International Accountant 116 by Association of International Accountants

INTERNATIONAL

ACCOUNTANT MARCH/APRIL 2021 ISSUE 116

New financial reporting issues for charities Budget 2021: the key tax announcements Corporate taxation: local and global complexities The focus for the financial services sector

CONTENTS

In this issue Contributors 2 Meet the team

News and views

OECD reports to G7 on the need to strengthen economic resilience

super-deduction providing allowances of 130%, or the first year allowance of 50%, on new plant and machinery.

AIA news

AIA launches a new Professional Qualification

7 Islamic finance

Financial services

Students 7 Exam preparation and technique This article provides advice on how you can best prepare for the Financial Accounting 3 paper, and the exam techniques that will allow you to make the most of your studies.

Ten themes for 2021 Recent events have changed the face of financial services regulation, but the future is still following the same charted course. Gavin Stewart (Grant Thornton) looks at the ten themes regulators are focusing on for 2021.

Challenges to Islamic finance Dr Roszaini Haniffa (Heriot-Watt University) considers the impact which Covid-19 may have on the future of Islamic finance. It will no doubt pose a challenge on the industry’s profitability, liquidity, asset quality and capital, just like its conventional counterparts.

10 Multinationals 24

Charities 18

Budget 2021

A guide to the key tax announcements In a Budget designed to tackle unprecedented issues, Rishi Sunak sets out his plans for the future. Much of the interest may be in the things we did not already know about, such as the new

Accounting for Covid-19 issues The impact of Covid-19 has led to new financial reporting issues for charities following the Statement of Recommended Practice (SORP). Jill Halford (BDO) considers some aspects of the current situation which the SORP does not address or where it provides little guidance, especially for situations which were not as common or significant as they may be now.

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

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

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Global and local complexities Corporate taxation has become a highly contentious topic in recent years. There has been increasing scrutiny on corporate approaches to international taxation, particularly in tech and e-commerce. Emine Constantin (TMF Group) considers global and local complexities holding multinationals to account in accounting and tax.

Dates for your diary Upcoming events

Technical 29 Global updates

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Editor’s welcome

Contributors to this issue

Editor’s welcome

JILL HALFORD

Jill Halford is a Business Assurance Partner and leads the national charities team within BDO’s Not for Profit (NFP) team. She has over 20 years’ experience working in the charity sector. She has extensive knowledge of reporting under UK GAAP and Charities SORP, and sits on the ICAEW charity technical committee. EMINE CONSTANTIN

ello and welcome to the latest issue of International Accountant magazine. AIA will shortly be launching its new professional qualification which will be examinable from November 2021. Offering a streamlined structure, optional papers and a dedicated Ethics paper, the qualification teaches and tests the skills and knowledge needed by today’s accountants, auditors and finance professionals. Working alongside a highly experienced academic team, its regulators and the wider business community, AIA have structured the qualification to meet the needs of employers, whilst maintaining the high standards and requirements of a body operating in the regulated sector. You can read more about the new qualification on page 6. In this issue we have a guide to the key tax announcements made in the Budget, including details on the new super‑deduction providing allowances of 130%, or the first year allowance of 50%, on new plant and machinery. Continuing the tax theme, we look at global tax complexities. Corporate taxation has become a highly

Rachel Rutherford Editor, IA

contentious topic in recent years and there has been increasing scrutiny on corporate approaches to international taxation, particularly in tech and e-commerce (see page 24). Covid-19 continues to impact accountants and financial services and we consider the new financial reporting issues for charities following the Statement of Recommended Practice (SORP), such as some aspects which the SORP does not address or where it provides little guidance (see page 19). Likewise, we look at the impact which the Covid-19 pandemic may have on the future of Islamic finance (see page 21). It will no doubt pose a challenge on the industry’s profitability, liquidity, asset quality and capital, just like its conventional counterparts. And we also consider the themes for 2021. Recent events have changed the face of financial services regulation, but the future is still following the same charted course, especially with the publication of the long awaited Department for Business, Energy and Industrial Strategy (BEIS) consultation “Restoring trust in audit and corporate governance” which sets out proposals to strengthen the UK’s framework for major companies and the way they are audited.

Emine Constantin is the Global Solutions Director, Accounting and Tax at TMF Group. She has extensive experience and application in the business financial services field. She is currently managing the activity of over 100 employees, as well as the statutory and management accounting systems for a very large number of clients within the Romanian subsidiary of TMF Group. Emine has extensive experience in IFRS/US GAAP reporting. GAVIN STEWART

Gavin Stewart is Head of Strategy Execution for the Grant Thornton’s Financial Services Group (FSG). His focus lies in bringing together the wide range of skills the company offers across its various service lines in ways that help fix clients problems and build trust and integrity in the financial services industry. DR ROSZAINI HANIFFA

Dr Roszaini Haniffa is Professor of Accountancy at Heriot-Watt University, Edinburgh and Chief Editor of Journal of Islamic Accounting and Business Research. She is AIA’s moderator for Islamic Auditing and Governance paper. ISSUE 116 | AIAWORLDWIDE.COM

News TAX POLICY

HONG KONG

UK tax policies and consultations

Hong Kong government clarifies tax policy

The government has published a policy paper “Tax policies and consultations (Spring 2021)” outlining a number of measures that are designed to enhance the stability and effectiveness of the UK tax system by outlining a future pathway for its tax administration and tax policy development. These measures shape the next steps in delivering the government’s ten year tax administration strategy, and will take forward policy development across a range of important tax

issues, including business rates and environmental taxes, as well as a range of simplification measures. Further details are available at gov.uk.

OECD

OECD reports to G7 on need to strengthen economic resilience against crises Creating an emergency Rapid Response Forum to ensure that global supplies of essential goods continue to flow during major international crises is one of a broad range of recommendations contained in a new OECD report to the G7 on building economic resilience. The report, “Fostering economic resilience in a world of open and integrated markets”, says that the devastating impacts of the global financial crisis and now the Covid-19 pandemic will continue to leave lasting scars on our economies and societies. With the risk of other systemic threats on the horizon – starting with climate change but also spanning security threats, including cyber-attacks – it is critical to learn the lessons of these and previous crises in order to tackle the vulnerabilities of our economic system, absorb shocks and engineer a swift rebound. Ensuring the resilience of global supply chains of essential goods is crucial, the report says. An emergency Rapid Response Forum would provide the G7 and other governments with a means of upstream policy co-ordination AIAWORLDWIDE.COM | ISSUE

and, particularly, consultation ahead of the imposition of any trade restrictions. Such an initiative could also prepare timely co-operation on logistics, transportation, procurement, planning and communication. Commissioned by the UK government, which is currently holding the G7 presidency, the OECD report underlines the need for governments to co-operate both with the private sector (through, for instance, supply chain stress tests and emergency planning) and with other countries to boost transparency, discipline export restrictions and adhere to international regulation and standards. The report says the Covid-19 crisis has caused a huge surge in demand for certain goods, notably in the health and information technology sectors but argues that global supply chains have been part of the solution. After shortages of masks and personal protective equipment, in particular at the beginning of the pandemic, the global production and trade of facemasks both later increased tenfold to meet demand.

The Hong Kong government has clarified its tax policy in response to media enquiries about an article in the Financial Times, published on 22 March, carrying an interview with the Chief Secretary. The government insists that it has maintained a high level of transparency in taxation policy with a low and simple tax regime and will continue to do so. The government stressed that Hong Kong’s economic success has been built on a thriving market economy and a small government underpinned by a simple, transparent and low tax regime. Businesses and individuals in Hong Kong enjoy one of the most competitive tax systems in the world. It pointed out that Hong Kong has always been a staunch supporter of international efforts to enhance tax transparency and combat tax evasion and money laundering. UK-EU NEGOTIATIONS

Technical negotiations concluded on UK–EU MoU Technical discussions on the text of the Memorandum of Understanding (MoU), which was agreed in a Joint Declaration on Financial Services Regulatory Cooperation alongside the Trade and Cooperation Agreement, have now been concluded. Formal steps need to be undertaken on both sides before the MoU can be signed but it is expected that this can be done expeditiously. The MoU, once signed, creates the framework for voluntary regulatory cooperation in financial services between the UK and the EU. The MoU will establish the Joint UK-EU Financial Regulatory Forum, which will serve as a platform to facilitate dialogue on financial services issues.

News IASB

IASB seeks comments to help shape its five-year plan

The International Accounting Standards Board (Board) has published a consultation document to seek views on what the Board’s priorities should be over the next five years. This is the third time the Board has consulted the public via an agenda consultation to help create its five-year plan. The Board is asking for views on the strategic direction and balance of its activities – for example, how much time it should spend on developing new IFRS Standards compared with that spent on its other activities, such as supporting consistent application of the Standards. The Board is also seeking views on which financial reporting issues it should prioritise and on the criteria for adding projects to its work plan. The feedback received will help the Board to determine its activities and work plan for 2022 to 2026. Some of the Board’s capacity during the period from 2022 to 2026 will be devoted to completing projects already underway and to post-implementation reviews that assess whether recently issued IFRS Standards are working as intended. However, the Board also expects to have capacity to take on some new projects. In parallel with the Board’s Agenda Consultation, the Trustees of the IFRS Foundation are considering the establishment of a sustainability standards board to operate alongside the IASB within the Foundation’s governance structure. The Board is asking for stakeholder comments on the Request for Information Third Agenda Consultation by 27 September 2021.

DIGITAL ECONOMY

EU will move ahead with tax take from digital economy The EU is willing to move ahead with its own proposals on taxing the digital economy if an agreement is not reached at an international level, according to the current EU Council presidency. According to João Leão, the Portuguese Minister of State for Finance, EU finance ministers had discussed the taxation of the digital economy at their informal meeting on 16 March 2021. The negotiations are

currently in progress at the OECD level, and it was reported that the ministers wished to give them time, with the aim of finding an overall consensus in a multilateral context. In January 2021, the European Commission asked for views on an EU-wide digital levy, which would cover digital services, including social media, online marketplaces and other online platforms that operate in the EU.

ISLAMIC FINANCE

UK bolsters Islamic finance offering with second Sukuk The UK has bolstered its position as a world-leader in Islamic finance by issuing its second sovereign Sukuk, the Islamic equivalent of a bond. £500 million of Sukuk with a fiveyear maturity has been sold to investors based in the UK and in the major hubs for Islamic finance in the Middle East and Asia, where there is strong demand. The UK issued its first sovereign Sukuk in 2014, making it the first country outside the Islamic world to issue sovereign Sukuk and cementing its position as an international centre for Islamic finance. This second Sukuk offering is more than double the size of the first issuance, increasing the supply of high-quality, Sharia-compliant liquid assets to the market and supporting the development of Islamic finance products in the UK.

The Chancellor of the Exchequer Rishi Sunak said: “We’ve set out ambitious plans to make the UK the most open and dynamic financial centre in the world. “By launching our second sovereign Sukuk, we’re cementing the UK’s position as the leading global hub for Islamic finance outside of the Islamic world. “Strong investor demand for this Sukuk meant we achieved a good price for the taxpayer and will help us develop our relationships with Islamic economies around the world.” As with the first issue, the second sovereign Sukuk will use the Al-Ijara structure which is in widespread use in the market. It will be underpinned by rental income from a number of central government office properties which are owned by the government. ISSUE | AIAWORLDWIDE.COM

AIA News

AIA

NEWS AUDIT REFORM

DISCOUNT CARD

AIA’s initial response to government consultation on UK audit reform

AIA is pleased to announce its latest partnership with TOTUM Pro powered by NUS, a discount platform designed specifically for professional qualification learners and members of recognised professional bodies. With over 200 UK discounts and thousands worldwide from both famous brands and local independents, a TOTUM Pro membership opens up a whole world of fantastic savings on everything from dining out and keeping fit to fashion retail and travel abroad. Announcing the partnership, AIA Marketing and PR Manager Carl Jepson said: “We are very pleased to be announcing this new partnership which is available to all members around the globe. “We hope our membership will take full advantage of this opportunity to access in-store and online discounts from businesses including Amazon Prime, Boots, Fender and Halfords.” AIAWORLDWIDE.COM | ISSUE 116

New discount card For AIA members and students

The Department for Business, Energy and Industrial Strategy (BEIS) has published a white paper “Restoring trust in audit and corporate governance” which sets out proposals to strengthen the UK’s framework for major companies and the way they are audited. The paper is the long-awaited result of three separate reviews by Sir John Kingman, Sir Donald Brydon and the Competition and Markets Authority, which sets out proposals for how companies should report on their governance and finances, how reports should be audited, changes to the audit and the audit market and the powers and role of a new regulator. As a Recognised Qualifying Body for Statutory Auditors in the UK, the AIA will be responding to the consultation in full. Whilst we welcome the depth of the reforms in tackling multiple issues with the ultimate purpose of restoring trust and public confidence in the profession, we will carefully consider the impact on our members and the businesses they support.

AIA chief executive Philip Turnbull said: “Since the start of the review process, AIA has worked with the wider profession in sharing our observations and ideas on the future shape of the audit profession and we welcome both the reviews and this comprehensive consultation. “Central to lasting and significant change is a set of reforms that will strengthen the UK’s position and restore both business confidence and public confidence in business and measures that set the UK apart in terms of audit quality, whilst ensuring that the audit profession remains an attractive career prospect. “It is vital that full consideration is given to how the reforms will affect SMEs, the lifeblood of the British economy, and the accountants that serve them. We will issue a full response that highlights the standard of the AIA professional qualification and encourages meaningful and proportionate oversight of the sector.”

AIA News QUALIFICATIONS

AIA launches new Professional Qualification Following a major review and revision of the structure of the AIA exams, AIA has launched its new Professional Qualification, designed to create a programme which leads to qualified accountants with subject specific knowledge, skills and awareness of context fit for modern commercial, public enterprise and professional environments. The new professional qualification will be examinable from November 2021. The qualification offers two pathways that leads to qualification as a qualified accountant or statutory auditor and delivers the knowledge, skills and experience to enjoy a career in your chosen field.

What’s changed?

Overall, the qualification has been streamlined to reflect developments in the business environment and the general standard of students’ prior knowledge, making it both quicker to complete and more accessible and affordable. The Foundation level is now tested through a single integrated, multiple choice exam, covering Financial Accounting, Management Accounting, Corporate Governance and Audit, and Business Management. Taxation and Business Law are tested at Professional Level 1 with a single exam for each topic. A greater emphasis on professional ethics has been placed in the qualification through the inclusion of a standalone paper at Professional Level 2 and the testing of the application of ethical principles to relevant situations in papers such as Taxation and Auditing. To allow further flexibility for students taking the accountancy route, there is the introduction of optional papers – Developments in Assurance and Accountability and Business and Financial Management – at Professional Level 2. The oral test has been removed from the audit pathway. All students now sit a Multidisciplinary Case Study at Professional Level 2. All exams are now conducted online by Computer Based Testing.

AIA Achieve Academy

In line with the new qualification,

New qualification structure Level

Subjects

Exam

Foundation Unit Exemptions for prior learning are available.

● Financial Accounting ● Management Accounting ● Corporate Governance and Audit ● Business Management

A single, multiple choice, three-hour online exam covering all components.

Professional Level 1 ● Financial Accounting and Reporting 1 Each subject is tested Exemptions for ● Principles of Governance and Audit by a three-hour prior learning are ● Management Accounting online exam. available. ● Business Law for Accountants ● Taxation (UK, HK and China versions) Professional Level 2 ● Financial Accounting and Reporting 2 Each subject is tested No exemptions are ● Developments in Assurance and by a three-hour exam. * Students on the available. Accountability (or the Islamic Accountancy pathway version)* can choose between ● Business and Financial two optional papers: Developments in Assurance Management* and Accountability or ● Ethics and Professional Practice Business and Financial ● Multi-disciplinary Case Study Management. AIA has also made developments to its online learning provision. The AIA Achieve Academy is a fully integrated online learning platform which provides a structured programme of study for all papers within the AIA Professional Qualification. Designed in conjunction with BPP Learning Media, the Achieve Academy utilises a range of teaching and learning tools proven to deliver exam success, including: ● AIA textbooks and recommended reading; ● recorded lectures: structured in line with the qualification to give you optimum results; ● AIA Learning and Practice Workbooks for each paper within the syllabus; ● practice questions; ● tutor feedback; and ● graded check point tests taken within the AIA platform to ensure that you are advancing through the programme; ● live topic workshops; and ● mock exams with performance feedback Discussing the new qualification structure, AIA Chief Academic Coordinator Professor Stuart Turley said: “The focus on practical relevance, professionalism, understanding the integration between subjects, and progressing to higher levels of skill are

all things that students should value in the revised qualification structure. The changes being introduced will provide a qualification route that students can take pride in completing and find useful and relevant in pursuing a career in professional accountancy.” AIA President Shahram Moallemi said: “AIA members operate throughout the world helping businesses, from start‑ups to global operations, reach their full potential. Their knowledge and skills base comes from the AIA Professional Qualification, which has been developed through collaboration with employers, businesses and academics to create a professional qualification that delivers world-class accountancy and business skills for today’s finance professionals.” Throughout the syllabus review and qualification development, AIA has worked closely with regulators, including the Financial Reporting Council, ensuring that the new qualification meets all the requirements of the Companies Act and other regulatory requirements. Existing students can access the AIA Switchover Policy via their online account, which will be updated following the May 2021 exams to reflect the new structure. Any questions can be directed to the AIA Exams Team at exams@aiaworldwide.com or via Live Chat at www.aiaworldwide.com. ISSUE 116 | AIAWORLDWIDE.COM

STUDENTS

Exam preparation and technique

©Getty images/iStockphoto

This article provides advice on how you can best prepare for the Financial Accounting 3 paper, and the exam techniques that will allow you to make the most of your studies.

AIAWORLDWIDE.COM | ISSUE 116

STUDENTS

Pay attention to the mark allocation – both per question and per section of each question. It is far easier to get 50% for each part of each question than to get 100% for one part.”

he Financial Accounting 3 paper is as demanding and complex an exam paper as any you are likely to encounter on your path to becoming a professionally qualified accountant. Therefore, it is important that your preparation for the exam, and your performance on exam day, is the best that it can be. This will ensure that you have maximised your chances of exam success. Here are a few ideas to help you with your preparation and, most importantly, with tackling exam questions. Think of these ideas as “good habits”, practice them in all of your study questions, and they will become automatic on exam day, thus greatly improving your chances of success.

Question practice

It is important to draw up a detailed study plan at the outset of the module. There are some very good study planning and technique hints in the early parts of the Learning and Practice Workbook for this module. You may not always be able to satisfy every part of your study schedule on a week by week basis (life is rarely that straightforward), but it is always good to have a plan that you can focus on and drive your preparation. Accounting is not a difficult subject to study, but it does require a great amount of study time in preparation.

There are many benefits to be gained from looking at practice questions. I refer to it as “question experience”. Always try to begin with straightforward questions and understand the essential principles, and then you can move onto more demanding questions. Remember, the hardest questions will often contain complexities which you cannot resolve. Don’t worry, move on. It is better to understand 80% of a question rather than not look at it at all. It is imperative that you practice tackling as many questions as possible as if you were in an exam type situation; e.g. with a blank sheet of paper and no books in front of you. On other occasions, you can get some equally good benefit by reading a question carefully and then working through the model answer. If you are following the latter approach, try to tick off or highlight each part of the answer you understand. This also represents a good learning experience and makes good use of limited time.

Group accounting

Time management

Study well

Group accounting and related areas account for 55% of the syllabus and needless to say will be a crucial part of your examination. You will be building upon knowledge gathered in the Financial Accounting 2 paper, thus ensuring you have a good base knowledge to begin with. Ensure that you are strong on the fundamentals in this area, including good presentation of the three key workings: goodwill; non-controlling interest; and consolidated retained earnings. Also, become familiar with vital definitions that underpin the principles of group accounts. Make sure you have fully mastered the four key areas of group accounting for this paper: ● complex groups (sub-subsidiaries); ● changes in group structure (piecemeal acquisitions and disposal of subsidiaries); ● foreign currency subsidiaries; and ● group Statements of Cash Flow.

Accounting standards

This is a very demanding and important area of the syllabus (30% of the content) and breaks down into 19 different areas covering over 20 accounting standards. It is important to have both breadth of knowledge (across all the relevant accounting standards) and depth of knowledge (key definitions, principles and application) of individual standards. Summaries of pertinent points are particularly helpful here but only AFTER you have been through the study material dealing with that

particular topic in sufficient detail. If you do not have time to make your own, you could try accessing some good summary documents widely available online. Search for the PwC “IFRS Overview 2019” It contains a brief summary (one page or thereabouts) of the key points of each accounting standard. Regular access to brief summaries will greatly aid the learning process.

Ensure that your time management is impeccable. This means that each part of a question must be answered in the time allocated. The Financial Accounting 3 exam is a three hour exam (180 minutes). 100 marks are available, which equates to 1.8 minutes per mark. Calculate your time allocation (i.e. 10 marks x 1.8 = 18 minutes) before you start each new part of a question, and then STICK TO IT! Your watch is a vital tool during an exam! Pay particular attention to the time allocated to written questions. You cannot answer a 20 mark (36 minute) question in 15 minutes – you just cannot! Think carefully about what the examiner is asking you to discuss. You are asking for trouble (and very few marks) if you think you are being smart by giving a short answer and saving time. You may wish to present your answer using bullet points to explain key principles as opposed to lengthy paragraphs of text. The idea here is not to make your answers shorter but to improve the presentation and readability for the marker.

Answer all parts of the question

Pay attention to the mark allocation – both per question and per section of each question. It is far easier to get 50% for each part of each question than to get 100% for one part, however strong you feel you are in that area. You MUST attempt each section, otherwise you cannot pick up the easy marks. ISSUE 116 | AIAWORLDWIDE.COM

STUDENTS

©Getty images/iStockphoto

scenario, which will typically call upon your in‑depth knowledge of an accounting standard. It is often good to give key definitions as background to the regulations (standards) you are referring to. For example, a question dealing with treatment of an outstanding legal claim will require the definition of a provision and a contingent liability, and in what circumstances it is appropriate to raise these items. Secondly, you need to apply these regulations to the given scenario. Often (but not always!) the treatment suggested in a question will be inappropriate. You will need to point out why the proposed treatment is incorrect and outline the correct course of action to be take.

Question 1: Compulsory (40 marks)

Your performance in this question will go a long way to determining your overall success or failure in the paper. Therefore, students often feel that this justifies spending a disproportionate amount of time on this question – DO NOT! The maximum time to spend on this question is 40 x 1.8 minutes = 72 minutes. For every extra minute you spend on the question, you are diminishing your performance on one of the other questions and therefore reducing your chances of passing overall. It is therefore recommended that you do this question LAST (in the final 72 minutes of the examination) so there is no possibility of overrunning! If you are lucky, you might even finish the other three questions slightly earlier, giving you a nice clear run at the compulsory question.

Critical evaluation

At this level, a question may ask you to critically evaluate a particular accounting treatment. It is essential that you answer such a question in two parts. Firstly, you must state all the relevant regulations that are applicable to the particular AIAWORLDWIDE.COM | ISSUE 116

Pay careful attention to the limitations in the required section. If the question says that a statement of changes in equity (SOCE) is not required, not even the best SOCE in the world is going to earn you any marks! In other words, please read the question requirements carefully!

Workings

Many students produce solutions with inadequate workings. Think of your workings as an audit trail between the question paper and your final solution. If the audit trail is lost, it is impossible to determine what has been taken into account and you will therefore not be awarded marks. Subtotal amounts on your workings and crossreference your solution (such as profit or loss; i.e. what has been asked for) to the place where the workings are presented. The number used and the calculations used in getting to that number must be presented.

Accuracy

Be alert when using figures and make sure that you are being accurate with your calculator. Pay attention to information that is given in millions, thousands or units and make sure that your answer seems to be approximately correct by doing a quick review of the figures you have produced. Perhaps do key calculations twice!

Satisfy all question requirements

You must fully answer the question being asked. If the question asks you to advise the directors of the correct accounting and deferred tax treatment of a lease agreement, you must firstly specify the correct accounting treatment of the lease (including initial raising of the asset and liability, subsequent depreciation and finance cost charges, presentation of the asset and the liability in the statement of financial position). Secondly, you then turn to the deferred tax treatment (carrying value of the net leased asset, tax base of the liability, and the subsequent recognition of the likely deferred tax liability). If you cover both of these aspects, you should be in line for a high mark on that question!

Limitations

Presentation

Be alert when using figures and make sure that you are being accurate with your calculator.”

Remember that marking is not an easy task! A neat appearance to your solution creates a good initial impression that may make the examiner more inclined to scratch around to try and find marks. Do ensure your handwriting is legible – a good quality pen helps in this regard! Try marking a friend’s question and you will quickly realise the importance of tidiness, legibility, layout of answers, etc. I hope this article gives you some good ideas about how to maximise your chances of passing this complex paper. Please read it on a regular basis, and perhaps read it again just before your exam commences. It is good to have a sound strategy and have these ideas in your head as you tackle the paper. ●

©James Veysey/Shutterstock

BUDGET 2021

ISSUE 116 | AIAWORLDWIDE.COM

BUDGET 2021

A guide to the key tax announcements In a Budget designed to tackle unprecedented issues, Rishi Sunak sets out his plans for the future.

ith so many of the Budget changes having been widely floated in advance in the media, much of the interest may be in the things we did not already know about; for example, for companies, the new super-deduction providing allowances of 130%, or else the first year allowance of 50%, on new plant and machinery. Also of interest is the introduction of a new (but long-awaited) points-based penalty regime for tax return filing obligations, which will replace existing penalties for VAT (from April 2022) and income tax self assessment (from April 2023 in most cases). This is not the end of the story, as we are promised consultation documents on as yet unspecified future tax changes on 23 March. When announcing consultations, the financial secretary indicated that it would contain a range of important but less high profile measures (our italics), so it may possibly not be quite as exciting as some commentators have been suggesting, but significant nevertheless. We shall find out soon enough.

Personal tax Rates and allowances for 2021/22

The personal allowance will increase to £12,570 and the basic rate limit to £37,700 in 2021/22. These levels will continue up to and including 2025/26. The additional rate threshold remains at £150,000. This applies equally across the UK, except that Scotland has its own income tax rate bands set by the Scottish Parliament. The starting rate for the savings limit will remain at £5,000. As regards pensions tax, the link to the Consumer Price Index increase for the lifetime allowance has been removed for five years, so the allowance remains at £1,073,100 for 2021/22 to 2025/26. The government will legislate to ensure that collective money purchase pension schemes, which will be introduced by the Pension Schemes Act 2021, can operate as registered pension schemes for tax purposes. AIAWORLDWIDE.COM | ISSUE 116

The capital gains tax annual exempt amount will remain at £12,300 up to and including 2025/26. Inheritance tax thresholds and rates are unchanged and the nil rate band will remain fixed until April 2026.

Income tax exemption for certain financial support payments An exemption from income tax will apply for financial support payments made by the UK government and devolved administrations to potential victims of modern slavery and human trafficking. The exemption will take effect retrospectively from 1 April 2009 when the financial support payments started.

Social Investment Tax Relief

Social Investment Tax Relief for both income tax and capital gains tax will be extended until April 2023.

Relief for gifts of business assets

Entitlement to capital gains tax relief for gifts of business assets is disapplied where a transferee company is controlled by a person who is not resident in the UK and who is connected with the person making the disposal. This anti-avoidance rule will be amended to ensure that it applies when the non-UK resident person gifting the asset also controls the recipient company.

Individual savings accounts and child trust funds

The ISA, junior ISA and child trust fund limits are unchanged for 2021/22.

Employment tax Coronavirus-related measures

Home office equipment expenses: Legislation was introduced in 2020 to provide that there is no charge to tax for an amount reimbursed to an employee on or after 11 June 2020 (backdated to 16 March 2020 by concession) and before 6 April 2021 in respect of home office equipment expenses. “Home office equipment expenses” are expenses incurred by the employee in respect

BUDGET 2021

A one-off payment of £500 is being made under a coronavirus support scheme to working households in receipt of tax credits to cover a period from April to September 2021.”

of equipment obtained for the sole purpose of enabling the employee to work from home during the Covid-19 pandemic. There must be no significant private use. The exemption applies equally to NIC. These exemptions will now be extended to cover the 2021/22 tax year. Employer-provided coronavirus tests: Legislation is already in place to ensure that the provision of coronavirus antigen tests (but not antibody tests) to employees by employers do not attract tax and NIC for 2020/21. These exemptions will be extended to cover 2021/22 as well. Employer-reimbursed coronavirus tests: Finance Bill 2021 will introduce a retrospective income tax exemption for payments that an employer makes to an employee to reimburse them for the cost of a coronavirus antigen test for 2020/21. A corresponding NIC exemption has already been put in place by regulations. A similar exemption will be introduced for 2021/22 for both income tax and NIC. Enterprise Management Incentives (EMI): Where employees are furloughed, working reduced hours or taking unpaid leave due to coronavirus, they may not be able to meet the committed working time requirement of EMI. Finance Act 2020 included legislation to ensure that a disqualifying event does not occur purely as a result of any such occurrence. This has effect in relation to the period 19 March 2020 to 5 April 2021 inclusive, but it will now be extended until 5 April 2022. As previously announced, Finance Bill 2021 will legislate to ensure that new EMI options issued to employees who have not met the working time requirement as a result of coronavirus will be qualifying EMI options. This will have effect throughout the period 19 March 2020 to 5 April 2022. Cycle to Work scheme: Firming up a statement made to Parliament in December 2020, new legislation will introduce a time-limited easement to disapply the condition that states that bicycles and cyclist safety equipment, where obtained through a Cycle to Work scheme, must be used mainly for qualifying journeys (to or from work or in the course of work). Due to lockdown, it will not be possible in many cases for that condition to be met. Employees who joined a Cycle to Work scheme and were provided with a bicycle or cycling equipment on or before 20 December 2020 will not now have to meet the qualifying journeys condition until after 5 April 2022. However, employees who join a scheme on or after 21 December 2020 still need to meet all the conditions for the exemption. Coronavirus support scheme: working households receiving tax credits: A one-off support payment of £500 is being made under a coronavirus support scheme to working households in receipt of tax credits. It will cover a six-month period from April to September 2021. Legislation to be included in Finance Bill 2021 will exempt this payment from income tax.

Off payroll working

As previously announced, a technical change to the off payroll working rules will apply from

6 April 2021. The change relates to company intermediaries and narrows the definition of an intermediary to bring it back within the intended scope of the policy. It has now been confirmed that an equivalent change will also be made to the relevant NIC regulations ahead of 6 April 2021 and that the government will also introduce a Targeted Anti Avoidance Rule (TAAR) to ensure that the definition of an intermediary cannot be exploited. Two further minor changes will be made relating to the provision of information.

Car and van benefits

The amount to which the appropriate percentage is applied in determining the taxable benefit of company car fuel is £24,600 for 2021/22 (£24,500 for 2020/21). The cash equivalent of the benefit of a company van for 2021/22 is £3,500 (£3,490 for 2020/21). The cash equivalent of the benefit of van fuel for 2021/22 is £669 (£666 for 2020/21). As announced at Budget 2020, the government will legislate in Finance Bill 2021 to reduce the van benefit charge to zero for 2021/22 onwards for vans that produce zero-carbon emissions.

Salary sacrifice arrangements and statutory parental bereavement pay

The optional remuneration arrangements legislation introduced in 2017 removed the income ISSUE 116 | AIAWORLDWIDE.COM

BUDGET 2021 Temporary extension to carry back of trading losses

The period over which trading losses can be carried back is to be temporarily extended from 12 months to three years. This extension applies for trading losses incurred by companies in accounting periods ending between 1 April 2020 and 31 March 2022 (tax years 2020/21 and 2021/22 for unincorporated businesses). This extended carry back is not without restriction, though. For companies there is no limit on the amount of trading losses that can be carried back to the preceding year, but, after that, a maximum of £2 million of unused losses are available for carry back against profits of the same trade for the earlier two years. This £2 million limit applies to each accounting period falling within 1 April 2020 to 31 March 2022. For individuals claiming trading loss relief, there is a similar regime. The amount of trading losses that can be carried back to set against profits of the preceding year remains unlimited, and the current restrictions to carry back losses from a trade against general income will remain. There is, however, a separate £2 million cap that will apply to the extended carry back of losses made in each of the tax years 2020/21 and 2021/22.

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Capital allowances

Business tax Corporation tax rates

As widely anticipated, the Chancellor announced an increase in the rate of corporation tax but not for another two years. For 2021 and 2022, the main rate of corporation tax (for non-ringfenced profits) will remain at 19%. However, from 1 April 2023, this rate will increase to 25% for companies with profits over £250,000. Companies with profits of £50,000 or less will continue to be taxed at 19%. Where profits fall between £50,000 and £250,000, the tax rate will be 25%, but companies will be able to claim marginal relief. The related 51% group company test will be repealed and replaced by associated company rules. The diverted profits tax rate will also be increased to 31% from 1 April 2023 (currently 25%), maintaining the 6% differential between it and the main rate of corporation tax. AIAWORLDWIDE.COM | ISSUE 116

The Chancellor Rishi Sunak speaks to HM Treasury staff as he makes final preparations for the budget

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tax and NIC advantages for many employmentrelated benefits provided via salary sacrifice schemes. In certain cases, the old rules are permitted to continue until 5 April 2021 provided there is no variation in the employee’s employment contract. Backdated legislation will be introduced to ensure that the receipt of statutory parental bereavement pay does not count as a contract variation for this purpose.

For companies within the charge to corporation tax, increased allowances for expenditure on plant and machinery will apply temporarily. For qualifying expenditure incurred from 1 April 2021 to 31 March 2023, companies will be able to claim: ● a super-deduction providing a first year allowance of 130% on most new plant and machinery investments that qualify for 18% main rate writing down allowances; and ● a first year allowance of 50% on most new plant and machinery investments that ordinarily qualify for 6% special rate writing down allowances. The relief will not apply to contracts entered into prior to Budget day on 3 March 2021. The general exclusions in CAA 2001 s 46 will apply, and there will be exclusions for used and second-hand assets. The rate of the super-deduction will require apportioning where expenditure is incurred in an accounting period that straddles 1 April 2023.

Interest or royalty payments to connected companies in the EU

From 1 June 2021, interest or royalty payments made from the UK to a connected EU company will no longer automatically be paid without deduction of withholding tax. Instead, the treatment of these payments will be governed solely by the reciprocal obligations under the relevant double tax agreements. The government intends to repeal the UK domestic legislation that gave effect to the EU Interest and Royalties Directive for payments made on or after 1 June 2021. This measure ensures that EU companies no longer receive any more favourable treatment than companies based elsewhere in the world.

BUDGET 2021 A further measure will be introduced that enables HMRC to recover payments where an individual was entitled to the payment at the time of claim but subsequently ceases to be entitled to all or part of it.

Class 4 national insurance limits

The Class 4 upper profits limit will increase to £50,270 in 2021/22 and remain at this level up to and including 2025/26. The lower profit limit is increased to £9,568.

VAT and indirect taxes VAT registration/deregistration thresholds

The current VAT thresholds for registration and deregistration (£85,000 and £83,000 respectively) will be maintained until 31 March 2024.

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Reduced rate for the hospitality industry extended

The Budget included an announcement on the location of eight English freeports. Once tax sites within these freeports have been designated, businesses in those tax sites will be able to benefit from a number of tax reliefs. These include: ● an enhanced rate of structures and buildings allowance of 10%, which will have effect for qualifying expenditure where the first contract for construction of the relevant structure or building is entered into on or after the date the freeport tax site is designated. To qualify, the structure or building must be brought into use on or before 30 September 2026; ● a 100% enhanced capital allowance, which will be available for expenditure on plant and machinery incurred on or after the date the freeport tax site is designated until 30 September 2026; and ● stamp duty land tax relief for purchases of land or property, subject to that land or property being acquired and used for qualifying purposes and subject to a control period of up to three years. It will apply to qualifying transactions with an effective date from the date the freeport tax sites are designated until 30 September 2026.

Self-employment income support scheme (SEISS) payments

Eligibility for the fourth grant will be based on the claimant’s submitted tax return for 2019/20, which must have been submitted by 2 March 2021. Under current legislation, a SEISS payment is taxed as income for 2020/21. Legislation will be introduced to ensure that payments from the SEISS are taxed as income for the tax year in which they are received. A SEISS payment that an individual claims but to which they are not at that time entitled can be recovered by a tax charge.

The Chancellor Rishi Sunak speaks by phone to United States Secretary of the Treasury Janet Yellen from his office in Downing Street.

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Freeports

The reduced rate of 5%, which currently applies to certain supplies relating to hospitality, hotel and holiday accommodation and admission to certain attractions, will be extended until 30 September 2021. A new reduced rate of 12.5% will then apply until 31 March 2022, after which the standard rate will apply. Regulation 55K of the VAT Regulations will be amended to ensure that businesses using the flat rate scheme will also benefit.

New payment scheme in respect of deferred VAT

Due to coronavirus, businesses were allowed to defer VAT liabilities falling due between 20 March 2020 and 30 June 2020 until 31 March 2021. It was subsequently announced (on 24 September 2020) that businesses would be able to pay that deferred VAT in up to 11 monthly interest-free instalments. This measure will be legislated for in Finance Act 2021. The legislation will also provide for a penalty of 5% of the outstanding VAT if a business has not, by 30 June 2021: ● paid its liability under the deferral scheme in full; ● opted into the in new payment scheme; or ● made alternative arrangements to pay by 30 June 2021.

Eligibility for the fourth SEISS grant will be based on the claimant’s submitted tax return for 2019/20, which must have been submitted by 2 March 2021.”

The application of the penalty will be at the discretion of HMRC. It will apply instead of the normal default surcharge regime.

Stamp duty land tax

The temporary increase in the stamp duty land tax nil rate band for residential property in England and Northern Ireland that was due to end on 31 March 2021 will be extended. The nil rate band will continue to be £500,000 for the period 8 July 2020 to 30 June 2021. From 1 July 2021 until 30 September 2021, it will be £250,000, and it will return to the standard amount of £125,000 from 1 October 2021. Report by Tolley Guidance, which provides practical and expert guidance on UK tax. See Tolley.co.uk. ISSUE 116 | AIAWORLDWIDE.COM

FINANCIAL SERVICES

Ten themes for 2021 Gavin Stewart considers ten themes that are likely to impact the future of financial services in the coming year.

t the start of 2020, there was a clear consensus around the direction for future regulation to progress in. The period of reform triggered by the financial crisis was coming to an end and a new agenda, focused on operational resilience, climate change, digitisation and competition, was taking shape. After Brexit, the UK would move towards becoming a low-regulation financial centre. Covid-19 has reshaped this landscape, forcing us to think differently about our society and economy. This doesn’t mean, however, that previous assumptions about regulation AIAWORLDWIDE.COM | ISSUE 116

are redundant, or that long-term trends have suddenly ceased to apply. However, they need to be re-assessed. Of the previous agenda, digitisation will accelerate and competition will take a back seat, while future regulation around operational resilience and climate change will have been deepened and broadened in scope. Coronavirus seems to be ushering in a period of activist regulation, rendering more distant the prospect of the UK becoming a low regulation centre. Below are the key themes that UK regulators will focus on over the next five years. Many of these are interdependent and

©Getty images/iStockphoto

Gavin Stewart Head of Strategy Execution, Financial Services Group, Grant Thornton UK LLP

FINANCIAL SERVICES overlapping. Perhaps the biggest challenge for the regulators and, by extension, firms will be understanding these links and balancing their efforts accordingly.

1. Completing the post-financial crisis reform agenda

Although coronavirus has already forced the postponement of many planned regulatory initiatives, with almost certainly more to come, the remaining planks of the reform agenda that emerged in response to the financial crisis seem certain to remain a priority. UK authorities have repeatedly reiterated that LIBOR replacement will go ahead as planned at the end of 2021. Internationally, Basel IV and the fundamental review of the trading book (FRTB) seem likewise certain to proceed. However, there will be debates as to whether these reforms should be amended to reflect the impact of coronavirus and the right balance between global and national standard setters.

2. Defining the role of financial services after Brexit

The Brexit transition period ended with the predictable last-minute deal containing little on financial services. We are therefore likely to see continuing negotiations over equivalence. Arguably as important in the long term will be defining the respective roles of parliament, Her Majesty’s Treasury (HMT) and regulators in the post-Brexit world, and HMT has started to consult on this. This has kickstarted the public debate around whether the UK should be at the front of setting global regulatory standards or become a lowregulation offshore centre – “Singapore-onThames”, as it is often dubbed. This will play out over the coming years and assume different forms, depending on sector and issue. Bank of England governor Andrew Bailey and CEO of the Prudential Regulatory Authority (PRA) Sam Woods have argued publicly that regulators should retain a high level of discretion over rule making, so we know where the Bank of England and Prudential Regulation Authority (PRA) stands on this. However, the Financial Conduct Authority (FCA) under Nikhil Rathi is an unknown quantity and the issue could drive a wedge between the UK regulators.

As the volume of consumer data increases, regulators will focus more on what information regulated firms hold, how it is held and how they use it.” 16

3. Further blurring the line between the PRA and FCA

The fight against coronavirus is stressing the UK’s “twin peaks” regulatory framework in unanticipated ways, and highlighting that major financial crises are nearly always both prudential and conduct-based. This has required regulators to work more closely together than originally intended, and has also forced the FCA to focus for the first time on its supposedly unimportant prudential role. In the future, the PRA and FCA will continue to work more in tandem, and there should be an enhanced role for the Financial Policy Committee (FPC) as the strategic body in charge during emergencies. In parallel, the PRA may take on the prudential regulation of the largest asset managers in the same way as it does for the largest investment firms. The sector has become more concentrated since the financial crisis and the coronavirus situation has demonstrated the centrality to the financial system of the largest asset managers. The debate over whether they should be designated as Global Systemically Important Financial Institutions (G-SIFIs) will also revive.

4. Regulation for vulnerable consumers

Coronavirus is increasing the number of vulnerable consumers and, for some, the depth of their vulnerability, and long-term unemployment and lower household incomes seem likely to persist for several years. The picture is further complicated by the FCA’s temporary regulations, providing mortgage holidays and freezes on consumer credit payments, and influencing the behaviour of both firms and customers. Looking to the future, some form of these temporary regulations may become permanent. There will also be an extended and painful post mortem on how firms treated vulnerable consumers through the last year that will soak up considerable regulatory and firm resources, including senior management bandwidth.

5. Consumer privacy and data protection

As the volume of consumer data that is collected and stored continues to increase, regulators will focus more on what information regulated firms hold, how it is held and how they use it. Unregulated firms and those that are regulated as e-money or payment services providers, rather than under the Financial Services and Markets Act 2000, are likely to play a larger role in this landscape. Regulators will seek new ways to ensure that consumers’ data is properly protected and is not misused, including how to exert influence beyond the conventional regulatory perimeter. With regulators also focusing more on outsourcing, operational resilience and cyber, the effective entry hurdle for authorisation will become higher. ISSUE 116 | AIAWORLDWIDE.COM

FINANCIAL SERVICES 6. Digitisation of data and decision making

Restrictions to combat coronavirus will accelerate digitisation across the industry. Financial services regulators will need to work hard to assess the risks and trade-offs involved and to ensure that these are effectively mitigated and managed. Understanding the issues raised – for example, by the interface between machine and human decision making and their impact on customers and markets – will stretch regulators in new ways. This will drive fundamental changes in the way they work and how customers interact with regulated firms. Controlling the risks of what might be an extremely rapid pace of change is an early challenge that the regulators will want to get ahead of, assessing the continuing effectiveness of firms’ systems and control functions in relation to business models and workforces that will alter radically.

7. Regulators re-engineering their own operating models

Regulators’ operating models are overdue for fundamental review. The core of the FCA’s is little different from the original FSA model of the early 2000s, and it is now going through a major restructuring. Meanwhile, the PRA’s model is a semideliberate return to the Bank of England supervision approach of the late 1990s. Neither was designed with the challenges of the 2020s in mind. The realities of recent events have brought the shape of these challenges into sharper relief and, as a minimum, it is clear that regulators will need to become more digitally enabled and proficient, but also less siloed and hierarchical. They will also need to become more effective at identifying and, more importantly, solving future and long-term problems. Many of these problems will stretch beyond the regulatory perimeter, as reality regulators now acknowledge, but which their operating models are not geared to tackle. The critical Gloster review of the FCA’s regulation of London Capital and Finance will accelerate these changes.

8. The intermediation role of compliance functions

The role of compliance in financial services has grown and evolved significantly since the financial crisis of 2007 to 2009. However, 2020 has called some of this into question and will also accelerate the speed of change. In particular, the much higher proportions of staff working from home, the impact of digitisation and the greater focus on supply and value chains will drive regulators towards wanting almost real-time access to first-line data and decisions. This will place the current intermediation role of compliance under considerable pressure, severely compressing or collapsing altogether the time available to review, clean up and generally manage AIAWORLDWIDE.COM | ISSUE 116

The current crisis will intensify regulators’ already emerging focus on external treats, such as climate change and cyber security.” the firm’s compliance and its communication with regulators.

9. The industry’s resilience to major external threats

The current crisis will intensify and extend regulators’ already emerging focus on external threats, such as climate change, cyber security and financial crime. While the regulatory regime has generally responded well to the demands of the coronavirus situation, the crisis has far from run its course. And it has already highlighted areas that current and proposed regulations do not cover adequately or where regulatory thinking needs to develop further. Likely developments include the broadening and potential deepening of the proposed regime around operational resilience, with the explicit inclusion of provision for future pandemics and long-lasting “events”, as well as cyber attacks, and a greater focus on preventing financial crime. There also needs to be further thinking on climate change to better capture the increasing probability of climate-related events that are high impact for financial services and the economy more broadly. These might include the steepening frequency of extreme climate phenomena and the indirect effects of droughts, food shortages and geopolitical conflict and instability.

10. Group supervision for financial services

One of the major consequences of coronavirus across all sectors will be an increase in M&A activity as the industry continues to consolidate, while also seeking to diversify revenue and risk. Unfortunately, UK regulation has never settled on a consistently effective approach to the supervision of financial services groups; including both those that are wholly or mostly financial services, and others that are predominantly nonfinancial services but contain a financial services element. Both the UK’s current twin peaks framework and the FCA’s preference for a predominantly sector-based approach are unsuited to dealing with this. We should therefore expect a fresh regulatory approach to group supervision – one that includes a rebalancing towards consolidated supervision and, following the Gloster review, a more comprehensive consideration of the risks posed by unregulated activities. ●

Author bio

Gavin Stewart is Head of Strategy Execution for the Grant Thornton’s Financial Services Group.

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CHARITIES

ISSUE 116 | AIAWORLDWIDE.COM

CHARITIES

Accounting for Covid-19 issues Jill Halford considers the impact of Covid-19 on financial reporting issues for charities following the SORP.

he impact of Covid-19 has led to new financial reporting issues for charities following the Statement of Recommended Practice (SORP). In many cases, the SORP already provides perfectly adequate guidance. For instance, debtor recoverability may be more difficult to assess in the current environment, and consideration of estimates and judgements, stock values or legacies may all present problems. However, the SORP already addresses these topics and the current situation does not fundamentally change the required approach. Notwithstanding, the SORP does not address some aspects of the current situation or provides little guidance. This is especially true for situations which were not as common or significant as they may be now. These are the areas we consider in more detail below.

Jill Halford Head of Charities, BDO

Various grants have become available from charitable institutions and the government, including emergency funds and the Coronavirus Job Retention Scheme. In particular: ● Grants should be recognised, inter alia, on entitlement – furlough money will generally be received in the month to which it relates. ● Grants may be received to cover costs of staff usually charged to restricted funds. Unless the grant terms are specific, the income should be treated as unrestricted. Costs may then be either apportioned to unrestricted funds, or treated as restricted and covered by a transfer, which should be explained in the notes. ● Grants received to meet specific expenditure should not be netted off. Therefore, furloughed employment costs should still show as employee costs in full. Some grants, such as the Small Business Grant Fund and the Retail, Hospitality and Leisure Grant Fund, are not time or performance related, and therefore the income should be recognised at the point of entitlement.

The annual report

The Charities SORP Committee has already issued guidance on the annual report, which outlines the key areas trustees may wish to consider when preparing their trustees’ annual report, such as how the virus control measures affected the charity’s activities and explaining any financial uncertainties. For more detail, the guidance is available at www.charitysorp.org/ about-the-sorp/covid-19. In addition, the Financial Reporting Lab of the Financial Reporting Council (FRC) has made two important observations in its October update. It states that companies should not just confine themselves to “best case” and “realistic worse case” when setting out going concern considerations, but provide more background and scenarios. It also addresses risk reporting and points out that reporting in regard to the pandemic has evolved. Rather than Covid-19 being a stand‑alone risk, it should instead by presented in terms of its effect on other risks, and any other longer term, knock-on effects. AIAWORLDWIDE.COM | ISSUE 116

Income accounting Grants

Donated services

Author bio

Jill Halford is Head of Charities at BDO and leads the national charities team within BDO’s Not for Profit (NFP) team. She has over 20 years’ experience working with the charity sector.

Many charities are receiving additional support, especially through volunteer time. The principles of SORP Module 6 are unchanged. Volunteer time must not be included in charity accounts. However, under the Job Retention Scheme, employees from other employers may volunteer for a charity. In this case, assess whether the services received are ones which the charity would otherwise have purchased, whether they are part of the “trade or profession” carried out by individuals and whether they can be “reasonably quantified”. If so, they must be included in the accounts.

Waivers

There are a variety of situations where costs may be waived or deferred. These may include

CHARITIES interest on loans, rents due and staff costs. It is important to be clear on the underlying basis of any such agreement. A deferral means the cost should still be accrued for, whereas a waiver represents income. A revision to FRS 102 affects temporary rent concessions occurring as a direct consequence of the Covid-19 pandemic and within a limited timeframe. The change requires entities to recognise such changes on a systematic basis over the periods that the change in lease payments is intended to compensate. The effective date for these amendments is accounting periods beginning on or after 1 January 2020, with early application permitted. Where staff have voluntarily foregone income and are contractually entitled to it, then this should be treated gross and the full costs would therefore flow through to the disclosure tables. Trustees in this situation are likely to consider the materiality of the items in the context of the accounts and make sure that disclosures adequately explain the situation. Any bonuses should be treated on the same basis, as long as they are contractual. The guidance in SORP 6.5 makes clear that commercial discounts are not income. Instead, for instance in the case of a property lease, the discount should be treated as a reduction in the cost over the life of the lease. Charity finance teams will therefore need to assess exactly whether a waiver is a commercial discount or a gift to the charity.

Income conversions

Some charities will have trading income sources which have been converted into gifts. Examples might include arts charities being donated pre-sold tickets, or subscription income where no service can be provided. Where a customer confirms that an item of trading income may now be treated as a gift, that item should be reclassified as a donation. Where that confirmation is received after the year end, then that may be treated as an adjusting post balance sheet: it would depend on the exact terms of the underlying contract and facts.

Expenditure

The main issues relating to expenditure concern presentation. As discussed above, furloughed staff costs should be treated on a gross basis. Furloughed staff costs, and staff operating under the Job Support Scheme, should be treated in the same way as other staff costs in terms of disclosure. If staff have agreed to reduced levels of pay, and the charity employer voluntarily makes top-up payments to staff, the full cost should be treated as staff costs. A note should be added to the staff costs note explaining the discretionary element in accordance with the SORP’s guidance on ex gratia payments (SORP 9.24). Staff costs are allocated to the charitable activity in which they are engaged. If a charity

Trustees are encouraged to ensure that accounts continue to be presented as transparently as possible.

has temporarily suspended activities, then staff costs should still be presented as relating to this activity. A subsequent decision to close an activity may represent a discontinued business and would require separate disclosures and accounting, as set out in SORP 4.19. Other costs may have been incurred on events and activities that were subsequently cancelled or postponed. The classification of this expenditure is not altered by that decision; however, costs relating to future events that would previously have been carried on the balance sheet may need writing off. Greater explanation of the results may be needed in the Financial Review section of the Annual Report. Cost allocations, both direct costs and support costs, may require to be changed where the pattern of activity has altered significantly.

Assets

Some assets will have their carrying value affected, perhaps because they cannot be maintained, the related activity has stopped or they are simply now not needed. Similar considerations apply to current and fixed assets. Where some sort of write down is required, this should be charged to the relevant charitable expenditure heading. The heading in the SORP “other expenditure” is not designed simply to reflect such exceptional costs (SORP 4.56).

Liabilities

There are a number of loan schemes available and they should be treated in accordance with their terms. As many of these loans are to cover revenue expenditure, they impact deleteriously on a charity’s free reserve position. This will need explanation within the annual report. Any holiday pay accrual needs to take into account furloughed staff as the holiday entitlement is unaffected.

Use the SORP to address these issues

While we focus on some of the key areas, it is important to note that there are many other broader issues the finance team will need to consider in statutory reporting as a result of the pandemic, affecting both the annual report and the accounts. There will probably be implications for the going concern basis for preparing some accounts, and many valuations will be subject to substantial fluctuations. The pandemic will undoubtedly throw some new accounting challenges into the mix as well. Nonetheless, the principles of the Charity SORP, and FRS 102, still apply. Trustees are encouraged to ensure that accounts continue to be presented as transparently as possible. In particular, SORP 3.40 requires trustees to report on assets where there is a significant risk of material adjustment within the next reporting period. Depending on a charity’s year end, this may be a more common item of disclosure than before. ● ISSUE 116 | AIAWORLDWIDE.COM

ISLAMIC FINANCE

Challenges to Islamic finance Dr Roszaini Haniffa considers the impact which the Covid-19 pandemic may have on the future of Islamic finance.

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Dr Roszaini Haniffa Professor of Accountancy, Heriot-Watt University

AIAWORLDWIDE.COM | ISSUE 116

ISLAMIC FINANCE

he global financial sector has been hit by two major crises within just over a decade: the global financial crisis (GFC) of 2008 to 2009; and the global health crisis caused by Covid-19. Financial risk falls under two types: endogenous and exogenous. Endogenous risk is the outcome of the market interactions based on the market players’ abilities, biases, prejudices and resources; while exogenous risks are shocks to the financial system from outside the system. The GFC was an endogenous risk that emerged due to the actions of market players and bankers, which led to excessive risk-taking and build-up of debt. However, the Covid-19 crisis is due to exogenous factors that have a negative impact on the real economy directly and on almost all sectors globally.

Challenges to Islamic finance

The Islamic finance industry is no exception. While it was largely unscathed by the GFC due to shariah principles that prohibit speculation and risky asset classes, it is not immune this time around. The onset of the pandemic has had far reaching consequences on businesses and employment as a result of the lockdown and strict social distancing rules. In oil producing jurisdictions offering Islamic finance, the industry faced further shock from the plummeting oil price and suspension of infrastructure projects. The plunge in global economic growth and the continuing uncertainty as to when the pandemic will end will no doubt pose a challenge on the Islamic finance industry’s profitability, liquidity, asset quality and capital, just like their conventional counterparts. Hence, there is urgency for the industry leadership to take swift action and not to be complacent in addressing those challenges and the following critical issues: ● the effects of a prolonged economic collapse on the structural stability of Islamic financial institutions; ● the ability to sustain supporting moratorium, deferment of loan repayments and other support measures; ● the disruption of further digital transformation on the business model; and ● the identification of social finance areas that can be optimised to steer the industry forward.

Author bio

Dr Roszaini Haniffa is Professor of Accountancy at Heriot-Watt University, Edinburgh.

A balance-sheet approach is a good starting point in identifying clues signalling the future trajectory of Islamic banking. The quality of lending capacity, liquidity position, operational efficiency and strength of equity capital signal the buffer that the bank possesses in fighting adverse economic conditions. The asset-side of Islamic banks reflect the range of financing: ● debt-based products: such as ijarah (leasing), murabahah (mark-up), istisna (cash advance for manufacturing assets) and salam (cash advance for agriculture);

● equity-like products: such as musharakah (profit-sharing); and ● fee-based products: such as waqalah and hawalah (bank transfer services) and wadiah (safe custody services).

High risk customers

Islamic banks with a significant proportion of debt-like instruments – and which have a significant market share related to microfinancing and lending to SMEs – may anticipate involuntary default incidences if the borrowers’ financial conditions continue to deteriorate beyond the short-term relief measure of moratorium and deferred payment. This is a critical issue because, unlike their conventional counterparts which can charge interest on deferred payment, shariah committees in some jurisdictions do not allow Islamic banks to rollover loans or to charge penalties on late payment as their income. Islamic banks should therefore reassess the risk profiles of their customers by classifying customers who are impacted by Covid-19 as high risk, and design strategies to support them guided by the Islamic ethical principles of rahmah, ihsan, ‘adl, and hikmah (compassion, benevolence, justice and wisdom). The shariah committees need to reiterate those sentiments to Islamic financial institutions in supporting the most affected customers and economic sectors. Failure to address this aspect would increase their reputational risk if customers believe their efforts were insufficient. ISSUE 116 | AIAWORLDWIDE.COM

ISLAMIC FINANCE address simultaneously. The recommendation by the World Health Organisation (WHO) in April 2020 (see bit.ly/3lhxdq1) to use contactless payments means that Islamic banks need to invest in digital technologies to adapt to the changes in market reality. Compared with standalone Islamic banks, Islamic windows are be in a relatively better position when it comes to adopting new technology, as they can leverage on their parent banks’ infrastructure. This also means that Islamic windows will be able to integrate their existing Islamic financing products, with minimal additional effort, to automate processes and to deliver services “at speed” to the market when compared to standalone Islamic banks. The pandemic also generates opportunities for Islamic banks to provide financing to the business start-up segment by initiating capacity building platforms to support SMEs in the Halal and IR 4.0 and Digitalisation sectors, which would place them in good stead in the post-Covid-19 era.

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The Islamic capital market

Similarly, Islamic banks with a high proportion of financing facilities in the areas of transportation and construction are also likely to have substantial asset quality deterioration. It is therefore important to diversify financing capability into other sectors – especially health, agriculture and food – to reduce their asset quality risk. Fee-based services offered by Islamic banks, such as fees/commissions for providing bank transfer services (outside the country), commissions for issuing Islamic credits, and safe custody services, will see a drop as customers’ spending in retail falls and investors choose to hold on to their cash.

A time for action

On the liability side, most Islamic banks are largely funded by profit-sharing investment accounts (PSIA) comprising investment accounts of customers and interbank deposits, with the rest being sukuk issues (see below), non-remunerative funding such as wadiah (current account), and remunerative funds such as murabahah (fixedterm deposits). During a time of crisis, it is important for banks to take proactive action in assuring depositors that there is no shortage of liquidity and that their deposits are safe. If depositors start to withdraw their savings and cause irrational panic, this will leave the banks with liquidity crunch. Besides the asset-liability challenge, some banks within the Islamic banking market may also face competitive pressures caused by accelerating trends in digitisation, which they will need to AIAWORLDWIDE.COM | ISSUE 116

Many Islamic banks are largely funded by profitsharing facing investiments account comprising investments of customers and interbank depotists.”

Turning to the Islamic capital market, the second most significant component of the Islamic finance sector, a significant chunk of the outstanding sukuk (Islamic bonds) is concentrated with sovereigns and financial institutions, with the rest being corporate sukuk. The impact of the pandemic on sovereign sukuk market is expected to be less intense and in a worst-case scenario, sovereign issuers are more likely to redeem their sukuk through central banks. Similarly, the effect on sukuk issued by financial institutions is also not worrying as most of the issues have maturities close to perpetuity. As for corporate sukuk, it is assuring to find the maturity structure tilted towards longer term with about 15% of sector-wise corporate sukuk maturing in 2021 and 2022. However, for corporate sukuk in the oil and gas, airlines and hospitality sectors, a considerable number will be maturing within the next nine to 36 months and there are concerns on whether those issuers under liquidity stress will be able to secure refinancing. Even if they manage to refinance, lenders may increase the cost of funding and require additional collateral to mitigate the risk. With regards to the equity capital market, the outlook is promising. Early indications suggest that Islamic equity indices (IEIs) are following a market-based approach for screening, and outperforming their corresponding benchmark equity indices (BEIs) on nominal as well as on risk-adjusted basis (Sharpe ratio) irrespective of regional differences (Ashraf et al., 2020, see https://ssrn.com/abstract=3611898). All is not doom and gloom for Islamic finance in treading into the future. In fact, the Covid-19 crisis provides the golden opportunity for Islamic finance to shift from credit-based to equitybased financing, which will be one step nearer to the “genuine” model of Islamic finance. Fintech applications will become more popular and grow in size and Islamic finance should jump on the bandwagon to stay relevant. ●

MULTINATIONALS

Global and local complexities Emine Constantin considers global and local complexities holding multinationals to account in accounting and tax.

Emine Constantin Global Solutions Director, Accounting and Tax, TMF Group

Author bio

Emine Constantin is the Global Solutions Director, Accounting and Tax at TMF Group. She has extensive experience and application in Business Financial Services field.

omplying with local – and often diverse – accounting and tax regulations is an ongoing challenge faced by businesses operating internationally. The traditional, nexus-based taxation principles don’t seem to apply in the new world, where physical flows are replaced by electronic flows and the tracking of goods and services becomes more complex. Consequently, corporate taxation has become a highly contentious topic in recent years. There has been increasing scrutiny on corporate approaches to international taxation, particularly in tech and e-commerce. Jurisdictions are also using taxation on foreign goods as a way of protecting their own economies, as we have seen in the US-China trade war. The digital economy has become so significant for tax authorities that the Organisation for Economic Co-operation and Development (OECD) in July 2020 issued a global tax reporting framework for digital platforms in the sharing and gig economy, designed to help taxpayers comply with their tax obligations, while ensuring a level-playing field with traditional businesses. Companies acting in this field are requested to provide detailed transactional information to tax authorities. The Covid-19 pandemic has continued to put tax at the forefront, with changes introduced by governments to keep companies up and running and economies in motion. The global economic impact of Covid-19 will be long lasting and far reaching. As part of our reporting on the accounting and tax landscape, we will also examine the impact of this crisis as the global economy continues to navigate uncharted territory.

accounting and tax system in 77 jurisdictions worldwide and ranked them in order of complexity. This report further explores the findings of the Global Business Complexity Index (GBCI) 2020 report, delving deeper into the nuances of accounting and tax laws and practices. As seen in the GBCI 2020, three key themes summarise recent global trends: ● Internationalisation versus localism: Global standardisation is harmonising some accounting and tax practices, while local complexities persist – and are even increasing – in some jurisdictions. ● Modernisation versus tradition: Global trends are based around a drive towards modern practices, whereas local considerations often reflect traditional modes of operation. ● Technology: Its role in fostering a globalised business environment and how this is being deployed and used for accounting and tax reporting around the world.

Accounting and tax laws and practices

Market complexity

The TMF Group Report “Accounting and tax: The global and local complexities holding multinationals to account” analysed the

On a global level, the five countries with the most complex accounting and tax systems are Argentina, Bolivia, Greece, Brazil and Turkey; and ISSUE 116 | AIAWORLDWIDE.COM

MULTINATIONALS Accounting and Tax Complexity Ranking 1

Argentina

Paraguay

Bolivia

Italy

Greece

Costa Rica

Brazil

Venezuela

Turkey

Romania

China

Malta

Vietnam

Belgium

Portugal

Honduras

Colombia

Luxembourg

Hungary

Ukraine

Croatia

South Africa

Korea

El Salvador

Malaysia

Finland

Slovakia

Guernsey

Panama

Czech Republic

Cyprus

Canada

Serbia

Japan

Peru

Bulgaria

Sweden

Jersey

Spain

Philippines

Austria

New Zealand

Qatar

the five least complex are the British Virgin Islands, Denmark, Curacao, Switzerland and Hong Kong.

Indonesia

Dominican Republic

India

Mauritius

The five most complex markets

Russia

USA

Ecuador

the Netherlands

Taiwan

Norway

Thailand

Ireland

Israel

Singapore

Uruguay

Australia

Mexico

Cayman Islands

France

Jamaica

Germany

United Arab Emirates

Nicaragua

Hong Kong

Slovenia

Switzerland

Chile

Curacao

Kazakhstan

Denmark

Poland

British Virgin Islands

Guatemala

Drivers of complexity for the top five most complex accounting and tax jurisdictions are frequent, and rapidly enforced changes in legislation can often lack clarity and be challenging to understand. Another key driver is having varying tax regimes and multiple layers of tax regulations within a jurisdiction. This is particularly apparent in South America, which houses three of the five most complex accounting and tax environments.

The five least complex markets

The least complex jurisdictions for accounting and tax “partner” with businesses that operate within them, establishing a relationship between companies and tax authorities. For some of the least complex jurisdictions such as Curaçao and the British Virgin Islands, there is very little requirement to pay tax as they operate a “low tax” or “tax neutral” economy. Any taxes that do need to be paid in the least complex jurisdictions can usually be submitted through an online portal via user-friendly systems. AIAWORLDWIDE.COM | ISSUE 116

MULTINATIONALS

The new ‘making tax digital’ scheme is one of the small categories of digitisation programmes that introduce rather than remove complexity.” Specifically, the new “making tax digital” scheme is one of the small categories of digitisation programmes that introduce rather than remove complexity, at least in the short run. Focusing on VAT, it creates a net increase in requirements and processes to be implemented by companies. In addition, the introduction of a digital services tax and a series of forthcoming changes are issues accountants in multinational firms will have to grapple with.

Global issues

The UK

The UK accounting and tax system ranking highly in terms of complexity making the country a trickier proposition for accountants than Russia, France or Germany. Specifically, the new “making tax digital” scheme is one of the small categories of digitisation programmes that introduce rather than remove complexity. Focusing on VAT, it creates a net increase in requirements and processes for companies. In addition, the introduction of a digital services tax and forthcoming changes from Brexit are issues that accountants in multinational firms will have to grapple with. There are some areas where the UK is more competitive than its neighbours. For example, companies deal with one central tax authority, as opposed to countries such as France, Germany, Italy and Spain, where firms must liaise with multiple bodies. In addition, the UK’s tax system is simpler than that of Germany, where companies must pay different taxes at federal, state and local level as opposed to the single corporate rate of 19%. (Note, though, that the UK’s corporation tax will change in April 2023 to introduce a higher rate band of 25% for business with profits over £250,000 and a tapered increase for businesses with a profit above £50,000.) A further driver of complexity for accountants is the UK’s exit from the European Union. The UK’s ranking has been impacted by its unstable economic outlook and the introduction of greater laws and regulations relating to “economic substance” requirements in the next five years because of Brexit.

Globally, additional findings of the report include: ● E-filing and e-reporting technology is advancing quickly across the world, with the Covid-19 pandemic speeding up adoption rates in some jurisdictions. That said, adoption varies considerably from one region to the next. In South America, 70% of jurisdictions have made electronic transaction reporting mandatory, compared to 34% in the EMEA Region and 15% in APAC. ● Alignment to international accounting standards is strongest in North and South America – with 50% of jurisdictions subscribing to International Financial Reporting Standards (IFRS). In APAC and EMEA, local Generally Accepted Accounting Principles (GAAP) are in place in 71% and 44% of places respectively. ● Governments are taking a more flexible approach to tax audits and filing, particularly in APAC. Companies can extend tax/statutory filings deadlines in 50% of places across the region, and in 43% of places businesses can postpone the start of a tax audit, compared to just 10% of places in South America, for both those criteria. ● Authorities continue to face challenges around managing tax revenues as economies become increasingly globalised and capital flows unconstrained by borders – with multinational digital service providers a particular focus. Many jurisdictions have introduced digital services taxes and profit allocation, ensuring taxes are paid in the country where value is created and preventing companies from moving profits to other jurisdictions. The UK, France, Austria, Italy and Turkey have already introduced such taxes. ● Read the full report at: www.tmf-group.com. ISSUE 116 | AIAWORLDWIDE.COM

Events UPCOMING WEBINARS

UK workplace pensions update Speaker: Tim Middleton 13 April 2021 This webinar looks at the changes to workplace pension schemes that have happened in the last 12 months, including the Pension Schemes Act 2021. This webinar will also cover: ● proposals to reform automatic enrolment; ● proposals to allow the equalisation of Guaranteed Minimum Pensions (GMPs); and ● controls to prevent scams. Navigating the impact of Covid 19: an employment law perspective – Ireland Speaker: John Eardly 15 April 2021 Covid-19 has led to the most serious economic disruption in living memory. From cashflow to supply chains, businesses across the globe have been forced to radically change their business model simply to survive. The longer-term impact of this pandemic will be felt long after its most severe effects have passed. An important challenge in this new business environment will be how to navigate the pitfalls posed by employment law. This seminar will present a focused consideration

of this area from both within and outside the business. Issues to be covered include: ● recent court decisions concerning Covid-19 business management; ● remote working and productivity; ● increasing or reducing staff levels; ● staff training/re-training; and ● managing health and safety. Solvent and insolvent liquidations: how and when should they be used? Speaker: Richard Simms 6 May 2021 This webinar will demystify the world of liquidations, covering

both the solvent and insolvent process and some case studies. The session will cover: ● a liquidation market update; ● when a solvent or insolvent liquidation should be used; ● solvent liquidation – pros and cons; ● insolvent liquidations – pros and cons; ● steps for each process; ● the accountant’s role; and ● how FA Simms can help. Self-assessment for landlords Speaker: Aiden Corcoran 14 May 2021 The session will look at self-assessment tax for clients who are landlords and will cover the following areas: ● types of rentals: private, residential/ FHL or commercial; ● allowable expenses; ● payments on account/payment planning; ● Covid-19: the implications for the landlord (or the impact on the landlord); ● overview of GoSimpleTax software; and ● Q&A session. Visit www.aiaworldwide.com/events for more information and registration.

CPD on demand Have you missed out on AIA’s recent CPD Webinars? Our on demand content is delivered by industry experts and leading professionals, giving you the flexibility to learn and develop your skills where and when suits you best. Each webinar is worth one verifiable CPD unit and can be purchased through

the AIA shop. The following content is available now: ● Working from home: how does it work for Accountants? ● Topical tax update: Covid-19 and tax (Ireland) ● Making Tax Digital for Income

● AIA-NCA workshop: creating good quality SARs ● Financial Reporting Update (Ireland) Login to your AIA online account and choose “Shop” from the MyAIA menu.

Tolley®Guidance Find solutions quickly, understand how to apply them and avoid undue risks. Tolley®Guidance gives you direct access to critical, comprehensive and up-to-date tax information that you can rely on.

NAVIGATE THE COMPLEXITY OF TAX 28

ISSUE 116 | AIAWORLDWIDE.COM

Technical INTERNATIONAL

IFAC supports the next steps and strategic direction of the IFRS Foundation’s work on sustainability IFAC supports steps announced by the IFRS Foundation in its ongoing consideration of whether to establish a new Sustainability Standards Board (SSB) alongside the IASB and under the existing governance structure of the IFRS Foundation. IFAC welcomes the engagement of the International Organisation of Securities Commission (IOSCO) in this important initiative, as outlined in the IFRS Trustee statement, as well as in IOSCO’s February 24 media release. IFAC agrees with the trustees’ strategic views that the new SSB should focus on information material

to decisions of investors and other providers of capital; and that the new board would initially focus its efforts on climate-related reporting, while also working toward meeting the information needs of investors on other environmental, social and governance (ESG) matters. Likewise, IFAC agrees that a “building blocks” approach facilitates both the use of existing standards and frameworks, including the Taskforce on Climate-related Financial Disclosures (TCFD), and the flexibility for coordination on reporting requirements that capture wider sustainability impacts, as

IFAC articulated in its Way Forward roadmap. IFAC CEO Kevin Dancey said: “IFAC continues to support the ongoing rationalisation of a coherent global system. The IFRS Foundation is uniquely qualified and positioned to lead here, including engagement with existing sustainability-related initiatives and standard setters from key jurisdictions. IFAC looks forward to providing input to the forthcoming IFRS Foundation Constitution consultation and encourages our member bodies and stakeholders to take an active interest in these next steps.”

INTERNATIONAL

“The Exploring the IESBA Code series is a very useful tool to complement the IESBA eCode,” said Dr Stavros Thomadakis, IESBA Chairman. “Each instalment provides a summary of important aspects of the Code with cues on how to read and apply its authoritative text. This final instalment spotlights the purpose of the Code, how it is structured, and how it should be used – by accountants in business (PAIBs) and public practice (PAPPs), including auditors. The successful completion of this initiative demonstrates once again how IESBA’s and IFAC’s partnership is valuable in supporting the global adoption and implementation of the Code.” IFAC’s CEO, Kevin Dancey, said: “The ethical foundation of the accountancy profession is one of its most important features. The Exploring the IESBA Code series demonstrates IFAC’s commitment to this ethical foundation and our role in supporting the important work of IESBA, as well as the International Auditing and Assurance Standards Board (IAASB) and International Public Sector Accounting Standards Board (IPSASB). “I encourage our members, professional accountancy organisations and national standard setters around the world to leverage this new resource – to help raise awareness of the Code and to help professional accountants uphold their public interest responsibility.”

IFAC and IIRC set out a vision for accelerating integrated reporting assurance

IFAC and IESBA reach a key milestone in delivering ethics and independence resource IFAC has completed its inaugural series – Exploring the IESBA Code – a unique educational resource developed in collaboration with the staff of the International Ethics Standards Board for Accountants (IESBA). Launched in November 2019, each instalment of the series highlights important concepts and topics in the International Code of Ethics for Professional Accountants (including International Independence Standards). The final instalment explains the “building blocks” structure of the Code and its interconnected nature. This is intended to help readers understand how to use and navigate the Code so that they can quickly identify and access the ethics and independence standards and guidance relevant to them. Other topics covered in the series include: ● the fundamental principles; ● the conceptual framework; ● auditor independence; ● conflicts of interest; ● inducements; ● non-compliance with laws and regulations (NOCLAR); ● pressure; and ● the role and mindset expected of the professional accountant with a focus on bias. AIAWORLDWIDE.COM | ISSUE 116

As an increasing number of businesses around the world implement integrated reporting as a route to long-term value creation and sustainable development, the demand for assurance services on such reports is expected to rise accordingly. To help meet this demand, and to increase confidence in integrated reporting, the International Federation of Accountants (IFAC) and the International Integrated Reporting Council (IIRC) are launching a new joint initiative, Accelerating Integrated Reporting Assurance in the Public Interest (“the Initiative”). The Initiative recognises that new thinking is required to determine what comprises integrated report assurance and how to best deliver it, given integrated reporting’s broad and forward-looking focus on value creation. The Initiative, which will be rolled out in instalments, is designed to heighten awareness of key issues, drive constructive conversation with and among key stakeholders, and encourage providers and users of assurance services in particular to lend their voices to the effort. The first instalment sets out what integrated reporting assurance involves for organisations, auditors and others. This instalment also addresses the difference between the two types of assurance – limited and reasonable – and what is required of auditors and

Technical organisations to strive for reasonable integrated reporting assurance. Feedback on the Initiative and the first instalment can be sent to stathisgould@ ifac.org. All comments are welcome, especially those that address: ● perceived or actual opportunities and challenges for progressing integrated reporting assurance; and ● areas in which additional thought leadership and guidance would be useful for organisations, auditors and assurance providers. Commenting on the initiative, Charles Tilley, Chief Executive Officer, IIRC said: “We believe the move toward assurance of integrated reports, particularly the move from limited to reasonable assurance, should lead to improvements in the quality of integrated reports and underlying business practices, and enable investors and other stakeholders to have more confidence in the information reported about the business and its resilience.” Tjeerd Krumpelman, Global Head of Advisory, Reporting & Engagement, ABN AMRO N.V. said: “We decided a few years ago to obtain cover-to-cover independent assurance, based on the <IR> Framework, from our financial statements auditor, EY, on our 2017 Integrated Report. We were a ground breaker in this regard, and encourage all other integrated reporters to do the same. We believe this pathway has not only enhanced the credibility of our report and provided stakeholders with increased confidence, but we also received valuable reporting and process improvement recommendations. Our next step is to move from limited to reasonable assurance for parts of our integrated report, and to obtain assurance on other non-financial disclosures, such as our Human Rights report, because it makes good business sense.” Kevin Dancey, Chief Executive Officer, IFAC, said: “Integrated reporting assurance, and indeed providing assurance on all non-financial (including sustainability) information, is a critical element in the future role of accountants, requiring them to apply their professional expertise to assurance engagements that enhance the credibility of corporate reporting. Practice needs to develop quickly in this immature part of the reporting and assurance world, particularly to provide confidence in narrative and forward-looking information. Professional accountants, as preparers and assurance providers, are uniquely qualified to help lead the way in this important area.”

Accounting Standards Advisory Forum: call for candidates The IFRS Foundation invites nominations of suitable candidates for membership of the Accounting Standards Advisory Forum (ASAF). National standardsetters and regional bodies may nominate themselves or another eligible organisation. The ASAF was established in 2013. The advice of its members helps the International Accounting Standards Board (IASB) to develop globally accepted and high-quality accounting standards. Resources about the ASAF, including the Terms of Reference and the Memorandum of Understanding that established the forum, are available on the ASAF page.

Candidates for membership

The ASAF comprises 12 non-voting members, represented by 12 individuals, plus the Chair. The Chair or the Vice-Chair of the IASB acts as the Chair of the ASAF. In order to ensure a broad geographical representation and balance of the major economic regions in the world, the 12 members are from the following geographical regions: ● one member is from Africa; ● three members are from the Americas (North and South); ● three members are from the AsiaOceania region; ● three members are from Europe (including non EU); and ● two members are appointed from the world at large, subject to maintaining an overall geographical balance. Membership of the ASAF is open to all recognised accounting standard-setters of jurisdictions and regional bodies. Existing ASAF members are eligible for reappointment. Candidates for membership are asked to confirm that they would be willing to sign or reaffirm agreement to the Memorandum of Understanding with the Foundation; and, in particular, to provide the required commitments as set out in Section 2 of that document. For its part, the Foundation confirms that it will formally meet the commitments set out in Section 3 of the Memorandum of Understanding.

Criteria for membership

Candidates should explain how they meet, or plan to meet, the criteria for membership in support of the commitments set out in the Memorandum of Understanding and any candidate should demonstrate:

● its technical competence: in other words, that it has the necessary technical resources, including human capital resources with standardsetting expertise, technical experience and practical knowledge of financial reporting issues, to enable it to contribute meaningfully and participate actively in substantive technical discussions; and ● the scale, degree and expertise of the resources available to the candidate that will enable it to participate as an active member of the ASAF, including an ability and willingness to fund the travel and accommodation costs of representatives and to devote sufficient time and other resources, where necessary, to the preparation of material for ASAF meetings.

Other factors

Candidates are also invited to submit any additional material that they consider relevant to support their nomination to be a member of ASAF, including details of: ● the candidate’s knowledge and experience of IFRS Standards and their application; ● the candidate’s contribution to the activities of the Foundation and the IASB’s standard-setting process; and its knowledge of the issues and concerns from its jurisdiction/region – together with examples; and ● the scale of the capital market in their jurisdiction/region; and, where relevant, how the candidate intends to seek input from and represent other perspectives of national standardsetters within its region.

Nominations

Nominations and applications are invited by 30 April 2021. They should be sent to Ms Katherine Maybin at kmaybin@ifrs.org. Membership will be on the basis of organisational representation. Candidate organisations are required to select a single designated individual who will be their representative on the ASAF. The individuals should meet the criteria set out in paragraph 2.2.3 of the Terms of Reference.

Process for selection

Candidates will be selected on the basis of a geographical balance, the membership criteria and other factors referred to above. The Foundation will consider all candidates for selection by taking these issues into account. The final selection of ISSUE 116 | AIAWORLDWIDE.COM

Technical members of the group will be made by the Trustees of the Foundation, having taken advice from the Board. The first ASAF meeting of the new membership will take place on 9–10 December 2021.

UK AND IRELAND FRC encourages more transparency when reporting against the UK Corporate Governance Code The Financial Reporting Council (FRC) has issued advice for companies on how to report transparently and effectively when departing from certain provisions of the UK Corporate Governance Code. The Code sets high standards for Corporate Governance. It recognises that companies have differing circumstances and so offers flexibility through its “comply or explain” approach to reporting. The FRC encourages companies to embrace the flexibility offered by the Code so that investors and wider stakeholders benefit from reporting that clearly demonstrates a commitment to good governance, and clearly sets out a company’s circumstances. It is important that companies: ● embrace the flexibility offered by the Code and develop bespoke governance processes and practices which raise standards; ● make it easy for readers to find out which Provisions of the Code they have departed from in their annual report; and ● ensure that they provide full, clear and meaningful explanations for any such departures. This new guidance builds on the findings of the FRC’s Review of Corporate Governance Reporting issued in November. These reports are part of the FRC’s ongoing drive to promote good practice and support companies to continually improve their reporting against the Code.

Call for feedback: FRC launches Technical Actuarial Standards post implementation review The Financial Reporting Council (FRC) is carrying out a post implementation review of the Technical Actuarial Standards (TASs) and has issued a call for feedback for the current Framework for TASs, Technical Actuarial Standard AIAWORLDWIDE.COM | ISSUE 116

100 (TAS 100), and potential actuarial standards in relation to IFRS 17. The post implementation review of the TASs and other actuarial standards is being carried out to ensure they continue to support the delivery of high-quality technical actuarial work and satisfy the Reliability Objective. The nature and extent of technical actuarial work and the environment in which actuaries operate has evolved considerably since the publication of the TASs in 2016. The call for feedback closes at 5pm on Friday 7 May 2021.

Expectations in respect of the European Single Electronic Format (ESEF) Regulation Under the EU Transparency Directive and ESEF Regulation, annual financial reports of issuers which have securities listed on an EU regulated market must be published in accordance with the requirements of the European Single Electronic Format (ESEF) for financial years beginning on or after 1 January 2020. The ESEF requirements are designed to ensure that annual reporting takes place in a single, structured, electronic format so that the financial statements are machine-readable. Recognising the challenges faced by issuers as a result of the Covid-19 crisis, political agreement was reached by the co-legislators permitting member states to delay ESEF obligations by one year, thus allowing issuers to apply the ESEF reporting requirements from financial years beginning on or after 1 January 2021 and not 1 January 2020, as set out in the original legislation. This postponement is included in the EU’s Capital Markets Recovery Package introduced to alleviate the negative effects of the Covid-19 pandemic. The Department of Finance has advised that it will opt for postponement in Ireland following the agreement by the co-legislators. In light of this, the Central Bank wishes to clarify its expectations in relation to the ESEF Regulation taking into account the one-year postponement. The Central Bank of Ireland will continue to accept annual financial reports from Irish issuers subject to the Transparency (Directive 2004/109/EC) Regulations 2007 (S.I. No. 277 of 2007) and ESEF Regulation in PDF format for financial years beginning between 1 January 2020 and 31 December 2020. Similarly, in examining the compliance of those financial reports from such issuers with the relevant financial

reporting framework, the Irish Auditing and Accounting Supervisory Authority (IAASA) will also accept financial statements in PDF format. Issuers who wish to publish their annual financial reports in accordance with the ESEF Regulation in 2021 (for financial years beginning between 1 January 2020 and 31 December 2020) will still be able to proceed. Where an issuer chooses to publish their annual financial reports in ESEF in 2021, all relevant requirements of the Transparency Regulations and the ESEF Regulation will need to be complied with. Directive 2004/109/EC of the European Parliament and of the Council of 15 December 2004 on the harmonisation of transparency requirements in relation to information about issuers whose securities are admitted to trading on a regulated market and amending Directive 2001/34/EC. Article 4(7) of the Transparency Directive will be amended in order to grant member states the option to allow their issuers to apply the ESEF requirements starting from 1 January 2022, provided that they notify the European Commission of their duly motivated intention to do so. This amendment will most likely not enter into force before March 2021. Considering that the ESEF requirements have started applying on 1 January 2021, member states will be exceptionally allowed to opt for the ESEF postponement based on the above-mentioned political agreement.

EUROPE ESMA supports increasing corporate transparency through the creation of ESAP The European Securities and Markets Authority (ESMA), the EU’s securities markets regulator, has submitted its response to the European Commission’s (EC) targeted consultation on the European Single Access Point (ESAP). ESMA recommends a phased approach, which should prioritise financial and nonfinancial information of public companies. Steven Maijoor, Chair, said: “A single access point for information about companies is one of the key missing components of the Capital Markets Union. ESMA is fully supportive of the ambition to set up the ESAP, as it will increase investor trust in companies across the EU and lower the costs of capital. “ESMA is ready to take up a central role in setting up and running the ESAP as

Technical suggested by the CMU High Level Forum and the European Parliament.” ESMA believes that full benefit of the ESAP can be reaped only if information included in the single database is comparable in terms of content and rendered in a structured, machine readable format. ESMA supports an increased use of structured data formats. However, in light of the complexity of the project, ESMA encourages the EC to carefully weight the scope of the ESAP versus feasibility and operability considerations. ESMA’s position is aligned with the Final recommendations of the High Level Forum on the Capital Markets Union on the ESAP and by the European Parliament Resolution on the CMU.

ESMA proposes rules for taxonomyalignment of non-financial undertakings and asset managers The European Securities and Markets Authority (ESMA), the EU’s securities markets regulator, has published its Final Report on advice under Article 8 of the Taxonomy Regulation, which covers the information to be provided by non-financial undertakings and asset managers to comply with their disclosure obligations under the Non-Financial Reporting Directive (NFRD). The recommendations define the Key Performance Indicators (KPIs) disclosing how, and to what extent, the activities of businesses that fall within the scope of the NFRD qualify as environmentally sustainable under the Taxonomy Regulation. The key recommendations relate to the definitions to be used by nonfinancial undertakings for the calculation of the turnover KPI, the CapEx KPI and the OpEx KPI, and the KPI that asset managers should disclose. Steven Maijoor, Chair, said: “Today’s recommendations on the KPIs for nonfinancial undertakings and for asset managers provide a solid basis for the European Commission to adopt an important element of the EU Taxonomy framework. ESMA’s advice sets out in concrete terms how to comply with the disclosure obligations under the Taxonomy framework, balancing investors’ demand for high quality information and avoiding undue burdens on market participants. “These disclosures are essential to provide investors with the information needed to direct investments towards environmentally sustainable activities. They will also be a key building block for the reporting of other financial market participants under the EU Taxonomy.”

Recommendations

ESMA’s proposals focus on how to further specify the three KPIs set out in Article 8(2) of the Taxonomy Regulation for nonfinancial undertakings and those provided by asset management companies that fall within scope of the NFRD: ● Non-financial undertakings: The proposals set out the definitions that should be used for the calculation of the turnover KPI, the CapEx KPI and the OpEx KPI. These are complemented with the minimum information that should accompany these disclosures and the methodology including the level of granularity for the reporting of the three metrics. ● Asset managers: The proposals set out the KPI that asset managers should disclose, the methodology to be applied to that KPI and recommendations for the development of a coefficient methodology to assess Taxonomy-alignment of investments in investee companies that do not report under the NFRD. ESMA also proposes that non-financial undertakings and asset managers use standardised templates for their reporting under Article 8 in order to facilitate comparability of these disclosures and enhance their accessibility to investors that will reuse this information. The EC invited the three European Supervisory Authorities (ESMA, EBA and EIOPA) to provide advice on Key Performance Indicators (KPIs) disclosing how, and to what extent, the activities of businesses that fall within the scope of the NFRD qualify as environmentally sustainable under the Taxonomy Regulation. Along with ESMA, the other two ESAs published their proposals: EBA advice and EIOPA advice.

ASIA PACIFIC Singapore 2021 volumes of SFRS(I)S AND FRSS The ASC has published the collections of SFRS(I)s and FRSs that are required to be applied for annual reporting period beginning on 1 January 2021. These include official pronouncements issued by the ASC up to 31 December 2020, but do not include new/revised/amendments to SFRS(I)s and FRSs which are effective for annual reporting periods beginning after 1 January 2021. Further information is available at www.aisc.gov.sg.

UNITED STATES FASB, IASB and The Accounting Review seek academic research papers for joint 2022 “Accounting for an Ever-Changing World” Conference The Financial Accounting Standards Board (FASB), the International Accounting Standards Board (IASB), and The Accounting Review (TAR) have issued a joint call for academic research papers on how key standards are performing in the capital markets. Selected papers will be presented at a joint conference titled “Accounting for an Ever-Changing World,” scheduled for 2 to 4 November 2022 in New York City, and will be considered for publication in The Accounting Review. The initiative is intended to strengthen connections between the academic and standardsetting communities and encourage academic research that supports the FASB and the IASB in their review of recent major standards.

Call for research papers

Research papers should focus on the effectiveness of the FASB and/or IASB standards on revenue recognition (Topic 606 and IFRS 15, Revenue from Contracts with Customers), leases (Topic 842 and IFRS 16, Leases), and financial instruments (Topic 326, Financial Instruments – Credit Losses, and IFRS 9, Financial Instruments). Specifically, the standard-setting Boards seek information on whether the standards have: ● accomplished their stated objectives; ● provided benefits to users of financial information; ● resulted in unexpected implementation or continuing application costs; or ● given rise to unexpected economic consequences. Research that examines the impact of similarities or differences between US GAAP and IFRS Standards in these areas is also appropriate.

Deadline for paper submissions

The deadline is 15 May 2022; early submission is encouraged. Selected papers will be presented at the conference and considered for publication in The Accounting Review. Papers should follow TAR’s editorial policy and be submitted via the journal homepage, along with a cover letter indicating the submission is for the joint conference. (A submission fee of $200 is required.) ISSUE 116 | AIAWORLDWIDE.COM

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