International Accountant 111 by Association of International Accountants

INTERNATIONAL

ACCOUNTANT

MAY/JUNE 2020 ISSUE 111

Insolvency: weathering the storm of Covid-19 Grants under the Coronavirus Job Retention Scheme Prepare for the easing back of government support

The reporting puzzles of IFRS 17

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 Meet the team

News and views

Financial crimes grow during the pandemic

for employees that have been furloughed. Steve Collings (Leavitt Walmsley Associates) examines the accounting treatment of such grants.

AIA news

Update on Covid-19

Webinars 7

Covid-19 20

Webinars on VAT and income tax AIA and GoSimpleTax together bring you webinars to update you on VAT and income tax

Five key steps for SMEs Accountancy Europe’s SME Experts consider how accountants can guide SMEs through the crisis.

Business support

Nursed back to health Government support packages for businesses and employees have enabled many businesses to stay afloat so far. Richard Simms (Simms & Partners) examines how businesses can fully prepare for the easing back of support.

16 Students 8

IFRS 17

Current issues in auditing: part 3 Students must be familiar with current and professional issues and pronouncements as part of their understanding of professional auditing.

Solving the reporting puzzle Insurance entities that are preparing for IFRS 17 financial reporting have many questions around choosing year-todate reporting versus period-to-date reporting. Dieter Van der Stock (Moody’s Analytics)considers the challenges faced by accounting teams.

Insolvency 26 Brexit 16

Covid-19

Accounting for Covid-19 HMRC has now started to send payments out to employers in respect of the Coronavirus Job Retention Scheme

The ties that bind Despite the widespread chaos caused by the coronavirus, at the time of going to print, the Brexit date is fixed – the UK’s transition period will end on 31 December 2020. Andy Spencer (Accordance) considers the issues surrounding Brexit, the One Stop Shop and VAT in the EU.

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

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Weathering the storm The global Covid-19 pandemic could cause the largest wave of cash-flow and trading insolvencies in recent history. Marc Jones (Stewarts) asks what it means for the insolvency regime.

Dates for your diary Upcoming events

Technical 30 Global updates

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Editor’s welcome

Contributors to this issue

Editor’s welcome

MARC JONES

Marc Jones is a partner at Stewarts, the UK’s largest litigation-only law firm. His key practice areas include banking and financial services litigation, securities litigation, fraud claims and asset tracing. FLORIN TOMA

Florin Toma is the current Accountancy Europe President, leading its SME Work closely coordinating with its SME Governance and Team. Florin is the managing partner of JPA in Romania. ANDY SPENCER

s we continue to adapt and change to the ongoing coronavirus outbreak, I hope you and your families are all safe and well, and are finding new ways to thrive in these strange times. During the last few months, we have all had to learn some sharp lessons in responding to a fast‑changing situation, whether they be in safely implementing social distancing or modifying our businesses to ensure that they conform to the latest guidelines. Here at AIA, things have been no different. We have been working hard to ensure that members have the information they need to guide their clients and employers through this time by developing Covid-19 specific guidance, alongside our usual resources. For students, we have had to make the difficult decision to cancel the May exam session, but students can continue to learn through the AIA’s interactive learning platform, AIA Achieve, to prepare for the November exams. In this issue, we offer several articles for accountants operating during the coronavirus outbreak. Our cover feature ‘Weathering the Storm’ asks what

Rachel Rutherford Editor, IA

Covid-19 means for the insolvency regime, as the pandemic could cause the largest wave of cash-flow and trading insolvencies in recent history (see page 26). We also examine the financial implications of government schemes, such as the Coronavirus Job Retention Scheme, and review the accounting treatment of such grants (see page 12). In another piece, we offer practical advice on how accountants can guide SMEs through this crisis at a time when they need all the support they can get (see page 20). However, coronavirus is not the only issue that accountants are facing at the moment. At the time of going to print, the Brexit date is fixed, and the UK’s transition period will end on 31 December 2020. We therefore consider the issues surrounding Brexit, the One Stop Shop and VAT in the EU (see page 16). IFRS 17 is also challenging some accounting teams and we look at the many questions around choosing year-to-date reporting versus period-to-date reporting for insurance entities that are preparing to use the standard (see page 22). Stay safe and if you need further guidance or support please get in touch with AIA in the usual way.

Andy Spencer is Director of Professional Services at Accordance. He delivers major international VAT projects for blue-chip clients, with expertise in structural compliance and commercial efficiency. STEVE COLLINGS

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

Richard Simms is Managing Director of F A Simms & Partners. Richard is an FCA Qualified Accountant and has a Diploma in Anti Money Laundering. DIETER VAN DER STOCK

Dieter Van der Stock is an IFRS subject-matter expert, Dieter manages the accounting aspects in the delivery of the Moody’s Analytics RiskIntegrity for IFRS 17 solution for insurers. ISSUE 111 | AIAWORLDWIDE.COM

News COVID-19

INVESTIGATION

Financial crimes grow during the pandemic

FRC launches investigations into KPMG and PwC The Financial Reporting Council (FRC) has commenced two investigations into the audits of Eddie Stobart Logistics plc for the years ended 30 November 2017 (KPMG) and 30 November 2018 (PwC). The investigations will be conducted by the FRC’s Enforcement Division under the Audit Enforcement Procedure.

istockphoto/koto_feja

FINANCIAL DISCLOSURES

As a result of the Covid-19 pandemic and the unprecedented sums of relief money moving across the global economy, the threat of financial crimes and malfeasance continues to grow. In this context, CPA Canada and the International Federation of Accountants (IFAC) has published a report that explores a key facet of uncovering and fighting illegal activities: beneficial ownership transparency. The fight against money laundering, corruption and tax evasion requires the participation of several stakeholders, including accountants, who rely on strong legal frameworks and accurate information. “Beneficial ownership information, which identifies who has controlling ownership of an entity, is important to the discovery of financial crimes,” said CPA Canada president and CEO Joy Thomas. “Enhancing the transparency of this information should strengthen anti-money laundering regimes and help in seeking out lawbreakers and their proceeds of crime.” The report, “Approaches to beneficial ownership transparency: the global framework and views from the accounting profession”, contributes to the global conversation as countries grapple with questions regarding the extent to which, and by whom, beneficial ownership information is collected, reviewed and made available. Central AIAWORLDWIDE.COM | ISSUE 111

to this discussion is the concept of beneficial ownership registers and registries. In examining how various countries are complying with the recommendations from the Financial Action Task Force (FATF) on transparency and beneficial ownership information, and with the perspectives of senior accounting leaders across the globe, the report has reached the following findings: ●● Establishing a public beneficial ownership registry does not immediately ensure that a country’s law enforcement and other agencies have access to accurate information in a timely manner. ●● In several jurisdictions, the move to a public registry has been a phased approach, starting with non-public registries and then transitioning to public registries; and ●● Verifying information and ensuring appropriate levels of access are key factors in a registry’s efficacy. “The global accountancy profession, with its strong public interest mandate, is a committed partner in the fight against financial crime,” said Kevin Dancey, IFAC CEO. “We are eager to advance important policy conversations, including those over beneficial ownership, and to work meaningfully alongside governments, law enforcement and other stakeholders to combat financial crime in all its forms.”

SEC to improve financial disclosures about business acquisitions and dispositions The Securities and Exchange Commission has announced that it has voted to adopt amendments to its rules and forms to improve for investors the financial information about acquired or disposed businesses, facilitate more timely access to capital, and reduce the complexity and costs to prepare the disclosure. The amendments will update its rules, which have not been comprehensively addressed since their adoption some over 30 years ago. “This action, which is designed to enhance the quality of information that investors receive while eliminating unnecessary costs and burdens, will benefit investors, registrants and the market more generally,” said Chairman Jay Clayton. “I want to thank the staff for their outstanding efforts to bring their years of experience to modernising these rules.” The amendments to the rules and forms are intended to assist registrants in making more meaningful determinations of whether a subsidiary or an acquired or disposed business is significant, and improve the financial disclosure requirements applicable to acquisitions and dispositions of businesses, including real estate operations and investment companies. The amendments will be effective on 1 January 2021, but voluntary compliance will be permitted in advance of the effective date.

News LEGISLATION HONG KONG

istockphoto/CHUNYIP WONG

The Exemption from Salaries Tax and Profits Tax (Anti-epidemic Fund) Order

The Exemption from Salaries Tax and Profits Tax (Anti-epidemic Fund) Order will be gazetted and take effect from 29 May 2020. The order seeks to implement tax exemption from the year of assessment 2019/20 to most of the financial assistance or relief under the Anti‑epidemic Fund provided to businesses or individuals. The Hong Kong government established the Anti-epidemic Fund and two rounds of relief measures have been rolled out. Apart from certain measures that have no tax consequences in respect of the sums received under the fund, other measures entail tax liabilities under the Inland Revenue Ordinance. To enable businesses and individuals to fully benefit from the assistance under the fund, the beneficiaries will be exempt from the payment of profits tax and salaries tax in respect of the assistance unless the sums are paid for general business activities and are not paid in a matching arrangement. The government will adopt the same principles to provide tax exemption when further relief measures are rolled out under the fund. Employers and employees do not need to report the sums exempted in tax returns upon the order’s commencement. Businesses or individuals that have already filed their tax returns can provide the Inland Revenue Department with a written notification to amend the relevant information. Employers should file a revised employer’s return for relevant employees. The order will be tabled at the Legislative Council for negative vetting on 3 June 2020.

The government has introduced the Corporate Insolvency and Governance Bill in Parliament, which will put in place a series of measures to amend insolvency and company law to support businesses in addressing the challenges resulting from the impact of coronavirus (Covid-19). The Bill consists of six insolvency measures and two corporate governance measures. The insolvency measures will provide vital support to businesses to help them through this period of instability. The Bill will do this by: ●● introducing a new moratorium to give companies breathing space from their creditors while they seek a rescue; ●● prohibiting termination clauses that engage on insolvency, preventing suppliers from ceasing their supply or asking for additional payments while a company is going through a rescue process; ●● introducing a new restructuring plan that will bind creditors to it;

istockphoto/Dina Damotseva

Corporate Insolvency and Governance Bill introduced

●● enabling the insolvency regime to flex to meet the demands of the emergency; ●● temporarily removing the threat of personal liability for wrongful trading from directors who try to keep their companies afloat through the emergency; ●● temporarily prohibiting creditors from filing statutory demands and winding up petitions for coronavirus related debts; ●● temporarily easing burdens on businesses by enabling them to hold closed AGMs and conduct business and communicate with members electronically, and by extending filing deadlines; and ●● allowing for the temporary measures to be retrospective so as to be as effective as possible.

TARIFFS

The new UK Global Tariff The government has announced the UK’s new Most Favoured Nation tariff regime, the UK Global Tariff. This will replace the EU’s Common External Tariff on 1 January 2021 at the end of the transition period. The new tariff aims to support the economy by making it easier and cheaper for businesses to import goods from overseas. It is a simpler, easier to use and lower tariff regime than the EU’s Common External Tariff and will be in pounds, not euros. There will also be a reduction in red tape and other unnecessary barriers to trade, reducing cost pressures and increasing choice for consumers and back UK industries to compete on the global stage. The changes include scrapping unnecessary tariff variations, rounding tariffs down to standardised percentages, removing all “nuisance tariffs” (those below 2%) and getting rid of the EU’s Meursing table (the additional code required for the import or export of goods containing

certain types of milk and sugars) to operate a more standardised approach. The UK Global Tariff also expands tariff free trade by eliminating tariffs on a wide range of products. It ensures that 60% of trade will come into the UK tariff free on WTO terms or through existing preferential access from January 2021, and successful FTA negotiations will increase this. The government is maintaining tariffs on a number of products backing UK industries such as agriculture, automotive and fishing. Some tariffs are also being maintained to support imports from the world’s poorest countries that benefit from preferential access to the UK market. The UK Global Tariff was designed following widespread engagement with businesses across the UK. As it will come into force on 1 January 2021, it’s important that businesses can familiarise themselves with the new tariff regime ahead of this date. ISSUE 111 | AIAWORLDWIDE.COM

AIA

NEWS UPDATE

AIA update on Covid-19

AIA recognised by the Quality Care Commission AIA members are listed as financial specialists by the Quality Care Commission for the purposes of completing a statement of financial viability that is used by the QCC as part of its application for registration process. CAMPAIGN

AIA advocacy and mentoring We’re proud to have you as an AIA member and hope you’re proud of your membership and professional accreditation too. Help us to spread the word about the benefits of membership and build the AIA community by supporting our campaigns. You can help in lots of ways, from engaging with us on social media or responding to surveys, by using your designatory letters and talking about your AIA membership – it all helps support the work AIA are doing to support you. AIAWORLDWIDE.COM | ISSUE 111

Members: how we are supporting you Supporting our members throughout their careers is central to what we do, and during these unprecedented times, we recognise that we must adapt to help you and your business. We have tailored our services to include: ●● the AIA Covid-19 hub: an online resource that provides the latest information and guidance for members and which is sector and country specific; ●● an enriched webinar programme with expert speakers to guide you through the latest changes and developments in a safe environment; ●● news, commentary and guidance via the eNews and specialist publications; ●● Covid-19 Toolkit: simple and practical guidance from AIA’s tax partners, Tolley, on how best to advise your clients through the Coronavirus pandemic; and ●● answering your questions on topics such as practice compliance, AML, HR and financial reporting implications resulting from business support schemes. Students and exams AIA are still working towards resuming the AIA exams in November 2020,

QCC

AIA is working hard to ensure members have access to the services and information they need to offer businesses the best financial advice and overcome the challenges of the Covid-19 pandemic. Working alongside our global partners, AIA has been able to adapt its operations to ensure that all staff are working in a safe environment, whilst maintaining our service levels and preserving professional standards and compliance across regulated areas.

but we are also looking at alternative platforms and methods of assessment should we need to make changes to that policy. We are strongly recommending that students continue to study and use all the available resources we have to support them in passing the exams. We also understand that each student will have their own particular circumstances and we would encourage you to get in touch with the Exams Team if you have any concerns or questions at: exams@aiaworldwide.com. AIA Achieve is operating as normal, and this gives those that choose to self-study the best possible chance of passing the exams. Support from e-tutors, practice questions, study planners and a mock exam are just some of the study support tools that students on AIA Achieve use to prepare for the AIA exams. For further information visit: www.aiaworldwide.com/achieve.

AIA News MARKETING TOOLS

AIA welcomes new member to the Regulatory Oversight Committee

New marketing tools for AIA members

Geoff Westmoreland, Deputy Area Commercial Director for HSBC Retail Banking and Wealth Management has joined the AIA’s Regulatory Oversight Committee. Geoff has extensive experience of the anti‑money laundering regime within financial services and brings a wealth of knowledge from his years in the banking sector. The AIA Regulatory Oversight Committee is charged with ensuring that the AIA maintains its compliance with the UK Money Laundering Regulations and adding a level of oversight and scrutiny in line with

best practice. The Committee will report directly to Council, taking responsibility for the appropriateness of the framework for AIA’s internal regulation of Members in Practice. Geoff, along with the rest of the Committee members will review the risk based approach, supervision and compliance work of the AIA and will also ensure that appropriate action is taken against relevant persons when necessary where they have failed to meet their anti-money laundering obligations.

NAVIGATE THE COMPLEXITY OF TAX

REGULATORY OVERSIGHT

AIA has released new marketing collateral to help members promote their practice. Whether you’re looking to increase engagement with existing clients or grow your firm, our new promotional tools can help. The logos, images and leaflets all come with instructions for use and can be located under “AIA Marketing Tools” in the Secure Document Library of your AIA account. Login to My AIA and download your free marketing material today.

Tolley®Guidance Find solutions quickly, understand how to apply them and avoid undue risks. Tolley®Guidance gives you direct access to critical, comprehensive and up-to-date tax information that you can rely on. Written exclusively by tax professionals for tax professionals, Tolley®Guidance combines tax technical commentary with practical guidance, so you can confidently deal with your clients’ needs. Whether you need to update your knowledge, gain deeper understanding or gather information about a specialist area, Tolley®Guidance can help you with step-by-step examples and simple guides. Devote more time to clients, instead of hunting for answers.

RELX (UK) Limited, trading as LexisNexis®. Registered office 1-3 Strand London WC2N 5JR. Registered in England number 2746621. VAT Registered No. GB 730 8595 20. LexisNexis and the Knowledge Burst logo are registered trademarks of RELX Inc. © 2019 LexisNexis SA-0719-077. The information in this docuSment is current as of July 2019 and is subject to change without notice.

ISSUE 111 | AIAWORLDWIDE.COM

WEBINARS

Webinars on VAT and income tax AIA and GoSimpleTax’s joint webinars will update you on VAT and income tax.

Key elements on VAT

uring May, GoSimpleTax collaborated with the AIA to bring you, their members, webinars on VAT and income tax. It was great to see so many members taking part. Feedback has been positive throughout and members have told us they found the webinars interesting and informative. Members who viewed the webinars received updates on VAT and income tax and how Covid-19 is affecting them both.

Making Tax Digital (MTD) for VAT is the first stage of the government’s initiative to completely digitalise tax. It took effect on 1 April 2019, with full compliance starting on 7 August 2019. Spreadsheets are allowed under the Making Tax Digital regime, although bridging software will be required to file the VAT return to HMRC. You may also be using an old bookkeeping system that has not been updated to comply with MTD for VAT. If this is the case, you will also need to use bridging software to make your VAT return submissions to HMRC.

Key elements on income tax

●● From 13 May 2020 for 2020/21, employers will be able to reimburse employees for office equipment purchased due to Covid-19 without tax consequences on the basis that no tax charge would arise had the employer provided the equipment direct. ●● Annual leave: Employees are now allowed to carry over four weeks’ leave into the next two years, as announced by Business Secretary Alok Sharma, where workers have not used all their annual leave entitlement due to Covid-19. ●● Companies House: There has been a temporary pausing of the strike off process. The government said that suspending this power will give businesses “affected by the coronavirus outbreak the time they need to update their records and help them avoid being struck off the register”. ●● Filing accounts/annual statements: A three month extension has been given by Companies House. ●● Off-payroll working rules (IR35) have been delayed 12 months. ●● Encourage your clients to submit their 2019/20 tax return as soon as possible to avoid getting a nasty surprise in January 2021.If they know their tax liability now, they can plan for the future. ●● Statutory Residency Test: There are temporary changes for those coming to the UK to work in a Covid-19 related job. Obviously, much more was covered in the webinar. We would urge you to view the slides and to also keep up to date with any changes made via www.gov.uk/coronavirus/business-support. AIAWORLDWIDE.COM | ISSUE 111

How does VAT bridging software work?

AIA members receive a 25% discount from GoSimpleTax and GoSimpleVat To claim your discount either visit www.gosimpletax. com/aia-tax and sign up to the free trial (your code will be emailed to you) or email mail@ gosimplesoftware. co.uk. Please also use this email address should you have any questions for the team.

Once you have registered with HMRC for MTD for VAT and received email confirmation that your account is active, you will then need to “authorise” your bridging software to link with your HMRC account. The software will help to guide you through these steps. Bridging software then transfers your VAT information to HMRC’s systems via an incredibly simple digital process. You’ll complete your spreadsheet or your non-compatible bookkeeping software as usual, then upload or link the VAT 100 report to the bridging software product. After this step is completed, it’s best to check that the pre-populated form’s values match those of your VAT 100 report. When you are happy that all is correct, you can submit the VAT return direct to HMRC.

Who can take the most value from bridging software?

Anyone dealing with the VAT return process will benefit from bridging software – from accountants submitting on behalf of their clients to small and large businesses filing for themselves. SMEs, in particular, will find the tools valuable. This is because of the higher cost of other types of software, and the time required to get to grips with them. It’s also particularly beneficial to those who already have accounting software which is not compatible with MTD. Further details were given in the webinars which members can access at: https://info.gosimpletax.com/aia-webinars. ●

STUDENTS

Current issues in auditing: part 3 Students must be familiar with current and professional issues and pronouncements as part of their understanding of professional auditing.

A The most significant changes to accounting standards in recent days relate to both IFRS 16 Leases and IFRS 15 Revenue Recognition.” 8

s highlighted to students in the last study guidance article, within the syllabus for Paper 15 Professional Practice (Auditing) is section 15.5 Current and Professional Issues and Pronouncements. It states in this section of the syllabus that “candidates are expected to keep abreast with the latest developments in professional issues, decisions of legal cases, changes in legislation and issuance of audit and accounting pronouncements that will affect processes, strategies and legal implications of audit assignments and evaluation services and the profession”. I re-emphasise to students that this topic is weighted at 20% and is therefore as important as topic 15.1 Regulatory Issues and Professional Practices, and only 5% less important than 15.2 Statutory Audit and other evaluation and 15.3 Audit Strategy and Process. It is therefore of continued concern to the examiner that students do not appear to be adequately prepared in this area. Following the performance on the November 2019 paper, the examiner continues to feel that candidates are expecting this topic to be examined as a discrete question which they can choose to avoid, rather than as a requirement to contextualise other aspects of the syllabus around the emergent concerns for the profession in a more embedded manner. To this end, the AIA has produced the following support for candidates preparing for the May 2020 sitting of Paper 15, highlighting a number of emerging issues with which they should ensure familiarity. This article is not intended to be exhaustive but should signpost candidates towards their wider professional reading. ISSUE 111 | AIAWORLDWIDE.COM

STUDENTS Students should also be familiar with the specific more advanced areas of auditing practice that are only examined on Paper 15. The last sitting again exposed limited understanding of both the audit of segmental reports and the audit of related party transactions. A diligent review of the detailed syllabus for Paper 15 should highlight these specific technical concerns. Students are also reminded that Paper 15 is 90% application rather than knowledge recall, and that their answers must reflect this. To this end, the examiner advises students to ensure that they understand the key issues in accounting standards and auditing standards, codes, etc. and then apply this to the question diligently. Reiterating the question does not score marks and merely stating the theory without application also results in a very low mark. For those candidates that did not pass the paper, the examinersâ&#x20AC;&#x2122; main observation on the performance of both papers in 2020 concerned the lack of depth that students brought to their answers. Where students did have a grasp of the issues under consideration, they often failed to develop the discussion to show their application to the case in the question.

ÂŠ istockphoto/Oxyggen

Key accounting standards

AIAWORLDWIDE.COM | ISSUE 111

The most significant changes to accounting standards in recent days relate to both IFRS 16 Leases and IFRS 15 Revenue Recognition, as they create significant new accounting judgments around the lease classification and revenue, and create additional subjectivity in both aspects of accounting. As new standards which are more complex and often not compatible with previous practice, the risk of error in application and the possibility for management bias being reflected in the estimates is significant. Both standards have also required additional disclosure which needs to be balanced and meaningful to enable users of the financial statements to understand the impact of assumptions on the figures. IFRS 16 is now mandatory and students should be familiar with the treatment required. One key area related to both of the standards which is causing concern to the IASB relates to the treatment of onerous contracts. This will require amendments to IAS37 Provisions, Contingent Liabilities and Contingent Assets which are expected in the first half of 2020. These will attempt to resolve the issue of which costs should be included in determining the cost of fulfilling a contract for the purpose of determining whether it should be considered onerous. For IFRS 16 Leases, students should be aware of the reclassification of leases from operating leases recognised in the income statement to finance leases recognised in the statement of financial position with the resultant non-current asset recognition and consequent depreciation. This raises a number of subjective areas for the audit; namely, the valuation and impairment of non-current assets (already recognised as a challenging area of high subjectivity) and the

STUDENTS valuation of the lease and the recognition of its costs through the income statement. Students are advised to ensure that they understand the key issue in IFRS 16 and so could explore how they would audit the resulting figures.

Following the review of IFRS3 Business Combinations in 2015, the IASB has been reviewing four significant areas of concern within this accounting area: ●● the effectiveness and complexity of testing goodwill and impairment; ●● the issues around accounting for goodwill subsequent to its initial recognition; ●● the identification and fair value measurement of intangible assets; and ●● the information regarding the subsequent performance of the acquiree.

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

Developments in audit practice: data analytics and ethics

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

Audit reporting

Students are reminded that audit reporting is another core area of the syllabus and that it

Developments in auditing standards: audit of accounting estimates

extends more widely than the conventional audit report. The development of the extended audit report in the UK has influenced international audit reports and students should be familiar with this. There do, however, remain weaknesses in reporting and the Brydon Review recommends the following areas for improvements: ●● Create continuity between successive audit reports. ●● Provide greater transparency over differing estimations, perhaps disclosing graduated findings. ●● Call out inconsistencies in information made public. ●● Reference external negative signals and how they have informed the audit. ISA 720 The Auditor’s Responsibilities relating to Other Information was revised in June 2016 and its impacts are starting to be seen in the current cycle of audit reporting. Under ISA 720, the auditor is responsible for ensuring that other information included in the audited financial statements is not materially inconsistent with either the financial statements or their understanding of the entity’s position from their knowledge of the business gained during the audit. This relates to all of the narrative information issued by the reporting entity and covers all of the material issued before the audit report. This supports the ethical requirement that the auditor avoids being knowingly associated with information that is either materially false or ISSUE 111 | AIAWORLDWIDE.COM

STUDENTS misleading. It is particularly focused at the need to make the auditor’s comment on the extended disclosure requirements for directors around risk and viability statements. The standard requires that the auditor specifically reviews and comments upon: a) the directors’ confirmation in the annual report that they have carried out a robust assessment of the principal risks facing the entity, including those that would threaten its business model, future performance, solvency or liquidity; b) the disclosures in the annual report that describe those risks and explain how they are being managed or mitigated; and c) the directors’ explanation in the annual report as to how they have assessed the prospects of the entity, over what period they have done so and why they consider that period to be appropriate, and their statement as to whether they have a reasonable expectation that the entity will be able to continue in operation and meet its liabilities as they fall due over the period of their assessment, including any related disclosures drawing attention to any necessary qualifications or assumptions. ISA 720 Auditors’ Responsibilities Relating to Other Information 2016 This raises an interesting issue within the idea of the expectation gap, as the auditor’s requirement to comment has been operationalised as a statement that the auditors have reviewed the issues detailed above and have nothing material to add or draw attention to. The Brydon Review further proposes a resilience statement which would replace the existing going concern and viability statements: ●● The short term reporting component of the statement would incorporate the existing going concern assessment but with enhanced transparency, including the disclosure of material uncertainties that could impact on the company as a going concern before any mitigating action has been taken into account. ●● The medium term component would be a more robust and transparent version of the existing viability statement. This component of the resilience statement should include stress testing of various scenarios that could threaten the company’s business model, drawing on existing models currently used by the Prudential Regulation Authority for financial services companies. ●● The long term component would provide an opportunity for directors to set out how they are positioning the business strategically to address the risks of, for example, climate change and other potential existential threats. These suggestions highlight current areas of concern in reporting and students should be familiar with these. AIAWORLDWIDE.COM | ISSUE 111

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

Sustainability reporting and assurance

The UN Sustainable Development Goals are being used as a framework by investors to assess the exposure of companies to risks to their ability to sustainable create value within the organisation. This is linking into the developments of integrated reporting and the recent report by the Task force for Climate Based Financial Disclosure. Policy makers within governments and regulators are also looking to these goals to drive the future direction of sustainability in companies. Within this framework, the Sustainability Accounting Standards and other sustainable measures are being developed and the former were issued at the end of 2018. The 2017 recommendations of the Financial Stability Board (FSB) “Task Force for Climate related disclosures” seek to establish a framework for an organisation’s disclosures “that will help financial market participants understand their climate risk”. These were widely adopted in the 2018 corporate reports, and are creating a significant market opportunity for sustainability assurance and sustainability consultancy as the standards provide a key framework against which corporate sustainable reporting can be assured. The approach of the professional practice to such an assignment is the same as any other assurance assignment. It consists of initially identifying the subject matter for the engagement. The interested parties who may be using this information and the standards against which the assurance would be carried out must be explored and clarified. This process is essential to clarify the real risk areas in the assurance assignment so as to understand the concerns of the company and what assurance is seeking to achieve. A key idea for the auditor providing assurance against new sustainability standards is what would render the information useful. In common with all other information for decision making, this would reflect the ideas of appropriate standards of relevance, completeness, reliability, neutrality and understandability. This debate mirrors other debates around quality reporting, including narrative reporting, risk reporting and KPI reporting. There are challenges in ensuring that the information is fairly represented, unbiased, consistent and transparent. The ideas from the FRC in their Cutting the Clutter publication may help this wider issue to be appreciated (for more information, see bit.ly/2Zg73L5, bit.ly/2AEIVI2 and www.fsb-tcfd.org). ●

A key idea for the auditor providing assurance against new sustainability standards is what would render the information the most useful.” 11

COVID-19

Accounting for Covid-19 Steve Collings examines the accounting treatment of grants received in respect of the Coronavirus Job Retention Scheme.

Steve Collings Partner, Leavitt Walmsley Associates Ltd

s businesses continue to deal with the significant level of disruption caused by the Covid-19 pandemic, HMRC has now started to send payments out to employers in respect of the Coronavirus Job Retention Scheme (CJRS) for employees that have been furloughed. For self-employed individuals, it is expected that the self-employed income support scheme will be up and running from the middle of May 2020. This article examines the accounting treatment in respect of grants received in respect of the CJRS and the Coronavirus Statutory Sick Pay Rebate Scheme, together with the disclosure requirements under UKÂ GAAP.

Grants received from HMRC for furloughed employees

Employers who have furloughed employees will have been claiming the 80% grant available from HMRC. Many businesses have now received these grants and, in terms of the accounting treatment, there are a couple of points that need to be considered where the financial statements are concerned. FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland deals with government grants in Government Grants s 24. FRS 102 para 24.3A states that government grants cannot be recognised in the financial statements until there is reasonable assurance that:

ISSUE 111 | AIAWORLDWIDE.COM

COVID-19

Employers who have furloughed employees will have been claiming the 80% grant available from HMRC. A couple of points must be considered where the financial statements are concerned.

The above restriction is also the same for small companies in The Small Companies and Groups (Accounts and Directors’ Reports) Regulations 2008 para 8. Author bio

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

a) the entity will comply with the conditions attaching to them; and b) the grants will be received. Once the recognition criteria has been met, FRS 102 para 24.5E states: “A grant that becomes receivable as compensation for expenses or losses already incurred or for the purpose of giving immediate financial support to the entity with no future related costs shall be recognised in income in the period in which it becomes receivable.” The relevant accounting policy in respect of the grant will then be applied. This will either be the “performance model” (FRS 102 para 24.5B) or the “accrual model” (FRS 102 paras 24.5C to 24.5G). Where the CJRS is concerned, recognition of the grant in the financial statements is likely to be the same under both models; i.e. it will be recognised immediately in profit and loss. The grant in respect of furloughed employees must be presented as income within profit or loss. This can be done either separately as “Grant income” or “Government grant” or within the heading “Sundry income”. The grant cannot be offset against the payroll expense (or any other expense) in profit or loss because this is prohibited in company law. The Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008 Sch 1 para 8 states:

Non-small entities

FRS 102 para 24.6 requires an entity to disclose the following: a) the accounting policy adopted for grants in accordance with para 24.4 (i.e. the performance model or the accrual model); b) the nature and amounts of grants recognised in the financial statements; c) unfulfilled conditions and other contingencies attaching to grants that have been recognised in income; and d) an indication of other forms of government assistance from which the entity has directly benefited.

Small entities choosing to report under FRS 102 s 1A

A small entity choosing to report under FRS 102 s 1A is not required to apply the above disclosure requirements and there are no specific disclosure requirements in s 1A for small companies where government grants are concerned. However, there is still a requirement for the directors to ensure that the financial statements give a true and fair view, so potentially there may be some disclosures made in respect of the grants received if the directors view this as necessary to enable a true and fair view to be presented.

Micro-entities

For micro-entities choosing to report under FRS 105 The Financial Reporting Standard applicable to the Micro-entities Regime, there are no specific disclosure requirements.

Coronavirus Statutory Sick Pay Rebate Scheme

For payments received by an entity from HMRC in respect of the Coronavirus Statutory Sick Pay Rebate Scheme, the same accounting treatment as above will apply. ● © istockphoto/bob_bosewell

“Amounts in respect of items representing assets or income may not be offset against amounts in respect of items representing liabilities or expenditure (as the case may be), or vice versa.”

Disclosure requirements

AIAWORLDWIDE.COM | ISSUE 111

BUSINESS SUPPORT

Business support

Collaboration with our business partners and friends is more important than ever in these challenging times, which is why we launched BusinessSupport.co.uk. The site features interviews with business owners who tell their stories as they find new ways to operate and share their experiences for the benefit of others. One of first interviews is with Philip Turnbull, AIA chief executive. The site also features a business survival guide for Covid-19, which pulls together valuable information about rescuing businesses in difficulties. It can be used as a planning guide to help businesses emerge from this pandemic as strong as they can be, as well as best practice advice, checklists, case studies and how-to guides addressing many aspects of business financing, planning and management within the context of the Covid-19 crisis. Please visit BusinessSupport.co.uk. Weâ&#x20AC;&#x2122;d love your feedback and would be delighted if youâ&#x20AC;&#x2122;d like to contribute an article or have a business or client that would like to be interviewed.

ISSUE 111 | AIAWORLDWIDE.COM

BUSINESS SUPPORT

Richard Simms examines how businesses can fully prepare for the easing back of government support.

Richard Simms Managing director, FA Simms & Partners

have, as you will all have done, followed closely the government’s response to the impact of lockdown on businesses. You will have formed your own opinions, but the government support packages for businesses and employees have certainly enabled many businesses to stay afloat so far. However, there is still a long road ahead and what is important is that professional advisors, their clients or employers are getting all the help they can to be able to take advantage of the government support and move businesses forward in the best shape possible.

Emerging from lockdown

We now know roughly what the next stage of lockdown will look like, although at the time of writing there are some details to be announced. Many businesses will be looking to emerge from their different states of mothballing in the coming months. There could be a substantial peak of avoidable insolvencies if action is not taken to fully prepare businesses for the easing back of government support and potentially months of heavily restricted trading conditions. Business owners and managers should use this time to plan and analyse for what lies ahead. Accurate information will be vital in allowing businesses to adjust to life after lockdown and the withdrawal of government support. From my own discussions with business owners over the last few months, you won’t be surprised to hear that no one has said, “I saw this coming and I was completely prepared for it.” Although there is an obvious commonality in the underlying cause, how businesses are being affected is diverse. There is a challenge in our discussions: how to tell whether a business was already facing financial difficulties on a significant level before the current crisis. How businesses react to this pandemic will be recorded and analysed for years to come. How your clients’ businesses react and move forward will be their choice, but wouldn’t it be great AIAWORLDWIDE.COM | ISSUE 111

Relaxing of wrongful trading

The relaxation of the wrongful trading restrictions during the pandemic are to allow businesses to avoid the need for insolvency at a time when there is great uncertainty over their future. These changes are yet to be tested. Where a company can be shown to have been insolvent before Covid-19, it is not expected that the changes will protect company directors against wrongful trading allegations before the pandemic. The Covid–19 relaxation of wrongful trading insolvency laws was retrospectively applied from 1 March 2020. This no doubt a positive move on behalf of the government and one that I’m sure wasn’t taken lightly. The good news is that this allows businesses breathing space to review, assess and rebuild. I’ve not seen much about paying dividends from a company during the relaxed wrongful trading rules, but if a company is insolvent it shouldn’t pay dividends. It is possible that a company can be insolvent and not be criticised for wrongful trading, but still be insolvent for the purposes of the payment of a dividend. It is for accountants to ensure that dividends are not being paid if there’s a risk that a company could be shown to be balance sheet or cashflow insolvent.

How will we be affected in the longer term?

Though it may not seem possible today, it is entirely possible that the UK economy will be stronger in the mid-term. To flourish in the future will require innovation both in terms of the use and development of technology, and also in working practices. Being open-minded, prepared and willing to adapt to the changing environment that is ahead of us all will be crucial. Together, we can emerge from this crisis stronger than ever! As compliance continues to be a dominant part of business, those that can use compliance to reduce the risks of their business will prosper. The modelling of risk management has been hugely helpful in modelling my own business. There are also lessons to be learned from the current situation and there are benefits and savings to be made from using technology to support businesses as we continue to use social distancing. The ease of getting people together in multiple locations and countries makes great sense and there is a time saving from not travelling which drives efficiency and should be maintained in the future. ●

Nursed back to health

if they could learn from others and help others to learn. From conversations with financiers, it’s evident that the challenge of determining the financial strength of a business before coronavirus is one of the reasons why many applications for finance have been turned down.

BREXIT

The ties that bind Andy Spencer considers the issues surrounding Brexit, the One Stop Shop and VAT in the EU

espite the widespread chaos caused by the coronavirus, at the time of going to print, the Brexit date is fixed – the UK’s transition period will end on 31 December 2020. As of 1 January 2021, our trading rules with the EU will be different. The bind is that we do not yet know what rules we will be operating under, which makes planning difficult for businesses involved in intra-EU trade. The government’s strategy may be to force a last-minute deal with favourable trading terms for the UK – but failing this, we will revert to WTO terms. In any event, the implications for VAT are significant, as leaving the single market and customs union will mean the UK is treated as a third country by the EU. The current way of accounting for VAT on intra-EU movements of goods on both a B2B and B2C basis will change significantly.

The E-Commerce Directive

Should the ramifications of Brexit not be enough, 1 January 2021 is also theoretically the date on

Andy Spencer Director of Professional Services, Accordance

which the EU is changing the B2C rules on intra-EU supplies of goods with the implementation of the E-Commerce Directive. However, this date has now been thrown into doubt following a proposal by the European Commission that the implementation date should be delayed by six months until 1 July 2021. This is due to the devastating impact of coronavirus and the need for governments and tax authorities to prioritise other issues. The Commission has made it clear that the delay should be as short as possible to minimise additional budgetary losses for member states. The proposal will now be considered by the European Parliament and the Council of the European Union but it would appear very likely that it will come into effect.

The One Stop Shop

The result of the E-Commerce Directive is that the default position for most businesses selling goods which are delivered to a B2C customer in another member state is that they will have to account for VAT in the country of delivery. This will significantly increase the number of countries in which many ISSUE 111 | AIAWORLDWIDE.COM

BREXIT ●● The supplier can file an OSS VAT return in their member state of identification (MSI). For EU companies, the MSI is their country of establishment. Non-EU companies can choose a MSI. ●● Removal of the low value consignment relief (LVCR) will ensure that EU businesses compete on equal footing with non-EU companies. As the requirements for businesses to account for VAT in other member states increase, the EU is expanding MOSS with three different strands: ●● Union OSS, for intra-EU supplies of B2C goods, sales by intermediaries and EU businesses supplying B2C services; ●● Non-Union OSS for non-EU businesses supplying B2C services; and ●● Import OSS (IOSS) for imports of goods into the EU below €150.

The impact of these changes

businesses have to account for VAT, so the EU is also introducing a new One Stop Shop (OSS) for VAT accounting. The OSS is an expansion of the existing Mini One Stop Shop (MOSS) and will apply not only to the VAT accounting for B2C intra-EU sales of goods but also to all B2C intra-EU services, including electronically supplied services, as is currently the case under MOSS. It also has the objective of reducing the VAT gap – which according to the most recent figures sits at around €137.5 billion – while adapting the EU’s VAT system to the digital economy. These changes offer the potential of a much needed simplification for e-commerce businesses with regards VAT. Among the central changes are: ●● An EU-wide threshold of €10,000 replaces all existing country thresholds, so only the smallest businesses won’t be impacted by the need to account for VAT in other member states. ●● VAT will be due in the member state of consumption (MSC). For goods, this is where they are delivered. AIAWORLDWIDE.COM | ISSUE 111

The availability of OSS could throw businesses a lifeline in terms of simplifications and a lessening of the administrative burden of multiple member state registrations. However, it also requires significant preparation and does not completely remove the need for traditional VAT registrations – these will still be required depending on the specific circumstances of the business. For example, if a business has a warehouse in another member state, it will require a local VAT registration to account for local sales, as OSS only allows for accounting of intra-EU transactions. The introduction of the OSS will also present some challenges for businesses as it gives tax authorities visibility of all B2C sales of goods and services in all member states. There is a significant risk that if sales in the months after the implementation date are over previous distance selling thresholds, tax authorities may be alerted to potential previous breaches. For example, if sales in the second six months of 2021 are at €10,000 per month to an individual member state and the business was not previously registered in that country, the tax authority is likely to review whether VAT should have been accounted for previously. If past failings are identified, there will be a need to account for VAT retrospectively and also an exposure to penalties and interest.

Use of audits

At the same time as introducing OSS, the European Court of Audits has recommended increased the use of audits for e-commerce companies. This makes sense as the VAT paid by these businesses is retained by the government, so it is crucial that they collect this tax. It is surprising that so little attention has been paid to intra-EU e-commerce in the past considering the sums involved. Under OSS, tax authorities can request detailed data to support VAT accounting and ensure that VAT has been accounted for in the correct place. There are also risks around the OSS provision for one single VAT return: if it is submitted late, there is potentially increased risk

Despite the widespread chaos caused by Covid-19, the Brexit date is fixed – the UK’s transition period will end on 31 December 2020.” 17

BREXIT of exposure to multi-country penalties. Finally, should a business be repeatedly non-compliant, the ability to use OSS will be withdrawn, which would require VAT registrations to be put in place in all countries to which goods are delivered, as well as in those countries where B2C services are considered to take place. It is also important to note that use of the OSS mechanism is not compulsory – businesses can choose to maintain registrations in all applicable member states instead. Whether this is appropriate for an individual business will depend on a range of factors and a full review of the facts needs to be undertaken to reach the right decision.

Impact of Brexit

Beyond this, the potential for the E-Commerce Directive and Brexit to interact negatively is significant. At present and until there is confirmation that the introduction of the e-commerce changes has been delayed, businesses should be planning for both Brexit and OSS to occur on the same date and have appropriate solutions in place. However, given the proposal by the European Commission to delay the e-commerce package until 1 July 2021 and current uncertainty in respect of Brexit, it is essential that businesses are also prepared for the situation if one or both of these events is delayed. For example, if the transition period ends on 31 December 2020 but the proposed delay in the implementation of OSS goes ahead, UK businesses selling goods to private consumers will need to consider how they will deal with the import of the goods as the Import OSS will not be available. They will still be able to use LVCR for goods up to a maximum of €22 (although the operation of LVCR varies between member states) but there will be issues for goods where LVCR does not apply. Potential options include the use of EU warehouses and importing goods into a single member state but there are logistical complexities and additional costs no matter what solution is used. Customer experience is key to e-commerce transactions so making the customer liable for the VAT due on the importation of the goods is not necessarily the solution, especially considering the high level of returned goods in some sectors. If the Commission’s proposals are rejected and OSS goes ahead on time but the Brexit transition period is extended, OSS provides a temporary respite from considerations on how to deal with those goods over €150 which are ineligible for the Import OSS. There will, however, be the need for a solution when the transition finally ends. For e-commerce companies selling goods to private individuals in the EU, there is a lot to contend with.

Looking forwards Author bio

Andy Spencer has worked in VAT for over 25 years. He joined Accordance in 2009 and has responsibility for the consulting and compliance teams.

On the positive front, the UK government has confirmed that postponed accounting for import VAT will apply from January 2021 – if the transition period ends on 31 December 2020. This removes the need to pay VAT at the time of entry of the goods into the UK and will apply to goods that

are imported from any country outside of the UK and not just from the EU. For importers of goods into the UK, this is positive news and will provide significant cash flow benefits as the import VAT is postponed to the VAT return. However, a question mark hangs over the position of B2C sales to the UK of goods post Brexit. At present, goods below £15 imported from outside the EU are free of VAT under the LVCR. There has been an exception in place for goods that are imported from the Channel Islands since 1 April 2012 due to what was considered large scale abuse of the relief prior to that date – when a wide range of products, including CDs and DVDs, were often shipped from the UK to the Channel Islands only to be imported again without VAT. The UK government was clearly concerned that, post Brexit, this relief would benefit EU sellers of goods, as well as the large number of non-EU sellers who currently benefit from the regime. As a result, it previously brought in legislation for the removal of LVCR when the UK leaves the EU following the transition period. The same approach is being taken by the EU in levelling the playing field for its domestic suppliers and is being replicated in countries around the world to generate additional tax and remove a cost advantage for non-resident suppliers. One of the reasons for LVCR was to balance the cost of receiving small amounts of VAT with the administrative cost of collection. The increasing use of technology allows this challenge to be met, and the UK’s solution to the problem is similar to Import OSS. Legislation was introduced in December 2018 for a special scheme for goods below the value of £135 – the financial limit reflects the threshold below which there is no customs duty on the import. Whilst the legal framework is in place, it is not currently clear whether this scheme will go ahead in exactly the way that it was originally intended, and we expect further announcements from HMRC in due course. In summary, this is a complex time for accountants and clients involved in intra-EU trade. For all businesses, reviewing supply chains and contingency planning for the possible Brexit scenarios is essential. The requirement for UK businesses to appoint a fiscal representative in many member states after the transition period ends will also need to be carefully considered. For e-commerce companies, there are additional steps to be taken in preparation for having to account for VAT in potentially more countries than at present. The various OSS registrations may provide the solution but whilst they are a simplification, they are not necessarily simple. Some essential steps are to conduct supply chain reviews while determining where ongoing VAT registrations will be required. It’s also fundamental to establish which version or versions of OSS will be appropriate, and what rates of VAT apply to your sales in each member state as the rules can vary significantly. Finally, the review of e-commerce, accounting/ERP systems to ensure they are in line with reporting requirements and any changes posed by the Brexit process is essential. ● ISSUE 111 | AIAWORLDWIDE.COM

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COVID-19 © istockphoto/khvost

Five key steps for SMEs

Accountancy Europe’s SME Experts consider how accountants can guide SMEs through the crisis. Florin Toma President, Accountancy Europe

ccountants – many of whom are small practitioners themselves – are SMEs’ trusted advisors. The Covid-19 crisis is a critical time, when SMEs need all the guidance they can get to navigate through the storm. The onus is on SME accountants and small accountancy practices to help struggling SMEs through these difficult times. The following actions are recommended for SME accountants to support their struggling SME clients. Many of these will also be relevant to small accountancy practices and practitioners themselves. ISSUE 111 | AIAWORLDWIDE.COM

COVID-19

Inform yourself of all aid options

Accountants should be aware of all financial and other forms of aid provided by national governments or at EU level. It would be helpful for the national accountancy body to be aware of aid that other countries provide, so they can flag any best practices to their own national policymakers.

Apply the available aid to your client’s situations

Identify clients in high risk sectors and those that would benefit most from public support measures. Help them by: ●● advising them on all the claims available to them and guiding them through the process; ●● identifying options for SMEs to diversify their business; ●● accessing emergency financing provided by governments; and ●● if possible, consider renegotiating your fees and payment schedules with them.

Help with immediate business survival

Inform your SME clients of immediate measures that might make the difference between survival and collapse. Also, help them to implement the following measures, among others: ●● Access the reliefs on offer as soon as possible to maximise the impact. ●● Review and adjust their cash flow forecasts to determine the impact that cuts in sales will have on their ability to pay their suppliers and debt. Businesses should continue to pay their suppliers when they can to help avoid a widespread collapse of the financial system. ●● Consider the business model to ascertain whether the SME can deliver goods or services in an alternative manner, such as by home delivery or online; and whether it can downsize or stop certain activities, such as travel, sales and marketing. ●● Understand their supply chains and plan for the supply of products and services to be disrupted. This may involve scaling back production for some parts and stock, and reconsidering the use of suppliers and clients from countries heavily impacted by the virus. ●● Check their insurance and whether they are eligible for a claim for any financial losses. ●● Communicate with their staff to discuss the possibility of short-term pay cuts. ●● Ensure that their financials are up to date so they can monitor profitability, stock and debtor-creditor balances. Many governments offer deferment of tax returns and financial information filing. However, the long-term impacts of such deferments are not clear. They could result in a later bottleneck in filing such returns and the possible loss of financial and tax data. ●● Renegotiate their payment terms with suppliers and help them to communicate with their bank should they be unable to meet loan commitments. AIAWORLDWIDE.COM | ISSUE 111

SMEs need all the guidance they can get to navigate through the storm. The onus is on SME accountants to help struggling SMEs through these difficult times.

●● Negotiate with their debtors, for example to offer discounts in exchange for early payment. ●● Continually monitor the situation and inform your clients of new initiatives. When the lifting of the restrictions becomes imminent, they will therefore be ready to recommence trading. ●● If all else fails, consider the insolvency options as it may be possible to rescue viable businesses by debt reorganisation rather than be forced into full liquidation.

Help SMEs plan for the medium term

Many SMEs are likely to be in a crisis mode. SME accountants should help them to avoid emergency measures that could endanger the medium-term viability of the business. They can, for example, help SMEs to reconsider whether laying off employees is unavoidable. On top of having negative social and societal impacts, cutting down on their workforce also constitutes a loss of key skills for the business. This should be a last resort option only, so first make your clients aware of all the alternative options, aid and financing available, and help them to access them. It is possible that staff would prefer to take a temporary pay cut over redundancy. This could increase staff loyalty and allow the business to resume operations once the restrictions are lifted. Start building financial reserves as soon as possible, to prepare for a new peak in coronavirus cases even after the current restrictions are lifted.

Help your clients to benefit from the SME ecosystem

You may need to call in other relevant experts to support your clients in executing these steps. Some countries, for example, require involving a certified professional for business restructuring and insolvency. It could also be wise to get legal advice to examine force majeure clauses in business and insurance contracts. As their accountant, your SME clients will rely on your networks. This article was prepared by Accountancy Europe’s SME Experts combining practical experience from across Europe. ●

Author bio

Florin Toma is the current Accountancy Europe President, leading its SME Work.

IFRS 17

Solving the reporting puzzle Dieter Van der Stock considers interim reporting under IFRS 17 and the challenges faced by accounting teams. Dieter Van der Stock Director – Product Manager IFRS 17, Moody’s Analytics

nsurance entities that are preparing for IFRS 17 financial reporting have many questions around choosing year-to-date reporting versus period-to-date reporting. They may also be wondering how to manage their annual reporting, interim reporting and internal management reporting in parallel. This article discusses the requirements of the standard in relation to interim reporting, and explores several challenges accounting teams may face in light of IFRS 17.

Year-to-date versus period-to-date reporting

In a general IFRS context, IAS 34 specifies that the frequency of your interim reporting must not affect your annual figures. In other words, your annual statement must always be based on all the assumptions that were available on the last day of your financial reporting year (31 December for most firms) and on measurement over the entire year. This means that interim reporting must be year-to-date.

Under this general principle, a firm which reports interim quarterly figures cannot start its Q2 calculations with opening balances equal to the closing balances of Q1. (This is referred to as “period-to-date” or “period-to-period” reporting.) Instead, it must always restart reporting from 1 January because the assumptions underlying the calculations have evolved in the meantime, and certain calculations do not work in an incremental way. This has significant implications under IFRS 17, which introduces the contractual service margin (CSM) and the loss component (LC). Some movements in the CSM and the LC are not additive.

The embedded asymmetry within CSM and LC calculation under IFRS 17

For example, for interest accretion on the CSM, the sum of Q1 and Q2 (i.e. on a period-to-date basis) will be different from the measure calculated across the six months in one calculation (i.e. year-to-date basis). This is due to many reasons but mainly because of CSM amortisation: para 44(e) of the standard requires amortisation to be based on the CSM balance after all other adjustments are made during the period (hence the amortisation occurs at the end of the period). So, when reporting Q1, you amortise as at 31 March, and when performing a period-to-date analysis for Q2, you amortise from the period of 1 April to 30 June. For the Q2 results on a year-to-date basis, you are expected to amortise from 1 January to 30 June and not from 1 April (because Q1 is now mid-period from a Q2 perspective). This results in different values of the CSM balance and the various movements (interest accretion and amortisation) at the end of Q2, depending on the approach used. Furthermore, changes in the present value of fulfilment cash flows due to experience differences, and various financial (variable fee approach only) ISSUE 111 | AIAWORLDWIDE.COM

IFRS 17 ÂŠ istockphoto/Andrii Kalenskyi

Your annual statement must always be based on all the assumptions that were available on the last day of your financial reporting year (31 December for most firms) and on measurement over the entire year.â&#x20AC;?

and non-financial assumptions also adjust the CSM. From an actuarial perspective, for practical purposes these changes are estimated either at the start or end of the reporting period. The timing of incorporating these impacts affects the value of amortisation and interest accretion on the CSM, also contributing to the gap between calculating Q1 and Q2 on a period-todate basis, versus recalculating from 1 January (i.e. on a year-to-date basis). These examples of non-incremental calculations would require entities to first reverse all transactions of Q1 and then recalculate the entire half year before posting their Q2 numbers. Therefore, para B137 of IFRS 17 originally required a deviation from the general principle of IAS 34, and said that previously reported estimates on insurance contracts must not be changed. So, for example, if you also present quarterly interim statements, then after Q1 AIAWORLDWIDE.COM | ISSUE 111

is presented, its results are final; and when presenting Q2, you should start with opening balances equal to Q1â&#x20AC;&#x2122;s closing balances and only start measurement from April. At the end of the year, your annual statement will be the sum of the (unamended) quarters. This effectively required a period-to-date basis for interim reporting. Although this deviation was intended to ease the challenges highlighted above, it also created new hurdles, especially when we add consolidation to the equation. For example, what if a subsidiary does not have to submit interim statements locally, but its overseas headquarters

IFRS 17

You now have a choice: report year-to-date or period-to-date. Problem solved? Not necessarily. This only applies to your external reporting.”

must produce quarterly consolidated statements? The head office will need to apply quarterly reporting of interest accretion, amortisation and so on, but for the subsidiary’s local reporting, the calculations need to be performed on an annual basis. This creates a “dual CSM problem” as the subsidiary needs to have two separate versions of its calculations. With many enterprises having multiple layers of consolidation, the picture becomes even more complex. Therefore, after considering several alternatives, the IASB ultimately decided to make the requirements of para B137 optional, giving a choice between year-to-date and period-todate reporting – even though it could also lead to reduced comparability between otherwise identical insurers, depending on the frequency of their interim reporting and accounting policy choice.

Internal versus external reporting

You now have a choice: report year-to-date or period-to-date. Problem solved? Not necessarily. This only applies to your external reporting. Alongside external reporting (both interim and annual), many entities also report monthly, quarterly or biannually for internal management analysis. Regardless of your choice regarding para B137, the frequency of your internal reporting is irrelevant to external stakeholders (and the IASB). It must not affect your interim and annual results. However, given that internal reporting intends to provide management with a preview of the direction external (interim and annual) statements are heading to, the former should be designed to align with the policy choice of the latter.

YTD across the board

Some firms will choose to generate internal monthly results year-to-date and post them in their ledger for external year-to-date interim and annual statements. This approach is a clean-cut way to have one single ledger for both internal and external reporting: a firm’s Q1 interim report equals its internal March report and its annual statement equals its internal December report. In this instance, however, firms should keep in mind that before posting results in the journal, they need to reverse previous periods. Moreover, after interim results are disclosed, not everybody likes to roll them back and present a new calculation three months later.

Period-to-date across the board

Others may opt for period-to-date reporting, in line with how para B137 was originally intended. But how will they synchronise their period-todate with their internal monthly reporting? If monthly reporting is also period-to-date, they cannot simply add January, February and March to produce their interim Q1 report, due to the embedded asymmetry explained earlier. This challenge becomes even more pertinent when we have contracts changing onerousity/

profitability status over the period (i.e. from profitable with a CSM to onerous with a loss component and vice versa). For example, what if a group of insurance contracts started the quarter as non-onerous in January, but in your February internal reporting the contract becomes onerous? Obviously, period-to-date internal reporting cannot be the basis for external reporting. Instead, an entity could apply a year-to-date mechanism for internal reporting for January, February and March, so it could use its March figures for Q1 external reporting. Subsequently, it could calculate April, May and June, each starting from 1 April for internal reporting. Hence in May, it would only reverse April and so on, and therefore its June internal reporting would equal what it must report externally for Q2.

Solving the reporting puzzle

Given the considerations and challenges discussed thus far, what should your enterprise do? For example, there are different combinations of year-to-date versus period-to-date at different reporting levels; and entities that produce quarterly results starting from January, but as the sum of previous quarters’ period-to-date results. To decide how best to approach interim reporting under IFRS 17, one could build a decision tree, with a different outcome for each reporting stream of each entity. Questions include: ●● Is this only for solo reporting or do we also cover consolidated reporting? ●● In addition to external reporting, do we also produce internal reporting? ●● In addition to annual reporting, is there also interim reporting? ●● For each of these reporting streams, is it year-to-date or period-to-date? The IFRS framework is principles-based, which means neither IFRS 17 or IAS 34 gives detailed guidance on how exactly a firm should set up their reporting framework to meet the parallel – and at times opposing – reporting requirements. Let’s examine best practices for several plausible combinations. In some cases, firms could manage the parallel reporting challenge with a single ledger and adjustment entries. This could be achieved by making appropriate accounting policy choices regarding para B137 and aligning internal reporting with external reporting. However, when you need to combine diverse reporting requirements across and between different entities of an enterprise, posting adjustment upon adjustment can become difficult to audit and explain. Moreover, you may have a “dual CSM problem” when differences in assumptions between reporting regimes (quarterly vs annual or solo vs consolidated) may lead to entirely different roll-forward amounts. Entertaining more than one ledger offers a solution: perform calculations separately and post the entries in two or more parallel journals. This increases the processing volume but reduces complexity, and thus facilitates auditability. ISSUE 111 | AIAWORLDWIDE.COM

IFRS 17 No interim, no consolidation, no problem?

more frequent reporting. But this leads to a dual CSM problem because you will not be able to produce an external report by summing up internal journals. Remember that “period-to-date” means “external period-to-date”. In addition, at the start of the next year you will want to start from opening balances equal to the closing balances of your external reporting (a “true up”), and not from the closing balances of your last internal reporting. Hence you should maintain two ledgers in parallel. This dual ledger approach also solves the onerosity challenge. Here’s why: although you might have created a loss component for a group which turned onerous in your internal ledger, if it ended the external reporting period as non‑onerous, the external ledger would not contain a loss component for it. The opposite scenario would be the case for onerous groups turning non-onerous. A common scenario will be that external reporting is period-to-date but internal reporting is year-to-date, because this is simply the most logical approach from an actuarial point of view. In addition, it is also the most common approach for many local GAAP measures. Here also you will work with two separate ledgers. For your internal reporting, you will need to reverse previous periods before posting the last period – except for the first internal period of the year, where you will also want to “true up” your opening balances with the external closing balances. One could wonder if we cannot derive external period-to-date reporting by subtracting the previous internal statement from the current one, for example, by calculating Q3 period-todate (external) by starting from Q3 year-todate (internal) and subtracting Q2 year-to-date (internal) from it. However, this would not lead to a period-to-date presentation of Q3, but rather present the marginal impact of Q3 year-todate, which includes the impact of altering the assumptions for Q1 and Q2. Some entities, meanwhile, may require more journal combinations to meet their reporting requirements; for example, combinations to support both an internal year-to-date and periodto-date ledger, combinations to support their actuarial analysis and incremental accounting analysis respectively, or combinations to add one or multiple consolidation layers. In practice, this means that some firms may require more than two parallel ledgers.

An entity which is not required to produce a consolidated financial statement, and is only required to submit an annual statement, could theoretically avoid the entire “period-to-date problem” by not posting anything across the year. Their actuaries could produce roll-forward statements, for example monthly, but if they don’t post them in the ledger, there would be no accounting issues to solve. However, this would mean that the accountants don’t have a journal until the end of the year, so we believe this is an unlikely scenario.

Interim solo reporting without internal reporting

If the frequency of your interim statements is enough for internal management reporting purposes, you can keep your reporting challenge simple by making the right accounting policy choice, as offered by the amended para B137. You can align interim and annual reporting as both being period-to-date. This way, you only need one ledger in which each interim period is calculated as a standalone period. At the end of the year, you only need to sum up interim results to get your annual statement. You can also align interim and annual reporting as both year-to-date, which also allows you to manage both in one ledger. You will need to reverse previous periods before posting the next period. You will have to recalculate the amounts from 1 January, but the opening position and expected cash flows to be released over the period are the same since they are both sourced from the opening period’s results.

Add consolidation

But what if a subsidiary needs to report biannually to its local regulator, while its foreign parent company needs to submit a quarterly consolidated statement? Under the original para B137, this would have created a dual CSM problem, because the biannual local statement could not have been generated by adding the Q1 and Q2 period-to-date statements submitted to the parent company. B137 was amended with this type of challenge in mind: you can now align solo with group reporting by applying year-todate across the board, and consequently end of June, Q2, and biannual statements are equal.

Add internal management reporting to the mix

If you require more frequent reporting for internal analysis (for example, driven by local GAAP requirements), the year-to-date question yields some more scenarios, outlined below. Choosing year-to-date for both internal and external reporting, similar to how you handle interim reporting, you can cope with one journal and reversal entries for previous reporting periods. However, some entities are still considering applying period-to-date, also for their internal, AIAWORLDWIDE.COM | ISSUE 111

Conclusion

Author bio

Dieter Van der Stock is Director – Product Manager IFRS 17 at Moody’s Analytics, specialising in IFRS 17 and other financial reporting standards.

Regardless of which option your organisation selects for addressing para B137 of IFRS 17, you are likely to run into some challenges. And while interim reporting adds another level of complexity to addressing IFRS 17, it can be managed effectively if appropriate accounting policy choices are made, and if the appropriate processes and supporting software are implemented for actuarial calculations, financial accounting and reporting. ●

INSOLVENCY

Weathering the storm Marc Jones asks what the Covid-19 pandemic means for the insolvency regime.

Marc Jones Partner, Stewarts

ISSUE 111 | AIAWORLDWIDE.COM

t is widely acknowledged that the global Covid-19 pandemic could cause the largest wave of cash-flow and trading insolvencies in recent history. Bank of England projections indicate that the UK economy is facing the deepest recession in over 300 years, an estimated 30% drop in output in the first half of 2020. Many struggling businesses will have already been wiped out by extended periods of lockdown, while even previously healthy businesses with significant consumer exposure and reliant on steady cashflow (most notably those in the leisure industry) may also become casualties of the pandemic.

Government responses

The UK government has taken unprecedented steps to support businesses and workers through initiatives such as the Covid Corporate Financing Facility (CCFF) and the Coronavirus Job Retention Scheme. However, it is clear that the scale and duration of these measures are limited and will not be enough to stop many thousands of businesses entering into some form of insolvency down the line. A serious problem for today’s companies – and consumers – is that the existing corporate insolvency regime is not fit for saving good businesses. It is normal for some businesses to fail, just as it is for some to succeed. As one business or even industry sector goes under – whether that be because it’s been badly run, undercut by foreign markets, rendered obsolete by new technology – so investment is reallocated to other profitable ventures. In normal times, this “creative destruction” is at the heart of modern capitalism, and corporate insolvency is fundamental to ensuring its functioning. But these are anything but normal times. From very early on in this crisis, the focus of the government has been on trying to put the UK economy into suspended animation, ready to be reanimated once Covid-19 is beaten. Government ministers have talked about giving businesses breathing space in the form of debt holidays. They have warned creditors against premature threats of litigation, and have told contracting parties to behave fairly. Some of that has become law, some is in draft legislation and some is just guidance. Working out quite what is expected of the insolvency profession in the current context is far from clear.

Move from a creditor-led regime

The crux of the issue is the creditor-led nature of the current insolvency regime, which prioritises the rights of creditors over keeping the insolvent business going. In contrast to government efforts which target the economy as a whole, each insolvency is treated independently. Keeping alive “Covid-insolvent” businesses may be in the national economic interest, but it is not relevant in the current insolvency process – which prioritises individual creditors, not the UK economy. AIAWORLDWIDE.COM | ISSUE 111

INSOLVENCY Clearly, in an unprecedented crisis such as today’s, in order to give businesses the best chance of survival there must be a shift away from the creditor-led nature of the current regime, on a temporary basis at the very least. A form of trading insolvency, or “light touch administration procedure”, which enables companies to weather the storm would offer a short-term lifeline to businesses fighting for survival. Debenhams is one high profile example of a company which has adopted this approach in its recent administration. At the centre of the process is a cooperation and consensus between officeholders and directors. The administrators delegate responsibility to the directors and take a monitoring role, applying key safeguards where appropriate. Equally, the recent decision in the Carluccio’s administration, confirming that the government’s furloughing scheme is available to entities in administration, is welcome.

Corporate Governance and Insolvency Bill

The recently published Corporate Governance and Insolvency Bill (assuming it is enacted in substantially its current form) goes some way to addressing the problems. The Bill introduces some temporary Covid-19 specific measures, as well as some permanent changes to the insolvency landscape. Of the Covid-19 specific items, the well-publicised suspension of wrongful trading gives directors some wiggle room but significantly it does not release directors from their other statutory and fiduciary duties. More significant is the restriction on presenting a winding-up petition. A creditor will not be able to do so unless “the creditor has reasonable grounds for believing that coronavirus has not had a financial effect on the company, or the facts by reference to which the relevant ground applies would have arisen even if coronavirus had not had a financial effect on the company”. That is a very significant restriction and, of the various measures in the draft bill, is surely the one that will give rise to most disputes. What is meant by “financial effect” is not clear but it looks like a low threshold that will make it very difficult for creditors to petition. Those that do may well have to present expert evidence on the financial performance of the debtor in the pre-Covid-19 period to support their reasonable belief. Of the permanent changes, the “moratorium” and “cross-class cram down” procedures are the most significant. The first enables a company to obtain a 20-day payment holiday during which legal action cannot be taken against it. In order to obtain a moratorium, all the company needs do is appoint an IP as “monitor” to oversee the moratorium – though the directors remain in control at al times – and file certain papers at court. The moratorium comes into effect on filing. The period can be extended to 40 days by the directors and monitor; and for up to one year with the support of creditors. The “cross-class cram-down” is introduced as part of a new restructuring plan (similar to

Many struggling businesses will have already been wiped out by extended periods of lockdown, while even previously healthy businesses may become casualties of the pandemic.” 27

INSOLVENCY

●● pre-selection of business partners and suppliers; and ●● payroll, expense and debt collection carve out and independent control.

a scheme of arrangement) that companies can now propose to creditors. The twist is that the company can apply to court for an order binding entire classes of dissenting creditors to the plan (i.e. not just any minorities in those classes). In order to get approval, the company will have to satisfy the court that the proposal is fair and equitable and that the “cram-down” creditors would be no worse off than if the company entered an alternative insolvency procedure. Those measures go some way to protecting business in the short term, but under the current lockdown scenario, given the volume of expected insolvencies, there is a risk that administrators may hand back too much power to directors regarding ongoing trading. The ICAEW has warned its members against the widespread involvement of directors in ongoing trading because of the significant potential risk to insolvency practitioners from handing over too much control to corporate directors. In the current crisis, with high volumes of work and communication being conducted remotely, insolvency practitioners may have difficulty assessing the motives and experience of the directors they are dealing with.

The role of insolvency practitioners

Author bio

Marc Jones’ key practice areas include banking and financial services litigation, company and shareholder disputes, professional negligence, contentious insolvency, fraud and asset tracing.

The insolvency profession needs more and better options to manage the economic fallout from the pandemic. A key part of insolvency practitioners’ work over the coming months will be to engage and cooperate with management on various business options. As a result, more protection for insolvency practitioners is advisable. Protection would need to be industry and sector specific, but among the options being discussed are: ●● appropriate financial controls and restrictions, such as barring directors’ access to the administrator’s post-appointment bank account; ●● capping orders;

The Debenhams administration, which is being handled by FRP, has a number of protections built in to protect officeholders and so serves as a good example to follow. But even with protections, it seems inevitable that insolvency practitioners will get caught in the crossfire at some point. Valuations are almost inevitably going to be called into question upon any form of sale or disposal. Given the impact of Covid-19 on almost every market and asset class, and the massive uncertainty about future trading conditions, valuations will be a major source of disputes in the insolvency context. Some creditors will want to take their money; others will want to keep the business going in the expectation of trading out and making a better return. Insolvency practitioners will have to decide whether to take action against debtor companies, mindful that such a decision can trigger a domino-effect wave of further insolvencies. If and when a new regime is brought in, there will be numerous uncertainties or points left open to interpretation which insolvency practitioners will need to navigate carefully, and with expert legal advice.

Conclusions

It is important to look at the actions of other jurisdictions to see if any lessons can be adapted for UK plc. Germany and Spain have suspended the obligation to file for insolvency until 30 September 2020. Australia has brought in a number of measures to support businesses, including increased time limits to satisfy and respond to statutory demands, and an increase in the level of debt required for creditors to issue a statutory demand. It is widely accepted that a surge in litigation will arise from the pandemic. We’ve already begun to see disputes over contractual clauses such as force majeure, and the insurance industry is faced with numerous group actions over business interruption insurance. (Whether business interruption insurance claims succeed will determine the viability of many thousands of businesses.) In the short term, as a result of further restrictions on liquidity and cash flows, a depression of values is likely which will impact financial covenants and could trigger defaults. Further, if banks do call in loans on the back of alleged covenant breaches, disputes over valuations will again be front and centre. Businesses are fighting for survival. The economic outlook is extremely uncertain but even on the most optimistic projections is grim for some time to come. What is more certain is that in such unprecedented times it is in the nation’s interests for all those involved in the insolvency process to focus on cooperation, not conflict. ● ISSUE 111 | AIAWORLDWIDE.COM

Events

AIA COVID-19 HUB

Due to Covid-19 the AIA’s event schedule has been postponed. To ensure members still have access to continuing professional development courses, we are expanding the number of online courses available to members. For the most up to date listings, please visit: www.aiaworldwide.com/events.

You can watch our free on-demand webinars through the AIA’s Covid-19 Hub at: www.aiaworldwide.com/ covid-19-guidance-resources.

●● Covid-19 Government Assistance Schemes: Some tax implications ●● Covid-19: HR implications for your clients ●● AIA Accounting for Covid-19 ●● AIA AML Update: Responsibilities during Covid-19

AIA MEMBERS IN PRACTICE Logging your CPD

It is really important that you log your CPD activities. You can do this via MyAIA and we strongly recommend that you update the information as soon as an activity has been completed.

Auditing and Accounting Seminars ●● Triennial review refresher | Part 1 (John Selwood) ●● Triennial review refresher | Part 2 (John Selwood) ●● New anti-money laundering regulations published (John Selwood) ●● Recent amendments to UK GAAP (John Selwood) ●● Impairment of assets (John Selwood) ●● Financial reporting and Brexit (John Selwood) ●● Amendments to the Charities SORP (FRS 102) (John Selwood) ●● Brydon review of audit (John Selwood) ●● Revised Ethical Standard issued (John Selwood) ●● Charities: Recap for independent examiners and auditors (John Selwood) ●● Charities: Matters of material significance (John Selwood)

Members in practice have free access to the following seminars via their AIA/Tolley account:

Business Tax Seminars ●● Business tax round up (Dean Wootten) ●● Corporation tax for non-resident property business: introduction (Malcolm Greenbaum) ●● Corporation tax for non-resident property business: other issues (Malcolm Greenbaum) ●● Covid-19 VAT issues and government schemes (Neil Warren) ●● Cash flow savings for VAT (Neil Warren)

Personal Tax Seminars ●● Personal tax round up (Dean Wootten) ●● Covid-19 Job Retention Scheme: updated guidance (Dean Wootten) ●● Covid-19 Self-employment income support scheme: updated guidance (Dean Wootten) ●● Pension Scheme Pays elections (Kevin Read) ●● What to do when things go wrong (Karen Eckstein)

AIA MEMBERS: CHINA AIA has agreed that they Beijing National Accounting Institute (BNAI) will conduct free of charge online CPD for AIA members. BNAI will offer 100 hours of courses, from AIAWORLDWIDE.COM | ISSUE 111

which AIA members can select up to 40 hours for their own CPD. After completing the selected course and reaching the prescribed number of learning

hours, AIA members will have the option to print an online certificate in order for them to authenticate and validate their yearly CPD requirements.

Technical INTERNATIONAL

As financial crimes grow during the pandemic, accounting groups address key piece of AML action As a result of the Covid-19 pandemic and the unprecedented sums of relief money moving across the global economy, the threat of financial crimes and malfeasance continues to grow. In this context, CPA Canada and the International Federation of Accountants (IFAC) have published a report that explores a key facet of uncovering and fighting illegal activities: beneficial ownership transparency. The fight against money laundering, corruption and tax evasion requires the participation of several stakeholders, including accountants, who rely on strong legal frameworks and accurate information. “Beneficial ownership information, which identifies who has controlling ownership of an entity, is important to the discovery of financial crimes,” said CPA Canada president and CEO Joy Thomas. “Enhancing the transparency of this information should strengthen anti-money laundering regimes and help in seeking out lawbreakers and their proceeds of crime.”

The report, “Approaches to beneficial ownership transparency: the global framework and views from the accounting profession”, contributes to the global conversation as countries grapple with questions regarding the extent to which, and by whom, beneficial ownership information is collected, reviewed and made available. Central to this discussion is the concept of beneficial ownership registers and registries. In examining how various countries are complying with the recommendations from the Financial Action Task Force (FATF) on transparency and beneficial ownership information, and with the perspectives of senior accounting leaders across the globe, the report finds the following: ●● Establishing a public beneficial ownership registry does not immediately ensure that a country’s law enforcement and other agencies have access to accurate information in a timely manner.

●● In several jurisdictions, the move to a public registry has been a phased approach, starting with non-public registries and then transitioning to public registries. ●● Verifying information and ensuring appropriate levels of access are key factors in a registry’s efficacy.

INTERNATIONAL

for navigating these uncertain times. Research indicates the business advice provided to small businesses from their professional accountant is associated with improved rates of survival, growth, improved decision-making procedures and superior financial performance. Poor financial management is a leading reason why businesses fail. The Checklist covers key financial management and strategic management tasks, helping businesses to proactively identify and consider essential and timely information. Many businesses are looking for the “next normal” and a new approach to resilience. Early on, the pandemic accelerated digitisation and transformed small businesses responding to drastic consumer behaviour shifts. A small business’s ability to survive the current environment, and thrive in the future, will be greatly strengthened by support from their professional accountant. The Checklist is included on IFAC’s dedicated Covid-19 hub at www.ifac.org.

New report highlights priorities for accountants in business and public sector

IFAC launches “Small Business Continuity Checklist” IFAC has published a “Small Business Continuity Checklist – how to survive and thrive post Covid-19”. Small businesses have been disproportionately affected by the Covid-19 pandemic. Most organisations worldwide are small in size, and the importance of small businesses to the global economy is indisputable. Covid-19 containment measures severely impacted cashflows, disrupted supply chains and put small business survival at risk on an unprecedented scale. Governments worldwide moved quickly to deploy supportive measures for small businesses and entrepreneurs to help them maintain short-term liquidity. However, many are still struggling. Small and medium-sized practices (SMPs) have in-depth knowledge of their clients and provide vital guidance

“The global accountancy profession, with its strong public interest mandate, is a committed partner in the fight against financial crime,” said Kevin Dancey, IFAC CEO. “We are eager to advance important policy conversations, including those over beneficial ownership, and to work meaningfully alongside governments, law enforcement and other stakeholders to combat financial crime in all its forms.” With this report, the authors offer considered insights on the most effective ways to comply with international anti-money laundering standards. To view the first report, visit: cpacanada.ca/beneficialownership.

Professional accountants in business and the public sector have important roles to play in leading their organisations through the current crisis and the challenging times ahead. IFAC and its members are focused on supporting accountants as they navigate these uncertain times, and as they address other ongoing opportunities and challenges facing the global profession. To continue this conversation, the latest report from the IFAC Professional Accountants in Business (PAIB) Committee is now available: “Supporting accountants in business and public sector through uncertain times”. It includes highlights from the two-day virtual meeting of the PAIB Committee, which focused on key topics of relevance to accountants in business, including: ●● value creation and integrated thinking; ●● the latest recruitment trends, evolving accountancy roles and ISSUE 111 | AIAWORLDWIDE.COM

Technical the implications on learning and development; ●● key areas of data for PAIBs; ●● areas of innovation in public sector finance and accounting; and ●● guidance on expanding PAO membership. Full details of the report are available at www.ifac.org.

IFAC launches Practice Transformation Action Plan IFAC has published a “Practice Transformation Action Plan – a roadmap to the future” (the Plan), which covers four key focus areas for small and medium-sized practices (SMPs): ●● embrace change; ●● leverage technology; ●● focus on talent management; and ●● evolve the firm operating model and build advisory services. The Covid-19 pandemic is an accelerator for the adoption of technology. Many firms are now operating virtually and supporting employees through flexible work arrangements. These extraordinary circumstances also offer practitioners significant opportunities to adapt and service a rapidly changing world. As trusted business advisers, they are best positioned to provide clients with a range of services to help navigate these difficult and uncertain times. SMPs may still be in a “fire-fighting” phase but want to be proactive and ready to adapt to radical and unplanned changes. Effective transformation requires strong leadership, new approaches to training and continued learning, and an emphasis on providing relevant, value-added services. The Plan was developed with advice and guidance from the IFAC SMP Committee and recognises that every firm will be different. The actions taken will need to be tailored to each firm’s circumstances and objectives to be successful. A dedicated “practice transformation” web page has been created, featuring case studies and examples of how member organisations are supporting their firms to innovate and evolve, as well as additional tools and resources. Now is the time for practitioners to lead and become part of the solution for their clients and for their own future as we enter a whole new world. AIAWORLDWIDE.COM | ISSUE 111

IASB issues package of narrow-scope amendments to IFRS Standards The International Accounting Standards Board (Board) has issued several small amendments to IFRS Standards. The package of amendments includes narrow-scope amendments to three Standards, as well as the Board’s Annual Improvements, which are changes that clarify the wording or correct minor consequences, oversights or conflicts between requirements in the Standards. ●● Amendments to IFRS 3 Business Combinations update a reference in IFRS 3 to the Conceptual Framework for Financial Reporting without changing the accounting requirements for business combinations. ●● Amendments to IAS 16 Property, Plant and Equipment prohibit a company from deducting from the cost of property, plant and equipment amounts received from selling items produced while the company is preparing the asset for its intended use. Instead, a company will recognise such sales proceeds and related cost in profit or loss. ●● Amendments to IAS 37 Provisions, Contingent Liabilities and Contingent Assets specify which costs a company includes when assessing whether a contract will be loss-making. ●● Annual Improvements make minor amendments to IFRS 1 First-time Adoption of International Financial Reporting Standards, IFRS 9 Financial Instruments, IAS 41 Agriculture and the Illustrative Examples accompanying IFRS 16 Leases. All amendments are effective from 1 January 2022.

IASB proposes deferring IAS 1 amendments’ effective date due to Covid-19 The International Accounting Standards Board (Board) has proposed to defer by one year the effective date of Classification of Liabilities as Current or Non-current, which amends IAS 1 Presentation of Financial Statements. The IAS 1 amendments were issued in January 2020, effective for annual reporting periods beginning on or after 1 January 2022. However, in response to the Covid-19 pandemic, the Board is proposing to provide companies with more time to implement any classification

changes resulting from the amendments by deferring the effective date by one year to annual reporting periods beginning on or after 1 January 2023. The Board is not proposing any changes to the original amendments other than the deferral of the effective date. The Board has responded quickly to provide support to stakeholders at this difficult time. Accordingly, the comment period on the proposal is short – 30 days. The comment deadline is 3 June 2020.

EUROPE ESMA issues Public Statement: Implications of the Covid-19 outbreak on the half-yearly financial reports The European Securities Markets Authority (ESMA) has published a Public Statement promoting transparency and consistent application of European requirements for information presented in half-yearly financial reports impacted by the Covid-19 outbreak. In the Public Statement, ESMA acknowledges that the coronavirus outbreak poses significant challenges to business activities and introduces a high degree of uncertainty on the expected development of the pandemic and the associated knock-on effects on the economic and financial system. Against this backdrop, ESMA continues to highlight the need for issuers to continue providing the necessary level of transparency in financial communication. In particular, ESMA’s Public Statement: ●● emphasises the requirement for issuers to provide updated information that is useful to investors to adequately reflect the current and expected impact of the Covid-19 situation on the financial position, performance and cash-flows of issuers; ●● highlights the importance of providing information on the identification of the principal risks and uncertainties to which issuers are exposed; and ●● calls on management, directors and Audit Committees and, where applicable, auditors, to ensure that half-yearly financial reports provide comparable, relevant and reliable information and an adequate level of disclosure and transparency to users of those reports.

Technical Coronavirus’ impact on auditing for 2019 year-ends and beyond Measures taken to contain the coronavirus affect us all. This publication, which is available to download at: www.accountancyeurope.eu/ publications/coronavirus-impact-onauditing-for-2019/, focuses on how this impacts businesses and the people that audit them. It aims to support European auditors in adapting their work to new circumstances in ongoing audits with 2019 year-ends and beyond. To this end, Accountancy Europe has analysed corona crisis related auditing guidance, as issued by global and national regulators and professional institutes. It highlights the following main matters for auditors to consider: ●● obtaining audit evidence; ●● auditor’s assessment of going concern; and ●● auditor’s reporting. As the situation evolves, Accountancy Europe will keep collecting new guidance on its webpage Coronavirus resources for European accountants. Most of the matters in this publication apply also to audits with closing dates after 2019. It will shortly issue an additional overview with main matters for consideration specifically for audits with 2020 closing dates.

Coronavirus resources for European accountants All of us are affected by the Coronavirus outbreak. Its consequences significantly impact our daily lives, the economy and also accountants in all capacities throughout society. Accountancy Europe has collated resources relevant for European professional accountants and will keep updating the resource. See www.accountancyeurope.eu/ professional-matters/covid-19resources-for-european-accountants/.

UK AND IRELAND Additional company guidance on reporting of exceptional items and APMs The Financial Reporting Council (FRC) has updated its guidance for companies on corporate reporting to explain how they should report exceptional items and alternative performance measures

(APMs) in their reports and accounts, in the context of the Covid-19 crisis. Investors expect to see balanced, transparent and clearly explained disclosures of material items arising from the crisis. A link to the guidance can be viewed at www.frc.org.uk.

to establish expectations for high quality reporting next year. The deadline for receiving stewardship reports remains 31 March 2021.

Additional information on company filings and AGMs during Covid-19

IAASA has issued a Consultation Paper on its proposals to revise the Ethical Standard for Auditors (Ireland), International Standards on Auditing (Ireland) and Glossary of Terms. The purpose of this consultation paper is to obtain the views of stakeholders with regard to IAASA’s proposals to issue revised versions of: ●● the Ethical Standard for Auditors (Ireland); ●● certain International Standards on Auditing (Ireland) and the International Standard on Quality Control (Ireland) 1 (together the “ISAs (Ireland)”); and ●● the Glossary of Terms, which defines the terms used in the Irish auditing framework.

To provide companies with additional information upon which to plan activities over the coming months. in respect of company filings, AGMs and other general meetings during Covid-19, a further Q&A has been jointly produced by BEIS and the FRC. The government has also announced additional information on changes to insolvency laws to assist those companies for which Covid-19 restrictions make it difficult to meet statutory obligations to hold meetings and to file documentation on the Companies Register. Further information is available at: www.frc.org.uk.

Corporate governance update The quality of corporate governance and stewardship activity by companies and investors is inevitably of heightened importance during the Covid-19 crisis. The FRC’s Corporate Governance and Stewardship team is currently monitoring corporate governance and AGM reporting and practices, and in the summer will publish its initial assessment of good practice. This will be followed by the annual review of corporate governance later in the year, which will focus on evaluating the quality of reporting and practice on the main areas of change to the UK Corporate Governance Code. To enable the FRC to monitor and assess this more effectively as it transitions to become the new regulator, ARGA, the Corporate Governance and Stewardship Team has been strengthened with two new senior management positions. David Styles has appointed Maureen Beresford as Head of Corporate Governance and Claudia Chapman as Head of Stewardship. Additional policy and reporting associates have also been recruited. The enlargement of the team will also mean that the FRC is better able to work with a widening range of stakeholders to develop corporate governance and stewardship policy and guidance. The FRC will continue its outreach to stakeholders on the Stewardship Code

IAASA issues Consultation Paper on proposal to revise the Ethical Standard for Auditors (Ireland)

The Consultation paper and the proposed revised Ethical Standard for Auditors (Ireland) and Glossary of Terms and the proposed revisions to the ISAs (Ireland) are available at www.iaasa.ie. The proposed effective date of the revised standards in Ireland is for the audits of financial statements with accounting periods beginning on or after 15 October 2020. Stakeholders and interested parties are invited to provide responses to the above questions by email only to submissions@iaasa.ie no later than 5pm on Friday 3 July 2020. IAASA recognises that this is a challenging time for everyone due to the impact of Covid-19 and that working arrangements have changed significantly in recent weeks. In this context, while a response period of three months (until Friday 3 July 2020) has been specified in this consultation paper, IAASA will monitor the situation and extend the consultation period if necessary.

ASIA PACIFIC Implementation of revised XBRL filing requirements ACRA has issued Practice Direction No. 2 of 2020 to guide companies on the revised requirements and data elements for the filing of financial statements in ISSUE 111 | AIAWORLDWIDE.COM

Technical eXtensible Business Reporting Language (XBRL) format. The revisions are part of continual efforts to streamline filing requirements. For most companies, the number of data elements that they need to file with ACRA will be reduced.

Timeline for implementation of revised XBRL filing requirements

To allow companies more transition time in view of the Covid-19 situation, ACRA is deferring the effective dates as follows: 1. Companies are required to apply the revised filing requirements and data elements from 1 January 2021. 2. Companies can opt to voluntarily apply the revised filing requirements and data elements from 16 May 2020 to 31 December 2020. Companies that file before 1 January 2021 can continue to prepare and file the XBRL financial statements based on the current XBRL filing requirements.

statements offline using the BizFinx preparation tool (Prep Tool). An updated version (version 3.2) of the Prep Tool based on the revised XBRL filing requirements is now available. The Excel/XBRL.zip files that are prepared using the beta version (version 3.1) released on 9 March 2020 can be edited in the updated version, without any loss of data. To install the updated version (version 3.2) of the Prep Tool, go online, launch the Prep Tool (version 3) and click “Application Updates” on the introduction page. Companies that opt to prepare, validate and upload their XBRL financial statements based on the current XBRL filing requirements till 31 December 2020 can continue to use the Prep Tool (version 2.7).

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An updated version of BizFinx preparation tool

FASB issues staff Q&A document on hedge accounting during Covid-19 pandemic

Companies can continue to prepare, validate and upload their XBRL financial

The Financial Accounting Standards Board (FASB) has issued a question

and answer document (Q&A) that responds to frequently asked questions about the disruptive effects of Covid-19 on cash flow hedge accounting. FASB Accounting Standards Codification Topic 815, Derivatives and Hedging, provides guidance on when to discontinue cash flow hedge accounting and when and how to reclassify amounts deferred in accumulated other comprehensive income (AOCI) to earnings. In recent weeks, stakeholders have asked how the postponement or cancellation of forecasted transactions related to the effects of the Covid-19 pandemic should be considered when applying cash flow hedge accounting under Topic 815. The FASB staff developed this Q&A to provide guidance on this unique and evolving situation, based on the information and feedback they’ve received to date. The FASB staff will continue to monitor questions and communicate with stakeholders through additional statements, technical inquiries, and other means, as appropriate. The Q&A is available at: www.fasb.org.

STAY UP TO SPEED Whillans keeps you up to speed with all the new and revised rates and tables from Budget to Finance Act. Order Now Save 15% when you buy the set www.lexisnexis.co.uk/whillans2020

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RELX (UK) Limited, trading as LexisNexis®. Registered office 1-3 Strand London WC2N 5JR. Registered in England number 2746621. VAT Registered No. GB 730 8595 20. LexisNexis and the Knowledge Burst logo are registered trademarks of RELX Inc. © 2018 LexisNexis SA-0418-020. The information in this document is current as of April 2018 and is subject to change without notice.

International Accountant 111

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Accounting for Covid-19 from International Accountant Magazine