International Accountant 113 by Association of International Accountants

INTERNATIONAL

ACCOUNTANT

SEPTEMBER/OCTOBER 2020 ISSUE 113

The injustices of the loan charge Shifting deadlines in the world of Covid-19 Terms and conditions of bounce back loans

Capital gains tax: growing numbers of returning expats

CONTENTS

In this issue Contributors 2

Meet the team

News and views

AIA news

AIA Membership renewals

Businesses want UK/EU agreement AIA launches its app Don’t forget to renew your membership

EXPAT R

8 Bounce back loans

Bouncing back from the brink Richard Simms (FA Simms & Partners) asks whether the strict range of terms and conditions mean that bounce back loans amount to a bouncing bomb.

18 Students 8

Capital gains tax

Coming home? The Coronavirus pandemic and Brexit will result in a considerable rise in the number of returning UK expats. Marc Beattie (AHR Private Wealth) explains why returning expats need to consider capital gains tax implications very carefully.

Paper 14: The cost of capital We examine the meaning behind the weighted average cost of capital with particular focus on AIA’s Paper 14 Financial Management.

12 Loan charge

IFRS 9

A wave of change The Covid-19 pandemic has had a considerable impact on the global economy and the ripples will be felt across many industries and professions for years to come. Scott Dietz (Moody’s Analytics) considers the challenges of implementing IFRS 9 in a post-pandemic world.

Covid-19 22 Business recovery Considering the regulatory changes and shifting deadlines that are set to take place over the next year, Andromeda Wood (Workiva) asks how to ensure businesses meet their deadline requirements in the world of Covid-19.

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

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

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

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

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Seeking justice Nathan Talbott (Wright Hassall) asks whether taxpayers should seek a Judicial Review to address the injustices inherent in the loan charge – a tax charge on any outstanding loans stemming from the use of disguised remuneration tax avoidance schemes.

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Risk management

Dates for your diary

Rebooting risk management Today’s environment is one not only of heightened risk, but of prolonged uncertainty. Business-as-usual risk management, crisis management and resilience can enable agility. John Peirson (Deloitte Risk & Financial Advisory) considers how to make risk relevant in a world remade by Covid-19. Upcoming events

Technical 30 Global updates

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AIA does not guarantee the accuracy of statements made by contributors or advertisers or accept responsibility for any views which they express in this publication. ISSN: 1465-5144 © Copyright Association of International Accountants

Editor’s welcome

Contributors to this issue

Editor’s welcome

MARC BEATTIE

Marc Beattie is Chief Operating Officer and Co founder at AHR Private Wealth. He has been working in the financial services and private banking industry since 1999. SCOTT DIETZ

Scott Dietz is Director in the Regulatory and Accounting Solutions team responsible for providing accounting expertise across solutions, products, and services offered by Moody’s Analytics in the US. RICHARD SIMMS

conomic upheaval as a result of the Covid-19 pandemic has led to significant changes in the business world with those enterprises and individuals that have been able to adapt and change proving to be the most robust. Consequently accountants, as key business advisors, not only have to keep abreast of the rapidly changing business environment and government support measures, but also spot commercial threats and evaluate growth opportunities, making them more important than ever during unsettled and uncertain times. It is therefore vital that your AIA membership is renewed as soon as possible to support your professional development, add value to your career aspirations and continue to gain important insights and support to develop your skills and knowledge. See page 7 for further details. The Covid-19 pandemic has had a considerable impact on the global economy and the ripples will be felt across many industries and professions for years to come. In this issue of International Accountant, we consider the challenges of implementing IFRS 9 in a post-pandemic world, take a closer

Rachel Rutherford Editor, IA

look at the terms and conditions of the bounce back loan and consider the combined impact of the pandemic and Brexit on ex-pats returning to the UK, reviewing the capital gains tax implications of doing so. We also question whether taxpayers should seek a Judicial Review to address the injustices inherent in the loan charge and review risk management strategies in an already uncertain business environment. To minimise the disruption caused by coronavirus to the AIA exams and student progression, AIA has moved all its professional exams and some of its diploma exams to computer based testing. The online assessment is a cloud‑based platform that allows students to undertake exams within a controlled environment from the comfort and safety of your own home, whilst maintaining AIA’s stringent exam regulations through monitoring and supervision. Students should register as soon as possible for the November 2020 exams and familiarise themselves with the Online Exams Advice, both of which can be done via My AIA. In this issue, we also have an article on Paper 14 – a must read for those of you sitting the Financial Management paper.

Richard Simms is Managing Director of F A Simms & Partners. Richard is an FCA Qualified Accountant and has a Diploma in Anti Money Laundering. NATHAN TALBOTT

Nathan Talbott is Partner within the tax and financial services litigation team at Wright Hassall, dealing with investments, tax schemes, pensions and HMRC enquiries and negotiations. ANDROMEDA WOOD

Andromeda Wood is senior director of data modelling at Workiva. Her main area of interest is the role of technology and data in the future of corporate reporting and is an experienced data modeller. JOHN PEIRSON

John Peirson is the chief executive officer (CEO) of Deloitte Risk & Financial Advisory and has held multiple leadership roles across the firm. He leads more than 15,000 professionals. ISSUE 113 | AIAWORLDWIDE.COM

News

More than three-quarters of business want UK/EU agreement

Hong KongASEAN pact to take effect

With the final round of Brexit negotiations underway, more than three-quarters of businesses (77%) say they want a deal to be agreed. Only 4% say they prefer a no deal scenario. The impact of the pandemic has lessened businesses’ ability to prepare for Brexit, with nearly half (47%) saying that the impact of dealing with Covid-19 has negatively affected preparations. The findings come as the CBI’s latest Growth Indicator reports that private sector activity fell in the quarter to September, but at a slower pace than last month (-23% from -39%), marking the third consecutive month in which the rate of decline has eased. Dame Carolyn Fairbairn, CBI DirectorGeneral, said: “Now must be the time for political leadership and the spirit of compromise to shine through on both sides. A deal can and must be made. “Businesses face a hat-trick of unprecedented challenges: rebuilding from the first wave of Covid-19, dealing with the resurgence of the virus and preparing for significant changes to the UK’s trading relationship with the EU. More than three-quarters of businesses want to see a deal that will support people’s jobs and livelihoods. This matters for firms and communities across Europe. “For the whole continent, the pandemic has diminished firms’ ability to prepare for an abrupt interruption of restrictions on trade and movement between the UK AIAWORLDWIDE.COM | ISSUE 113

and the EU. A good deal will provide the strongest possible foundation as countries build back from the pandemic. It would keep UK firms competitive by minimising red tape and extra costs, freeing much needed time and resource to overcome the difficult times ahead. “Governments across Europe have shown a level of ambition to fight the pandemic many wouldn’t have believed – it’s time to show that same creativity and flexibility on securing a Brexit deal.” The composite measure, based on 648 responses (to surveys conducted between 26 August and 15 September 2020), saw activity in the distribution sector stabilise in the quarter to September (-1% from -26%), after five rolling quarters of decline. The pace of decline also slowed again in manufacturing (-20% from -46%), consumer services (-39% from -64%) and business and professional services (-28% from -32%). Looking ahead, the fall in private sector activity is expected to ease again over the next three months (-11%). While distribution firms expect activity to fall (-23%), consumer services (-22%) and manufacturers (-6%) expect a further easing, while business & professional services firms (-2%) expect business volumes to stabilise. A supplementary question found that private sector activity on the whole remains 16% below what would be expected under ‘normal conditions’ (i.e. in the absence of Covid-19).

HONG KONG

BREXIT

The commitments relating to Hong Kong and Brunei Darussalam, an Association of Southeast Asian Nations (ASEAN) member state, under the trade and investment agreements between Hong Kong and ASEAN will enter into force on 20 October 2020. Tariff reduction commitments under the Free Trade Agreement covers different kinds of Hong Kong commodities, including jewellery, apparel and clothing accessories, watches and clocks, and toys. Hong Kong service providers will enjoy better business opportunities and legal certainty in market access for services sectors in Brunei Darussalam, such as business, telecommunications, construction and related engineering, education, tourism and travel related services, and transport services that have traditional strengths or potential for development. Upon the Investment Agreement’s implementation, Brunei Darussalam will provide Hong Kong enterprises investing in its area with fair and equitable treatment of their investments, physical protection and security of their investments, and the assurance of the free transfer of their investments and returns. So far, the commitments relating to the eight ASEAN member states of Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand and Vietnam have taken effect.

News TRADE

Republic of Ireland transposes Fifth AML Directive into national law

Trade Hub launched to support Scottish businesses

Member states of the European Union were required to introduce legislation by 10 January 2020 to transpose the Fifth Anti-Money Laundering Directive (5AMLD) into national law. The Irish government has now published the Criminal Justice (Money Laundering and Terrorist Financing) (Amendment) Bill 2020, which proposes to amend the Criminal Justice (Money Laundering and Terrorist Financing) Acts 2010-2018. The new Bill reflects the legislative outline set out previously in the 2019 General Scheme with some changes (for example, the scheme proposed legislative provisions to support the Criminal Assets Bureau and An Garda Síochána in the administration of their AML/CTF functions by improving their access to bank records in electronic form). Although the Bill transposes the majority of 5AMLD’s requirements, significant provisions remain outstanding. In August, the government announced that the Department of Finance would legislate for the establishment of a central register of beneficial ownership for express trusts and the establishment of centralised national bank and payment account registers. It is now likely that these will be legislated for separately, along with provisions in respect of Virtual Asset Service Providers regulation. The new Bill introduces amendments to high and low risk factors, customer due diligence requirements, extending the scope of regulation and clarifying PEPs and beneficial ownership information.

IRELAND

A new Trade Hub dedicated to helping businesses in Scotland thrive and grow internationally has been launched, intended to provide support for thousands of companies in economically challenging times. UK government exports minister Graham Stuart MP met with Scottish businesses and representative organisations, including FSB Scotland, NFU Scotland, the Scottish Council for Development and others, to discuss the support available for companies in the region. Based in Edinburgh’s Queen

Elizabeth House, the UK Department for International Trade’s new Scotland Hub will provide businesses with greatly increased trade support. Through the Trade Hub, businesses will be able to utilise the UK government’s global networks, expertise and influence, as well as world-leading credit agency UK Export Finance (UKEF), to grow their overseas trade and build back from the impact of coronavirus. Leveraging the strength and reach of the UK government, the hub will deliver effective services for people and businesses in Scotland.

DISQUALIFICATION

Seven year disqualification for Cambridge Analytica boss Alexander Nix has been banned from running limited companies for seven years after permitting companies to offer potentially unethical services to prospective clients. Within the undertaking, Alexander Nix did not dispute that he caused or permitted SCL Elections Ltd or associated companies to market themselves as offering potentially unethical services to prospective clients, demonstrating a lack of commercial probity. Effective from 5 October 2020, Alexander Nix is disqualified for seven years from acting as a director or directly or indirectly becoming

involved, without the permission of the court, in the promotion, formation or management of a company. Alexander Nix was a director of SCL Elections Ltd, a company that provided data analytics, marketing and communication services to political and commercial customers. He was also a director of five other connected UK companies: SCL Group Ltd, SCL Social Ltd, SCL Analytics Ltd, SCL Commercial Ltd and Cambridge Analytica (UK) Ltd. All six companies entered into administration in May 2018 before entering into compulsory liquidation in April 2019. ISSUE 113 | AIAWORLDWIDE.COM

AIA

NEWS CONSULTATION

AIA AGM 2020 The AIA held its 88th AGM on 2 September 2020. The AGM was held as a virtual event, and members were given the opportunity to use online voting, to protect our members and staff and in line with revised requirements of the Corporate Insolvency and Governance Act 2020. All the resolutions of the AGM were passed and the following members were re-elected to Council: Venetia Carpenter, Michael Chow, Mohd Noh Jidin, Koon Sang Jong and Maggie Timoney, who reflect the AIA’s global strengths as members from the UK, Singapore, Malaysia, and Hong Kong. 2018-2019 was the first year of delivering the AIA strategy that takes the organisation through to 2024, with developments that will support the AIA through a period of many fundamental changes. From the very first signs of Covid-19, AIA implemented contingency plans with two defined priorities: protecting employee health and safety; and doing everything it could to ensure business continuity. AIA President Les Bradley said: “Despite the crisis and through the exceptional efforts of our employees and partners, AIA has persisted in consolidating its strategy and is committed to securing its long-term viability by fast-tracking new initiatives and services for students and members. We continue to use our expertise, technical ingenuity and global network to help our members and businesses recover from the impact of Covid-19.” Full details including the President’s full statement, voting results and AGM recording at: www.aiaworldwide.com. AIAWORLDWIDE.COM | ISSUE 113

AIA calls for greater legal protection for accountants and tax agents AIA has called for greater legal protection for the professional titles “accountant” and “tax agent” in its response to the HMRC consultation “Raising standards in the tax advice market: call for evidence”. The consultation seeks to explore ways to raise standards and increase transparency in the tax advice market. AIA has campaigned to highlight the benefits of using qualified accountants and tax agents, who are trained to a high standard in both ethical and professional conduct; and throughout the response has provided clarity and guidance on how AIA works to uphold standards of tax advice issued by its members in practice. Within the scope of the consultation there is a wider public interest argument in place for expansion of the role of professional bodies within the remit of improving “good agents” and how they can add value. AIA argues that the government should work to promote the effectiveness of good agents by recognising that additional safeguards and public interest concerns are met by consumers undertaking the services of a regulated individual to conduct their tax affairs, with proper recourse to advice if things go wrong and an independent complaints system. All the options set out within the consultation require careful consideration against the public interest – ensuring a continuation of the availability of tax advice to members of the public, whilst recognising the benefits of greater scrutiny over the competence of tax agents to bear

ANNUAL GENERAL MEETING

down on bad behaviour and agents. It must be recognised that any option that increases the burden and cost of regulation may result in tax agents leaving the regulated sector and acting with a lower level of scrutiny which would not result in a net benefit position. Read the full response on the AIA website, www.aiaworldwide.com, under “Consultations”.

AIA News WEBSITE

AIA launches its new website We are very excited to announce the launch of our newly designed website, www.aiaworldwide.com. As leader in the accountancy profession, it’s important for us to make information regarding our services, membership, qualifications and thought leadership easily accessible for our current and prospective members. We endeavour to provide our members with the most accurate, up-to-date information and share our knowledge and expertise in the field of accountancy. We wanted to make the new website faster, easier to navigate and more user-friendly. We have now segmented the website so that students, members and the public see the information most relevant to them.

What’s new for visitors?

Our goal for the new website is to provide our visitors with a clean and user-friendly way to learn about AIA qualifications, membership and services and to browse information based on their own circumstances and career objectives. The new website gives better access to: ● About AIA: our work, governance, strategy and branches; ● Join Us: our membership options, qualifications, entry requirements and member benefits; ● News; and ● Events. It also contains integrated social media buttons to foster improved communication and we will be updating our content with helpful information, news, events, announcements and promotions. Users can join AIA using the online applications and track the progress of the application using their online account or contact the AIA Team directly with any questions you may have through the Live Chat function.

What’s new for members?

As well as access to AIA information such as consultations, news and events, the members section is designed to allocate resources depending on membership type and includes: ● Continuing Professional Development: You can access online CPD, review the AIA CPD

requirements, record your CPD activities and submit your annual declaration. ● Guidance and Resources: The latest technical guidance, practice and membership resources, and information on regulatory requirements and member benefits can be found in this section. ● Document Library: Access to AIA documents, membership guides, technical resources and upgrade information. ● Member Benefits: AIA collaborates with strategic partners to give you discounts on a range of products and services. Details can be found in this section. ● News, Events and Publications: The latest AIA news, events and publications are available via your online account. ● Members in Practice: Members that choose to hold an AIA practising certificate also have access to specific resources such as practice guidance, marketing materials, document templates, access to additional recognition, Tolley Tax Library and AML Compliance software. ● My AIA: Your personal online account that allows you to update your work and contact details and make payments for subscriptions, events and membership applications or make additional purchases through the AIA shop.

What’s new for students?

When an AIA student logs in to the AIA website, they will have everything they need to help and support them on their AIA journey to becoming a qualified accountant. In addition to everything that is publicly available, students will view a specific interface that includes: ● Initial Professional Development: Review the IPD requirements, update your record online and, when the time is right, apply for full membership as an Associate. ● Exams: Review the exam timetable and regulations, enter exams online and track your exam progress. ● Study Resources: Everything you need to get started and revise for the professional exams, including paper specific guidance, past exam papers and examiner feedback. You can also register for the AIA’s distance learning programme, purchase additional study materials or sign up for events. ● News and International Accountant: The latest news and all published issues of International Accountant magazine are accessible to students. ● My AIA: Your personal online account that allows you to update your work and contact details and make payments for subscriptions, exams and membership applications or make additional purchases through the AIA shop. ISSUE 113 | AIAWORLDWIDE.COM

MEMBERSHIP

AIA membership renewals

embership helps your professional development, adds value to your career aspirations and gives you insights and support to develop your skills and knowledge.

Don’t forget to renew your AIA membership. You’ll find everything you need to know below.

Renew online: members and students

Complete your renewal online today: 1. Visit www.aiaworldwide.com/my-aia 2. Login using your AIA membership number 3. Click the “My AIA” button 4. Click “Account Details” 5. Follow the steps to complete your renewal 6. Declare your CPD Your renewal should be completed by 1 October to ensure you continue to receive access to your AIA membership benefits.

Members in practice: changes to how you renew for 2020

● The new AIA website is faster, easier to navigate and linked to your account. ● From 2020, all practising certificate renewals are completed online. ● You can also declare your CPD online and keep an updated record of your evidence. ● You should renew your practising certificate as soon as possible to be sure of your supervision. Renewing on time means that you’re covered, and we can continue to support your practice. www.aiaworldwide.com/renew Completed renewals should be submitted before 1 October 2020.

What if I don’t renew on time?

● Beyond 1 October, AIA applies a “late renewal penalty” of £50 per month which is applied to the account of members who have not submitted a complete application. ● Continuing to work in public practice without a valid certificate is not permissible under AIA’s Public Practice Regulations. ● Remember, your application is only complete when AIA receives your subscription payments and completed renewal form. AIAWORLDWIDE.COM | ISSUE 113

Membership benefits

Here’s a reminder of some of the main benefits that come with AIA membership: ● International accreditation makes it easier for members to operate with global partners and in other countries. ● News and guidance with AIA publications, including the latest finance news direct to your inbox and regulatory, legal and business news with your subscription to AIA’s magazine International Accountant. ● You are part of a professional body that works closely with government, regulators and other stakeholders as your advocate. ● Boost your career and salary potential with our internationally recognised qualifications and designatory letters, which demonstrate your enhanced level of expertise and commitment to professional standards. ● AIA has a growing network of branches and members throughout the world that can help, enabling you to explore new trends and seek new opportunities. ● Professional credibility – your membership shows clients, colleagues and employers that you are a highly qualified and experienced finance professional. ● Access to the latest information, technical guidance and compliance information via the new AIA website: www.aiaworldwide.com. ●

If you have any queries regarding your renewal, please contact AIA Membership services. Email: membership@aiaworldwide.com Tel: +44(0)191 493 0277 Online: www.aiaworldwide.com/contact-us/

STUDENTS

Paper 14: The cost of capital This article examines the meaning behind the weighted average cost of capital with particular focus on AIA’s Paper 14 Financial Management.

first came across the term “cost of capital” 25 years ago, when I was a trainee accountant at the London headquarters of a global chemical manufacturer. My colleagues in the corporate reporting group and I were preparing the press release that announced the annual financial results to the London and New York stock markets and I saw the term in that release. Not knowing what it referred to, I asked a more experienced colleague to enlighten me and they responded: “It’s the return the investors need to justify putting their money in our business.” This struck me as an important piece of information. My instincts told me that keeping your investors satisfied was something that you should strive for. In this article, I will look at the meaning behind the weighted average cost of capital with particular focus on AIA’s Paper 14 Financial Management.

The golden rules

Every commercial business, incorporated or not and regardless of its size, has a capital structure. The capital structure refers to the source or sources of finance the business has raised from its investors. This affects everyone from sole trader businesses which use little more than the finance provided by their proprietors when setting up their businesses to multinational corporations with much more complex and varied sources of finance. Regardless of the size or simplicity of the capital structure, all capital structures have a cost. That is, as my former colleague pointed out to me nearly 25 years ago, the providers of finance expect a return from their investment. Rational investors do not provide their money for free. Based on the length of time they are parting with their money and a number of other factors generally relating to the riskiness

of their investment, the rational investor will expect a reward in return for letting the business use their money. Generally, a rational investor only accepts higher risk if the reward is commensurately higher. The golden rules in relation to the cost of capital are as follows: 1. All providers of capital (investors) expect to be rewarded for their investment. 2. Higher risk means higher reward, which means higher cost of capital.

Cost of equity

In most exam questions that I have seen over the last 20 years, a company’s capital structure comprises: finance from the company’s owners (equity); one or two sources of debt; and maybe some preference share capital (which is not ISSUE 113 | AIAWORLDWIDE.COM

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STUDENTS

dealt with here). We start with equity. This is because, with few exceptions, companies will start up with finance from their owners. Other sources of finance are provided to the company later. If the cost of capital is the annual return required by a company’s investors, the cost of equity (ke) represents the annual return specifically required by the company’s shareholders. Shareholders are typically rewarded in a combination of two ways. Firstly, their return can be in the form of capital appreciation. In other words, the value of the company increases from one year to the next and so the shareholder owns something more valuable than before. The share price has gone up. Shareholder wealth has increased. AIAWORLDWIDE.COM | ISSUE 113

Secondly, shareholder return can be in the form of dividend payments. In other words, profits generated by the company’s activities are distributed, generally in cash, to the shareholders. The shareholder has more cash than before. Again, shareholder wealth has increased. The cost of equity measures the total return that the shareholders are expecting. A company with a cost of equity of 16% might generate that return entirely in the form of dividends or entirely in the form of capital appreciation. Alternatively, the 16% return might be made up of a combination of the two. Broadly speaking, there are two methods of estimating the cost of equity capital: 1. dividend growth model (DGM); and 2. capital asset pricing model (CAPM).

The cost of equity measures the total return that the shareholders are expecting.” 9

STUDENTS Dividend growth model

We begin by looking at the DGM formula for the cost of equity. A glance at the formula suggests that the cost of equity (ke) is made up of two parts which are added together to get the total required shareholder return. The first part of the formula is the fraction. This takes d 0 , the current dividend per share and then multiplies it by 1 plus the expected growth in dividends. So d 0(1+g) therefore represents the dividend per share that the shareholders are expecting next year. We then divide the expected dividend by today’s share price (p 0 ). Today’s share price is the financial investment that the shareholder is making today, either by purchasing a new share or continuing to hold onto that share. It follows that the fraction in the DGM represents the expected return in the form of dividends, in percentage terms, over the coming year. The DGM then adds g to the dividend return to reflect that the shareholders may be expecting growth in addition to the dividends. Indeed, the shareholders may not be expecting dividends at all and the company is expected to generate their returns entirely in the form of growth by ploughing cash profits back into the business to fuel growth.

Capital asset pricing model

CAPM aims to estimate ke in a very different way. The formula itself does not differentiate dividends from growth. This does make sense as they both represent the same thing: increases in shareholder wealth. Instead, CAPM estimates ke based on the systematic risk associated with the shareholder’s investment. Systematic risk is the risk inherent in a share which cannot be diversified away by the shareholder by building a portfolio of a range of different investments. We measure systematic risk using a range of mathematical models but what we are interested in here is how we represent it. We use a beta factor (β) to show the level of systematic risk associated with a share. What does this beta factor tell us? Well, if the beta factor of a share is higher than 1, that means that the share is more volatile than the market as a whole and is therefore riskier than the average share. Conversely, if the share has a beta lower than 1, it is less volatile and less risky than the average share. The higher the beta factor, the higher its systematic risk. And mindful of the second golden rule above, the higher beta factor leads to a higher expected return for those rational shareholders. Let’s look at the CAPM formula: ke = rf + β(r m-rf ) Like the DGM, CAPM supposes that the cost of equity is made up of two parts. First is the risk-free rate of return (r f). This is the rate of return you would have to offer an investor to persuade them to part with their money for a time, knowing that they would get every penny

A share with a lot of systematic risk will lead to a higher required return. More risk means that a greater return is expected.”

back at the end of the investment. No investment is entirely risk-free, so r f is quite a theoretical concept, but we often take the yields (returns) on short-term government bonds as the closest we can get to risk-free rates of return. Then, we add a premium to the risk-free rate to reflect the systematic risk of the share. That premium takes the difference between the average market-rate of return (rm) and the risk‑free rate and then multiplies that market premium by the share’s beta factor. Therefore, it follows that a share with a lot of systematic risk will lead to a higher required return. More risk means that a greater return is expected.

What factors affects the cost of equity?

It is not possible to list all the factors that could make a company’s cost of equity higher than that of another. But whether you measure it using the DGM or the CAPM, it all boils down to the risk that shareholders are bearing by investing in that company. Here are a few of the more important factors. 1. Business activities: Some businesses are just riskier than others. Investing money in a research project which promises to cure a deadly disease is hugely risky. On the upside, a company that can cure cancer would generate massive profits if successful. The downside risk is that the research fails or that the cure has dangerous side-effects, which could mean that the project leaves the shareholders with nothing but losses. The cost of equity of an organisation which engages in this type of activity is likely to be on the high side. The beta factor is likely to be higher than 1 and shareholders would want to see results fast either in the form of dividends or, more likely, growth in the share price. 2. Life cycle of the business: Start-up ventures are riskier than their more mature counterparts. More mature companies have more backers, more organisational experience and more resources, which means that they are likely to be more stable than a new business with no or little track record. 3. Other sources of finance: The presence of financial gearing affects the stability of returns to shareholders because profits and cash are reduced because of the interest paid to the company’s creditors. That risk to shareholders’ returns will inevitably increase the minimum return acceptable to shareholders. 4. General economic conditions: In times of economic growth, the business environment can generate optimism among shareholders and other investors, encouraging them to put money into businesses with confidence. In more difficult and uncertain times, companies may have to promise their shareholders greater reward before they are willing to part with their money. This expectation of greater reward will inevitably push the cost of equity up from the company’s point of view. ISSUE 113 | AIAWORLDWIDE.COM

STUDENTS Cost of debt

The cost of debt (kd) is the cost to a company of providing its lenders with their expected annual percentage return. In very simple terms, this could be viewed as the interest that a business has to pay to its lenders in order to persuade the lenders to lend. However, in a world with tax, the cost of debt is likely to be lower than the annual return expected by lenders. This is because the borrowing company will get tax relief for their finance costs relating to debt, whereas this is not the case for equity. If a company must pay £100 million in interest to its lenders in a year, it will deduct the interest from its taxable profits and thereby get a tax saving on that interest. So, if the company pays its corporate tax at 20%, then the after-tax cost of the interest is: £100m x (1-0.20) = £80m. In other words, the return is £100 million but the cost is only £80 million. The same effect is true if we express kd as a percentage. The cost of loan finance is generally the interest rate agreed with the bank, adjusted for tax (multiplied by (1-t)). So, if the interest rate is 7% per annum and the company pays tax at 15%, the cost of this loan finance is: 7% x (1-0.15) = 5.95%. Debt can take other forms in addition to straightforward loans. Larger companies can raise debt on the bond markets. These are securitised debt instruments, which often allows the lender to sell their investment on to alternative lenders. These debt instruments can be redeemable, irredeemable or convertible. Irredeemable bonds are never repaid to lenders; the interest is paid every year into perpetuity. Redeemable bonds pay interest to lenders but will also be repaid on a predetermined date. Convertible bonds are like redeemable bonds, but the lender has a choice of having the bond redeemed or converted into shares in the borrowing company. In this case, the lender becomes a shareholder.

Irredeemable bonds

The cost of irredeemable bonds is calculated by taking the annual interest (i) on each bond and dividing it by the current market value of the bond (p0). If there is tax present in the exam question, you should adjust the interest by multiplying it by (1-t) as follows:

Redeemable and convertible bonds

It is a little more complex for redeemable bonds because the return to lenders consists not just of interest but also a redemption of the bond where the borrowing company buys the bond back from the lender – this acts as a repayment of the debt. To estimate the kd of a redeemable bond, we have to find an internal rate of AIAWORLDWIDE.COM | ISSUE 113

return (IRR) of the bond cash flows: the current market value of the bond at T0, the interest payments adjusted for tax from T1-n and then the redemption value that is repaid at Tn. This approach is identical for convertible bonds, except that at Tn we need to use the greater of the redemption value and the conversion value (the predicted value of the shares). This is because at Time n the lender can choose to convert the bond into shares or have the debt repaid. A rational lender would take whichever option is worth more at that time.

What affects the cost of debt?

The same golden rule about risk and return applicable to shareholders also applies to lenders. The higher the risk associated with lending money to a company, the higher the return expected by lenders. The factors affecting the cost of equity also affect the cost of debt. Business activities, lifecycle, stability and maturity are all very relevant to potential and existing lenders. In addition, however, with debt, the existence of security can be helpful in lowering the cost of debt. This is because lenders know that in the event of a default, an asset or assets may be seized in order to compensate for the loss to the lender, thus lowering the lender’s risk. Also, it is worth bearing in mind that, unless the debt is irredeemable, debt is temporary finance – it has to be paid back at some point, whereas equity is permanent. All other things being equal, the returns required by lenders are generally greater on debt with longer terms to maturity.

Weighted average cost of capital (WACC)

The WACC is the weighted average cost of the capital structure. The calculation is weighted by market values. A company has a cost of equity of 15% and a cost of debt of 5% with shares trading at £700m and debt trading at £300m then the WACC is: (15% x 700/1,000) + (5% x 300/1,000)

= 12%

Why do we need the WACC?

In terms of Paper 14 Financial Management, once the examiner has asked you to calculate the WACC, it is possible that you may have to put it to some use. The most likely way it will be used is in a net present value (NPV) calculation as a discount rate. Discounting projected cash flows using the WACC puts them into present value. An investment with a positive NPV is worthwhile for the organisation because, financially, it meets the requirements of the investors. Even if the investors require a very high return from the organisation’s activities, discounting the cash flows using WACC still ensures that we take account of the cost of rewarding the shareholders and lenders. ●

An investment with a positive net present value is worthwhile for the organisation because, financially, it meets the requirements of the investors.” 11

Â© istockphoto/jimkruger

IFRS 9

ISSUE 113 | AIAWORLDWIDE.COM

IFRS 9

A wave of change Scott Dietz considers the challenges of implementing IFRS 9 in a post-pandemic world.

Scott Dietz Director, Regulatory and Accounting Solutions, Moody’s Analytics

FRS 9 presents several changes to those working in investment accounting. What will these changes mean for finance teams implementing the new standard in a post-pandemic world? The Covid-19 pandemic has had a considerable impact on the global economy and the ripples will be felt across many industries and professions for years to come. And while recovery may be slow and arduous, organisations should be taking steps now to ready themselves for operating in a post-pandemic era. Of course, those steps will look different across the board. If we look at the impact for finance professionals in the insurance sector specifically, those steps will undoubtedly include addressing the wave of change in accounting standards – such as the International Accounting Standard Board’s IFRS 17 and IFRS 9 standards – and their looming implementation deadlines. To address these standards efficiently while navigating the uncertain business environment brought on by Covid-19, insurers and their finance teams need to keep in mind that a return to “normal” could happen after or right at the time of implementation. This timing means that insurers will have to adopt these standards in an economy facing tremendous uncertainty. With that in mind, let’s consider what insurers and their accounting teams can do, right now, to be in a better position to implement one particularly challenging aspect of these new standards: the new allowance framework within IFRS 9. AIAWORLDWIDE.COM | ISSUE 113

Current state of play

Author bio

Scott Dietz is a Director at Moody’s Analytics, with over 15 years of experience leading auditing, consulting and accounting policy initiatives for financial institutions.

The international accounting standard IFRS 9 is changing investment accounting. It brings changes to the classification of investments, how hedging activities are determined and accounted for, and how a reserve or allowance for potential future losses of these investments should be determined. As mentioned, we will focus on one of the key changes within IFRS 9: the allowance determination. From industry participants that have already adopted this accounting framework, we have learned that the process can take upwards of two years. There are many factors leading to this long runway, including significant data requirements that challenge nearly all adopters, and numerous management decisions that are required along the way. Each of these decision points requires testing and analysis to determine the best methodology selections for your organisation. Examples of such selections include the following: ● What is a reasonable and supportable forecast period? ● What credit loss metrics are appropriate and how will they be determined? ● What criteria should be used to determine stage allocation logic? These decisions represented challenges for organisations even before the pandemic and resulting economic downturn. Given the current state of the economy, and the belief that the recovery may extend beyond the implementation

IFRS 9 date of this standard, it inevitably leads to the question of how the implementation of IFRS 9 in a post-pandemic world be different from a pre‑Covid19 implementation?

In addition to the operational concerns, many of the conceptual questions which IFRS 9 presents may need to be revisited as a result of the pandemic.”

Implementing in a future state

The impact of the pandemic is huge and far‑reaching. Implementations that require significant collaboration between functions and lines of business – accounting and actuarial, for example – may experience additional stress and operational difficulties due to rapid and continuous change of how insurers conduct their day-to-day activities. IFRS 9 requires insurers to measure the expected credit losses of financial instruments based on the deterioration of each instrument’s credit risk since initial recognition – an operational concern for many insurers. A typical insurer’s investment portfolio under IFRS 9 contains commercial real estate loans, whose changing credit ratings may inform how the instrument’s overall credit risk is measured. If an instrument’s credit risk increases significantly, the insurer is then required to calculate the expected credit losses over the expected life of the financial instrument rather than allowances based on 12 months of expected credit losses, which is what’s required if the credit risk of an instrument has not increased significantly. In addition to the operational concerns, however, many of the conceptual questions which IFRS 9 presents may need to be revisited as a result of the pandemic. Among the questions insurers need to consider: ● What is the impact of Covid-19 on their internal credit assessments? ● When should a loan be downgraded? ● What if there is a government assistance programme that defers the manifestation of loan non-performance while allowing the borrower to stop payments temporarily? ● How do you assess whether the credit risk has truly deteriorated and the borrower will not be able to repay the loan fully versus the borrower taking advantage of the government assistance? Then there is the additional work that accounting teams may be doing to get comfortable with the IFRS 9 results given volatility. Expected credit loss estimates under IFRS 9 should be informed by history, current conditions and forecasts over the expected life of a financial instrument. The Covid-19 pandemic presents the challenge of finding relevant historical loss information, and injects uncertainty and volatility into economic forecasts. Lifetime projections may require more scenarios, running robust sensitivity assessments and detailed attribution analyses to be able to determine drivers of the changes in estimates and reasonableness of the results. Benchmark assessments may be a good way for management to challenge the model-run outputs and inform the qualitative framework to capture significant drivers that are not part of the modeled approach.

Scenario analysis and accountants

Within the IFRS 9 standard’s guidance, accountants are required to estimate their expected loss reserves considering multiple hypothetical economic outcomes. In practice, this requirement has led to institutions considering multiple economic outcomes such as a mostlikely, upside, and downside; and then taking a weighted average with the weights reflecting the likelihood of each outcome. With this in mind, one way in which insurers can prepare for the uncertain economic outlook in the near to medium term is to have a robust process that considers multiple scenarios that reflect a range of possible future outcomes for the economy. These scenarios should incorporate the latest data, economic models and economists’ views, so that they give an accurate and internally consistent picture of how the economy would fare under different “what-if” narratives. Such scenario analysis forms the cornerstone of stress testing and budgetary planning. Scenario analysis should not be limited to the IFRS 9 process. These efforts can add value to the asset liability sensitivity exercises and stochastic risk analysis performed by the actuarial teams to understand how key metrics – such as profit, liquidity and capital – are likely to change under various economic scenarios. Since these scenarios consider the comprehensive set of risks facing the different lines of businesses, and the interdependencies between them, their use can enhance collaboration between different groups within the company, building enterprise‑wide process consistency and improving efficiency.

Beyond IFRS 9

There are many key decision points that IFRS 9 requires of companies adopting the standard. These include data management, the use of credit risk models, economic scenarios and stage allocation logic. However, as firms that have already adopted IFRS 9 – or current expected credit losses (CECL) in the US – know, one of the key considerations for insurers is the effect of the new standard on their balance sheet and how they will manage this change alongside IFRS 17. Understanding IFRS 9 classification of financial assets – including fair value (FV) through profit and loss, and FV through other comprehensive income (OCI) and amortised cost – and applying the standard in conjunction with IFRS 17 adoption may cause income statement volatility and balance sheet asset liability mismatches. Those insurers who have not yet implemented IFRS 9 should take advantage of the extension given by the International Accounting Standards Board and adopt a comprehensive approach for implementation of both standards. Furthermore, they may want to consider using deterministic economic scenarios not only for IFRS 9 but for actuarial projections as well to get a consistent view of their balance sheet forecast. ● ISSUE 113 | AIAWORLDWIDE.COM

BOUNCE BACK LOANS

Bouncing back from the brink Richard Simms Managing director, FA Simms & Partners

any small and medium-sized businesses have received a bounce back loan. Around 860,000 loans were approved in the first six weeks and these loans are essential for businesses affected by the Coronavirus pandemic. However, HM Treasury has warned that any misuse of the scheme could result in prosecution for fraud. It is important that a problem isn’t inadvertently created by not understanding the scope of the loan and what can and can’t be done with this money.

Bounce back loan terms and conditions

The bounce back loan is a debt, not a grant, and consequently has terms and conditions attached from the lender, which should be checked very carefully. Common conditions include: ● There is only one application per “group”. If you have applied for more than one business that is under common ownership or control, then this is fraud. ● You must not have already received a loan under the Coronavirus Business Interruption Loan Scheme (CBILS), the Coronavirus Large Business Interruption Loan Scheme (CLBILS) or the Covid-19 Corporate Financing Facility (CCFF) unless you are refinancing it in full AIAWORLDWIDE.COM | ISSUE 113

Richard Simms asks whether the strict range of terms and conditions mean that bounce back loans amount to a bouncing bomb.

with the bounce back loan. You have until 4 November 2020 to arrange this with your lender. ● The bounce back loan is an alternative source of finance if you have been affected by the Coronavirus outbreak. It can be used for a wide range of purposes, such as working capital or investment, but it must support trading or commercial activity in the UK. It is not for personal use. ● If the business that takes out the loan is in default under the terms of any other borrowing facility, whether it is with the same lender or not, it will be deemed to be in default of the bounce back loan. ● Be particularly careful if your business needs any other source of funding during the life of the bounce back loan taking any form of security, mortgage, charge, pledge, lien or encumbrance over its assets whatsoever. You must check this is allowed in the loan terms and conditions, as often it is not.

Bounce back loans and fraud

As a spokesman for HM Treasury stated: “Our bounce back loan schemes are designed to keep businesses running during this difficult time… We’ve been clear that the loans must be repaid and banks are undertaking appropriate precautions against fraud,

BOUNCE BACK LOANS including customer checks and the monitoring of transactions. Any fraudulent applications can be criminally prosecuted.”

In simple terms: is the total of what you owe more than you own? The easiest way of identifying this is if a company has positive reserves on its balance sheet ● Cash-flow insolvency: This is when a company cannot make a payment when it is due. This will often be highlighted by a demand for payment by a supplier or lender which the business is unable to meet.

How is fraud being committed?

There has been speculation that bounce back loans are being used to fund luxuries such as “supercars”. Car Dealer Magazine has spoken to several top end car dealers who all confirmed that this is a definite trend. The lines between what is and what isn’t company money can easily be blurred. Liquidators regularly deal with directors of insolvent limited companies who routinely use the company bank account as an extension of their personal bank account. Sometimes, the first time that a director becomes truly aware of the implications of this is when a liquidator asks for the many thousands of pounds of those transactions to be repaid. Anecdotally, it seems that some people believe that this particular loan is “free money” and that should businesses flounder the debt will go with them. This is not true and is a dangerous way to view the situation.

The key principal of insolvency law is that those owed money by the business must be treated fairly. For example, if ten people are owed £1,000 and the company has £1,000, then they should each get £100. In some circumstances, those owed money (the creditors) have a legal priority over other creditors.

Associated creditors

Any payments by the business that do not follow the correct legal priority may well be reversed if the business ends up in a formal insolvency process; for example, a repayment of a loan to a business owner in priority to others. It is also worth noting that if a bounce back loan is used for personal use, it would be legally repayable and personal assets may be at risk.

Money laundering

Do not forget that the lender and the accountant has a legal duty, as part of its money laundering obligations, to report to The National Crime Agency if they have a suspicion that a business has obtained or is using a bounce back loan fraudulently. If it is proven, this could result in criminal prosecution.

Can a bounce back loan be used to pay a dividend or salary? Dividends

Money Saving expert Martin Lewis asked the Treasury whether a bounce back loan can be paid as a dividend if a business has retained profits but is cash poor. The answer to the question was “yes”. However, a broader answer might include a discussion on taking dividends from a company when the company might be deemed to be insolvent. A dividend paid from an insolvent company may also need to be paid back if the company enters a formal insolvency process, so if by making the dividend payment the company has become insolvent then it would again be repayable.

Is your company solvent?

The bounce back loan was introduced to quickly and efficiently provide funding to a business in difficulty due to Covid-19. However, it should not be viewed as an opportunity to pay back loans from the business owner to the business or to borrow money from the company. Why? Because if the business has trading difficulties, becomes insolvent and is not able to recover from that position, then it could be placed in a formal insolvency process and the appointed insolvency practitioner will need to identify the point in time when the company was last solvent. They must then review the activities of the business and establish the reasons for the failure of the business. That review process will also consider whether the bounce back loan was obtained when the company was technically insolvent (with or without the owner’s knowledge) or whether the company become insolvent from actions taken after the loan was obtained.

How to find out if your company is insolvent

● Balance sheet insolvency: A company is insolvent if it does not have sufficient assets to discharge its debts and liabilities.

Salary

Any salary taken via a PAYE scheme should be set at a reasonable level. An excessive salary would also be investigated by an insolvency practitioner during a formal insolvency process and it is important to remember that these loans must be used for the economic benefit of the company and not the individual.

Author bio

Richard Simms is managing director of FA Simms & Partners. He is an FCA Qualified Accountant, has a Diploma in Anti Money Laundering and is a licensed insolvency practitioner.

If you are unsure of the future of a business or the use of a bounce back loan, please visit www.BusinessSupport.co.uk. The site brings together 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. ● ISSUE 113 | AIAWORLDWIDE.COM

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LOAN CHARGE

Seeking justice Nathan Talbott asks whether taxpayers should seek a Judicial Review to address the injustices inherent in the loan charge. Nathan Talbott Partner, Wright Hassall

ISSUE 113 | AIAWORLDWIDE.COM

LOAN CHARGE

ntroduced in the Finance Act 2016, the loan charge is a tax charge on any outstanding loans stemming from the use of disguised remuneration (DR) tax avoidance schemes. Involving the remuneration of individuals (normally directors, shareholders or their family members), DR schemes relied on loans or payments from a third party, usually through a trust structure, which were never repaid. These schemes were designed to avoid the payment of income tax and National Insurance for the employer and employee. Any loans that were taken after 5 April 1999 and had not been repaid by 5 April 2019 were treated by the loan charge as taxable income. The loan charge received widespread criticism by taxpayers and specialists, with many questioning its retroactive nature, arguing that it undermined the finality of tax affairs where HMRC had previously taken no further action. Despite the backlash, HMRC stood its ground and outlined the following options for affected taxpayers, with regards to the loan charge: ● repay outstanding loans in full; or ● agree settlement terms with HMRC. If neither of those options were taken, HMRC indicated that taxpayers should report and pay the loan charge.

Consequences of the loan charge

The government accepted the review’s recommendations and draft legislation implementing the recommendations was published on 20 January 2020. The Finance Bill 2020 received Royal Assent on 22 July 2020 and

AIAWORLDWIDE.COM | ISSUE 113

Author bio

Nathan Talbott is a member of Wright Hassall’s tax and financial services litigation team, dealing with disputes relating to investments, tax schemes, pensions and HMRC enquiries and negotiations.

Following mounting pressure, the chancellor commissioned a review into the loan charge to consider whether it was an appropriate way of dealing with DR schemes used by individuals for tax avoidance purposes. Led by Sir Amyas Morse, the review was completed in December 2019 and recommended the following: ● The loan charge should not apply to loans entered into before 9 December 2010. ● “Unprotected years” were defined as arising from loans entered on or after 9 December 2010, where the taxpayer had made reasonable disclosure of their scheme usage to HMRC and HMRC did not open an investigation. It deemed that these should be out of scope of the loan charge. ● HMRC should refund the voluntary restitution elements of settlements made since 2016 that were paid to settle unprotected years when the relevant loans fell into one of the recommendations above.

LOAN CHARGE HMRC published guidance on refunds for DR settlements on the same day. Whilst the Finance Act 2020 deals with circumstances where settlements have been agreed with HMRC for loans no longer “caught” by the loan charge, it does not address situations where individuals have taken steps to repay outstanding loans in reliance on HMRC’s guidance and in fear of the loan charge. Below are three examples of how the loan charge impacts different taxpayers.

Case study: Mr Bloggs

Mr Bloggs is director and shareholder of ABC Ltd. In 2003/04, Mr Bloggs, on the advice of his accountants and tax advisers, pays £5 million to a trust and takes loans in the sum of £4 million. HMRC did not open any enquiries into the scheme use. In 2018, following the implementation of the loan charge, Mr Bloggs and ABC Ltd settle with HMRC using the November 2017 Settlement Opportunity. Pursuant to the settlement with HMRC, Mr Bloggs wrote to the trustees to write off the loans and wind up the trust. Following the loan charge review, Mr Bloggs and ABC Ltd applied and received a full refund of their settlement, with HMRC using the Disguised Remuneration Repayment Scheme 2020. Mr Bloggs now has no outstanding DR loans and the trust is no longer in existence.

Case study: Mrs White

Mrs White is director and shareholder of DEF Ltd and used the same scheme in 2003/04. HMRC did not open any enquiries into the scheme use. Mrs White decides to take no action and ignores the impending loan charge. Following the loan charge review, Mrs White’s loan now falls outside the scope of the loan charge and she need not take any further action. Her loan is still in existence and potentially Mrs White will, in the future, have to pay trust fees and be exposed to other potential tax liabilities depending on the nature of the trust.

Case study: Mr Bailey

The Finance Act 2020 does not address situations where settlements have been agreed with HMCR for loans no longer ‘caught’ by the loan charge.” 20

Mr Bailey is director and shareholder of XYZ Ltd and also used the same scheme in 2003/04. HMRC did not open any enquiries into the scheme use. Following HMRC’s guidance around the loan charge, Mr Bailey chose to repay the loan in 2018. He liquidates several investments and repays the loan to the trust. Following the review, Mr Bailey’s loan would have been outside of the scope of the loan charge. He writes to HMRC requesting confirmation that he can cancel his repayment of the loan without being subject to a new tax charge. HMRC denies his request and confirms that if Mr Bailey were to cancel his repayment, this would be treated as a “relevant step” for the purposes of Part 7A of the Finance Act

2012. It would be treated as income and taxed accordingly.

Overview

Mr Bailey is therefore left in a position whereby he has repaid the money to the trust, but he has no tax efficient way of accessing that money. The only way to do so would be to extract it, at which point it would be treated as remuneration and taxed accordingly. This is to be contrasted with Mrs White who did nothing, but in doing so has now avoided the obligation to pay tax under the loan charge. She has retained the benefit of the loan for her personal benefit without paying any tax on it. Consequently, by following HMRC’s guidance that he must comply with the loan charge, which Mr Bailey dutifully did, he is in a materially less advantageous position than Mrs White – who ignored HMRC’s guidance. This appears to be an unjust outcome. However, if Mr Bailey is unhappy with the position, he has limited options available to challenge HMRC. One option that is available is to pursue a Judicial Review.

Judicial Review

A Judicial Review allows the courts to examine decisions taken by public bodies (in this instance, HMRC) to ensure that they act lawfully and fairly. On the application of a party with sufficient interest in the case (Mr Bailey), the court will conduct a review of the process which HMRC (or the public body) followed to reach its decision, and assess whether or not that decision was validly made. There are four grounds on which a Judicial Review can be pursued, known as illegality, irrationality, procedural unfairness and legitimate expectation. After complying with the pre-action protocol for Judicial Review, the taxpayer may be faced with his only option being to issue proceedings. The claim form must be issued no later than three months after the relevant decision and accompanied by various documents. The court will then consider and assess the Judicial Review and decide whether to permit or refuse the claim.

Conclusion

Some taxpayers have benefited from the Review and amendments made to the legislation by the Finance Act 2020. However, those who have repaid their DR loans following HMRC’s guidance will feel they have not been protected. Those taxpayers who followed the process outlined by HMRC may now find themselves in a worse position, with vital funds stuck in their trust, with fees accruing. With any method of extraction resulting in further tax liabilities, Wright Hassall’s Judicial Review is in place to challenge HMRC’s current position and address ongoing issues. ● ISSUE 113 | AIAWORLDWIDE.COM

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COVID-19

Business recovery Andromeda Wood asks how to ensure businesses meet their deadline requirements in the world of Covid-19. Andromeda Wood Senior director of data modelling, Workiva © Getty images/istockphoto

usinesses are beginning to wonder what their futures will look like after Covid-19. With the help of regulatory extensions on deadlines, companies have had more time to deal with issues that arose during the first half of the year; however, it’s time to start thinking about the second half, and the years to come. Considering the regulatory changes and shifting deadlines that are set to take place over the next year, businesses need to start thinking about handling the medium to long-term impacts, as opposed to the triaging of immediate effects that they have had to prioritise in light of Covid-19. Namely, the European Single Electronic Format (ESEF) and proposals for updates to the Non‑Financial Reporting Directive (NFRD) have both been priorities for businesses coming through the Covid-19 haze. As many move out of survival mode, they’re asking: what’s next? Businesses need to think towards longer term operations and take this time as an opportunity to consider what bouncing back might look like, and how to best get back on track.

Let’s think about the long term

Most importantly, companies will need to ensure that improved resilience has been built-in across all departments, whether through process efficiencies, tech integration or improved workflow. Companies that implement sustainable, long-term solutions, instead of temporary “quick fixes”, will have longterm advantages when many of the adjustments caused by Covid-19 prove to be permanent. When considering the challenges with remote working, businesses should prepare for permanent change to the workplace as we knew it, and companies will need to create solutions to keep employees connected and keep business moving. These solutions, which are often cloud-based, have the power to reduce the risk of human error,

which can lead to huge fines or potential reputational damage if unaddressed, and can also improve efficiencies, allowing employees to spend more time working on what really matters – such as strategy and digital transformation. Connected technologies – like connected reporting – are a great way to ensure that businesses coming out of the Covid-19 crisis are able to operate nimbly, ensure that data is input and managed centrally, and minimise the risk of human error while maximising oversight and accountability across teams.

The regulation game

The EU recently highlighted ways that businesses can adjust in a tailored way to the effects of Covid-19 in the recent changes to the European Commission ISSUE 113 | AIAWORLDWIDE.COM

COVID-19

2020 Work Programme, released last month (see bit.ly/3h8HNvG). This programme’s original focus was on top-level, long-term goals around ecosustainability and a “Europe for the digital age” but has had to shift priorities in light of Covid-19. The new focus includes adding top priority responses from both a health and economic perspective and, in addition, continuing to look at ways not to just “bounce back” to “normal”, but empowering businesses to move forward in line with the original long-term goals. Furthermore, we’re also seeing reportingspecific regulations begin to reflect the need for more forward-looking flexibility that accounts for shifts in the economy. The UK’s Financial Conduct Authority (FCA) has announced that it is considering pushing back the ESEF deadline in order to allow businesses time to adequately prepare. For many other EU countries, however, there are no signs of an extension in sight. With this in mind, updates to reporting guidelines were put in place earlier this month, with many countries now rolling out what they expect ESEF to look like in their local markets ahead of deadlines. In addition to ESEF’s on-time roll out, we are continuing to see movement around the NFRD, the consultation on which was also delayed when Covid-19 hit. However, we can expect to see more changes announced in the near future, including updated deadlines and changes to longer-term requirements. Many of the companies that have left addressing their reporting too long have ended up behind schedule. Relying on deadline extensions may pose a challenge to many to get on the front foot and operate within a shorter timeframe to meet these deadlines. Following the lead from European Commission’s 2020 Work Programme, businesses must prioritise their financial and non-financial reporting, regardless of whether or not the deadline is pushed back. Businesses need to adopt the attitude that “Europe is doing this, so we must too”, as the world continues to move forward and find its footing.

Behaving flexibly

Author bio

Andromeda Wood is senior director of data modelling at Workiva. Her main area of interest is the role of technology and data in the future of corporate reporting

Neither ESEF nor the NFRD seem so far to have had a significant impact on business’s reporting procedures; however, it is crucial for companies to pay attention to both, particularly considering the current, shifting climate and wider trends. For example, sustainability and digital transformation are mentioned as priorities in the ESMA’s recent response to the NFRD consultation (see bit.ly/2GyGnhq), and in a publication from the Capital Markets Union high-level forum (see bit.ly/2R5VTU0), both including suggestions for more electronic reporting. It is likely that our current processes won’t remain sustainable and resilient as the world continues to change, and this is something that we need to be mindful of and adjust to as we move through Covid-19 recovery.

AIAWORLDWIDE.COM | ISSUE 113

For many businesses, connected, cloud-based solutions hold the key to streamlining operations, workflow and taking the pain out of moving reporting deadlines.

Transforming to a digital-first system

Before Covid-19 hit the world and rocked the global economy across industries, global productivity was at a mere 0.8%; now, thanks to automation, it is predicted to increase annually at 1.4% according to a McKinsey Global Institute report. Companies that want to move forward will have to implement solutions where mundane or repetitive tasks, such as standardised data entry, will be automated. This will allow companies to focus on valueadded business activities, such as strategic support and growth. Providing better data for statutory reporting and compliance is a shared commitment that calls for a collaborative data revolution. Regulated entities across the globe have been subject to an increasing amount of fragmented regulatory regime changes, legislation, reviews and queries. There are so many variables and complexities that businesses need innovative solutions to support in streamlining their workflows. This shift demands a tech and data-driven approach for monitoring activities, including the heightened use of AI, machine learning and other cloud-based systems to create a more open, integrated and holistic compliance model. The goal is for the global use of power of automation and connection to streamline reporting processes, regardless of region or regulatory framework. Only then can businesses make better and more informed decisions. Currently, executives want more meaningful information to be provided wherever, whenever and however they want it, with room for better analysis and leverage of this insight in meaningful ways. We need to be at a point – before the ESEF deadline – where we can drive technological adoption across compliance and business reporting into transparent, actionable and dynamic changes that will further prepare us for a future already in progress. Many issues related to working remotely will continue presenting challenges, such as: ● processes becoming increasingly decentralised and difficult to manage; ● unclear ownership over activity; and ● the increased likelihood of mistakes. These will continue to pose challenges unless businesses start to think ahead and use cloud solutions like connected reporting. Taking the manual effort out of many reporting functions will allow teams to focus on what matters – meeting the ESEF, NFRD and other local regulatory deadlines – or, of course, the next crisis. ●

CAPITAL GAINS TAX

Coming home? Marc Beattie explains why returning expats need to consider capital gains tax implications very carefully.

Marc Beattie Chief Operating Officer, AHR Private Wealth

EXPAT EXPAT 24

ISSUE 113 | AIAWORLDWIDE.COM

CAPITAL GAINS TAX

illions of UK residents – around one in ten of the UK population, according to analysis by the Institute for Public Policy Research (IPPR) – have taken the plunge and relocated to a new country, as the lure of an expat lifestyle, career opportunities and the promise of a better quality of life have proved hard to resist. For many people, the expat life remains a transient experience. However, the combination of the extraordinary disruption and knock-on economic impact caused by the Coronavirus pandemic and the uncertainty surrounding Brexit will almost certainly result in a considerable rise in the number of returning UK expats over the next year or two. And many will look to accelerate their plans to return home, particularly if they’ve lost their job or want to be closer to family again.

The complexity of tax rules

Even as a British national, returning to the UK after a stint living abroad is not as straightforward as simply packing your bags and booking the next flight. As with any international relocation, careful planning and preparation is essential in order to avoid any expensive mistakes. The tax ramifications of a return home are no exception, and advisers have a pivotal role to play in guiding their clients through the minefield that is the ever-changing expat tax landscape. Despite the complexity of tax rules at play, many UK expats return home without being fully aware of how these regulations will apply to them. Coming back to the UK after time abroad is already inherently stressful, without the anxiety of being landed with an unexpected tax bill. For expats who have worked in a low or zero tax country for many years, it’s understandable that tax may not be front of mind. Capital gains tax (CGT) is one of the heftiest tax bills UK expats are likely to face on their return, but given proper advice much can be done to ensure that an individual’s CGT liability is kept to a minimum at this challenging economic time. Clients will therefore need to work closely with a financial adviser to devise a clear plan based on an in-depth understanding of the rules and identify the steps needed to mitigate the CGT risks. Each case is obviously different, and individual advice will vary depending on the client’s circumstances, but the following issues are the ones most likely to crop up in discussions about limiting CGT liabilities, so advisers should be prepared to discuss them.

Sales of assets

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If clients have assets to sell and profit to release, it is essential to do this well in advance of returning home. In anticipation of any move back to the UK, advisers should first identify which assets should be sold before the client becomes a UK resident again. Generally speaking, selling an asset when a client is still a non-resident makes them exempt from a UK CGT charge, so settling any assets standing at a gain will help clients to hold on to the profit without being taxed.

CAPITAL GAINS TAX

The Chancellor has ordered a review of CGT which could have massive implications for both clients and advisers.”

On the other hand, clients may want to consider holding onto assets standing at a loss until they are once again a UK resident. Individuals can report a loss on a chargeable asset to HMRC, which can in turn reduce the total taxable gains. These “allowable losses” can allow clients to have a smaller CGT bill when they return to the UK. Needless to say, this approach requires advisers to consider the local country rules on CGT. (This is discussed in more detail below.)

Non-resident capital gains tax

Recently-expanded non-resident capital gains tax (NRCGT) means that non-UK residents are subject to UK tax on gains arising from direct or indirect disposals of UK land and property, and interests in entities deriving at least 75% of their value from UK land or property. It is important for clients who plan to return to the UK to consider selling any UK property in the period leading up to their departure, as it may incur a lower CGT tax bill compared to when they become UK resident. Conversely, they may want to wait until they’re back in the UK to make any sales of their UK property where the sale results in a loss.

Principal private resident relief

If clients are selling their home as part of their return to the UK, they may qualify to receive principle private residence (PPR) relief. PPR protects an individual from CGT but the relief only applies in full if the property has been occupied by the individual as their only home or main home for their entire period of ownership. Additionally, married couples and those in civil partnerships can only have one main residence between them. Where the gain isn’t fully covered by PPR relief and the property is jointly owned, the CGT can be split, potentially resulting in a lower tax liability overall. Advisers should make sure to point this out to applicable clients.

Temporary non-residence rules

Author bio

Marc Beattie is chief operating officer and co-founder at AHR Private Wealth. He has been working in the financial services and private banking industry since 1999.

Another implication of CGT is temporary non‑residence, which generally applies if a client has been based away from the UK for five complete years or less. The rules around this are quite technical, so it is imperative that advisers understand their client’s circumstances. One of the downsides of temporarily being a non-UK resident is that sales of assets made while non-resident may become taxable when UK residence resumes. If a client is temporarily non-resident, any gains or losses on assets purchased before the period of temporary non-residence and realised during their period of non-residence – including in an overseas part of a split year – become chargeable to CGT in the year of their return. The rules are designed to prevent people from leaving the UK to dispose of an asset just to avoid CGT.

Local country CGT implications

Advisers should also ensure that clients are aware of the CGT rules of the country they’re based in to avoid any unwelcome surprises. Some popular

destinations for UK expats, such as Hong Kong and Dubai, have no CGT, so selling off investments before a client returns can save them thousands of pounds. On the other hand, countries like Australia have exit charges on assets standing at a gain. Clients may not be aware of the geographic variations in the rules, so it’s important to clarify them as soon as possible.

Ongoing uncertainty

The widespread disruption caused by Covid-19 hardly needs pointing out and, as part of the recovery measures, the Chancellor has ordered a review of CGT which could have massive implications for both clients and advisers. Given the current economic environment, it seems clear that the government will need to either increase taxes or cut spending, with little appetite for the latter after many years of austerity. Bearing in mind that the government’s last manifesto contained a pledge not to increase income tax, National Insurance or VAT, there has been speculation that the government may target wealthier individuals with a new wealth tax, but this would present huge implementation challenges. As a result, less glamorous taxes such as CGT are likely to be under the spotlight. Removing or reducing the annual exemption, which currently stands at £12,300, or reforming loss relief would seem to be the most realistic policies. Alternatively, the government may look to increase the rates of CGT to bring them in line with income tax. They could also look to abolish more of the reliefs around principal residence relief, but such changes would likely be met with fierce opposition, particularly as this is an area which has already been targeted in recent years. Whatever happens, it is fair to assume that the government would look to invoke any changes as soon as possible, likely the start of the next tax year. Any mid-tax year changes seem quite unlikely, although that is not entirely unprecedented. Either way, it will become even more crucial for clients to take advice before returning to ensure that any action or restructuring opportunities are undertaken before becoming UK resident. It is therefore essential that advisers work closely with their clients to ensure that they have a clear plan to achieve a safe passage on return. Needless to say, the secret with CGT planning starts with the planning. Clients should really start looking at their financial affairs 12 to 18 months before their actual repatriation and use the services of CGT experts to chart a course. The specific regulations relating to expat CGT can best be described as moving goal posts. The combination of ever-changing rules and the need to take into consideration the unique financial situation and varying plans of individuals only serve to add complexity to what is already an area of tax that is fraught with uncertainty. Having a clear CGT plan that clients are comfortable with – and understand as part of a wider strategy for a smooth return to the UK – can give them much-needed peace of mind. ● ISSUE 113 | AIAWORLDWIDE.COM

Rebooting risk management John Peirson considers how to make risk relevant in a world remade by Covid-19. John Peirson Deloitte Risk & Financial Advisory

oday’s environment is one not only of heightened risk, but of prolonged uncertainty. Blurring the lines between business-as-usual risk management, crisis management and resilience can enable agility in the face of an uncertain future. Blanket statements about the impact of the coronavirus pandemic and its economic fallout may be viewed sceptically. But this much we can say: risk management failures abounded. Indeed, regardless of how your organisation has been affected, there is much to be learned about risk management from this still‑unfolding crisis. Even after the past 20 years of continual disruption, risk management is too often either misunderstood or mistakenly thought of as a compliance function. But while compliance regimes may work well for known risks with clear implications and proven mitigations in a fairly static environment, Covid-19 has demonstrated that the environment is anything but static. Risk is not a well-behaved house guest, and the impact of Covid-19 was impossible to predict. And every senior executive, board member or risk leader whose organisation has prospered in spite of, or even because of, the Covid-19 crisis should clearly understand that next time will be different. The volatile, uncertain, complex and ambiguous (VUCA) environment virtually guarantees that the next crisis will not be any more predictable than any others have been during the past 20 years (see bit.ly/2SitPgK). The chance to upgrade and reposition risk management – to perform a risk reboot – is one of the true opportunities this crisis presents to risk leaders, executive teams and organisations. Not a reboot in the reset-your-device or restartthe-system sense from the tech world, but in the reboot-the-franchise sense from the moviemaking world. We mean reimagining, refreshing and re-energising risk management and all of its elements to help address a highly uncertain future. The concrete outcome of this reboot is a risk leader’s agenda and mandate – and a risk management function – geared to the critical risks

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the organisation faces as it pursues its purpose, mission, strategy, and goals. The following three guiding principles can help to ignite a risk reboot and guide it in productive directions.

1. Building trust among stakeholders

Cultivating stakeholders’ trust requires risk leaders to think more broadly and deeply about the organisation’s ecosystem of stakeholders. Relevant risk programmes are designed around the needs and expectations of all stakeholders – customers, employees, the board, vendors, partners, investors, the media, the community and society at large. When an organisation and its stakeholders truly trust one another, they become partners in risk management, alerting one another to emerging risks, collaborating on mitigation and creating greater value for each party. This has been shown through mechanisms such as customer councils and preferred supplier programmes, and among extended enterprise partners, in which key stakeholders are “brought into the organisation” to enhance relationships and build trust. Viewing stakeholders more broadly and deeply, and cultivating trust with the stakeholder ecosystem, positions a risk leader to: ● identify all groups in the organisation’s ecosystem of stakeholders and their relationships, not only with the organisation, but among one another; ● articulate what each stakeholder group specifically needs and expects from the organisation; ● understand the full range of risks that could undermine the organisation’s ability to fulfil each group’s needs and meet their expectations; ● grasp the interrelatedness of stakeholder expectations and the ways that stakeholder groups affect one another, and understand the interrelatedness of the associated risks; ● challenge management on potential flaws in a strategy, errors in execution, and areas where the organisation might break, while pointing out potential opportunities, solutions and fixes

RISK MANAGEMENT – with that second part key to avoid being viewed as a naysayer; and ● make sure the risk programme proactively monitors, mitigates and manages risks that could affect the organisation’s ability to deliver on stakeholder expectations, as well as trust and confidence among key stakeholder groups.

2. Elevating the role of risk management

A reboot elevates the role of risk by identifying new opportunities to deliver value, as well as by addressing actual and potential threats. This increases C-suite confidence in the risk function by delivering more relevant information, including predictive information, and solving the compliance conundrum created by the need to continually create controls, processes and reports in response to new mandates. A successful reboot also calls for risk leaders who understand not only risk but also business strategies and how they are implemented. These leaders, equipped with eclectic backgrounds and broad business experience, can translate the often abstract concept of risk into concrete impacts on strategies, initiatives and decisions. They can assist the executive team and the business in risk identification, monitoring, mitigation, management and response. Here are some actions that can help elevate risk management’s role: ● Take a fresh look at the organisation’s approach to risk, then rationalise and rightsize risk activities – particularly compliance activities, which can often be automated – and reinvest in higher-value or higher-return activities. ● Integrate risk management by cutting across organisational silos and activities. ● Streamline risk management by focusing people, processes, technologies and investments on the risks that matter most – the risks that could undermine the ability to fulfil stakeholder expectations. ● Quantify the cost and value of risk management outputs. ● Gear risk management to an environment of ongoing uncertainty by providing enhanced risk data and risk-based decision support.

3. Giving risk management the tools to do their job

Author bio

John Peirson is the chief executive officer (CEO) of Deloitte Risk & Financial Advisory and has held multiple leadership roles across the firm.

When a crisis strikes and amid ongoing uncertainty, management needs a clear picture of current and potential developments. Yet the risk leader and the risk function often lack the access to data, the analytical firepower and the ability to communicate with management and the organisation in real time or near-real time. A successful risk reboot empowers the risk leader with ready access to risk and performance data, analytical tools and reporting mechanisms, such as data visualisation. Equally important, the risk leader and his or her team should be prepared to provide early warnings of emerging risks to further support decision making – perhaps with an assist from

risk-sensing technologies, predictive analytics and scenario planning – along with actionable insights and recommendations. Scenario planning in particular can enable risk leaders to clearly portray the impact of potential risk events on specific stakeholders. It enables management to more clearly understand the full range of available options, as well as the if-then ramifications of each decision. Scenario planning also enables leaders to define potential signals that, if they were to emerge, might indicate the nature and impact of potential risks as well as the direction of future events. Some useful questions to ask in the effort to deliver risk intelligence include: ● What risk data does management need and how can we access and analyse that data and effectively distribute and communicate the results? ● How can we apply predictive analytics, risk sensing and other smart technologies to improve our risk management and decision support capabilities? ● How can we use scenarios to better understand developments in this and future crises? ● How can we better assist management in crafting potential responses to risk events? What signals and triggers might enable us to determine which responses should be implemented and when? ● How can we communicate better about risk across our organisation? How can we more clearly portray the potential business impact of risk events on our organisation and stakeholders? ● What actions do we recommend to mitigate risks and leverage opportunities that have been identified? How can we frame our recommendations in ways that compel management to act on them?

The future is a moving target

The Covid-19 pandemic has shown organisations that they can make decisions rapidly under conditions of extreme uncertainty. The challenge is to make even better decisions under the conditions that lie ahead. This calls for combating the inertia that may cause the organisation to lose that ability and return to business as usual, and drive risk management to return to former modes of operating. Risk functions have a rare but real opportunity at present. Rather than slowing down decisions, raising only objections, or entering the process too late, risk must be an enabler, not a barrier. That means supporting fast decisions, presenting solutions and being engaged at the outset. Read the full report at: bit.ly/34ddPlQ1. ● Thanks to Ed Hardy, Don Fancher, Deborah Golden, Mike Kearney, Dan Kinsella, Matt Marsh, Chris Ruggeri and Damian Walch at Deloitte Risk & Financial Advisory for their assistance with this article. Originally published by Deloitte Insights on 9/23/20. Republished with permission. ISSUE 113 | AIAWORLDWIDE.COM

Events

November webinars TOP TIPS FOR USING THE CLOUD TO MANAGE DOCUMENTS 4 November 2020 from 10.30-11.30 This webinar will cover: ● Why should you use cloud to store your documents? ● What are the benefits? ● How can you get the most out of your cloud storage software? Speaker: George Kizis was employee number three for SmartVault UK and is an authority on document management for the financial sector. George regularly runs educational webinars and speaks at industry

Speaker: Richard Simms is managing director of F A Simms & Partners Limited, a business rescue and insolvency practitioners. Having trained as an accountant and licensed insolvency practitioner, Richard took DEMYSTIFYING THE CREDITORS’ over the role of managing director in VOLUNTYARY LIQUIDATION PROCESS 1999. Richard is also director of the 25 November 2020 10.30-11.30 Anti-Money Laundering Compliance This webinar will cover: Company Limited (AMLCC). AMLCC is ● What is a CVL? a comprehensive and practical guide ● How quickly can it be done? assisting accountants and bookkeepers ● How does it affect the business to comply with the Money Laundering owner personally? Regulations that is offered to AIA ● The process members in practice as part of their ● Managing the potential pitfalls membership. events. As well as document management, his knowledge covers cybersecurity, communication technology, GDPR and disaster recovery planning.

Online CPD partners AIA has partnered with four leading online CPD partners to provide you with an extensive range of online courses, covering a broad range of technical and professional development. These are listed below with details of their offerings for AIA members.

BEIJING NATIONAL ACCOUNTING INSTITUTE

INSTANT CPD

Instant CPD provides online and ondemand HD video CPD courses. Their suite of courses, presented by expert lecturers, range from tax and technical to strategic and professional development. All courses come complete with notes, PowerPoint slides and brief multiple choice tests. Instant CPD is an accredited CPD centre by the CPD Standards Office and its courses are taken by thousands of accountants. Members can instantly access the HD video courses after purchasing from Instant CPD and watch them at their convenience. Upon completing a course, members can download and print an accredited Certificate of Completion. Find out more: www.aiaworldwide.com/ instant-cpd. AIAWORLDWIDE.COM | ISSUE 113

AIA has an agreement with Beijing National Accounting Institute (BNAI) to conduct online CPD free of charge for AIA members. BNAI will offer 100 hours of courses, from which AIA members can select up to 40 hours for their own CPD. After completing the selected course and reaching the prescribed learning hours, AIA members will have the option to print an online certificate in order to authenticate and validate their yearly CPD requirements. Find out more: www.aiaworldwide.com/ bnai. ACCOUNTINGCPD.NET

For many years AIA members have been able to use online CPD courses, published by Nelson Croom, to fulfil their CPD requirements. Now you can get those same great online CPD courses much more easily, by buying direct online from Nelson Croom’s online shop for accountants at www.accountingcpd.net.

Accountingcpd.net is a leading provider of online CPD for accountants, bringing together professional bodies, acclaimed authors and the development expertise of Nelson Croom, to offer members a wide range of online CPD courses. It’s CPD that really make you think. Find out more: www.aiaworldwide.com/ accountingcpd-net. TOLLEY ONLINE SEMINARS

AIA members in practice have access to Tolley Online Seminars as part of the AIA practising certificate package. Keep your tax knowledge up to date in a manageable way that works with your schedule. The monthly CPD seminars are delivered by industry experts in 15 minute online sessions, available to watch on your desktop, laptop or mobile. The seminars are developed and delivered by leading industry lecturers. Download and watch them where and when suits you. Find out more: www.aiaworldwide.com/ tolley-tax-intelligence. You can view the full range of conferences, seminars, webinars and partner events at: www.aiaworldwide.com/events.

Technical INTERNATIONAL

IFAC responds to the IIRC’s consultation draft of the International <IR> Framework 2020 IFAC welcomes the International Integrated Reporting Council’s (IIRC’s) revision of the <IR> Framework, which should be an important step in its continued development. In its response to the IIRC, IFAC is broadly supportive of the proposed revisions to the <IR> Framework, including strengthening the statement of responsibility for an integrated report, emphasising the importance of the role of those charged with governance, clarifying terms within the business model, and addressing the need for more balanced reporting of positive and negative outcomes. The Consultation Draft also asked for feedback on more strategic questions in “charting a path forward”. IFAC believes non-financial and financial information needs to be connected through a framework that captures relevant aspects of value creation and sustainable development. The <IR> Framework is the starting point for such a conceptual framework, given it is the only comprehensive reporting framework. However the Consultation Draft does not explicitly address the fundamental issue of how the <IR> Framework needs to further evolve to be considered an all-encompassing connected conceptual framework for reporting. IFAC believes this should be the priority focus for the IIRC and its strategic partners. For the <IR> Framework to be more widely recognised as a connected

umbrella conceptual framework for reporting, it must: ● provide the foundation for understanding and reporting on multi-faceted value drivers based on financial and non-financial information – and demonstrating the connections between them; ● provide the principles and key concepts around “how to report” with respect to scope, content and presentation. This is the foundation for “what to report” provided by other standards; ● support the convergence and comparability of reporting through incorporation of significant initiatives and standards that are the building blocks to converging and aligning metrics, including those related to sustainability/ESG; and ● enable assurance, which is critical to confidence in all corporate reporting and most effective when applied against metrics and narrative disclosures that are supported by clear best practices or reporting standards.

INTERNATIONAL

Organisation (WTO), United Nations Educational, Scientific and Cultural Organisation (UNESCO) , the International Energy Agency (IEA) and the International Organisation for Securities Commissions (IOSCO), the Joint Statement reiterates the central role that international organisations play in promoting the global public good, tackling transboundary issues, and achieving the United Nations Sustainable Development Goals (SDGs). IFAC is proud to be a member of the OECD IO Partnership and a signatory to the Joint Statement. The Joint Statement complements IFAC’s G20 Call to Action and its themes of Recommit to Global Collaboration and Resist Regulatory Fragmentation.

IFAC endorses Joint Statement from the Secretariats of the International Organisations The OECD has hosted the seventh annual meeting of the Partnership of International Organisations for Effective International Rulemaking (IO Partnership). The meeting concluded with the publication of a “Joint Statement of International Organisations in Support of Effective International Rulemaking”. Signed by nearly 50 major international organisations, as diverse as the World Health Organisation (WHO), World Trade

Achieving this will require a pragmatic approach. With that in mind, IFAC believes: ● In order to promote long-term relevance of the <IR> Framework and continued expansion of its use, it is vital that integrated reporting be positioned as an immediate solution to current market demands

for consistent, reliable information that enables rigorous measurement and reporting of factors material to value creation and sustainable development. ● The primary users of an integrated report must remain the providers of financial capital, which will help ensure: a) concise and focused reporting on value creation; b) the alignment of the <IR> Framework with the IASB’s Management Commentary Practice Statement; and c) the assurance of integrated reporting. ● The <IR> Framework must incorporate corporate impacts on society and the environment that are not expected to impact financial performance in the short term but are relevant to a broader corporate purpose, reputation and licence to operate, with a view that these broader impacts can ultimately have material financial impacts. ● The <IR> Framework may need to be rebranded as a Framework for Understanding and Reporting on Value Creation to position it more clearly as being about integrated thinking and reporting, and may also help to deal with the challenge that in many countries the adoption of integrated reporting is through existing regulatory requirements for management reporting.

“The COVID crisis has been a wakeup call,” said Kevin Dancey, IFAC CEO. “No one can address the problems of the 21st century acting alone. The OECD IO Partnership is invaluable because it positions us to learn from one another and better deliver on our respective public interest mandates and SDGs.” Nicola Bonnuci, IO partnership facilitator, commented, “The IO Partnership provides an ideal space to exchange on the challenges facing IOs in adapting our rulemaking activities to arising emergencies and the changes of the digital era, to rethink the forms of cooperation between IOs, and to deliver instruments that are trusted by governments and civil society.” ISSUE 113 | AIAWORLDWIDE.COM

Technical IFAC calls for creation of an international sustainability standards board alongside the International Accounting Standards Board IFAC called for the creation of a new sustainability standards board that would exist alongside the International Accounting Standards Board (IASB) under the IFRS Foundation. The proposed board would address the urgent and growing demand from investors, policy makers and regulators for a reporting system that delivers consistent, comparable, reliable and assurable information relevant to enterprise value creation, sustainable development and evolving stakeholder expectations. IFAC’s overview of the objectives, structure and building blocks of the proposed board can be found at The Way Forward. Kevin Dancey, CEO of IFAC, said, “The time for a global solution is now. Given the momentum that has developed this year – because of work by Accountancy Europe, WEF/IBC, the European Commission, the IOSCO Task Force and the five leading reporting initiatives – we have a unique opportunity to act in concert to do the right thing in the public interest. IFAC believes the IFRS Foundation, with the backing of public authorities, is optimally positioned to lead and coordinate this initiative, and they would do so with our full support. We recommend that the proposed board adopt a ‘building blocks’ approach, working with and leveraging the expertise and disclosure requirements of the CDP, CDSB, GRI, IIRC and SASB.” Veronica Poole, Global IFRS Leader and Head of Corporate Reporting at Deloitte, said: “Transparent measurement and disclosure of sustainability performance is a fundamental part of effective business management and is essential for preserving trust in business as a force for good. IFAC’s vision is fully aligned with the joint vision of the leading standard-setters on how their current standards and frameworks could complement IFRS Standards and US GAAP, and serve as a natural starting point for progress towards a more coherent, comprehensive corporate reporting system. “We now have a unique opportunity to accelerate progress and house all the relevant standards under one roof, as suggested by IFAC, to connect sustainability disclosure standards focused on enterprise value creation to financial GAAP. Integrated reporting together with the IASB’s work on AIAWORLDWIDE.COM | ISSUE 113

Management Commentary can provide a framework for this connectivity. IOSCO has stated its commitment to bring about the system change for the capital markets, and the IFRS Foundation trustees indicated that they are going to consult on introducing a sustainability focused standard-setter under the umbrella of the IFRS Foundation. The stars are lining up to bring about the fundamental shift in reporting that investors, business and society at large have been calling for.” Charles Tilley, IIRC Chief Executive Officer, said, “The IIRC has long championed a vision of a comprehensive and cohesive corporate reporting system to drive effective corporate governance and sustainable value creation. Bridging the gap between the two worlds of financial reporting and sustainability reporting is a vital element in fulfilling this vision and we support the development of a conceptual framework, based substantially on integrated reporting principles, to facilitate the linkages that will break down silos and restore trust.” Barry Melancon, AICPA President and CEO, and IIRC Board Chair, added, “IFAC’s recommendations are powerful, coming out at a time when the world is in search of answers. This is an important moment for the IFRS Trustees, as businesses and investors need robust and trusted standards and interconnected oversight. A cohesive approach to reporting is not just more efficient; it is essential to unlock the positive force of value creation. We also need innovation to complete the corporate reporting system to ensure we have an assurance process that is fit for purpose and the technology to support high quality reporting and governance.”

IASB completes response to IBOR reform with amendments to IFRS Standards The International Accounting Standards Board (Board) has finalised its response to the ongoing reform of inter-bank offered rates (IBOR) and other interest rate benchmarks by issuing a package of amendments to IFRS Standards. The amendments are aimed at helping companies to provide investors with useful information about the effects of the reform on those companies’ financial statements. The amendments complement those issued in 2019 and focus on the effects on financial statements when a company replaces the old interest rate benchmark with an alternative benchmark rate as a result of the reform.

The amendments in this final phase relate to the following: ● Changes to contractual cash flows: A company will not have to derecognise or adjust the carrying amount of financial instruments for changes required by the reform, but will instead update the effective interest rate to reflect the change to the alternative benchmark rate. ● Hedge accounting: A company will not have to discontinue its hedge accounting solely because it makes changes required by the reform, if the hedge meets other hedge accounting criteria. ● Disclosures: A company will be required to disclose information about new risks arising from the reform and how it manages the transition to alternative benchmark rates. Hans Hoogervorst, Chair of the Board, said: “Our response to IBOR reform helps companies deal with its effect on their financial instruments and enables them to continue providing useful information to investors.” These amendments are effective for annual reporting periods beginning on or after 1 January 2021, with early adoption permitted.

UK AND IRELAND IAASA outlines Covid-19 and Brexit as two key considerations when preparing 2020 financial statements IAASA, Ireland’s accounting enforcer, has published its annual Observations paper highlighting some significant topics that those charged with governance should consider when preparing their financial statements for 2020. IAASA’s paper highlights some key areas that warrant close scrutiny by those preparing, approving and auditing 2020 financial statements in the upcoming reporting season including: ● the pervasive impact of the Covid-19 pandemic on the recognition, measurement, presentation and disclosure of income, expenses, assets and liabilities in companies’ financial statements; and ● the challenges and uncertainties facing companies from Brexit. Against the backdrop of these two significant events, IAASA expects companies to provide entity specific and

Technical comprehensive disclosures that enable the users of their financial reports to understand: a) the impact that these events have had on their financial performance, financial position, cash flows and risks; b) the sources of estimation uncertainty and changes in the key assumptions underpinning assets, liabilities, income, expenses and cash flows; c) the mitigating actions taken to respond to Covid-19 challenges and to Brexit; and d) the expected impact on future financial performance, financial position, cash flows and risks.

2020. Section 27 of the Act empowers the Minister for Law to prescribe, by order, alternative arrangements for meetings otherwise requiring personal attendance. Pursuant to Section 27 of the Act, Covid-19 (Temporary Measures) (Alternative Arrangements for Meetings) Orders have been promulgated to enable various types of entities to convene, hold or conduct meetings by electronic means, even if this is not allowed under the written law or legal instrument which provides for the meeting.

This 2020 Observations paper is addressed primarily to the preparers, approvers and auditors of financial statements. However, IAASA believes that it will also be helpful to users of financial statements and assist them in understanding the significant judgments made by companies in preparing their financial statements. The paper seeks to highlight matters users may wish to be aware of and focus on when reviewing 2020 financial statements. While IAASA’s remit extends only to companies with securities admitted to trading on a regulated market (principally the Main Market of Euronext Dublin – the Irish Stock Exchange), the topics identified in the 2020 Observations paper could usefully be taken into consideration by a much wider range of companies with the aim of producing high quality financial reports more generally and increasing the transparency and usefulness of financial statements for users.

The Ministry of Law plans to extend the Meetings Orders to 30 June 2021. Amendments to the Act were passed in Parliament on 4 September 2020 to permit the Minister for Law to do so. If the president assents to the amendments to the Act, the amendments to extend the duration of the Meetings Orders will be gazetted, once the amendments to the Act come into force. The extension of the Meetings Orders to 30 June 2021 will give entities the option to hold virtual meetings, even where the entities are permitted under safe distancing regulations to hold physical meetings. This will help keep physical interactions and Covid-19 transmission risks to a minimum. The need to keep Covid-19 transmission risks to a minimum will remain in the long term, even as safe distancing regulations are gradually and cautiously relaxed.

ASIA PACIFIC Singapore’s Covid-19 relief measures: duration of alternative arrangements for meetings to be extended The Ministry of Law, in consultation with relevant ministries and agencies, intends to extend the duration of legislation that enables entities to hold meetings via electronic means to 30 June 2021. This will provide entities with greater legal certainty to plan their meetings, and the option to hold virtual meetings to minimise physical interactions, amid the continuing Covid-19 situation.

Background

The Covid-19 (Temporary Measures) Act was passed in Parliament on 7 April

Planned extension of the Meetings Orders

Deferral provisions

However, existing provisions in the Meetings Orders which allow for meetings to be deferred to a date no later than 30 September 2020 will not be extended to 30 June 2021. To give a further grace period to those entities that need more time to overcome practical difficulties in organising meetings (whether virtual or physical), the deferral provisions for certain types of entities will be extended, but only to permit deferrals to a date no later than 31 December 2020. For the avoidance of doubt, entities can choose to rely on meeting arrangements permitted by their governing instruments, as long as they can do so in compliance with prevailing safe distancing regulations. Further announcements will be made when the extension and amendments to the Meetings Orders come into effect. In the meantime, for further information and enquiries, entities may check the websites

of or approach their respective regulators. Guidance notes and regulators’ contact information is at www.mlaw.gov.sg/ covid19-relief/alternative.

MASB publishes amendments to Insurance Standards and defers the effective date of amendment to MFRS 101 The Malaysian Accounting Standards Board (MASB) has issued the following pronouncements: ● Amendments to MFRS 17 Insurance Contracts; ● Extension of the Temporary Exemption from Applying MFRS 9 (Amendments to MFRS 4 Insurance Contracts); and ● Classification of Liabilities as Current or Non-current – Deferral of Effective Date. The above pronouncements are wordfor-word the respective pronouncements issued by the International Accounting Standards Board (IASB). The “Notice of Issuance” can be downloaded from the MASB website.

Amendments to MFRS 17 Insurance Contracts MFRS 17 Insurance Contracts was issued in August 2017. In response to many of the concerns and challenges raised by companies implementing MFRS 17, the Amendments are issued to continue supporting the implementation by reducing costs and making it easier for companies to explain their results when they apply the Standard. The Amendments are designed to minimise the risk of disruption to implementation already underway and do not change the fundamental principles of the Standard or reduce the usefulness of information for investors. Amendments to MFRS 17 also defers the effective date of MFRS 17 by two years, to annual reporting periods beginning on or after 1 January 2023. The decision to defer the effective date will enable companies to implement the new Standard in a timely manner which MASB considers to be beneficial for investors, preparers and other stakeholders.

Extension of the Temporary Exemption from Applying MFRS 9 (Amendments to MFRS 4 Insurance Contracts) The Amendments to MFRS 4 extends the expiry date for the temporary exemption from applying MFRS 9 Financial Instruments by two years to

ISSUE 113 | AIAWORLDWIDE.COM

Technical annual periods beginning on or after 1 January 2023. The extension maintains the alignment between the expiry date of the temporary exemption and the effective date of MFRS 17, which replaces MFRS 4.

Classification of Liabilities as Current or Non-current – Deferral of Effective Date

The Amendment defers by one year the effective date of Classification of Liabilities as Current or Noncurrent (Amendments to MFRS 101 Presentation of Financial Statements). The said MFRS 101 amendments were issued by MASB on 16 March 2020, effective for annual reporting periods beginning on or after 1 January 2022. However, in response to the Covid-19 pandemic, the effective date is now deferred to 1 January 2023 to provide companies with more time to implement any classification changes resulting from the amendments. There are no changes to the original amendments other than the deferral of the effective date.

UNITED STATES FASB issues proposal to simplify how private company franchisors evaluate certain performance obligations The Financial Accounting Standards Board (FASB) has issued a proposed Accounting Standards Update (ASU) that would provide a practical expedient that simplifies how franchisors would analyse certain activities when determining their performance obligations in a franchise agreement. Stakeholders are encouraged to review and provide input on the proposal by 5 November 2020. When a business owner (the franchisee) opens a new branch of a franchise, the franchise agreement generally stipulates that the franchisor will support certain pre-opening activities to support the new branch. Those activities may include services such as training or site selection. The proposed practical expedient would permit certain pre-opening services listed within the guidance to be accounted for as a single bundled, separate performance obligation, if it is probable that the continuing fees in the franchise agreement would be sufficient to cover the franchisor’s continuing costs plus a reasonable profit. AIAWORLDWIDE.COM | ISSUE 113

FASB approves accounting updates to presentation and disclosures by not-for-profit entities for contributed non-financial assets The FASB has issued an Accounting Standards Update (ASU) intended to improve transparency in the reporting of contributed non-financial assets, also known as gifts-in-kind, for not-forprofit organisations. Examples include fixed assets such as land, buildings and equipment; the use of fixed assets or utilities; materials and supplies, such as food, clothing or pharmaceuticals; intangible assets; and recognised contributed services. “The ASU responds to feedback from not-for-profit stakeholders who identified gifts-in-kind as an area where the reporting could be improved,” stated FASB member Susan Cosper. “It addresses their concerns by requiring more prominent presentation of contributed non-financial assets and enhanced disclosures about the valuation of those contributions and their use in programmes and other activities, including any donor-imposed restrictions on such use.” The ASU requires a not-for-profit organisation to present contributed non‑financial assets as a separate line item in the statement of activities, apart from contributions of cash or other financial assets. It also requires a not-for-profit to disclose: ● contributed non-financial assets recognised within the statement of activities disaggregated by category that depicts the type of contributed non-financial assets; and ● for each category of contributed non-financial assets recognised (as identified in (a)): 1. qualitative information about whether the contributed nonfinancial assets were monetised or utilised during the reporting period. If utilised, a description of the programmes or other activities in which those assets were used; 2. the not-for-profit’s policy (if any) about monetising rather than utilising contributed non-financial assets; 3. a description of any donor-imposed restrictions associated with the contributed non-financial assets; 4. the valuation techniques and inputs used to arrive at a fair value measure, in accordance with the requirements in Topic 820, Fair Value Measurement, at initial recognition; and

5. the principal market (or most advantageous market) used to arrive at a fair value measure if it is a market in which the recipient NFP is prohibited by a donor-imposed restriction from selling or using the contributed non-financial assets. The amendments in this ASU should be applied on a retrospective basis and are effective for annual reporting periods beginning after 15 June 2021, and interim periods with annual reporting periods beginning after 15 June 2022. Early adoption is permitted. The ASU, including a FASB In Focus, is available at fasb.org.

FASB seeks public comment on private company council proposal on determining current price of an underlying share for equityclassified share-option awards The FASB has issued a proposed Accounting Standards Update (ASU) intended to reduce cost and complexity for private companies when determining the fair value of the shares underlying a share-option award on its grant date or modification date. Stakeholders are encouraged to review and provide comment on the document – a proposal of the Private Company Council (PCC) – by 1 October 2020. “Members of the PCC conveyed concerns that current guidance on determining fair value for these shares creates unnecessary cost and complexity for some stakeholders,” stated FASB chair Richard R. Jones. “The proposed ASU puts forth a potential solution to this issue, and we look forward to hearing what our stakeholders think about it.” The PCC shared stakeholder concerns that determining the fair value of traditional private company share-option awards is often costly and complex. This is primarily because the private company equity shares underlying the share option often are not actively traded and, thus, observable market prices for those shares or similar shares do not exist. The proposed ASU would allow a nonpublic entity to determine the current price of a share underlying an equity-classified share-option award using a valuation method performed in accordance with specific regulations of the US Department of the Treasury that provide acceptable methodologies to comply with the “presumption of reasonableness” requirements of Section 409A of the US Internal Revenue Code. The proposed ASU is available at www.fasb.org.

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