International Accountant 110

INTERNATIONAL

ACCOUNTANT

MARCH/APRIL 2020

Spring Budget 2020: tackling coronavirus Study from home with Achieve Accounting standards: decisions, decisions...

Money laundering: all you need to know

ISSUE 110

Audit Tr a i n i n g Offices Tr a i n i n g t h e n e x t generation of auditors B y b e c o m i n g a n A I A A p p r o v e d A u d i t Tr a i n i n g O f fi c e , y o u a r e c h o o s i n g to set your practice apar t from the competition; you are also choosing to provide your trainees with the most relevant and appropriate q u a l i fi c a t i o n s t o s t u d y i n o r d e r t o b e c o m e a q u a l i fi e d a u d i t o r.

W h y B e c o m e a n A p p r o v e d A u d i t Tr a i n i n g O f fi c e ?

Cost Effective Approach Attract and Retain Staff Ongoing Support and Guidance International Recognition Training Office Certification

CONTENTS

In this issue Contributors 2

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Meet the team

News and views

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AIA news

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Guidance for companies and auditors during COVID-19 AIA statement on coronavirus (COVID-19)

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6 Accounting standards Students 13 Current issues in auditing: part 2 The IFAC framework for audit quality provides a comprehensive overview of the relevant factors at an engagement, firm and national level.

Achieve 6

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Study from home with Achieve The unprecedented restrictions due to COVID-19 are affecting us all, but Achieve can help you to continue your studies from a distance.

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Decisions, decisions While some insurers started assessing the impact of both IFRS 17 and IFRS 9 early on, and are now progressing with implementation, many firms still have key decisions to make. Barbara Jaworek (Moody’s Analytics) asks why these standards remain at the top of the agenda for finance teams.

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8 Tax schemes

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High net worth individuals The tax avoidance strategies used within the UK’s football industry have recently come under significant HMRC scrutiny.

Miles Dean (Anderson Tax) takes a look at the role that tax schemes play in the football industry.

Money laundering Spring Budget 2020

A guide to the key tax announcements With the massive impact that the coronavirus is playing in our lives, the Budget turned into something which none of us could have foreseen.

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

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

International Accountant Staithes 3, The Watermark, Metro Riverside, Newcastle Upon Tyne NE11 9SN United Kingdom

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

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AML changes Accountants play an important role in keeping citizens and society safe from money laundering and terrorist financing.

David Potts (AIA) highlights all you need to know about changes to the UK money laundering regime.

Subscribe to International Accountant subscriptions@aiaworldwide.com

Digital transformation

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Dates for your diary

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The technological maze How can accountants navigate the maze of technology that faces them during digital transformation initiatives? Jules Carman (Sage) asks how to go about deciding which technology your business needs.

Upcoming events

Technical 29 Global updates

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AIA does not guarantee the accuracy of statements made by contributors or advertisers or accept responsibility for any views which they express in this publication.

ISSN: 1465-5144 © Copyright Association of International Accountants

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Editor’s welcome

Contributors to this issue

Editor’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

T

his is an unprecedented time in our history as coronavirus (COVID-19) continues to affect every corner of the globe.

I hope that everyone within the AIA network is staying safe and is putting their health and wellbeing first.

The COVID-19 pandemic has impacted every element of people’s lives, including our health and the way we live our lives, our interaction within our families and communities, the businesses we rely upon and the global economy. As we all continue to navigate our way through these unique and evolving challenges, we want you to know that the AIA is here to guide and support you, as you in turn guide and support the wider business community.

Supporting the small business community, the backbone of our economy, is one of the AIA’s core drivers and more than ever, we want to help you by providing timely, relevant information in this fast-changing situation.

Members have access to the AIA’s COVID-19 online resource, which we are updating daily to give you not only information, but simple and practical

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Rachel Rutherford Editor, IA

guidance on how best to advise your clients, covering areas such as tax technical and practice management tips. We are also rapidly making adjustments to the services we offer to ensure that learning and study can continue in a safe environment and will continue to develop to meet your needs at this time.

With the massive impact that the coronavirus is playing in our lives, the Budget turned into something which none of us could have foreseen. In this issue we have a guide to the key tax announcements made within the Spring Budget (see page 8), and for UK readers the AIA Tax Facts Card.

We also examine the role that accountants can play in keeping citizens and society safe from money laundering and terrorist financing (see page 18), look at how the tax avoidance strategies used within the UK’s football industry have recently come under significant HMRC scrutiny (see page 16), and consider how accountants can navigate the maze of technology that faces them during digital transformation initiatives (see page 26).

Stay safe and if you need further guidance or support please get in touch with AIA in the usual way.

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.

DAVID POTTS

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

BARBARA JAWOREK

Barbara Jaworek, ACCA works as a Director in Moody’s Analytics focusing on development and support of the RiskIntegrity solution for IFRS 17. She is an accounting expert with 13 years’ experience of supporting financial and regulatory reporting of insurance companies in various roles, including work for the IASB and EIOPA. In her current role, she is responsible for designing the reporting solution that is compliant with the newest requirements of IFRS 17 and she helps to accommodate it to clients’ accounting needs.

ISSUE 110 | AIAWORLDWIDE.COM

News CORONAVIRUS

CORONAVIRUS

FRC guidance for companies COVID-19 business and auditors during the support COVID-19 crisis

The UK government has announced a series of measures to significantly increase the economic support available to businesses and workers during coronavirus, including loans and guarantees to support firms and help them manage staff wages and cashflow through this period.

Detailed guidance is available at www.businesssupport.gov.uk.

In Ireland, the Revenue has issued COVID-19 information and advice for taxpayers and agents, which is available at www.revenue.ie/en/ corporate/communications/covid19/ index.aspx.

The Financial Conduct Authority (FCA), Financial Reporting Council (FRC) and Prudential Regulation Authority (PRA) have announced a series of actions to ensure that information continues to flow to investors and to support the continued functioning of the UK’s capital markets.

The FRC has published guidance for companies preparing financial statements and a bulletin for auditors covering factors to be taken into account when carrying out audits during the current COVID-19 crisis.

The guidance for companies highlights the need to agree new working practices if the usual forms of management and control are disrupted, and reminds Boards of the detailed consideration they need to give to capital maintenance. It addresses the difficulties companies currently face in making forward looking judgments in their financial statements; for example, in strategic reports and viability statements, with a focus on appropriate disclosure of material uncertainties and going concern issues.

AIAWORLDWIDE.COM | ISSUE 110

The bulletin reminds auditors that they must obtain sufficient, appropriate audit evidence to support their audit opinion. However, in the current circumstances, they will need to consider the use of alternative procedures, including remote working and technology to obtain that evidence. This will not work in all circumstances and it is likely that there will be more modified opinions arising from the impact of COVID-19 on businesses.

In response to the unprecedented challenges raised by the crisis, the FRC will, where possible, delay or extend the deadlines for consultations. It has paused for at least a month writing to companies following its review of their annual reports and accounts. It is considering how it can adjust its audit quality review work to reduce demands on audit firms; and it will pause for at least a month requests to firms on supervisory initiatives, such as operational separation of audit practices.

Detailed guidance is available at www.frc.org.uk.

Off-payroll working rules reforms postponed until 2021

istockphoto/Sezeryadigar

istockphoto/da-kuk

OFF-PAYROLL WORKING

Reforms to off-payroll working rules have been delayed by 12 months as part of the government’s COVID-19 economic response package.

The rules, which ensure two people sitting side by side doing the same work for the same employer are taxed in the same way, will now come into effect on 6 April 2021 instead of 6 April this year. Off-payroll working rules, known as IR35, were introduced in 2000 to ensure that someone working like an employee, but through their own limited company, pays broadly the same tax as someone employed directly.

The new introduction date will be legislated in the upcoming Finance Bill.

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News FINANCIAL STATEMENTS ADMINISTRATION

CEAOB issues a statement on the impact of COVID-19 on audits Ian Tuttle/Shutterstock

BrightHouse and Carluccio’s enter administration

The Italian restaurant chain, Carluccio’s and rent-to-own retailer BrightHouse have gone into administration, putting about 4,400 jobs at risk, in the first sign of the government’s coronavirus social distancing measures hitting the high street.

Geoff Rowley of FRP Advisory, who was appointed administrator of Carluccio’s, said he was hoping to mothball the business under the government scheme which would provide 80% of wages to its existing employees.

The chain’s 73 branches are already closed due to the government’s lockdown on all restaurants, cafes, pubs and non-essential retail, but it is hoped that they will find a buyer for some or all of the business.

Mr Rowley said: “We are operating in unprecedented times and the issues currently facing the hospitality sector following the onset of COVID-19 are well documented. In the absence of being able to continue to trade Carluccio’s, in the short term, we are urgently focused on the options available to preserve the future of the business and protect its employees.”

BrightHouse’s stores were also already closed under the government’s coronavirus control measures; however, administrators have stated that the business would continue to deliver smaller items to homes and, where possible, would continue servicing items already in people’s homes.

Chris Laverty, Andrew Charters and Sarah O’Toole of Grant Thornton, who were appointed as joint administrators, said BrightHouse would not be making new rent-toown or cash loan deals. They said that existing clients should continue to make payments in the usual way.

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The Committee of European Audit Oversight Bodies (CEAOB) has issued a statement regarding the impact of COVID-19 on the audits of financial statements. The statement highlights certain areas of importance for audits in the current crisis.

Obtaining sufficient appropriate audit evidence

The CEAOB and National Competent Authorities (NCAs) underscore that it is the auditor’s responsibility to obtain sufficient and appropriate evidence before issuing their audit report. It is acknowledged that access and travel restrictions, as well as the limited availability of personnel due to health considerations, may impair the auditor’s ability to obtain sufficient appropriate audit evidence.

For group audits, both the group engagement partner and component auditors should adapt their audit approach to the current circumstances. Auditors are advised to explore alternative means, including technology, to the extent possible. The completion of high quality audits under the current circumstances may require additional time, which may impact reporting deadlines. Consequently, auditors may need to postpone the issuance of their audit report, and where this is not possible or not likely to resolve the issue, auditors may need to modify their audit report to reflect that they have not been able to obtain the necessary audit evidence.

Going concern

Auditors must pay close attention to the entity’s assessment regarding its ability to continue as a going concern. Given the current circumstances, uncertainty around the forecasts for economies worldwide, as well as increased uncertainty around the outlook for many entities, may pose a challenge to the auditors’ assessment. Auditors should also consider the impact of their evaluation of management’s assessment of the entity’s ability to continue as a going concern on the audit report and the communication with those charged with governance. There also may be

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cases where an entity might need to apply liquidation-based accounting.

Subsequent events

For most entities, the crisis emerged after the end of their financial year. Auditors will need to assess whether the disclosures provided by the entity on the impact, both qualitatively and quantitatively, of the COVID-19 outbreak on its activities, financial situation and future economic performance is appropriate in view of the applicable financial reporting framework, and may need to include a related emphasis of matter paragraph in their audit report. Where this is not the case, auditors may need to modify their audit reports accordingly.

Reporting and communication

Auditors are reminded to pay appropriate attention to assessing whether the description of the entity’s financial position, the principal risks and uncertainties that it faces and its likely future development is consistent with the knowledge they have obtained as part of their audit work. Auditors are reminded that it is important that they communicate timely and appropriately with the entity’s management and those charged with governance about the impact of the COVID-19 outbreak on their audit work, as well as on the entity and its financial statements. Where appropriate, auditors may decide to include a key audit matter in their audit report.

They are also reminded that the applicable standards, the Audit Regulation ((EU) N°537/2014 of the European Parliament and of the Council of 16 April 2014), or local requirements may require that they report these matters to the relevant authorities or other bodies outside of the entity.

ISSUE 110 | AIAWORLDWIDE.COM

AIA News

AIA

NEWS

AIA statement on coronavirus (COVID-19)

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.

AIAWORLDWIDE.COM | ISSUE 110

Students

AIA exams scheduled to take place in May 2020 have been cancelled across all centres.

The next exam session will take place in November 2020; any candidate registered for May’s session will automatically be transferred.

To ensure that students who have partially completed the current Professional Qualification (Certificate in Accountancy, Diploma in Accountancy or Professional Diploma in Accountancy) are not disadvantaged by these changes, the new Professional Qualification will now be examinable from November 2021 with more details being provided later this year.

All students should refer to the AIA Withdrawal and Switchover Policy for the latest guidance which is available in the Secure Document Library via MyAIA. Students affected by the closure of study centres should contact AIA’s Exams Team to discuss alternative study provision at the earliest possible time (email: exams@aiaworldwide.com).

Members

Our members play an essential role, especially in uncertain times, advising and supporting businesses on a range of financial matters.

To support members at this time of crisis, AIA will continue to update our guidance and resources regularly, as well as signposting to sources of business

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AIA COMMITTEE

We have been continually monitoring the impact of the coronavirus outbreak and have taken steps to ensure minimal disruption to our global operations, whilst safeguarding the health and wellbeing of our staff, members and partners.

Following government advice, we have taken steps to adjust AIA’s operations and react to this rapidly evolving situation. support from government and other key organisations.

All events – conferences, seminars and member networking – have been cancelled until further notice.

We realise that members may be looking for alternative resources that can be delivered in a safe environment and will be extending the number of online courses and webinars available to allow continuity of learning.

AIA’s annual general meeting has also been postponed.

AIA Operations

AIA has modified working practices and staff will be working remotely from home until further notice.

All staff remain contactable by phone and email. However, all non-essential travel has been cancelled and alternative arrangements will be made for meetings.

We are diligently following official guidance from organisations such as the World Health Organisation, NHS and UK Foreign and Commonwealth Office and urge members to refer and adhere to policies designed to reduce the transmission of the virus in their own jurisdiction. We remain focused on member priorities and will do all we can to minimise disruption to services during this time.

Additional resources can be accessed at: https://www.aiaworldwide.com/ covid-19-guidance-resources.

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ACHIEVE

Study from home with Achieve Writing

Š istockphoto/monkeybusinessimages

The unprecedented restrictions due to COVID-19 are affecting us all, but Achieve can help you to continue your studies from a distance.

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ISSUE 110 | AIAWORLDWIDE.COM

A

s the coronavirus (COVID-19) pandemic sweeps the globe, we must all appreciate that we are now likely to face unprecedented restrictive measures upon our daily lives over the coming months in order to defeat this invisible enemy.

Unfortunately for the AIA and our loyal students following government advice, one of these unprecedented measures – made to safeguard the health and wellbeing of our students and staff – has been the cancellation of the upcoming May 2020 exams. This is an unwanted first in our 92 year history during peacetime.

All candidates registered for May’s exam session will automatically be transferred to our next session in November 2020.

However, rest assured that all is not lost during this time, as we are dedicated to minimising disruption for our students wherever possible.

We appreciate that many study centres will be closed for a prolonged period, so we would urge you to take full advantage of the AIA’s interactive distance learning programme, Achieve.

Make the most of Achieve

Achieve has been designed and developed specifically for AIA students in collaboration with leading publisher of study materials for professional exams, BPP Learning Media.

So whilst you are unable to attend your regular study centre, Achieve will provide you with an affordable and flexible study option – alleviating any additional stresses, and providing you with a variety of tools and resources to optimise your chances of exam success.

Achieve will help to guide your learning and provide you with access to advice, support and feedback from a specialist team of e-tutors, ensuring you consistently get the maximum benefit from your study. The programme will also offer you mock exams with written feedback, tutor marked practice questions, free to attend webinars, a course e-book and more.

e-Tutors

As an Achieve student, you will have access to e-tutors who specialise in a variety of fields, including accounting, finance and legal. The e-tutors form part of the study support team who are on hand to provide answers to your technical queries, feedback on your marked practice questions, and bespoke exam advice following your mock exam.

Practice questions

Practice makes perfect, so the programme offers you the opportunity to sit up to four AIAWORLDWIDE.COM | ISSUE 110

ACHIEVE

We appreciate that many study centres will be closed for a prolongued period, so we would urge you to take full advantage of the AIA’s interactive distance learning programme, Achieve. practice questions during each study period.

These practice questions are designed to test and reinforce your knowledge at key intervals during the programme. Each practice question is marked by your e-tutor and in-depth feedback is provided.

Webinars

As part of the programme, you will have the opportunity to attend a series of live webinars hosted by a selection of our e-tutors. The webinars will aim to guide you through how to approach an exam question successfully and give you vital advice as to what the examiners are looking for in your exam responses. The webinars also allow you the opportunity to ask questions face-to-face with your e-tutor.

Mock exam

An integral part of the Achieve programme is the mock exam. The mock exam takes place six weeks before the “real thing”, offering you the opportunity to hone your exam techniques. Your e-tutor will mark your exam and provide you with written feedback, allowing you a minimum of four weeks to focus any additional revision on areas of potential weakness.

All these tools will undoubtedly enhance your chances of success in the November 2020 exams, whilst your personalised study planner will allow you to maintain that healthy work/life balance which may be increasingly difficult at this present time.

Enrol onto Achieve by 31 May and you will also be eligible to a 25% discount, so don’t delay. Become an Achieve student today.

We are so confident that the Achieve programme will help you deliver the exam results you deserve 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*.

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. ●

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SPRING BUDGET 2020

A guide to the key tax announcements With the massive impact that Coronavirus is playing in all our lives, the Budget turned into something which none of us could have foreseen.

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n Wednesday 11 March 2020, Chancellor Rishi Sunak delivered his first Budget, having held the post for less than a month.

It must have been a Budget that was being tweaked right up until the morning of the speech, given the turmoil in which the country finds itself. A month ago, we were expecting Sajid Javid to present his first Budget speech focusing on a long-term post‑Brexit economic plan with the benefit, for the first time in a while, of a substantial government majority. However, the impact of coronavirus loomed large in this Budget, with the first part of the chancellor’s speech dedicated to the government’s response to the virus, including supporting individuals who cannot work,

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reliefs from business rates for a wide range of businesses, expanded time to pay arrangements for taxes, and the promise to fund the NHS to deal with the crisis. It is pretty rare to hear a chancellor promise to provide funding “whether its millions of pounds or billions of pounds … whatever it needs, whatever it costs” and it is a measure of the seriousness with which the government is tackling the crisis (even if opponents argue that this level of additional funding would not be required if earlier cuts had not been made).

Putting the current public health and consequent economic pressure to one side, the remaining focus of the Budget was on “getting it done”, with Mr Sunak’s enthusiasm for this mantra reaching fever pitch at times.

That motto was repeated throughout the ISSUE 110 | AIAWORLDWIDE.COM

SPRING BUDGET 2020

Key announcements

Announcements with immediate effect include: ●● a reduction in the lifetime limit for entrepreneurs’ relief; ●● changes to the rate and details of the structures and buildings allowance; and ●● an adjustment to the bank surcharge rules.

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speech, which set out the government’s plan for prosperity, including: “levelling up”, which encompassed opening treasury offices in all four countries of the UK and moving 22,000 civil service jobs outside of London; investments to encourage business growth, including additional government loan support and research and development; a raft of climate policies; infrastructure development including rail plans, roads and filling potholes; and further measures to support the NHS. From a tax perspective, there were not a huge number of surprises. The government committed to maintain a “sustainable and efficient businessfriendly tax environment”. Entrepreneurs (or at least those with relatively small businesses) will be relieved that entrepreneurs’ relief has not been abolished altogether, only targeted. Meanwhile, other expected measures have been confirmed, such as the introduction of the digital services tax, which many had predicted might be delayed given the views of the American government and the importance of the United States in our postAIAWORLDWIDE.COM | ISSUE 110

Other key announcements include: a review of the regulation and taxation of funds; a new notification requirement for large businesses; confirmation that the digital services tax will apply from 1 April 2020; confirmation of the introduction of off-payroll working rules from 6 April 2020; new measures to further target promoters of tax avoidance schemes; legislation to be included in FB 2020 to clarify the application of allowances and reliefs in the calculation of top slicing relief for life assurance policy gains; confirmation that draft legislation published in July 2019 relating to CGT private residence relief reforms will be contained unamended in FB 2020; and introduction of a 2% surcharge on SDLT for non-UK residents purchasing residential property in England and Northern Ireland from 1 April 2021.

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Brexit trade plans. Between them, the decision to reverse the planned corporation tax cut and the reduction to entrepreneurs’ relief is expected to amount to increased revenue of over £38bn between 2020/21 and 2024/25, which has enabled some of the spending announcements to be made within the government’s fiscal rules.

The other significant revenue raiser is additional investment in HMRC to enable it to improve tax compliance, which is expected to raise £3.8bn over the same period.

The chancellor also confirmed that we can expect another Budget in the Autumn. By that time, the impact of coronavirus will, hopefully, be fading for most and the outcome, or at least direction, of the future relationship between the EU and the UK will be better understood, such that we might expect to see more long-term tax policy announcements addressed at that time.

ATED annual chargeable amounts

ATED will rise by 1.7% from 1 April 2020 in line with the September 2019 CPI.

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SPRING BUDGET 2020 Income tax allowances 2019/20

2020/21

£29,600

£30,200

Maximum amount of married couple’s allowance

£8,915

£9,075

Minimum amount of married couple’s allowance

£3,450

£3,510

£2,450

£2,500

Personal allowance Income limit for married couple’s allowance (this allowance is reduced by £1 for every £2 of income above this limit) Married couple’s allowance for those born before 6 April 1935

Blind person’s allowance Blind person’s allowance

Capital gains tax rates and allowances

to 17%. The corporation tax rate will therefore remain at 19% for financial years 2020 and 2021. According to the notes to the Finance Bill resolutions, FB 2020 will contain provisions to charge corporation tax for both financial years (contrary to the usual practice of only covering the coming year), to set the rate for both years at 19% and to repeal F(No. 2)A 2015 s 7(2), which had previously reduced the 2020 rate to 17%.

The government has announced that the CGT annual exempt amount will be increased from £12,000 to £12,300 for individuals and personal representatives and from £6,000 to £6,150 for trustees of settlements for the tax year 2020/21.

The annual exempt amount is increased annually to keep pace with inflation in line with rises in the consumer prices index (CPI). CGT rates remain unchanged from the 2019/20 tax year.

Digital services tax (DST)

Climate change

The government confirmed that it is pushing ahead with introducing the new 2% tax on the revenues of certain digital businesses which derive value from UK users from 1 April 2020, as planned. There had been some speculation over whether the government would drop the measure as a result of US hostility (as seen in the case of France’s equivalent digital tax) and given the importance of getting a beneficial post-Brexit trade deal with the US. The new tax will, however, be legislated for in FB 2020.

As expected, there was a focus on climate change and meeting the UK’s net zero commitment. A number of measures were announced, including: ●● an increase in gas rates under the climate change levy (in 2022/23 and 2023/24); ●● an extension to the climate change agreement scheme (this allows businesses to reduce their climate change levy bill in exchange for improving energy efficiency); ●● a freeze in the carbon price support rate; ●● legislation in FB 2020 to prepare for a UK emissions trading system and a consultation on the design of a carbon emissions tax; ●● a consultation on aviation tax reform; and ●● measures and exemptions to support the use of zero emission vehicles.

Employment allowance

The employment allowance will be increased from £3,000 to £4,000 from 6 April 2020. This will enable eligible businesses to claim a greater reduction on their secondary class 1 NICs liability.

Corporate capital loss restriction

The government has confirmed that, as announced at Budget 2018, companies’ use of carried-forward capital losses is to be restricted to 50% of their capital gains arising in an accounting period, subject to an allowance permitting unrestricted use of up to £5m of capital or income losses per year. The measure will be in FB 2020 and will apply to carried forward capital losses that are used to offset gains accruing on or after 1 April 2020 (although anti-forestalling measures took effect from 29 October 2018). The restriction will be incorporated within the existing rules imposing a corporate income loss restriction that were introduced from April 2017.

Corporation tax rate

As pre-trailed, the government is cancelling the reduction in the corporation tax rate from 19%

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Entrepreneurs’ relief

The employment allowance will be increased from £3,000 to £4,000 from 6 April 2020.”

The Budget included the widely anticipated restriction to the availability of entrepreneurs’ relief.

The measure fell short of full abolition, with the chancellor instead opting for a reduction in the lifetime limit for gains qualifying for entrepreneurs’ relief from £10m to £1m. The new limit applies to qualifying disposals made on or after 11 March 2020.

Homeworking: flat rate deduction

The current maximum flat rate income tax deduction available to employees to cover their additional household expenses is £4 per week. This will increase to £6 per week from 6 April 2020.

Income tax rates and allowances

The government has confirmed that income tax rates and thresholds remain unchanged from the ISSUE 110 | AIAWORLDWIDE.COM

SPRING BUDGET 2020 2019/20 tax year. This follows the increase in the higher rate threshold to £50,000 from April 2019, one year earlier than originally anticipated. The following increases to income tax allowances will take effect from 6 April 2020:

Inheritance tax rates and allowances

The rates of IHT will remain unchanged from the 2019/20 tax year. The IHT nil rate band (NRB) remains frozen at £325,000. The maximum available residence nil rate band (RNRB) will increase from £150,000 in the current tax year to £175,000 for the 2020/21 tax year. This completes the phasing in of the RNRB, which began in the 2017/18 tax year. It is expected that the NRB and RNRB will both be increased in line with the CPI from 6 April 2021.

Insolvency: HMRC to become preferential creditor

FB 2020 will make HMRC a secondary preferential unsecured creditor (rather than a non-preferential unsecured creditor) in respect of income tax, employee NICs and student loan repayments collected through PAYE, construction industry scheme (CIS) deductions, VAT and any penalties or interest arising from such taxes. Although this measure has already been announced and draft legislation has already been published, the commencement date and geographical scope of the measure has changed. This measure will take effect from 1 December 2020 (instead of 6 April 2020, as was originally intended) and will be extended to Northern Ireland.

Insolvency: tax abuse using company insolvencies

Pre-announced: From royal assent to FB 2020, HMRC will be able to issue joint liability notices to make directors and others involved in tax avoidance, evasion or phoenixism jointly and severally liable for the tax liabilities of a company (or to make members or shadow members jointly liable for the tax liabilities of an LLP) where the company or LLP is subject to an insolvency procedure.

Large business notification

The government has announced that, from April 2021, large businesses will be required to notify HMRC when they take a tax position that HMRC is likely to challenge. The government will also consult on the detail of the notification process. The policy will draw on international accounting standards, since many large businesses already follow those standards. Perhaps, for example, a business might be required to notify if it files on a basis which is different to that outlined in an HMRC manual.

Limited liability partnership (LLP) returns

FB 2020 will include legislation to confirm that LLPs should be treated as general partnerships under income tax rules. The legislation is intended to put the current position beyond doubt, rather AIAWORLDWIDE.COM | ISSUE 110

than create additional obligations, and will apply both retrospectively and prospectively. The effect is to affirm the deeming provisions that treat LLPs as partnerships and their members as partners with the effect that where an LLP has delivered a partnership return on the basis of operating “with a view to profit” and is then found to be operating “without a view to profit”, HMRC can still amend the LLP members’ returns based on the LLP return as originally submitted.

Loan charge

Pre-announced: The government is to implement numerous changes to the disguised remuneration loan charge rules, as confirmed in its response to Sir Amyas Morse’s independent loan charge review. Draft legislation to implement these changes was published on 20 January 2020 and 27 February 2020, and will be included in FB 2020. In addition, the government will shortly issue a call for evidence on further action to eradicate disguised remuneration schemes that continue to be used.

The government is to implement numerous changes to the disguised remuneration loan charge rules.”

NICs thresholds

Pre-announced: As announced in the Queen’s speech in December 2019, the primary threshold for class 1 (employee and employer) NICs will be raised from £8,632 a year (£166 a week) to £9,500 (£183 a week), effective April 2020. The lower profits limit, applicable to class 4 (selfemployed) NICs, will also rise to £9,500 from £8,632 from April 2020.

Non-UK resident SDLT surcharge

Following a consultation that closed on 6 May 2019, the government has announced that it will introduce a 2% SDLT surcharge for non‑UK residents purchasing residential property in England and Northern Ireland. The surcharge will apply from 1 April 2021 (subject to transitional provisions) and will be included in FB 2020/21.

Pensions contributions: annual allowance

The reason behind the government’s review of the annual allowance limit and the income thresholds at which the allowance is tapered has been to address concerns that senior clinicians were turning down additional work to avoid exceeding the income threshold and inadvertently exceeding the annual allowance. That would have resulted in an income tax charge. There was some speculation that the government might seek to limit any amendment to the annual allowance rules to members of the NHS pension scheme, but the Budget announcement increases the income threshold for annual allowance tapering purposes to all.

Given that the intention is to implement this reform from 6 April 2020, scheme administrators should modify their systems to reflect this change.

The effect of this reform will only be felt by individuals earning taxable income (excluding the value of pension savings) of £110,000 and

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SPRING BUDGET 2020 to the 0% starting tax rate will remain at its current level of £5,000 for the 2020/21 tax year; ●● the adult ISA annual subscription limit for the 2020/21 tax year will remain unchanged at £20,000; and ●● the annual subscription limit for junior ISAs and child trust funds will be increased from £4,368 to £9,000.

© Paul Grover/Shutterstock

VAT: cross-border measures

above. However, the government estimates that this measure should bring an estimated 98% of consultants and 96% of GPs below the tapered annual allowance threshold, that is approximately 250,000 people. In broad terms, contributions to a registered pension scheme can be made by or on behalf of an individual every year up to the annual allowance without incurring tax penalties.

Currently, the annual allowance is set at £40,000 a year, subject to some tapering for high incomes which was introduced from April 2016. The tapering currently applies to those with “adjusted incomes” (taxable income and pension savings) of over £150,000 and “threshold incomes” (taxable income excluding the value of pension savings) of over £110,000. The rate of reduction in the annual allowance (from the current maximum of £40,000) is by £1 for every £2 that the adjusted income exceeds £150,000, up to a maximum reduction of £30,000 at £210,000.

Pensions contributions: lifetime allowance The lifetime allowance will increase from £1,055,000 to £1,073,100 for the tax year beginning on 6 April 2020.

Savings

The following savings tax measures were announced: ●● the band of savings income that is subject

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Several cross-border VAT measures were announced: ●● An informal consultation with stakeholders will be launched over spring 2020 on the post-implementation period VAT (and excise) treatment of goods imported from overseas sellers. This will include consideration of low value imports and goods located in the UK when sold to UK customers. ●● From 1 January 2021, postponed accounting for VAT will apply to all imports of goods, including from the EU. As a result, registered business will be able to account for VAT on all imported goods on their periodic VAT return. ●● The government has published a consultation on the approach to VAT (and excise) treatment of goods carried across borders by passengers for their personal use. The consultation, which closes on 20 May 2020, will consider inbound allowances for excise and non-excise goods, outbound duty-free and tax-free sales and the VAT retail export scheme.

VAT: e-publications

From 1 December 2020, a zero rate of VAT will apply to e-publications to ensure that e-books, e-newspapers, e-magazines and academic e-journals are subject to the same VAT treatment as their physical counterparts. The government will consult on the details of the legislation. The UK has had the discretion to extend zero-rating to e-publications since November 2018, and the subject has recently been considered by the Upper Tribunal (in News Corp v HMRC [2019] UKUT 404 (TCC)) and Revenue & Customs Brief 1/2020.

VAT: partial exemption and the capital goods scheme

The government will publish in due course a response to the call for evidence (that closed on 26 September 2019) on simplifying the rules on VAT partial exemption and the capital goods scheme.

VAT: women’s sanitary products

From 1 January 2021, following enabling legislation in FA 2016 s 126, and following the implementation period, a zero rate of VAT will be charged on women’s sanitary products.

This report is derived from Lexis®PSL Tax and Private Client services, with additional material from Tolley. The Lexis®PSL Tax and Private Client services provide lawyers with practice notes and precedents, with links to trusted sources. ● ISSUE 110 | AIAWORLDWIDE.COM

STUDENTS

Š istockphoto/porcorex

Current issues in auditing: part 2

The IFAC framework for audit quality provides a comprehensive overview of the relevant factors at an engagement, firm and national level.

T

he IFAC framework “A framework for audit quality: Key elements that create an environment for audit quality� (see bit.ly/2TDUdlv) provides a comprehensive overview of the factors driving audit quality at an engagement, firm and national level. It reiterates much of previous guidance but contextualises the ideas within the debate around the increasing focus on public interest.

The problems in ensuring audit quality in audit firms are clearly not easy to resolve. The regulatory reviews into audit firms in the UK routinely highlight areas of weakness. The spate of recent high profile audit scandals in public interest entities would support the idea that these problems result in poor quality in practice. It is therefore vital that students understand how audit quality is promoted and safeguarded in audit firms. It is an area that is frequently examined in this paper.

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In the UK, there is evidence that audit firm quality procedures are not as robust as the regulator might prefer. There is also evidence that the audit firms have a tendency to underestimate problems with their own work. This is not entirely unexpected, as subconscious bias will tend to mean that auditors who work within a specific audit culture will not be able to appreciate its weaknesses and it is very difficult for an audit firm to be objective about its own quality. However, there is an increased focus from IFAC and national regulators on firm audit quality policies and monitoring of such.

IES 8 Professional competence for engagement partners

IES 8 Professional Competence for Engagement Partners Responsible for Statutory Audits of Financial Statements (revised) has applied since July 2016. This responds to the risk that, as engagement partner work becomes more

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STUDENTS Audit quality policies in audit firms

“Audit is vital to investor confidence in UK companies. Poor quality audit work remains unacceptably common.

“The latest audit inspections for 2018/19, which relate principally to audits of companies’ December 2017 year ends, found 75% of FTSE 350 audits reviewed were good or required no more than limited improvements, compared to 73% in 2017/18. No firms achieved the FRC’s audit quality target for 90% of FTSE 350 audits to meet this standard. Looking across all audit reviews completed at the largest seven firms, the outcome was 75% compared to 74% in 2017/18. In the published reports, each firm has committed to specific actions to enhance audit quality including, for the worst performers, detailed audit quality improvement plans. The FRC will assess the success of these initiatives and secure further action if necessary.

“The FRC found cases in all seven firms where auditors had failed to challenge management sufficiently on judgmental issues. This has been a recurring finding over a number of years and it can have many contributory factors. These include the mindset of audit teams, especially an absence of professional scepticism in evaluating evidence presented by company management, tight reporting deadlines and the complexity of the judgments involved. Familiarity is also a factor arising from longstanding audit relationships, particularly if the company comes to be considered as ‘the client’ for the auditor, rather than the shareholder or investor.”

Financial Reporting Council (2019), “Firms’ Audit Quality Monitoring” specialised, it is possible that they are not up to date in all aspects of current technical developments. As their practice administrative duties increase, it is also tempting to delegate the specialist CPD to other members of the firm.

This then renders their knowledge insufficient to support the complex evaluation of audit evidence to come to an appropriate audit opinion.

As the engagement partner review supporting the development of this opinion is a critical function of the audit, audit quality can only be assured where professional competence is assured. This becomes a specific issue where the audit partner is rotated as part of the maintenance of independence or as a client business becomes increasingly specialised.

As part of the firm’s policies on audit quality, there must be safeguards to ensure the professional competence of partners.

Professional judgment

Professional judgment remains a key area of concern to regulators. The Brydon Review recommends: “ARGA (the new UK Regulator) should revisit the existing definition of professional judgment with a view to strengthening, and demonstrating better, the use of judgment in audit.”

(Brydon, D (2019) “Independent Review into the Quality and Effectiveness of Audit”) The developing ideas in “ED Proposed Revisions to the Code to Promote the Role and Mindset Expected of Professional Accountants 2019” articulate key areas that all professional accountants should consider in order to ensure that professional judgment is robust.

These include the following: ●● Obtain and understand information relevant for making reliable judgments based on facts and circumstances known to them. ●● Make informed challenges of views developed by others.

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●● Be sensitive to the integrity of information, including the source of the information and the appropriateness of its presentation. ●● Withhold judgment pending thoughtful consideration of all known and relevant available information.

The ideas around acting with integrity have also been further developed to expand from the idea of fair dealing and truthfulness, and the requirement to be straightforward and honest in all professional and business relationships. Integrity also requires having the determination to act appropriately when confronting dilemmas and can include: ●● standing one’s ground when facing pressure to do otherwise during the course of performing professional activities; and ●● challenging others as and when appropriate, even when doing so creates potential adverse personal or organisational consequences.

IFAC Exposure Draft 17: Professional Judgment: Emphasis on understanding facts and circumstances

The issues raised above are consistent with the ideas I highlighted from IFAC Exposure Draft 17: Professional Judgment: Emphasis on understanding facts and circumstances. This is a key area of understanding for students at paper 15.

The paper is concerned with the application of understanding and judgment to scenarios raised in the questions and students are expected to show that they are applying professional judgment robustly.

Students should ensure that they are familiar with the debate around professional judgment and the ED 17 in their wider reading to contextualise the emerging debates around auditor conduct.

Professional scepticism

Professional scepticism continues to be an ongoing issue. The FRC in the UK regards the poor application of professional scepticism as core to compromising the ability of the auditor to robustly challenge management judgment and therefore a significant contributor to recent audit failures.

These include Carillion Plc, Thomas Cook Plc, Patisserie Valerie Plc and others.

IFAC is currently reviewing its guidance on professional scepticism in order to meet public expectations (see bit.ly/2PRUnF4) and ICAEW has recently published a really helpful and practical insight into professional scepticism in the practice (see bit.ly/3cCIoF5). This highlights some of the core challenges that compromise the ability of an auditor to maintain a sceptical mindset, including time pressure and a lack of situational context. As Boards strive to meet faster reporting deadlines, time pressure is increasing. As audit clients become more complex and audit teams work against deadlines without really becoming immersed in the business, commercial factors seem to be conspiring to make being sceptical more difficult.

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STUDENTS to ensure that this final paper in audit embeds this critical skill area in students.

As all student accountants will be aware, the last few years has not been an easy one for the reputation of the profession. In the UK, the collapse of Carillion Plc was followed by months of media comment and a government Select Committee Report into the corporate failure. This lack of confidence in the ethics of accounting firms has driven the review of the functioning of the audit market and may see some substantial changes to audit practices over the next few years. This focus on the conduct of auditing firms is by no means limited to isolated cases of Big Four audits of public interest entities causing concern – and the problems relate to audits throughout the world. It is against this evidence of concerns over the quality of accounting ethics that the new International Code of Ethics for Professional Accountants was published last year, coming into force on 15 June 2019; and in December 2019 the Brydon Review – Assess, Assure and Inform was published (see bit.ly/2wC4CGM).

There are a number of very important developments to the new 2018 Code which, if adopted correctly, should do much to resolve some of the problems in ethics evidenced in recent scandals and help to re-establish the reputation of the accounting profession. The International Ethics Standards Board for Accountants (IESBA) launched the Code in April 2018 with the statement: “While the fundamental principles of ethics have not changed, major revisions have been made to the unifying conceptual framework – the approach used by all professional accountants to identify, evaluate and address threats to compliance with the fundamental principles and, where applicable, independence.”

The substantive revisions to the Code are: ●● an enhanced conceptual framework, which includes extensive revisions to “safeguards” throughout the Code that are better aligned to threats; ●● strengthened independence provisions regarding long association of personnel with audit clients; ●● strengthened provisions relating to the offering and accepting of inducements, including gifts and hospitality that apply to both professional accountants in business (PAIBs) and professional accountants in public practice (PAPPs); ●● strengthened provisions dedicated to PAIBs, including: ●● a new section relating to pressure to breach the fundamental principles; and ●● revised provisions relating to the preparation and presentation of information; ●● clarifications about the applicability of PAIB provisions to PAPPs; ●● new material to emphasise the importance of understanding facts and circumstances when exercising professional judgment; and ●● new material to explain how compliance with the fundamental principles supports the AIAWORLDWIDE.COM | ISSUE 110

Exercise of Professional Judgment 120.5

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

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

Reasonable and Informed Third Party 120.5

A2A1. The reasonable and informed third party test is a consideration by the professional accountant about whether the same conclusions would likely be reached by another party. Such consideration is made from the perspective of a reasonable and informed third party, who weighs all the relevant facts and circumstances that the accountant knows, or could reasonably be expected to know, at the time the conclusions are made. The reasonable and informed third party does not need to be an accountant, but would possess the relevant knowledge and experience, to understand and evaluate the appropriateness of the accountant’s conclusions in an impartial manner.

IFAC (May 2017) exercise of professional skepticism in an audit or other assurance engagements.

Students are reminded that three articles regarding issues raised by the Code were published

by AIA in the Student Accounting in July, August and September 2019.

Other issues

The Brydon Review has proposed a wide range of reform ideas to resolve the ongoing issues, including: ●● the inclusion of fraud analysis in the audit remit; ●● a replacement of “a true and fair view” with “present fairly” in all material matters; ●● a greater focus on going concern; ●● a change to the composition of audit committees to include a wider range of members, not only those from the accounting profession, including those with an enquiring mind and able to make robust independent decisions; ●● an alteration in audit scope to extend to the directors’ statements regarding their discharge to the public interest; and ●● the development of a new professional body – the Corporate Auditing.

Whilst the detailed recommendations may be beyond the content of Paper 15, the issues that they debate represent the very real concerns and challenges facing the global profession and students should be familiar with these.●

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TAX SCHEMES

High net worth individuals Miles Dean Head of International Tax, Andersen Tax

© istockphoto/Rost-9D

Miles Dean takes a look at the role that tax schemes play in the football industry.

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TAX SCHEMES

I

t’s a funny old game, tax planning. The tax avoidance strategies used within the UK’s football industry have recently come under significant HMRC scrutiny. Action has been taken in respect of a number of different arrangements in recent years.

The areas of particular interest include film partnership schemes, image rights and agent’s fees.

It’s possible that some advisers may have failed to adequately anticipate the risk of future HMRC enforcement, or fully explain the risks to clients.”

Ongoing enquiries

In 2019, HMRC confirmed ongoing enquiries into 198 footballers, 44 clubs and 29 agents.

Such investigations have even seen footballers’ homes raided by inspectors. Last year, HMRC warned some 1,900 football agents of possible investigations following “serious allegations of fraud”.

So far, some of the biggest names – and the biggest tax bills – have arisen from HMRC’s rulings on film partnership schemes. In August 2019, HMRC took action against a £450 million tax avoidance scheme. Its investors included David Beckham and Gary Lineker. The scheme involved the financing of some 60 films. Despite HMRC’s ruling being vigorously challenged in what became the longest ever tax appeal tribunal hearing, the taxman ultimately won the day. Other well-known footballers have been affected by such rulings, including Wayne Rooney, who was reportedly facing a £6 million tax bill following the collapse of a film investment scheme in 2018.

something of a herd mentality. In the case of the footballers who invested, it may be that word of mouth amongst players helped to drive investment decisions. Few young footballers are financially sophisticated. Many found themselves with unexpected wealth at a young age.

Since players typically retire at the age of 35, the question of investing for the future has a particular urgency for footballers. In reality, few would have fully appreciated the mechanics or potential tax implications of such schemes. Many will have therefore relied greatly upon their advisers in terms of risk assessment.

Players’ agents and financial advisers would have been happy to facilitate such investments, given the commissions involved.

Yet the investors will likely end up financially responsible for the fallout from adverse retrospective rulings, in the absence of actionable failings by their advisers.

Liability of advisers

Film partnership schemes were first introduced in 1997, with the aim of generating investment in the UK film industry. HMRC has recently clamped down on these schemes with retrospective rulings resulting in significant tax liabilities for investors. However, such investments were typically entered into on the advice of financial advisers, accountants and banks. The potential liability of advisers is now being tested in the courts.

It’s possible that some advisers may have failed to adequately anticipate the risk of future HMRC enforcement, or fully explain the risks to clients. In November 2019, 14 former footballers, including Andy Townsend, launched a £15 million legal action against St James’s Place, alleging that they had received inadequate advice concerning both film schemes and overseas property investment schemes. Steven Gerrard was one of a group of investors who launched a £100 million claim against HSBC’s private banking division as regards a film scheme. Andy Cole has sued Coutts bank after reportedly losing £8 million in a similar scheme, which had been marketed by the bank itself.

Driving factors

The significant number of footballers involved in such schemes is perhaps suggestive of AIAWORLDWIDE.COM | ISSUE 110

High net worth individuals

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 increased focus on footballers’ tax affairs came in the wake of a damning 2017 Public Accounts Committee report, which examined the effectiveness of HMRC’s enforcement against high net worth individuals, and tax evasion in the football industry. The report particularly highlighted the misuse of image rights.

HMRC’s image rights probe has been gaining momentum in recent years. In 2019, a HMRC spokesperson said that it “carefully scrutinises the individual image rights arrangements between football clubs and their players to make sure the right tax is being paid in the UK. We are carrying out visits to every Premier League club and most football league clubs, along with their players.”

A principle issue with image rights is whether the amount paid by a club in respect of such rights amounts to disguised remuneration. In 2019, a First-tier Tax Tribunal ruling held that image rights payments from a football club to an offshore vehicle constituted the player’s UK earnings for tax purposes.

As ongoing HMRC investigations continue, and footballers continue to take their advisers to court, the issue of tax avoidance in football looks set to continue to make headlines. ●

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MONEY LAUNDERING

AML changes: all you need to know David Potts highlights changes to the UK money laundering regime.

David Potts Director of Operations, AIA

T

he Money Laundering and Terrorist Financing (Amendment) Regulations 2019 (MLR 2019) were laid before Parliament in on 20 December 2019 and came into force on 10 January 2020. The regulations implement the EU Fifth Money Laundering Directive (5MLD).

MLR 2019 makes amendments to the existing Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (MLR 2017).

Accountants play an important role in keeping citizens and society safe from money laundering and terrorist financing. Their day to day work will be affected by the new regulations, which respond to public calls to counter terrorist financing and address a significant lack of beneficial ownership transparency.

Whilst many of the changes will not directly affect accountancy firms, such as an expansion of the scope of the regulated sector, there are key areas that firms and individuals must address in their policies and procedures: changes to due diligence regulations and reporting discrepancies to Companies House.

Scope of the AML regulated sector

Under the MLR 2019, the scope of persons and firms subject to MLR 2017 has expanded to include: ●● Tax advisers, including those who provide “material aid, or assistance or advice, in connection with the tax affairs of other persons, whether provided directly or through a third party”. ●● Lettings agents, including persons acting on behalf of either landlords or tenants where agreements are concluded for the letting of land (including buildings) for a term of a month or more and a monthly rent (at any point during the term) of €10,000 or more.

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© istockphoto/Nadine_C

MONEY LAUNDERING

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MONEY LAUNDERING ●● Art market participants, including: a) persons who by way of business trade in, or act as intermediaries in, the sale or purchase of works of art in respect of transactions amounting to €10,000 or more; and b) the operators of freeports who store works of art worth €10,000 or more. ●● Cryptoasset exchange providers, including persons who, by way of business, exchange, or make arrangements to exchange, cryptoassets for money, money for cryptoassets, or one cryptoasset for another, and persons who operate machines which use automated processes to exchange cryptoassets for money (or vice versa). ●● Custodian wallet providers, including persons who, by way of business, provide services on behalf of customers to safeguard, or safeguard and administer, either private cryptographic keys (in order to hold, store and transfer cryptoassets) or cryptoassets.

Additionally, firms involved in any of the sectors listed above must comply with requirements of the regulations and be supervised. Cryptoasset exchange providers and custodian wallet providers (“cryptoasset businesses”) will be supervised by the FCA (see bit.ly/2TM49tp), whilst art market participants and letting agents will be supervised

by HMRC or their relevant professional body). The FCA will maintain a register of cryptoasset exchange providers and custodian wallet providers.

Changes for regulated firms: policies, controls and procedures

In relation to requirements for systems and controls, MLR 2019 makes the following amendments: ●● Firms must have policies, controls and procedures in place to identify and scrutinise transactions which are complex or unusually large or have unusual patterns of transactions or which have no apparent economic or legal purpose. MLR 2017 required firms to have policies, controls and procedures which provide for the identification and scrutiny of transactions which are complex and unusually large or of unusual patterns of transactions. ●● Firms must ensure that appropriate measures are taken to assess and, if necessary, mitigate any money laundering or terrorist financing risk when adopting “new products, new business practices (including new delivery mechanisms) or new technology”. ●● Firms must have group-wide policies, controls and procedures for sharing information about clients with other group companies for anti‑money laundering or counter terrorist financing purposes. ●● Training requirements for “relevant employees” have been extended and now include any agents the firm uses in its business whose work is relevant to the firm’s compliance with MLR 2019 or who are otherwise capable of contributing, identifying or mitigating money laundering or terrorist financing risk, or preventing or detecting money laundering or terrorist financing.

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When to conduct client due diligence

Firms must ensure that appropriate measures are taken to assess and mitigate any money laundering or terrorist financing risks when adopting new products, business practices or technology.”

Currently, client due diligence (CDD) must be applied “at appropriate times to existing customers on a risk-based approach” and whenever the firm becomes aware that the circumstances of the customer relevant to its risk assessment have changed. MLR 2019 requires firms to conduct CDD when: ●● they have any legal duty in the course of the calendar year to contact existing clients for the purpose of reviewing any information which is relevant to the firm’s risk assessment, and relates to the customer’s beneficial ownership; and ●● they must contact an existing client in order to fulfil any duty under the International Tax Compliance Regulations 2014 (SI 2015/878).

Client due diligence

The following three sections are important to note for AIA Members in Practice and supervised firms: ●● Electronic identification: The amended regulations confirm that electronic ID verification from independent and reliable sources is acceptable for CDD purposes if it is free from fraud and provides adequate assurance as to an individual’s identity. This provision does not make electronic ID mandator; however, it does clarify that it can be used to meet CDD requirements if required standards are met. ●● Reporting discrepancies to the register: Before engaging with a limited company, LLP or certain types of trusts, firms must check details held by the Persons with Significant Control (PSC) Register in Companies House. Firms will be required to collect proof of registration or an excerpt from the register and report discrepancies between the information on Companies House and the beneficial ownership information they receive when conducting CDD. ●● Ultimate beneficial ownership (UBO) of corporate clients: Where a firm has not been able to identify the UBO of a client which is a body corporate, reasonable measures must be taken to verify the identity of the senior person in the body corporate responsible for managing it and keep written records of actions taken and difficulties encountered.

Enhanced due diligence

MLR 2019 introduces new requirements where firms must undertake enhanced due diligence (EDD) on their potential, and existing, clients where certain criteria are met.

High-risk third countries

When a client is established in a high-risk third country or a relevant transaction involves a client in a high-risk third country, required EDD measures include: ●● obtaining additional information on the customer and the customer’s UBO; ●● obtaining information on the source of funds and source of wealth of the customer; ●● obtaining information on the reasons of for the transaction; ISSUE 110 | AIAWORLDWIDE.COM

MONEY LAUNDERING ●● obtaining additional information on the intended nature of the business relationship; ●● obtaining the approval of senior management for establishing or continuing the business relationship; and ●● conducting enhanced monitoring of the business relationship by increasing the number and timing of controls applied and selecting patterns of transactions that need further examination.

regulations; however, they remain a requirement of 5MLD. The changes below are particularly significant for the UK regarding the widespread use of trusts in the legal system. Currently, HMRC requires a trust to be registered via the Trust Registration Service at gov.uk/guidance/register-your-clients-trust if: ●● it is an express trust where the trustees have incurred a tax liability in a given tax year; and ●● all non-UK express trusts which receive UK source of income or have UK assets on which the trustees have incurred a UK tax liability in a given tax year.

High-risk factors

Regulation 33 lists a selection of non-exhaustive risk factors (including customer, delivery channel and geographical risk) which firms must consider when assessing money laundering and terrorist financing risk and whether additional enhanced due diligence measures should be taken to mitigate any risk.

The various risk factors set out in MLR 2017 have been supplemented by the following, where: ●● the client is the beneficiary of a life insurance policy; ●● the client is a third-country national applying for residency or citizenship in an EEA state in exchange for transfers of capital, the purchase of property, government bonds or investment; or ●● there is a transaction related to oil, arms, precious metals, tobacco products, cultural artefacts, ivory and other items related to protected species, or items of archaeological, historical, cultural and religious significance, or of rare scientific value.

The term “express trust” covers all trusts that have been deliberately created by a settlor (i.e. as opposed to statutory, resulting or constructive trusts), while a “UK tax liability” for these purposes includes a liability to income tax, capital gains tax, inheritance tax and/ or stamp duty land tax. Under the 5MLD, the register will be expanded to cover all “express trusts”, and the information will be available to competent authorities, firms conducting CDD, and any person that can demonstrate a legitimate interest.

AIA will provide more details to members when available.

When should I implement the changes?

Members in practice should take steps now to assess their compliance with the new regulations and will be required to be fully compliant with the new requirements as introduced. However, account will be taken of the short lead-in time which businesses have been given to implement all the new requirements in assessing any responses to non-compliance. Each case will be assessed on its own merits.

When reviewing compliance with MLR 2019, firms must ensure that any risk assessment process incorporates these additional revised risk factors.

Reporting discrepancies in beneficial ownership information to Companies House

Member guidance

Firms supervised under MLR 2019 must report “discrepancies” between information that firms gather regarding their clients and the PSC Register at Companies House. Discrepancies must be reported if there is a material difference between the two sets of information. Companies House will investigate these discrepancies and, if necessary, contact the company.

Companies House has provided guidance on reporting discrepancies to the Register at: gov.uk/government/organisations/companies-house.

Approval of BOOMs and fit and proper test

Regulation 26 requires that supervisory authorities of firms approve beneficial owners, officers and managers (BOOMs). Amendments in MLR 2019 clarify that individuals seeking BOOM approval from supervisory bodies must provide information which enables a determination of whether the applicant has been convicted of a relevant offence. As a supervisory body, AIA is also placed under a new obligation to take necessary measures to ensure that any BOOM application meets these requirements prior to approval.

Are there more changes coming?

An expansion of the register of ultimate beneficial ownership for trusts and similar legal arrangements has not been implemented with these amended AIAWORLDWIDE.COM | ISSUE 110

Author bio

David Potts is the Director of Operations at the Association of International Accountants (AIA).

AIA provides extensive guidance to members on meeting the requirements of the Money Laundering Regulations in a variety of ways including: ●● AMLGAS: Anti-Money Laundering Guidance for the Accountancy Sector. Approved by AIA and HM Treasury to provide guidance to members on implementing the regulations – updated for MLR 2019. ●● AMLCC: Free AML software with your AIA Practising Certificate to take the pain out of compliance. Produce your firm-wide risk assessment, client due diligence and store your records securely whilst making it easy to evidence your compliance during a Monitoring Visit (see www.aiaworldwide.com/amlcc). ●● MIP Handbook: Extensive AML guidance and advice, including assessing risk. ●● Templates and checklists: Find extensive AML guidance and advice ranging from templates, checklists and the Member in Practice Handbook. ●● CPD: Visit www.aiaworldwide.com/events to see the latest range of CPD available, including an on-demand recording of AIA’s recent AML update webinar – FREE for AIA members.

AIA’s AML guidance is available to members via MyAIA. ●

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ACCOUNTING STANDARDS

I

t is often said that decision making is the determining factor in the success or failure of a given project. With this in mind, insurers have some important decisions to make this year. A case in point: their decisions around IFRS 17 and IFRS 9.

through profit and loss (FVTPL). Most insurers opted to defer implementation of IFRS 9 to align it with the timing of IFRS 17.

While some insurers started assessing the impact of both standards early on, and are now progressing with implementation, many firms still have key decisions to make. Here, we will highlight some of the considerations for implementing the new standards, and touch on questions that remain unanswered for many insurance companies.

The basics

Let’s start with IFRS 17, a new accounting standard that requires insurers to dramatically change the way they account for insurance contracts and ultimately how they communicate their company’s performance. However, before insurers get to the reporting element they must, among other things, make appropriate accounting policy decisions. These decisions will affect not only their implementation of the new standard, but their financial reporting for years to come.

Of course, the impact of implementing a new accounting standard can vary from company to company and country to country, not least because of the different accounting practices currently in use around the world.

Alongside IFRS 17, we have IFRS 9 for financial instruments, which creates further implementation complexities for insurers, particularly those whose financial assets are not measured at fair value

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The devil is in the detail

Author bio

Barbara Jaworek works as a Director in Moody’s Analytics, focusing on development and support of the RiskIntegrity solution for IFRS 17.

IFRS 17 is principles based like all the other IFRS standards, which means that insurers have some freedom to develop methodology, such as the discount rates method, and to select assumptions meeting the principles set in the standard. For example, IFRS 17 introduces the concept of a risk adjustment to represent the level of compensation for uncertainty required by a company, not restricting it to any method or set of assumptions.

But there is a catch: IFRS 17 requires extensive disclosures, including qualitative disclosures, such as the technique used to calculate the risk adjustment, and the corresponding confidence level implied by the methods and assumptions ISSUE 110 | AIAWORLDWIDE.COM

ACCOUNTING STANDARDS

Decisions, decisions Barbara Jaworek asks why IFRS 17 and IFRS 9 remain at the top of the agenda for finance teams.

used. Insurers will therefore be restricted in their accounting policy and methodology choices and will need to consider the impact those disclosures will have on the readers of their financial statements, and the decisions they make.

As might be expected, reporting changes under IFRS 17 relate not only to methodology disclosures, but also signal a shift in the financial KPIs. Traditional measures such as premiums earned will no longer be reported directly in the P&L statements. Although companies seem not to have made clear decisions yet on their future KPIs, analysts should be interested in the Contractual Service Margin (CSM), a new measure presented on the balance sheet reflecting deferred revenue and impacting expected future financial results.

While contemplating these significant changes in the measurement and reporting of insurance contracts, insurers who decided to defer implementation of IFRS 9 should not overlook the other side of the balance sheet. We note that companies with financial assets not measured under the FVTPL method will particularly be affected by the changes of the requirements. New classification and measurement rules for financial assets will require insurers to reassess the business model and the nature of expected cash AIAWORLDWIDE.COM | ISSUE 110

© istockphoto/BrianAJackson

Barbara Jaworek Director, Moody’s Analytics

flows. Similarly, new impairment requirements for financial assets will require firms to implement new, forward-looking models, changing the recognition of expected losses.

Data deluge

IFRS 17 and IFRS 9 create a need for new functionality within financial reporting systems.

For example, under IFRS 17 there will be a need for increased information at a more granular level, such as historical and current discount rates.

There will be a need to import large volumes of data from actuarial systems for several purposes, and then to combine that information with accounting data to provide comprehensive and coordinated IFRS 17 calculations.

In addition, the IFRS 17 requirement to disaggregate portfolios by profitability groups and annual cohorts may lead to hundreds or even thousands of groups of contracts that need to be measured, including tracking the loss component over time by group. And let’s not forget the challenges of data governance and auditability, essential to any financial reporting process.

The amount of current and historic actuarial and finance data required under IFRS 17, and the time needed to perform and review complex

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ACCOUNTING STANDARDS

Despite the more granular and complicated calculations called for under IFRS 17 and IFRS 9, the reporting deadlines for insurers will not change.”

CSM calculations, will require changes to an insurer’s current reporting technology. Naturally, an increased amount of data requires increased computing power to analyse, store, and manage that data. Software that offers a flexible approach to increasing data storage according to emerging demand, with an efficient audit trail and drill down/drill back functionality to support the posting and reporting process, is imperative.

Fast close revisited

Despite the more granular and complicated calculations called for under IFRS 17 and IFRS 9, the reporting deadlines for insurers will not change. This will inevitably mean that insurers must revise their closing process to ensure they have all the data they need to perform the new calculations on time. As they do that, consideration should be given to: ●● Automation and cost efficiency: Where possible, insurers should look for ways to avoid duplication of efforts, or long sequences where one step cannot be started before receiving input from the previous step. ●● Avoiding manual adjustments: In addition to delaying the reporting process, such adjustments will become increasingly challenging because of possible knock‑on effects, given the complexity and interconnectedness of different elements of the calculation and reporting. ●● Collaboration: Under IFRS 17 specifically, the inputs from accounting and actuarial teams will be tightly linked in the reporting process.

Improved collaboration between functions will be vital in a fast close environment.

It is important for insurers to keep fast close in mind now, as they make strategic implementation decisions. For example, European insurers considering using Solvency II-based risk marking as a basis for the IFRS 17 risk adjustment should consider how the timing of Solvency II inputs will affect the financial reporting cycle, if the Solvency II risk margin is not available on time.

Companies should also be careful using fast close methods based on assumption extrapolations which would be adjusted for the real data once it becomes available. Such practices could have been successful in less complex modelling, but IFRS 17 measurement is complex. Adjusting one of the variables could lead to unexpected consequences. For example, if a change in assumptions due to data available only after report date would change a group of contracts from profitable to onerous, then that loss would need to be reported immediately rather than deferred to subsequent periods.

The role of the CFO

Despite the significant changes that the new standards will bring, the expectations regarding financial reporting remain the same: for firms to produce reliable figures that investors, regulators and other stakeholders can trust. As such, CFOs

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should play an active role in the implementation of new accounting standards across the business, for they will oversee the figures produced under IFRS 9 and IFRS 17, and explain them to the CEO, auditors, shareholders and other stakeholders.

With this in mind, to effectively handle their reporting responsibilities, the CFO will need to understand the entirety of the new requirements including not only new accounting principles, but also the choices made around the actuarial modelling inputs to the reports. They will also have to understand the impact of IFRS 17 and IFRS 9 on the financial KPIs, which will change in form and pattern under the new standards.

Questions remain

It has been almost three years since IFRS 17 was issued (and six years for IFRS 9). Despite the extensive impact assessment and implementation programmes undertaken by many insurers, uncertainty about the new requirements persists in many areas. Below are topics that insurers should closely monitor for the emergence of further guidance from the International Accounting Standards Board, and to learn about the practices being developed among other market participants: ●● Interpretation of IFRS 17’s “grey areas”: The more detailed implementation work that insurers have performed, the more unsolved interpretation questions that have appeared.

One example is the variable fee approach eligibility for some participating products. ●● Aligning solo and group reporting: One of the practical aspects that many groups will face is dealing with consolidation issues. Both IFRS 17 and IFRS 9 may lead to different accounting between subsidiary and group (for example, different classification and measurement of financial assets). In the case of IFRS 17, this can lead to significant differences that in turn lead to different grouping and measurement of insurance contracts. Those differences cannot be solved by one-line adjustments, and require parallel accounting maintained for solo and group reporting purposes. ●● Aligning asset and liability measurement: Choosing the best accounting options on both sides of the balance sheet will be important, since both sides will be affected by IFRS 9 and IFRS 17. Insurers must explore how to reduce potential accounting mismatches. For example, choosing the OCI option under IFRS 17 should be aligned with the classification and measurement of financial assets under IFRS 9.

The IFRS 17 OCI option, however, remains a source of complexity and uncertainty among insurers, particularly those issuing participating contracts.

As IFRS 17 and IFRS 9 implementation programmes mature, this year is critical for many companies. They must make the right decisions today, which will benefit them not only at the transition date but for many years to come. ● ISSUE 110 | AIAWORLDWIDE.COM

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DIGITAL TRANSFORMATION

The technological maze

Jules Carma Head of Dig

Jules Carman asks how to go about deciding which technology your business needs.

H Look for the companies that have the experience to know what goes into a successful transformation.”

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ow can accountants navigate the maze of technology that faces them during digital transformation initiatives – and that’s not to mention when to actually make the move? That’s the question which many practices use to start the process of transformation, but as we’ve seen over this series, it should actually come after a thorough cultural assessment and gap analysis.

You need to understand the needs of your staff and the areas for improvement before you begin reviewing solutions.

Once you’ve completed those stages, it’s time to apply what you’ve learned by implementing the technology you have identified. When firms start to make the changes, they will reap the rewards of data insights, predictable and prescriptive trends, larger client portfolios, recurring revenues, and technologies such as artificial intelligence and blockchain. The question is, where do you begin,

and how do you choose? The IT market is growing at breakneck pace, and there are a thousand vendors competing for your digital transformation dollar. With that in mind, there are three key principles to bear in mind as you enter the fray.

1. Enhance what you already have

Don’t rip and replace if you don’t have to – try to complement existing systems where possible.

Any digital transformation project should prioritise business continuity, staff experience and customer service. With those goals in mind, by implementing technology that integrates quickly with existing solutions, you can maximise the chance of a smooth transition and a positive user experience.

For example, a rip and replace option would be scrapping your database and starting from scratch with a shiny new collaboration system. However, that cliff-edge strategy is likely to cause teething problems for both staff and customers. Instead, you could think about integrating your existing system ISSUE 110 | AIAWORLDWIDE.COM

DIGITAL TRANSFORMATION big innovation, and they’ll all tell you that their particular software gizmo is the wonder fuel your company needs to achieve its goals. The chances are, though, that there isn’t a quick fix for issues that are really worth addressing.

Rather than the whizz kids, look for the old hands – the companies that have lived through a few IT innovations and have the experience to know what goes into a successful transformation.

They should also be aware of what’s coming up in the next few years that you’ll need to be aware of.

You don’t just need technology; you also need the expertise to help you build an implementation that works for your individual challenges. A quality IT deployment isn’t an overnight job – it takes time, care and the kind of insight that comes with long experience. Make sure you work with a partner that can bring that level of individual attention and understanding to the table.

Working with an experienced IT provider will also help you to cultivate realistic expectations of your own organisation. Every business has growth goals, but it can be hard to know how to make the jump in reality. IT providers with deep experience can help you to map out that process in the best way for your operating model. For example, it might be the difference between buying wide-reaching enterprise grade enterprise resource planning (ERP) straight out of the gate and instead starting by investing in really good, usable accounting software and then working on from there.

an gital Transformation, Accountancy, Sage

© istockphoto/gremlin

3. Whole-life partnership

with the new technology rather than scrapping it, allowing you to gradually shift usage over.

In other words, compatibility with existing technology should be a key consideration during digital transformation projects. Companies that insist on rip and replace should be treated with caution – it might turn out to be the right approach for your business, but it shouldn’t be your first instinct.

Change is a gradual process. Be sensitive to the impact that new technology will have on people’s day to day lives, and give them and the company time to adjust – and assess whether you have the right skill sets in place to manage the new technology.

2. Ignore the pie in the sky

Ensure that you choose a technology provider that focuses on practical reality and is dedicated to serving the profession for the long term. The world is full of Silicon Valley wannabes peddling the next AIAWORLDWIDE.COM | ISSUE 110

Author bio

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

Finally, remember that digital transformation is an ongoing process. Select technology partners that will work with you beyond the installation date and understand your strategic goals. This is partly about making sure your new solution comes with comprehensive post-sales support, but it’s more than just that.

As we’ve seen, digital transformation is essentially a virtuous circle – cultural assessment followed by gap analysis followed by investment, and then rinse and repeat. The best investments will lead naturally to the next cultural assessment.

Now that we’ve solved problem A, what’s problem B, and how can our partners help us address it?

That philosophy should inform your decisions about which technology to purchase. It’s important to buy the right software for the job, but you also need to think about how technology fits into the company’s more long-term vision. There’s nothing worse than a white elephant. IT purchasers need to make sure that they consult with other business departments and ensure that the tech they implement and the partners they work with will work for the company over time.

In short, technology purchasing needs to be informed by the whole of the business, not just the CIO’s wish list. When digital transformation is driven by the holistic needs of the company and serves employee and client needs alike, success will be that much easier to achieve for everyone. ●

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Events WEBINARS

WWW.AIAWORLDWIDE.COM/EVENTS

7 April 2020 10:30 to 11:30 Coronavirus – An Advisory Webinar for Employers

21 April 2020 11:30 to 12:30 Pricing Your Services for Maximum Reward

8 April 2020 11:30 to 12:30 Improve Your Cybersecurity in 3 Steps

27 May 2020 12:00 to 13:00 HMRC & Companies House: Working Together for You

14 April 2020 11:30 to 12:30 Top Tips When Using the Cloud to Manage Documents

28 May 2020 11:00 to 12:00 Company Directors: Payroll and You

FACE TO FACE

UK 22 September 2020 Accountex Summit North Manchester 18 to 19 November 2020 Accountex London 2 to 3 December 2020 AccountingWeb Live Coventry

INSTANT CPD At Instant CPD, we know what works for accountants balancing the need to undertake CPD alongside their busy work schedules. And now, more than ever, online CPD is the obvious choice for busy professionals needing to keep up to date.

Instant CPD have a range of courses that reflect the diverse topic areas that accountants need. Through Instant CPD you can set your own goals and monitor your own progress. We use expert presenters who have a great deal of experience, either as dedicated professional lecturers, or sometimes in combination with individuals who are maintaining an accountancy or training practice of their own.

Online CPD is: ●● Convenient: You can do it without leaving home or office, saving you time and travel costs. ●● Flexible and accessible: Instant CPD’s courses are video streamed in real time and are available to view at any time you choose. ●● Easy to manage: Your online dashboard enables you to plan the number of units you wish to study, keeps track of your progress and automatically generates a Certificate of Completion once you have finished.

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There has never been a better time to do your CPD online!

●● Value for money: Competitively priced online training can be used for all of your CPD needs or fit alongside more traditional training options. ●● High quality: Instant CPD still uses top class, well known presenters, who are experts in their field. ●● Special Offer: In partnership with the AIA, Instant CPD provides packages of online courses to help you meet your CPD requirements.

Cover your CPD Anytime, Anywhere Online & On-Demand 28

Our current packages, available to buy via our website (https:// instantcpd.com/categories/11instant-cpd-for-aia-members) give you the chance to purchase a set of 15, 20 or 30 courses.

We are giving AIA members an extra 10% off any of these packages by using the code AIASPECIAL when you get to the checkout. Find out more at www.instantCPD.com.

2019-2020 CPD Packages from 150GBP providing 30+ CPD Units ISSUE 110 | AIAWORLDWIDE.COM

Technical INTERNATIONAL

IFAC outlines five factors for high quality audit and issues call to action for stakeholders in audit ecosystem High quality audits are the backbone of the global financial system. Each year, thousands of audits – including over 40,000 audits of public listed companies – make organisations more transparent and trustworthy, help attract investor capital, help secure jobs and help economies thrive.

The International Federation of Accountants (IFAC) and the global accountancy profession are committed to continuous improvement and recognise the negative consequences of any audit failure. As audit reviews unfold in various national jurisdictions, IFAC is setting out its recommendations for achieving high quality audits.

“Audits contribute meaningfully to the functioning of organisations, financial markets and economies.

While many thousands of audits are conducted each year without any issues, improvements are needed to ensure consistent high quality,” said IFAC CEO Kevin Dancey. “This,

Global coalition led by IFAC addresses the need for strong public financial management in emerging economies A coalition of 11 global and regional accountancy organisations and international development agencies, led by the International Federation of Accountants (IFAC), 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, features 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 AIAWORLDWIDE.COM | ISSUE 110

however, cannot be achieved in a vacuum. All participants in the audit and assurance ecosystem must work together in striving to achieve high quality audits 100% of the time. It is a vital part of our profession’s public interest mandate.”

In order to achieve high quality audits, IFAC identifies five essential factors: the right process, the right people, the right governance, the right regulation and the right measurement.

IFAC calls on all participants to create an environment that consistently produces high quality audits. In particular, firms, professional accountancy organisations (PAOs), regulators, audit committees and audit/ assurance professionals must work to: ●● approach audits as a value added service, not as a compliance exercise; ●● evolve new assurance services

to meet the needs of all stakeholders; ●● continue to focus on enhancing skills and competencies, adhering to fundamental ethical principles; ●● ensure diversity in hiring practices; ●● enhance transparency and communication from audit committees, firms and PAOs; and ●● adopt a prudential and evidencebased approach to regulation.

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 connection between accountancy and economic development is something that organisations, including DFID, the World Bank, the Asian Development Bank (ADB) and the Global Fund, have understood for a number of years and we are grateful for their ongoing partnership.”

Aman Trana, director, procurement, portfolio, and financial management department of the 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

“As the global voice of the accounting profession, IFAC works in the public interest and focuses on the role of professional accountants in audit and assurance – but always, and necessarily, as partners in a larger ecosystem striving for better outcomes,” said Dancey. “We call on regulators and PAOs to collect, analyse and publish more and better data – both aggregate and granular – on audit quality with the goal of enhancing transparency and promoting higher audit quality.”

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Technical institutions improving their public service delivery, financial efficiency, and transparency and accountability, thereby accelerating poverty reduction and achieving sustainable development.”

IFAC extends its sincere appreciation to its partners and hosts for making the conference possible: DFID, the World Bank, the ADB, the Global Fund, the Malaysian Institute of Accountants, the Confederation of Asian and Pacific Accountants, the ASEAN Federation of Accountants, the South Asian Federation of Accountants, and the Arab Federation of Accountants and Auditors.

IFRS Foundation to publish IFRS Taxonomy 2020 The IFRS Foundation has published IFRS Taxonomy 2020, which includes changes resulting from Interest Rate Benchmark Reform (Amendments to IFRS 9, IAS 39 and IFRS 7), and also the IFRS Taxonomy formula linkbase 2020.

The content will be available to all from the IFRS Taxonomy section of www.ifrs.org.

IASB clarifies requirements for classifying liabilities as current or non-current The International Accounting Standards Board (Board) has issued narrow-scope amendments to IAS 1 Presentation of Financial Statements to clarify how to classify debt and other liabilities as current or non-current.

The amendments aim to promote consistency in applying the requirements by helping companies to determine whether, in the statement of financial position, debt and other liabilities with an uncertain settlement date should be classified as current (due or potentially due to be settled within one year) or non-current. The amendments include clarifying the classification requirements for debt a company might settle by converting it into equity.

The amendments clarify, not change, existing requirements, and so are not expected to affect companies’ financial statements significantly.

However, they could result in companies reclassifying some liabilities from current to non-current, and vice versa, which could affect a

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company’s loan covenants. Thus, to give companies time to prepare for the amendments, the Board has set the effective date at January 2022.

Early application of the amendments is permitted.

Access Classification of Liabilities as Current or Non-current, amendments to IAS 1 (Paid eIFRS subscription required).

ESMA, in coordination with NCAs, continues to monitor developments in financial markets as a result of the COVID-19 situation and is prepared to use its powers to ensure the orderly functioning of markets, financial stability and investor protection.

UK AND IRELAND ESMA recommends action by financial market participants for COVID-19 impact The European Securities and Markets Authority (ESMA), together with National Competent Authorities (NCAs), is closely monitoring the situation in view of the continuing impact of the COVID-19 outbreak on financial markets in the European Union (EU). Following a Board of Supervisors discussion examining the market situation and contingency measures taken by supervised entities, ESMA is making the following recommendations to financial market participants: ●● Business continuity planning: All financial market participants, including infrastructures, should be ready to apply their contingency plans, including deployment of business continuity measures, to ensure operational continuity in line with regulatory obligations. ●● Market disclosure: Issuers should disclose as soon as possible any relevant significant information concerning the impacts of COVID-19 on their fundamentals, prospects or financial situation in accordance with their transparency obligations under the Market Abuse Regulation. ●● Financial reporting: Issuers should provide transparency on the actual and potential impacts of COVID-19, to the extent possible based on both a qualitative and quantitative assessment of their business activities, financial situation and economic performance in their 2019 yearend financial report if these have not yet been finalised or otherwise in their interim financial reporting disclosures. ●● Fund management: Asset managers should continue to apply the requirements on risk management, and react accordingly.

IAASA publishes compendium of financial reporting decisions IAASA, Ireland’s accounting enforcer, in line with its established policy of publishing selected financial reporting decisions, has published financial reporting decisions regarding the accounting treatments applied by Bank of Ireland Group plc, Crown Global Secondaries IV plc, Irish Residential Properties REIT plc, Kerry Group plc, Kenmare Resources plc and Smurfit Kappa Group plc.

These decisions cover a range of accounting matters including: ●● IFRS 9 Financial Instruments; ●● IFRS 13 Fair Value Measurement; ●● IFRS 15 Revenue from Contracts with Customers; ●● IAS 1 Presentation of Financial Statements; and ●● IAS 36 Impairment of Assets.

These decisions include instances where the company voluntarily agrees to enhance its accounting treatment and/or disclosures in future financial reports to address matters identified in the course of IAASA’s examinations. They may also include instances where IAASA agrees with or does not disagree with the accounting treatment applied by the company and, consequently, no corrective actions by the company are required.

IAASA’s policy on publishing financial reporting decisions and the criteria to be met for such decisions to be published are set out in IAASA’s Policy Paper on Publication of IAASA’s Financial Reporting Findings.

The financial reporting decisions for each issuer are included in a compendium of decisions which can be accessed on the IAASA website and IAASA will continue to publish selected financial reporting decisions periodically.

ISSUE 110 | AIAWORLDWIDE.COM

Technical IAASA publishes revised investigation procedures IAASA has published revised procedures governing the conduct of statutory investigations under the Companies Act 2014 s 934. The revised procedures, which have been developed following the enactment of the Companies Act 2018, will apply to all investigations initiated from 21 January 2020. The procedures can be downloaded from the IAASA website. IAASA conducted a public consultation process prior to making the procedures.

FRC writes to audit firms on operational separation The FRC has written to the UK’s largest audit firms setting out the regulator’s expectations for operational separation to bring about audit quality improvements and audit market resilience.

Claire Lindridge, the FRC’s director of audit firm monitoring and supervision (AFMAS) said: “The FRC’s focus is to ensure audit firms put audit quality front and centre, with new independence and financial transparency guidelines to support this.

“We expect the firms to put in place independent governance for the audit practice and ensure that the audit practice is appropriately ringfenced from the rest of the firm so that financial results are clear and transparent.”

FRC assesses company and auditor responses to climate change The Financial Reporting Council (FRC) has announced a major review of how companies and auditors assess and report on the impact of climate change.

The FRC will review the extent to which UK companies and auditors are responding to the impact of climate change on their business to ensure reporting requirements are being met.

The review will consider how the quality of information can be improved to support informed decision making by investors and other stakeholders. The FRC will monitor how companies and their advisers fulfil their responsibilities, and encourage better practice, by: ●● reviewing a sample of company reports and accounts across AIAWORLDWIDE.COM | ISSUE 110

industries to assess the quality of their compliance with reporting requirements in relation to climate change; ●● assessing a sample of audits to review how auditors are ensuring that the impact of climate risk has been appropriately reflected in company reports and accounts, including the key areas of judgment and related disclosures; ●● assessing the resources available within audit firms to support audit teams in evaluating the impact of climate change on audited entities; ●● evaluating the quality of disclosures under the new UK Corporate Governance Code regarding risk, emerging risk and long-term factors affecting their viability; and ●● evaluating whether the Financial Reporting Lab’s recommendation for companies to report in line with the Task Force on Climate-related Financial Disclosures framework has been adopted, highlighting developing good practice.

The FRC will also consider how investors are addressing the climate challenge in the stewardship of their investments and in their response to systemic and market risks when it monitors the first reports under the new Stewardship Code, which will be issued from the beginning of 2021.

Sir Jon Thompson, FRC CEO said: “Not only do Boards of UK companies have a responsibility to report their impact on the environment and the risks of climate change to their business, but investors expect them to operate sustainably.

“Auditors have a responsibility to properly challenge management to assess and report the impact of climate change on their business.

“The FRC has high standards for company disclosure, including regarding climate change. Company reports and accounts are essential to understanding how the corporate world is responding to the challenge of climate change.”

FRC advice to companies and auditors on Coronavirus risk disclosures The Financial Reporting Council (FRC) has published guidance for companies on disclosure of risks and other reporting consequences arising from the emergence and spread of

Coronavirus (COVID-19). The regulator is also discussing with audit firms whether the virus affects their ability to review component audits in China and the consequences to delivering timely audit opinions.

By law, companies are required to disclose principal risks to their business. The FRC is advising companies to carefully consider what disclosures they might need to include in their year-end accounts, which will be particularly relevant for companies either operating in or having close trading associations with China. The extent of the risk and the degree to which it might crystallise depends on companies’ specific business circumstances. These could include, for example, extensive operations or manufacturing in China, with consequential staff shortages and production delays.

Depending on the extent to which the virus spreads outside of China, other companies could also become affected. Additionally, companies which might not have a presence in China but have significant trading links or global supply chains dependent on Chinese-manufactured goods will need to consider their disclosures if their businesses face possible disruption.

The FRC is also in discussions with audit firms to assess the impact on their audits of UK listed groups with Chinese subsidiaries.

A spokesperson for the FRC said: “Given the potential for rapid spreading of the virus, required disclosures will likely change over time as more information about the epidemic emerges.

“Companies will need to monitor developments and ensure they are providing up to date and meaningful disclosures to their shareholders when preparing their year-end reports.”

Audit, accounting and corporate reporting during the transition period The FRC and Department for Business, Energy and Industrial Strategy (BEIS) have published joint letters for accountants and auditors with information regarding auditing, accounting and corporate reporting standards during the transition period following the UK’s exit from the EU. Information for accountants and separately for auditors is available from the FRC website.

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Technical ASIA PACIFIC Extension of time for Singapore listed companies to hold Annual General Meetings Singapore Exchange Regulation (“SGX RegCo”) has announced that it will allow SGX-listed issuers with a 31 December financial year-end, up to 30 June 2020 to hold Annual General Meetings (AGMs) to approve their 31 December 2019 financial results, subject to notification to SGX RegCo and fulfilment of certain criteria. This arose from feedback expressed by shareholders who want to participate in and vote at AGMs but may be concerned about attending large-group meetings amid the COVID-19 situation.

All companies incorporated in Singapore are required to hold AGMs and file annual returns with ACRA as mandated under the Companies Act. SGX RegCo has consulted ACRA on allowing Singapore incorporated companies listed on SGX more time to hold their AGMs and file annual returns. ACRA will process and allow these applications for extension of time (EOT) through BizFile+ for these companies with financial year end on 31 December 2019. Upon approval, ACRA will waive the fees for the EOT applications by Singapore listed companies, by way of a refund.

For further information on applying for EOT to hold AGM and file annual returns, visit: www.acra.gov.sg.

UNITED STATES FASB issues guidance to assist in transition away from interbank offered rates to new reference rates The Financial Accounting Standards Board (FASB) has issued an Accounting Standards Update (ASU) that provides temporary optional guidance to ease the potential burden in accounting for reference rate reform.

“This new ASU provides stakeholders with the guidance they need to ease the process of migrating away from LIBOR and other interbank offered rates to new reference rates,” said FASB chairman Russell

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G. Golden. “It addresses operational challenges stakeholders raised with the Board and will help simplify matters going forward. At the same time, the new guidance will also help reduce transition-related costs,” he added.

LIBOR and other interbank offered rates are widely used benchmark or reference rates in the United States and globally. Trillions of dollars in loans, derivatives and other financial contracts reference LIBOR, the benchmark interest rate banks use to make short-term loans to each other.

With global capital markets expected to move away from LIBOR and other interbank offered rates toward rates that are more observable or transaction based and less susceptible to manipulation, the FASB launched a broad project in late 2018 to address potential accounting challenges expected to arise from the transition.

The new guidance provides optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another reference rate expected to be discontinued.

The ASU is intended to help stakeholders during the global market-wide reference rate transition period. Therefore, it will be in effect for a limited time through to 31 December 2022.

The ASU, along with a “FASB in Focus” overview, is available at: www.fasb.org.

SEC accepts 2020 GAAP financial reporting taxonomy and SEC reporting taxonomy The Financial Accounting Standards Board (FASB) has announced that the US Securities and Exchange Commission (SEC) has accepted the 2020 GAAP Financial Reporting Taxonomy (Taxonomy) and the 2020 SEC Reporting Taxonomy (SRT).

The 2020 Taxonomy contains updates for accounting standards and other recommended improvements.

The 2020 SRT contains improvements to the dimensional elements whose underlying recognition and measurement are not specified by GAAP. In addition to the Taxonomy and the SRT, the

2020 XBRL US DQC Rules Taxonomy (DQCRT) has been finalised. The DQCRT is a FASB taxonomy that includes in a derivative format XBRL US DQC Rules (DQCR) published

by XBRL US as validation checks for XBRL filings with the SEC. The purpose of the DQCRT is to improve exposure and access to DQCRs, as well as to increase compliance with DQCRs. Over time, additional DQCRs also may be included. DQCRT files must not be referenced directly to any EDGAR submission, just as many GAAP Taxonomy linkbases must not be referenced in an EDGAR submission.

All of the Taxonomies and their related release notes are available on the FASB’s XBRL pages and through the following links: 2020 GAAP Financial Reporting Taxonomy and 2020 SRT.

FASB issues narrow-scope improvements to financial instruments guidance The Financial Accounting Standards Board (FASB) issued an Accounting Standards Update (ASU) that makes narrow-scope improvements to various aspects of the financial instruments guidance, including the current expected credit losses (CECL) standard issued in 2016.

The ASU is part of the FASB’s ongoing Codification improvement project aimed at clarifying specific areas of accounting guidance to help avoid unintended application.

The items addressed in that project generally are not expected to have a significant effect on current accounting practice or create a significant administrative cost for most entities.

“The FASB decided to issue this financial instruments ASU separate from other Codification improvements to increase stakeholder awareness of the changes and to expedite the improvement process,” stated FASB chairman Russell G. Golden. “It addresses areas brought to our attention by stakeholders, and it represents our ongoing commitment to support a successful transition to our standards.”

Among its improvements, the ASU clarifies that all non-public companies and organisations are required to provide certain fair value option disclosures.

ISSUE 110 | AIAWORLDWIDE.COM

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