | AIAWORLDWIDE.COM

US MULTINATIONALS unveiled a compliance facility giving taxpayers an opportunity to self-report non-DPT compliance. Whilst the facility does not provide an amnesty from penalties or civil or criminal investigation, it demonstrates goodwill on the part of the taxpayer to become compliant, such that any penalties are likely to be at the lower end of the scale.

6. Corporate interest restriction

The UK has a number of rules within its armoury to restrict the deductibility of interest expense, including: ● thin capitalisation; ● transfer pricing; ● unallowable purpose; ● corporate interest restriction; and ● hybrid and other mismatches. The corporate interest restriction regime applies to groups with net interest expense in excess of £2m (including interest on third party debt). The fixed ratio rule is the basic position and caps the deductible amount of net UK interest expense at 30% of UK taxable earnings before interest, taxes, depreciation and amortisation (EBITDA). A modified debt cap ensures that the net interest deduction does not exceed the total net interest expense of the worldwide group. A higher cap can apply, by election,

under the group ratio rule and is based instead on the net interest expense to EBITDA ratio for the worldwide group. To determine which ratio is most beneficial, a calculation must be performed. The result is often contrary to the theory! This new regime has impacted the real estate sector most significantly, where businesses require high amounts of debt resulting in significant disallowances of interest. With this in mind, and considering the numerous other changes to the taxation of UK real estate since 2013, the corporate interest restriction includes an exemption for public infrastructure assets (the public infrastructure benefit exemption (PIBE)). Broadly, the PIBE allows a number of adjustments or exclusions in calculating net interest of the group, where an election is made. PIBE applies to: ● companies carrying on qualifying infrastructure activities; and ● real estate investment businesses. Such activities include the provision of tangible assets forming part of the infrastructure of the UK (e.g. utilities, telecoms, transport, health and education), or the provision of rental properties as part of a UK property business to unrelated parties on a short-term basis (i.e. 50 years or less). ●

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AIAWORLDWIDE.COM | ISSUE 109

DIGITAL TRANSFORMATION

Fixing the gaps

Accountants undergoing digital transformation should know which gaps they are trying to fix, writes Jules Carman.

n the previous article in this series, published in the September/October 2019 issue, we discussed the fact that any digital transformation project should begin with a cultural assessment to make sure that the technology serves people’s real needs. Once you’ve spoken to your employees and made sure that you understand their problems and concerns, the next step is to carry out a thorough gap analysis to determine what’s causing those problems – and how they can be fixed. A good guiding sentiment for this step in the process is to ask: what one thing could you fix that would make everyone’s lives easier? Similarly, and crucially for accountants, how are you going to improve the service you offer clients? As we outlined previously, digital transformation initiatives should be led by the goal of discovering and solving inefficiencies and bottlenecks in existing workflows – not just bolting new technology on left, right and centre. With that approach in mind, accounting firms that are looking to move towards a digital way of working need to take the time to review the systems they have in place to identify where

change is needed most – and what practical steps can be taken towards fixing them. Moreover, remember that new technology isn’t always the answer – training and process redesign can be just as important.

Identifying operational inefficiencies

Author bio

Jules Carman is the Head of Digital Transformation, Accountancy, at Sage.

The first priority should be to review existing systems with the lens of your cultural review and find out where your growth potential is being limited. The problem might be something obvious, like a system that repeatedly crashes or runs slowly. Alternatively, it might be an application that doesn’t integrate with the rest of the workflow, leaving essential information locked in a virtual box and getting in the way of joined-up thinking. Accounting firms’ IT landscapes tend to evolve organically over time, particularly among longstanding companies that have made the full transition from pen and paper to the cloud over many years. This means that often they don’t operate smoothly as one system. Over time, you will add an application here and grow a deployment there, and although each addition ISSUE 109 | AIAWORLDWIDE.COM

DIGITAL TRANSFORMATION

Just like cultural assessments, gap analyses should always be run with one eye to your people.”

fixed. Why is your practice avoiding change for the sake of it, rather than pushing for maximum value? People get used to certain ways of doing things and can end up perceiving change as a greater burden than their current inefficiencies: better the devil you know. Most often, that approach is short-sighted and stubborn rather than pragmatic. Accounting firms that don’t grow are likely to end up regressing. If staff resist digital transformation simply because they don’t want to go to the trouble of learning how to use new systems, the upshot will be that they have to deal with increasingly inefficient systems as time goes on – which helps nobody. The question is not whether your practice will need to undertake a certain amount of work to improve efficiency – it’s why and then when. So better the devil that futureproofs the practice, rather than the one that traps it in the past. In practice, that means that, just like cultural assessments, gap analyses should always be run with one eye to your people. Education and accountability should be part of any gap analysis, helping employees to understand the benefits of undergoing change. That might mean running pilot schemes and collecting detailed feedback, providing detailed explanations of what’s going to change and why, and making sure to listen to concerns and worries throughout the process. Crucially, though, planning for digital transformation should be conducted with the overall good of the practice in mind. If ingrained inefficiencies get in the way, it’s essential to find a workaround that works for everyone.

Adapt to new expectations

may address a particular need, the whole can become siloed if the holistic needs of employees and clients aren’t properly considered. During the gap analysis stage of a project, the goal is to define where these siloes have appeared. Are there two applications doing the work of one? Is it possible to consolidate multiple workflows onto a single system, or a single provider, so as to allow freer information flow between them? By asking these questions, accountancies can save themselves time and money, while improving employee experience. The analysis may well uncover areas where new technology is required, however. Where new market requirements or regulations demand it, there may be a need for a capability that existing systems can’t provide – in which case, it’s essential to approach the implementation with an understanding of how the new deployment will work alongside existing technology.

Don’t play it safe

However, identifying these gaps and siloes is not always straightforward. Your employees might not be that keen on having their problems AIAWORLDWIDE.COM | ISSUE 109

It’s particularly important to adapt to new expectations because the drive towards digital transformation in accountancy is coming from clients first and foremost. Accountants need to improve their practice’s systems to ensure that they can meet growing desires for an employee-centric, client-centric and data-driven service. Modern firms need to be more than just accounting experts (although the core skills are still important). They also need to be able to provide holistic, consultative and strategic business advice. For that reason, it’s essential to review your client-facing systems for gaps as well. Where are there siloes which could be broken down to provide a deeper understanding of client processes and business models? How can you join the dots so that employees can add value to clients beyond the balance sheet? Technology should be an enabler for these changes, giving to practices the analytical tools and data visibility they need to step into a more advisory role. In short, new technology deployments should be about solving people’s problems, both internal and client-side. Take the time to focus on specific problems and inefficiencies – only then can you make an informed decision about which technology to implement. The future is digital – but people are still at the heart of accountancy. ●

CHARITIES

Accounting for International Development

Neil Jennings explains how accountants and auditors can use their skills to provide pro bono or remunerated support to a broad range of non-profit organisations around the world. Neil Jennings Founder, AfID

Neil Jennings is the founder of Accounting for International Development, supporting a broad range of non-profit organisations globally.

ccounting for International Development (AfID) is an organisation that offers support to charities across Africa, Asia and Latin America through working with accountants to provide financial management support to over 500 not-for-profits in over 50 countries. Now ten years old, AfID started as a result of my own volunteering experience with a small Rwandan NGO set up by orphans and refugees of the 1994 genocide. It became obvious that whilst the staff had achieved amazing results with little resources, the survival of their activities hung desperately in the balance due to a lack of ﬁnancial management experience and a faltering donor relationship. Volunteers had come and gone but sadly never addressing this issue and never really contributing to their long-term development and sustainability. On my return to the UK, I decided to leave my role as a director for an international accountancy recruiter and set up AfID, which started with ﬁve adventurous accountants, including Bob Gooderick, who carried out pilot assignments

in Cambodia, Tanzania and Malawi. From those humble beginnings, AfID has grown quickly over the last ten years with more charities being supported each and every year. Our volunteers providing the support are as diverse and varied as the NGOs themselves with the youngest to date being 22 years old and the oldest a spritely 78. AfID reports that as many as 25% of their volunteers have gone on to secure a rewarding full-time career in the not-for-profit sector post assignment. For our tenth anniversary, we have set ourselves the ambitious target of sending over 200 volunteers on assignments, which range in length from just two weeks up to 12 months, during the course of the year. Ten years on from when we first started, and in an era of decreasing foreign aid and rising donor scepticism, the need for sound financial management has never been so clear. With demands from NGOs continuing to rise, we are always in need of more volunteers. There is a tendency to imagine that you need to have decades of experience before being able to have any sort of lasting impact, but this simply ISSUE 109 | AIAWORLDWIDE.COM

CHARITIES isn’t the case. The truth is we need accountants from all backgrounds and all levels of experience – there is something for everyone! It’s a real privilege to look back at all that’s been achieved over the last ten years, none of which would have been possible, of course, without our wonderful volunteers. Their hard work and commitment have assisted the development, and in some cases the very survival, of so many organisations doing fantastic work in their communities. To begin your own volunteer journey, visit www.AfID.org.uk, email info@aﬁd.org.uk or call +44 (0)208 741 7000.

Case study: Guatemala The partner

Based in the Guatemalan highlands, Amigos de Santa Cruz has a local staff of over 20 working to improve the lives of the indigenous people of Santa Cruz la Laguna and surrounding villages. They are entirely staffed by members of this small, rural community.

The volunteer

Certified public accountant Matt Gerkens was looking to do something different and more meaningful with his holiday time. His priority when looking at potential assignments options was to ensure that it was a good fit to his proven skills and expertise built up through a 14 year career at Grant Thornton. Matt’s familiarity managing the audits of public and private companies, both large and small, made him a strong candidate for supporting Amigos. He had also served on the board for multiple not-for-profits, giving him some understanding of the challenges facing developing NGOs.

The challenge

Prior to Matt’s placement, Amigos had grown quite significantly with an increase in income of nearly a third in the course of a year and it needed a volunteer to assess its processes and controls to ensure they were still appropriate. Both the Executive Director and the In-country Director had also identified the pressing need to strengthen both their financial reporting and budgeting. Without stronger financial systems being put into place and a better trained staff, it was felt that Amigos might have no longer been able to sustain its numerous programmes, severely limiting its impact on local beneficiaries.

The assignment

Matt ﬁrst examined the internal processes around cash management to ensure they had proper policies, procedures and controls in place to prevent or detect signiﬁcant misappropriation of cash. AIAWORLDWIDE.COM | ISSUE 109

Matt then looked at areas of improvement with the administrative assistant, who is responsible for making entries into QuickBooks. This included the setting up of recurring transactions, custom reporting and accruals. The budgets were reviewed with the programme coordinators and Matt helped develop tools and templates to help in the budgeting process, training the coordinators of each programme in its use.

Key objectives achieved

● Review of overall accounting procedures, including the use of QuickBooks and expenses record keeping. ● Assistance with organisational and programme specific budgeting. ● Accounting and administrative procedures of income generating activities. ● Evaluation of reporting provided to funders.

The impact

As a result of Matt’s placement, Amigos de Santa Cruz saw the beginnings of how stronger ﬁnancial systems, together with better trained and empowered staff, would build the capacity of the organisation and ultimately improve the lives of the indigenous people. “This experience really allowed me to make a difference with an organisation that was in need of someone with my skill set. Being able to talk to my colleagues and clients about the experience and what I was able to accomplish has been great.” Matt Gerkens

What happened next?

Matt was Amigos’ first AfID volunteer. As part of AfID’s long term programme of support, the charity has since received five further finance volunteers from across the US, the UK and Europe. Each volunteer’s scope of work builds on the previous placement and the organisation’s ever-changing needs, from preparing for external audit to assessing the impact of new policies.

AUDIT REVIEW

Brydon Review of audit quality Steve Collings asks how to tackle the expectation gap between what auditors do and what they are perceived to do. Steve Collings Partner, Leavitt Walmsley Associates Ltd

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AUDIT REVIEW

n December 2019, Sir Donald Brydon issued his report into the quality and effectiveness of audit. This report was commissioned given the high profile corporate collapses over the last couple of years and attempts to address how the “expectations gap” can be bridged. The expectations gap is the difference between what an auditor does and what the general public perceive the auditor to do. The recommendations themselves are collectively aimed at improving audit and assurance in respect of public interest entities (PIEs), although any changes to the auditing profession are likely to have an impact on non-PIEs. The report makes 64 recommendations and whilst this article cannot examine all of his recommendations, it looks at some of the more significant ones.

Creation of a separate auditing profession

Perhaps the most significant recommendation is the development of a new auditing profession. The report states that auditing is too important to be left to an adjunct of another profession and should be an independent profession in its own right, with its own governing principles, qualifications and standards rather than being an extension of the accounting profession. Brydon has made the following recommendation (the Audit, Reporting and Governance Authority (ARGA) will be the successor body to the FRC): “ARGA should facilitate the establishment of a corporate auditing profession based on a core set of principles. ARGA should be the statutory regulator of that profession. In doing so, I recommend that ARGA develops a coherent framework for corporate audit that includes but is not limited to the statutory audit of financial statements.”

Whether this will or will not transpire, only time will tell. Currently, there are hundreds of thousands of trainee accountants coming through the accountancy profession. For many, an audit route is simply a non-starter, preferring tax, management accounting or another direction. This, of course, would limit the number of entrants into a new auditing profession. Some commentators do not think that having a separate audit profession in its own right is the answer, while some suggest that the starting point may be making the UK auditing standards more accessible. The report agrees with the Netherlands Commission on the Future of the Accountancy Sector, which states that:

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“The profession of auditor must become more attractive. Breaking the negative spiral into which the profession seems to have fallen is necessary. The profession itself is primarily responsible for providing an attractive environment for potential new auditors, and must address such crucial factors as work pressure, work-life balance and culture.”

Author bio

Steve Collings, FMAAT FCCA is the audit and technical partner at Leavitt Walmsley Associates Ltd, chartered certified accountants and statutory auditors, where Steve trained and qualified.

AUDIT REVIEW Again, these are only suggestions at the time of writing and any changes will, of course, be dealt with by the FRC/ARGA in due course.

The Brydon review recognises that there is a growing challenge in using ‘true and fair’ as a descriptor of financial reporting.”

True and fair concept

Auditors in the UK currently express an opinion as to whether the financial statements give a “true and fair” view. An immediate problem with this concept is that it has never actually been legally defined by the courts. The most authoritative statements as to the meaning of true and fair are legal opinions written by Lord Hoffman and Dame Mary Arden in 1983 and 1984 and again by Dame Mary Arden in 1993. A significant amount of time has elapsed since Lord Hoffman’s and Dame Mary Arden’s opinions were expressed and, during that time, there have been significant changes to accounting standards and company law. The Brydon review recognises that there is a growing challenge in using “true and fair” as a descriptor of financial reporting. This is on the basis that invariably financial statements will contain estimates and judgments. Auditors also only consider material issues within the financial statements and hence express an opinion on whether or not the accounts are free of material misstatement. The Brydon report states that it is difficult to see how either directors or the auditor can communicate effectively that modern company accounts are “true”. The report recommends that “true and fair” be replaced in company law with the term “present fairly, in all material respects”. Sir Donald Brydon considers that this will not actually weaken the auditor’s opinion on the financial statements; he considers that this more accurate statement will strengthen the value of that opinion.

Fraud

This is possibly one of the most contentious areas of the expectations gap. Members of the general public who are not accountants or auditors, or have not had any experience of accounting or audit, expect the auditor to detect all types of fraud in the financial statements. Indeed, when a major corporate collapse takes place where fraud is alleged, one of the first questions is: “Why didn’t the auditors spot that?” Currently, ISA (UK) 240 The Auditor’s Responsibilities Relating to Fraud in an Audit of Financial Statements only requires an auditor to obtain reasonable assurance that the financial statements, taken as a whole, are free from material misstatement, whether caused by fraud or error. Indeed, ISA (UK) 240 para 5 states that: “Owing to the inherent limitations of an audit, there is an unavoidable risk that some material misstatements of the financial statements may not be detected, even though the audit is properly planned and performed in accordance with the ISAs (UK).”

The Brydon report recommends that the auditor’s duty in respect of fraud be extended so that the auditor effectively has a duty to detect fraud. The report recommends: “A new reporting duty on directors to set out the actions they have taken each year to prevent and detect material fraud. “A corresponding new duty on the auditor to state in their report how they have assured the directors’ statement on material fraud, and what additional steps they have taken to assess the effectiveness of the relevant controls and to detect any such fraud.” The report also recommends that auditors undergo initial and ongoing period training in forensic accounting and fraud awareness, and that ARGA maintains an open access case study register detailing corporate frauds.

Auditor transparency

The report recommends increased auditor transparency as follows: ● Audit firms to ensure that there is a clear separation between the team which negotiates the audit fee and the team which carries out the audit. ● Audit firms to publish the profitability of their work from audit, and also the remuneration of their senior statutory auditors and the attendant performance measures around that remuneration. ● The auditor’s report to disclose the hours spent on each audit by each grade within the audit team. ● Clear reasons be provided for any resignation, dismissal or decision not to participate in a retender for an audit. In addition, auditors and companies should answer relevant questions in a general meeting.

Conclusion

Some commentators suggest that some of the recommendations might be a step too far; for example, the recommendation that the audit profession be split from accountancy and hence be a profession in its own right. The report acknowledges that audit itself is not “broken”, but has lost its way. Of course, good audits are responsive to areas such as fraud risk factors and challenging assumptions and judgments within the financial statements. It would be grossly unfair to tarnish all audits with criticism because feedback on many audits is good. Conversely, some commentators suggest that the report also contains some very valid recommendations; for example, the suggestion to replace the true and fair concept and the recommendation to provide clear reasons for any resignation, dismissal or decision not to participate in a retender. ● ISSUE 109 | AIAWORLDWIDE.COM

EVENTS We are busy finalising details of our CPD events for 2020, but please make a note of the following dates and full details will be published on the AIA website and in future issues of International Accountant. See http://www.aiaworldwide.com/events for further details.

LONDON

NEW VENUES FOR 2020

London London South Bank University Business School Explore Room – 3rd Floor 103 Borough Road London SE1 0AA

Manchester Manchester University Business School Oxford Road Manchester M15 6BH

DUBLIN

HONG KONG

23 April 2020 Conference

10 March 2020 Revenue Audits and Ethical Conduct Conference 10:00–15:00 Camden Court Hotel, Camden Street Lower, Saint Kevin’s, Dublin, DO2 WO82

12 March 2020 AIA Hong Kong Branch Annual Dinner 2020 18:30 Craigengower Cricket Club (CCC)

21 May 2020 Seminar

9 June 2020 Conference

10 September 2020 Conference

3 September 2020 Conference

5 November 2020 Seminar

8 December 2020 Conference

21 April 2020 Conference 19 May 2020 Seminar 8 September 2020 Conference 3 November 2020 Seminar

MANCHESTER

14 March 2020 Accountancy Forum – Contemporary Issues in Accounting 09:15-12:15 IVE Chai Wan

WEBINAR

Join tax expert Tim Keeley (Numera Partners LLP) as he provides an overview of the Chancellor’s first Budget since the General Election. The Budget will take place on 11 March. With expected changes to taxes and public spending in the

Budget 2020 (FREE) 13 March 2020 11:30 to 12:30 CPD Units: 1

post Brexit era, as well as pledges for social care and the environment, it is anticipated that there may

be some radical announcements affecting personal and business finance.

specialises in overseas personal tax planning and finding lateral solutions to tax problems. Tim’s knowledge and experience are regularly called upon by a wide range of clients and professional advisers. His tax career began in

1972 when he joined the Inland Revenue, and continued after serving as a District Inspector of Taxes to join private practice in 1987.

Tim Keeley Tim Keeley is a tax partner at Numera with special interest in personal tax planning at UK and international levels, aiming to provide practical solutions for clients that are realistic and relevant to their needs, and to explain them in clear language. He AIAWORLDWIDE.COM | ISSUE 109

Technical INTERNATIONAL

Global coalition led by iFac addresses need for strong public financial management in emerging economies A coalition of 11 global and regional accountancy organisations and international development agencies, led by IFAC, the International Federation of Accountants, convened a three-day conference to bring awareness to how effective public financial management is critical to the advancement of emerging economies. The conference, Developing Accountancy Capacity in Emerging Economies, featured a series of keynotes and workshops designed to equip accountants, government officials, stakeholders and other practitioners with a roadmap for facilitating conversations and driving progress in their respective jurisdictions. “Accountancy capacity development efforts, like this conference, are most effective when national, regional, and global organisations come together with a laser-focus on a common cause. IFAC, with the support of the UK Department for International Development (DFID), is grateful to

be able to catalyse the convening of institutions that comprise the financial management ecosystem, in order to enhance awareness and collaboration,” said Kevin Dancey, IFAC CEO. The accountancy profession plays an essential and significant role in a country’s sustainable economic development in both the public and private sectors. Not only has a strong and vibrant accountancy profession been regularly associated with lower levels of fraud and corruption, but there is also a recognised correlation between a strong accountancy profession and higher levels of economic growth. Supporting the development of accountancy capacity can be a catalyst to the success of the state-building strategies implemented by international development actors. Dr In-Ki Joo, IFAC President, said: “The role of professional accountants is to manage the financial information required by all stakeholders, and to develop the insights needed for

sound decision making that helps promote economic, social and political stability. This important connection between accountancy and economic development is something that organisations, including the DFID, the World Bank, the Asian Development Bank and the Global Fund, have understood for a number of years and we are grateful for their ongoing partnership.” Aman Trana, Director of the Procurement, Portfolio and Financial Management Department of the Asian Development Bank (ADB), said: “One of ADB’s operational priorities under its Strategy 2030 is to strengthen the governance and institutional capacity of its developing member countries. Professional accountants play a critical role in this area by supporting public financial management institutions improving their public service delivery, financial efficiency, and transparency and accountability, thereby accelerating poverty reduction and achieving sustainable development.”

INTERNATIONAL

transparency and confidence through reliable and decision-useful climate related information. ● Professional accountancy organisations (PAOs) have an influential role in influencing climate change mitigation and adaptation as advocates for the profession and providers of accounting training and support. PAOs can commit to keeping accountants informed about how they can support their organisations’ and clients’ efforts to respond to climate risk. ● Accountants can encourage and enable meaningful action on climate change as influential advisors in governments and organisations. They can achieve this by providing relevant insights, analysis, reporting and assurance to help organisations create and protect value over the long term.

Development Goals (SDGs), and to speaking out on climate action on behalf of the accounting profession, working through the B20, G20 and OECD. “Ignoring the impact of climate change is not an option – nor is business as usual,” said IFAC CEO, Kevin Dancey. “As instrumental members or advisers of every government, business and not-for-profit organisation, professional accountants must influence and enable the transition to a low-carbon society.” The conversations at COP 25 will be particularly important to provide clarity in reducing long-term emissions to meet the Paris Agreement. All actors in the global economy must usefully contribute, and professional accountancy remains a committed part of the solution.

Key messages to the UN’s COP 25 from the accountancy profession As the UN Climate Change Conference (COP) met, IFAC urged decisive action to put the world on a path to a sustainable future. To clearly articulate the role of the global accounting profession in addressing the climate emergency, IFAC published its Point of View on climate action. In the Point of View, IFAC sets forth recommendations for various stakeholders: ● Governments can take advantage of the UN Climate Change Conference of the Parties (COP) to provide clear direction on reducing long-term emissions, to deliver greater certainty for business, and to encourage investment in low-emissions technology and innovation. ● Businesses can accelerate plans for climate change mitigation and adaptation. They can deliver

At the global level, IFAC is committed to working with the global profession to build the knowledge and capacity of accountants to meet the Sustainable

IASB proposes to require comparable profit subtotals and bring greater transparency to ‘non-GAAP’ measures The International Accounting Standards Board has proposed improvements to ISSUE 109 | AIAWORLDWIDE.COM

Technical the way information is communicated in the financial statements, with a focus on financial performance. Responding to investor demand, the proposals would require more comparable information in the statement of profit or loss and a more disciplined and transparent approach to the reporting of management-defined performance measures (“non-GAAP”). The Board developed these proposals as part of its Primary Financial Statements project and wider work on “Better Communication in Financial Reporting”. The proposals cover three main topics. New subtotals in the statement of profit or loss Companies would be required to provide three new profit subtotals, including “operating profit”. Operating profit is commonly reported by companies but is currently not defined by IFRS Standards, making meaningful comparisons between companies difficult. The new subtotals would give better structure to the information and enable investors to compare companies. ‘Non-GAAP’ transparency Companies would be required to disclose management performance measures – subtotals of income and expenses that are not specified in IFRS Standards – in a single note to the financial statements. In this note, companies would be required to explain why the measures provide useful information, how they are calculated and to provide a reconciliation to the most comparable profit subtotal specified by IFRS Standards. These requirements would add much needed transparency and discipline to the use of non-GAAP measures and make it easier for investors to find the information they need to make their own analyses. Improved disaggregation of information Investors sometimes find it difficult to unpick a company’s reported information because items may be lumped together with insufficient labelling or explanations. Therefore, the Board has proposed new guidance to help companies disaggregate information in the most useful way for investors. Companies would also be required to provide better analysis of their operating expenses and to identify and explain in the notes any AIAWORLDWIDE.COM | ISSUE 109

unusual income or expenses, using the Board’s definition of “unusual”. These requirements would help investors analyse companies’ earnings and forecast future cash flows. Hans Hoogervorst, Chair of the International Accounting Standards Board, said: “These proposals represent a game changer in the comparability and usefulness of financial statements.” The proposals would result in a new IFRS Standard that sets out general presentation and disclosure requirements relevant for all companies, replacing IAS 1 Presentation of Financial Statements. The Board is also proposing to amend some other IFRS Standards. To read the General Presentation and Disclosures Exposure Draft, the Basis for Conclusions and the Illustrative Examples, and to comment on the Exposure Draft, please go to the comment letter page on ifrs.org. The Board is asking for stakeholder comments by 30 June 2020.

Help shape IFRS standards in 2020 To develop high quality accounting standards, the International Accounting Standards Board seeks views from people interested in and affected by financial reporting. This engagement helps the Board to generate ideas and evaluate suggested solutions to accounting problems so that IFRS Standards reflect the needs of the companies that use them when preparing their financial statements and of investors that use those financial statements when making investment decisions. Thus, the Board gives stakeholders the opportunity to have their say multiple times during a standardsetting project’s life. 2020 is shaping up to be a busy year for consultations and calls for stakeholder views. 2020 consultations The first major consultation document, already out for comment, proposes improving the way information is communicated in the financial statements, with a focus on financial performance. Exposure Draft General Presentation and Disclosures, which the Board published in December 2019 as part of its Primary Financial Statements project, is open for comment until 30 June 2020.

The Board plans to publish a number of important consultation documents this year, including a discussion paper in its Goodwill and Impairment project and an exposure draft in its Management Commentary project. Later this year, you will have an opportunity to help the Board decide on its global standardsetting priorities by contributing to the 2020 Agenda Consultation. Stakeholders will also be invited to provide comments on more narrowscoped proposed amendments, proposed updates to the IFRS Taxonomy and the IFRS Interpretations Committee’s tentative agenda decisions. Here is a list of the planned consultations. Discussion papers Q1: Goodwill and Impairment Q2: Business Combinations under Common Control Exposure drafts Q2: IBOR Reform and its Effects on Financial Reporting – Phase 2 Q2: Rate-regulated Activities H2: Disclosure Initiative – Targeted Standards-level Review of Disclosures H2: Management Commentary Requests for information Q1: Comprehensive Review of the IFRS for SMEs Standard Q2: Post-implementation Review of IFRS 10, IFRS 11 and IFRS 12 H2: 2020 Agenda Consultation How to stay up to date The work plan lists the Board’s projects and indicates the next project milestone for each, as well as explaining when the Board expects to reach that milestone. You can register for project alerts as work progresses. Consultations are an important part of the IFRS Foundation’s due process, which ensures that anybody can follow and contribute to standard setting.

UK AND IRELAND IAASA changes in Board membership The Minister for Business, Enterprise and Innovation, Heather Humphries TD, has appointed Mr David Hegarty as a member of the Authority. Mr Hegarty has been appointed on the nomination of the Director of Corporate Enforcement. He takes over from Mr Conor O’Mahony,

Technical who has served on the Board since March 2012.

IAASA publishes its settlement procedures for s 933 enquiries IAASA has published its settlement procedures for enquiries under s 933 of the Companies Act 2014. As with the s 934 investigation settlement procedures published earlier, the process offers both the authority and the prescribed accountancy body a means of achieving early resolution of the matter. Early settlement is an efficient use of the authority’s resources and provides timely resolution and transparency through the publication of the details of the case. The s 933 settlement procedures are available on www.iaasa.ie.

IAASA’S guide to reports on the quality assurance review of publicinterest entity audit firms IAASA has published a guide to its reports on the quality assurance review of public-interest entity audit firms (PIE audit firms). The guide can be found on www.iaasa.ie. IAASA’s Audit Quality Unit has an overall objective to promote improvements in the quality of auditing of public-interest entities (PIEs). This is achieved through the inspection of PIE auditors. The process involves an assessment of the design of the internal quality control system, performance of compliance testing around the implementation of the PIE audit firm’s processes and procedures, together with the review of a sample of audits of PIEs. From early 2020, IAASA will make quality assurance review reports on PIE audit firms available to the public. The purpose of the guide is to assist readers in understanding IAASA’s public reports on the quality assurance review of PIE audit firms. The guide sets out what users can expect from the quality assurance review reports and explains how the quality assurance review process drives the form and content of the reports on each quality assurance review. The guide sets out the following: ● key content in published reports on quality assurance reviews; ● the purpose and design of a quality assurance review; ● IAASA’s grading policy for findings arising in relation to the effectiveness of the design or implementation

of a PIE audit firm’s quality control system and for each of the PIE audits inspected as part of a quality assurance review; and ● the content of a report on quality assurance reviews and limitations of these reports. The appendices to the guide include an outline of a quality assurance review report. In summary, a report on the quality assurance review includes: ● a brief overview of the PIE audit firm; ● an explanation of the quality assurance review process; ● the scope of IAASA’s quality assurance review; ● an overall review of the PIE audit firm’s quality; ● the results of the quality assurance review; and ● the results of follow-up procedures.

Improved governance and reporting required to promote sustainability and trust in business Companies need to improve their governance practices and reporting if they are to demonstrate their positive impact on the economy and wider society, according to a new report from the Financial Reporting Council (FRC). While changes to the 2018 UK Corporate Governance Code raised the bar considerably and have led to some high quality reporting, greater focus is needed on longer term sustainability, including stakeholder engagement, diversity and the importance of corporate culture. These changes are expected to take time to bed in. The UK Corporate Governance Code was updated to help build trust in business by forging strong relationships with key stakeholders. It called for companies to focus on long term sustainability by aligning purpose, strategy and culture, promoting integrity and valuing diversity. The FRC reviewed reporting against the 2016 UK Corporate Governance Code and assessed FTSE 100 “early adopters” of the revised 2018 Code. The 2018 Code came into force in 2019 and all premium listed companies will report against it this year. The FRC’s analysis found some good examples of reporting by companies that are increasingly using incentives relating to non-financial matters and are grounded in long term strategy. Many companies are grappling with defining purpose and what an

effective culture means, with too many substituting slogans or marketing lines for a clear purpose. There is insufficient consideration of the importance of culture and strategy, or the views of stakeholders. Following the FRC’s 2016 report on culture, companies should be commenting on culture and now explain how they are monitoring and assessing it. There is also limited reporting on diversity. Those companies that did report well had clear plans to meet targets – beyond just gender – and understood the long term value of diversity. The use of engagement surveys was portrayed by many as an effective tool to achieve insight on employee engagement and culture. While these can help, they should not be used in isolation. Companies must be able to demonstrate that the engagement methods used are effective in identifying issues that can be elevated to the board and how this affects company decisions. The FRC’s Chief Executive, Sir Jon Thompson said: “While there are examples of high quality governance reporting from ‘early adopters’, looking ahead we expect to see much greater insight into governance practices and outcomes reporting on a range of key issues from diversity to climate change. “Concentrating on achieving box ticking compliance, at the expense of effective governance and reporting, is paying lip service to the spirit of the Code and does a disservice to the interests of shareholders and wider stakeholders, including the public. “Where companies depart from the provisions of the Code, they need to provide compelling explanations for why non-compliance is the right approach for their particular company.” Good quality explanations should be specific to individual companies, improve transparency and provide important insight into a company and the way it is run, often explaining risks and any mitigating actions. Explanations from a small number of companies continually fail to meet the Code’s Provision for board composition in terms of director independence were particularly poor. In the future, companies also need to ensure they apply the Code’s principles in a manner shareholders’ can more easily evaluate, with a much greater focus on activities and outcomes reporting. This should set out the effectiveness of the board in decision making, and how this has led to sustainable benefits for shareholders, employees and wider stakeholders. ISSUE 109 | AIAWORLDWIDE.COM

Technical FRC updates aid to audit committees in evaluating audit quality The Financial Reporting Council (FRC) has issued an update of its Practice Aid to assist audit committees in evaluating audit quality in their assessment of the effectiveness of the external audit process. The update takes account of developments since the first edition was issued in 2015, including revisions of the UK Corporate Governance Code, the requirement for all public interest entities (PIEs) to conduct a tender at least every 10 years and rotate auditors after at least 20 years, and increasing focus generally on audit quality and the role of the audit committee. It also takes account of commentary from audit committees suggesting how the Practice Aid could be more practical in focus and more clearly presented. The framework set out in the Practice Aid focuses on understanding and challenging how the auditor demonstrates the effectiveness of key professional judgments made throughout the audit and how these might be supported by evidence of critical auditor competencies. New sections have been added addressing the audit tender process, stressing that high audit quality should be the primary selection criterion, and matters to cover in audit committee reporting. As well as illustrating a framework for the audit committee’s evaluation, the Practice Aid sets out practical suggestions on how audit committees might tailor their evaluation in the context of the company’s business model and strategy; the business risks it faces; and the perception of the reasonable expectations of the company’s investors and other stakeholders. These include examples of matters for the audit committee to consider in relation to key areas of audit judgment, and illustrative audit committee considerations in evaluating the auditor’s competencies. The FRC encourages audit committees to use the Practice Aid to help develop their own approach to their evaluation of audit quality, tailored to the circumstances of their company. Audit committees are encouraged to see their evaluation as integrated with other aspects of their role related to ensuring the quality of the financial statements – obtaining evidence of the quality of the auditor’s judgments made throughout the audit, in identifying audit risks, determining materiality and planning their work accordingly, as well as in assessing issues. AIAWORLDWIDE.COM | ISSUE 109

EUROPE EU enforcers must monitor closely new reporting standards The European Securities and Markets Authority (ESMA), the EU’s securities markets regulator, has published the priorities that European enforcers will consider when examining the 2019 annual financial reports of listed companies. The 2019 enforcement priorities reflect the changes introduced in recent financial reporting standards and consider issues identified by national competent authorities (NCAs) through their enforcement activities in 2019. The common enforcement priorities related to 2019 IFRS financial statements include: ● specific issues related to IFRS 16 Leases, given the need to exercise significant judgment in its application, particularly in determining the lease term and the discount rate; ● improvement of the information provided under standards that became applicable in 2018 IFRS financial statements; ● IFRS 9 Financial Instruments for credit institutions – relating to expected credit losses and significant increase in credit risk, and IFRS 15 Revenue from Contracts with Customers for corporate issuers, which should be of focus where revenue recognition is subject to significant assumptions and judgments; and ● the application of IAS 12 Income regarding deferred tax assets arising from unused tax losses. Steven Maijoor, ESMA Chair, said: “The provision of good quality financial information by listed issuers in their financial statements is a key element in building investors’ confidence in European capital markets and the priorities regarding financial information reflect key changes in the IFRS standards in 2019 which impact on issuers and financial markets. “We continue to stress the importance of providing investors with material, complete, balanced and accessible information on non-financial matters, including environmental matters and climate change. Issuers should also improve the transparency and quality of reported information in various areas, most notably on the key non-financial performance indicators used and on the non-financial disclosure frameworks adopted.

“The consistent application of reporting standards across the EU is essential to enhancing investor protection and promoting stable and orderly markets.” ESMA also highlights the potential implications of the transition from one interest rate benchmark rate to another on financial reporting and the importance of timely disclosure of its consequences. It encourages issuers to prepare for the timely implementation of recent IFRS 9 amendments which address hedge accounting implications, and monitor developments in the EU endorsement process which is expected to be finalised in time for the 2019 accounts. Key non-financial information issues and alternative performance measures (APMs) ESMA highlights the principles of materiality and completeness of disclosures which should guide the reporting of non-financial information, including the importance of reporting information in a balanced and accessible fashion. This should include disclosures of non-financial information focusing on: environmental and climate change-related matters; key performance indicators; the use of disclosure frameworks; and supply chains. In addition, ESMA reminds issuers of the importance of providing adequate disclosures to enable users to understand the rationale for, and usefulness of, any changes to their disclosed APMs, especially regarding changes due to the implementation of IFRS 16. Other issues ESMA expects issuers to undertake all necessary steps to comply with the new European Single Reporting Format (ESEF) requirements which will begin to apply with the 2020 annual financial statements. Finally, it highlights the importance of disclosures analysing the possible impacts of the decision of the United Kingdom to leave the European Union. Next steps ESMA and European national enforcers will monitor and supervise the application of the IFRS requirements, as well as any other relevant provisions outlined in the statement, with national authorities incorporating them into their reviews and taking corrective actions where appropriate. ESMA will collect data on how EU listed entities have applied the priorities and will report on findings regarding these priorities in its report on the 2020 enforcement activities.

Technical UNITED STATES 2020 GAAP financial reporting taxonomy and SEC reporting taxonomy now available The Financial Accounting Foundation (FASB) has announced the availability of the 2020 GAAP Financial Reporting Taxonomy and the 2020 SEC Reporting Taxonomy (SRT), along with the new 2020 XBRL US DQC Rules Taxonomy (DQCRT). The 2020 taxonomy contains updates for the accounting standards and other recommended improvements. The 2020 SRT contains improvements to the dimensional elements whose underlying recognition and measurement are not specified by the GAAP but are elements commonly used by GAAP filers. The DQCRT is a FASB taxonomy that includes in a derivative format XBRL US DQC Rules (DQCR) published by the XBRL US as validation checks for XBRL filings with the SEC. The purpose of the DQCRT is to improve exposure and access to and thereby compliance with the DQCRs. This initial DQCRT implementation is limited to three DQCRs.

Over time, additional DQCRs may also be included. DQCRT files must not be referenced directly by any EDGAR submission, just as many GAAP Taxonomy linkbases must not be referenced in an EDGAR submission. The 2020 GAAP Financial Reporting Taxonomy and 2020 SEC Reporting Taxonomy are expected to be accepted as final by the SEC in early 2020. The taxonomies are available on the FASB’s Taxonomy (XBRL) pages and through the following links: 2020 GAAP Financial Reporting Taxonomy, 2020 SRT, and 2020 XBRL US DQC Rules Taxonomy. Questions about using the taxonomies and creating and submitting XBRL tagged interactive data files in compliance with SEC rules should be directed to the SEC. SEC details and guidance are available at the SEC’s portal on Structured Data.

Small Business Advisory Committee Meeting recap The Small Business Advisory Committee (SBAC) met on 17 December 2019. At the meeting, the SBAC members provided input on the following topics: ● EITF Issue No. 19-C, “Warrant

Modifications: Issuers’ Accounting for Modifications of Equity Classified Freestanding Call Options That Are Not within the Scope of Topic 718, or Topic 815”: SBAC members shared their experiences related to warrant modification transactions and acknowledged the diversity in practice. However, members expressed concerns about requiring the same accounting for different types of warrant modification transactions and suggested that the guidance should require consideration of the nature and fact patterns in determining appropriate accounting. ● Disclosure Framework: Disclosures – Interim Reporting: SBAC members discussed the complexity associated with the judgment involved in defining material changes and significant events in the context of interim reporting. Members also shared their views on information that should be disclosed on a quarterly basis. SBAC members also received updates on the following projects: ● simplifying the balance sheet classification of debt; and ● distinguishing liabilities from equity (including convertible debt).

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