International Accountant - David Johnson p.12 by Halo Financial

March / April 2015 • issue 80

FOCUS ON THE DETAIL A significant period of change strikes financial reporting – P16

ARTICLES, INTERVIEWS, ANALYSIS FROM THE WORLD OF ACCOUNTANCY

Certified Professional Forensic Accountant Designation

Certified Professional Forensic Accountant Designation is available for a limited period to qualified accountants under examination waiver program. Visit us to find out more at www.forensicglobal.org or e-mail us at info@forensicglobal.org

Institute of Certified Forensic Accountants (Chartered in USA & Canada)

EDITOR’S LETTER

s was widely expected in the UK, the Chancellor’s Budget on 18 March 2015 held the general election in mind. Politically motivated, he announced measures that would go down well with voters – tax breaks for savers, raising the tax-free personal allowance and cutting duties on beer. In this issue, all UK readers will receive the AIA Tax Facts card as an easy reference tool and there is a Budget summary on page 8. Hong Kong has also announced its Budget measures and there is a summary on page 26.

Other articles in this issue examine the how the small company accounting regime will change; start-up advice for accountants; a review of the 2015 global technology landscape; and financial exchange and how to plan for currency volatility. AIA is delighted to have joined Access Accountancy, an initiative with other professional bodies and employers to improve access to the accountancy profession. Under

Rachel Rutherford editor@aiaworldwide.com

Read my blog: www.aiaworldwide.com/ international-accountant/ editors-blog.html

a common banner, employers and professional bodies will increase the volume, scope and quality of activity to improve access to the accountancy profession for young people from less advantaged backgrounds in the UK. I am also pleased to announce that AIA will be hosting the President’s Dinner and Awards on Thursday 8 October 2015. The President’s Dinner and Awards will be held at BAFTA 195, the home of the British

Academy of Film and Television Arts, from 18:30 until midnight. The black tie event will commence with a drinks reception in the David Lean Room, giving you the opportunity to reconnect with old friends or make new ones, followed by a delicious three course dinner. Tickets and early bird booking offers are available now and further details can be found at www.aiaworldwide.com/presidentsdinner-and-awards.

CONTENTS: ISSUE 80: March − April 2015

EDITORIAL INFORMATION International Accountant, the bimonthly publication of the Association of International Accountants (AIA). INTERNATIONAL ACCOUNTANT Staithes 3, The Watermark, Metro Riverside, Newcastle Upon Tyne NE11 9SN United Kingdom T: +44 (0)191 493 0277 W: www.aiaworldwide.com MANAGING EDITOR Nicola Perry

2 Contributors Meet the team

10 Business rescue Top tips for your start-up clients

4 AIA news

12 Foreign exchange

23 Dates for your diary

Student of the year

Plan for currency volatility

Upcoming events

7 News and views

14 Technology

26 Hong Kong Budget

Ireland’s financial services strategy

Why you shouldn’t fear the cloud

The 2014/15 highlights

8 Budget summary

16 Financial reporting

29 Technical

The end of the tax return

A significant period of change begins

Updates from around the world

EDITOR Rachel Rutherford E: editor@aiaworldwide.com T: +44 (0)191 493 0281 ADVERTISING ENQUIRIES E: nick.lee@lexisnexis.co.uk T: +44 (0)208 662 2065 SUBSCRIBE TO INTERNATIONAL ACCOUNTANT E: subscriptions@aiaworldwide.com

Global tech sector In the wake of Alibaba’s mega float

DESIGN AND PRODUCTION LexisNexis, Quadrant House, The Quadrant, Sutton, Surrey SM2 5AS W: www.lexisnexis.co.uk Printed by The Manson Group Ltd, St Albans, Herts, AL3 6PZ This product comes from sustainble forest sources. Publishing services provided by

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

ISSN: 1465-5144 © Copyright Association of International Accountants

ISSUE 80: MARCH/APRIL 2015 INTERNATIONAL ACCOUNTANT

[CONTRIBUTORS]

Contributors to this issue GARY TURNER

JULIAN FROST Julian is leader of BDO’s global technology team and technology partner at BDO UK. He is currently responsible for leading BDO’s technology specialists in over 150 countries and territories worldwide. Under Julian’s leadership, the teams across the globe work to help clients to successfully navigate the challenges of international expansion, avoiding the hazards while seizing those short-lived opportunities. Julian has over 25 years’ experience, advising technology and telecoms businesses on growth and compliance, e-commerce and software development, telecommunications, RFID and biotechnology businesses. He specialises in the technology sector and, in particular, managed services. He is currently based in London and trained at Binder Hamlyn, which became BDO. BDO is offers public accounting, tax and advisory services in 152 countries and territories, with almost 60,000 people working out of 1,328 offices worldwide.

RICHARD SIMMS Richard has been managing director of FA Simms & Partners since 1999, in the same year passing his JIEB exams to become a fully licensed insolvency practitioner. Before that, he worked in accountancy and finance roles in London and around the country. FA Simms has worked with the AIA for a number of years, providing business rescue and insolvency guidance. The AIA helpline number is 08450 70 59 59. For further information, please visit: www. aiaworldwide.com/business-rescue-and-insolvency.

DAVID JOHNSON As a founding director of Halo Financial, David is a certified financial technician (CFTe) and a member of the Society of Technical Analysts (MSTA). David is an experienced commentator and author of a wide variety of articles for publications and websites on FX and currency matters. David is married with four children and two grandsons.

INTERNATIONAL ACCOUNTANT ISSUE 80: MARCH/APRIL 2015

Gary is managing director of Xero UK. Gary’s 20 years’ experience and solid background in accountancy software, combined with his passion for the industry, make him ideally suited to his role as managing director of the easy to use online accounting software firm Xero. Drawing on his inspirational leadership style and solid sales grounding, Gary’s three years spent heading up the UK arm of the international accounting software business have resulted in an outstanding track record of success. Prior to joining Xero, Gary worked as product group director for Microsoft and as managing director of the accounting, business software and payroll software solutions firm Pegasus. For further information, visit www.xero.co.uk.

STEVE COLLINGS Steve Collings is the audit and technical partner at Leavitt Walmsley Associates Ltd, based in south Manchester. He is the co-author to Financial reporting for unlisted companies in the UK and Republic of Ireland (Bloomsbury Professional 2014), as well as the author of several other books, articles and papers on accounting and auditing issues. He received the AIA’s Outstanding Contribution to the Accountancy Profession award in 2013 and was also named Accounting Technician of the Year at the 2011 British Accountancy Awards. Steve also lectures to the profession on all aspects of UK GAAP/IFRS, auditing and solicitors’ accounts rules and is also the financial reporting technical editor for AccountingWEB.co.uk.

ISSUE 80: MARCH/APRIL 2015 INTERNATIONAL ACCOUNTANT

AIA Members News

AIA HONG KONG BRANCH ANNUAL DINNER 2015 The AIA Hong Kong Branch 2015 Annual Dinner was held at the Hong Kong Bankers Club, in Central, Hong Kong on Friday 20 March 2015. AIA President Les Bradley attended the event, together with over 130 AIA members, Hong Kong Special Administrative Region (HKSAR) government officials, representatives from universities and other professional accountancy bodies, guests and friends. The event was considered to be memorable and enjoyable, and was labelled a great success. AIA Hong Kong Branch President Mr Kenny Chan said: “I would like to thank Ms Ada Chung, JP, Registrar of Companies, Companies Registry, as our speaker and guest of honour. Throughout 2014, the AIA Hong Kong Branch continued to focus on providing high quality services to its members and students, as well as promoting excellence in finance and accounting.” The following distinguished guests and were amongst those that attended the Annual Dinner: • The speaker and guest of honour: Ms Ada Chung, JP, Registrar of Companies, Companies Registry; • AIA President: Les Bradley; • AIA UK Director and Hong Kong Branch Ex-President: Mr K S Jong, FAIA; • AIA Hong Kong Branch President: Mr Kenny Chan, FAIA; • Hong Kong Branch Vice President and Annual Dinner Chairman: Mr Ebony Chiu, FAIA; • Hong Kong Branch Vice President: Mr Stephen Chan, FAIA;

• • • • • •

Hong Kong Branch Hon. Treasurer: Mr William Hui, FAIA; Hong Kong Branch Hon. Secretary: Ms Anna Cheung, FAIA; Hong Kong Branch Past President: Mr Joseph Yau, FAIA; Hong Kong Branch Past President: Dr William Ho, FAIA; Hong Kong Branch Hon Auditor: Professor Patrick Wong, FAIA; Hong Kong Branch Educational Consultant: Professor Ted Chen, FAIA (Hon); and • Commissioner, Inland Revenue Department, HKSAR Government: Mr Richard Wong.

AIA FUNDRAISING 2015 In 2015, AIA is undertaking a number of fundraising activities to raise money for the British Heart Foundation, including entering a team of brave and/or reckless staff into the Newcastle Stampede, a 10k obstacle race featuring a water wipeout, haybay hurdle and gladiator gauntlet. We will also be hosting a charity raffle at the AIA President’s Dinner and Awards. We have a target of £2,500 to raise, but we hope to exceed this and would love your support. To sponsor the AIA team, please visit www. justgiving.com/AIAStampede.

INTERNATIONAL ACCOUNTANT ISSUE 80: MARCH/APRIL 2015

The British Heart Foundation fights for every heartbeat. Its mission is to win the fight against cardiovascular disease and its vision is a world in which people do not die prematurely or suffer from cardiovascular disease. You can find out more about AIA fundraising and the AIA Stampede Team at, www. aiaworldwide.com/newcastle-stampede-2015.

[NEWS]

AIA STUDENT WINS PQ MAGAZINE DISTANCE LEARNING STUDENT OF THE YEAR AIA student, Esther B Alum, won “Distance learning student of the year” at the PQ Magazine Awards 2015, held at the prestigious Café de Paris in London. Esther is studying on the AIA Statutory Auditor Training Programme, through the distance learning programme, AIA Achieve. Esther is studying in her spare time, while also working for Lambeth Living Ltd, a social housing management company within Lambeth Council, managing the assets of the London Borough of Lambeth. Lambeth Living deals with day to day repairs, rent collections, estate management, anti-social behaviour and capital works on behalf of the council. She is a customer liaison officer under the Directorate of Property Services within the capital works delivery team and is responsible for communication and finance support, preparing and collating information for the budget monitoring team. Esther was delighted to win the award in recognition of her hard work and the challenges she has had to face in studying for a professional qualification while working. The AIA syllabus is interactive with real day to day work activities. “When I started in my role,” said Esther, “I oversaw a project worth £0.5m. I was able to prepare management reports and short term budgets and did it with confidence and pride. I chose the AIA professional accountancy qualification because it can be applied to practical work scenarios, and the support from the AIA staff is just amazing. Without that level of support I would not be where I am today.

“The AIA Achieve e-tutors are awesome! Their feedback is prompt and their explanations very clear, which makes it easy to understand where I need to improve. I would highly recommend Achieve. I have found that working through the assignments can make the difference between a pass and a fail.”

OTHER NEWS AIA RECOGNITION UPDATE: INSTITUTE OF CHARTERED ACCOUNTANTS, GHANA The Association of International Accountants (AIA) and the Institute of Chartered Accountants, Ghana (ICAG) have agreed a pathway to membership that provides a route for members of the AIA to join the ICAG. To obtain ICAG membership, AIA members must demonstrate three years’ relevant practical work experience in accountancy and finance, provide two referees and attend an induction programme that outlines the professional and ethical expectations of the Ghanaian Institute. Both organisations require members to adhere to their continuing professional development policies and pay their annual subscription to maintain their membership. AIA chief executive, Philip Turnbull said: “This agreement offers members of both AIA and ICAG the opportunity to enjoy the benefits that both organisations can offer, which include increased international recognition and improved professional mobility. I hope that this agreement will mark the beginning of a strong and fruitful relationship between AIA and ICAG.”

Those wishing to apply under this agreement can contact the AIA Ghana Branch, by telephone: +233 24 444 2053 or email: aiaghana@yahoo.co.uk; or contact the AIA Development Department, by telephone: +44 (0)191 493 0282 or email: development@aiaworldwide.com.

AIA RECOGNISED BY ONESAVINGS BANK AIA is pleased to announce that OneSavings Bank plc now recognises the AIA qualification for the purposes of verifying an applicant’s income and will be updating its lending policy accordingly. The OneSavings Bank group is a specialist lender offering residential, buy to let and commercial mortgages, secured loans and development finance funded by a retail customer proposition based upon the provision of good value long and short term savings. OneSavings Bank operates through its market leading brands, Kent Reliance, InterBay Commercial, Prestige Finance and Heritable Development Finance. A full list of banks and building societies that recognise the AIA qualification is

available at www.aiaworldwide.com/banksand-building-societies.

ACCESS ACCOUNTANCY AIA is delighted to have joined Access Accountancy, an initiative with other professional bodies and employers to improve access to the accountancy profession. Under a common banner, employers and professional bodies will increase the volume, scope and quality of activity to improve access to the accountancy profession for young people from less advantaged backgrounds across the UK. A commitment to social mobility within the profession has been welcomed by chair of the Social Mobility and Child Poverty Commission, Alan Milburn: “It is welcome that the accountancy profession is taking action to improve social mobility. I hope these measures will lead to significant progress in widening access to the profession, and inspire thousands of young people who might have thought accountancy was out of their reach to investigate the opportunities available.” Further information is available at accessaccountancy.org.

ISSUE 80: MARCH/APRIL 2015 INTERNATIONAL ACCOUNTANT

THE LINE IS ALWAYS MOVING

Tolley速Library Protecting tax professionals on The Front Line Dedicated to tax and accountancy, Tolley速Library is the largest reference library of its kind in the UK. It gives you access to the most up to date content and expert opinion from the leading lights in taxation, ensuring you have complete confidence in the information we provide. Protect yourself from risk today For your free trial visit tolley.co.uk/library

[NEWS]

[U P D A T E ] TSB AGREES £1.7BN TAKEOVER BY SPAIN’S SABADELL

TSB has agreed to a £1.7 billion takeover by Spanish bank Sabadell. TSB relaunched as a separate bank to parent Lloyds Banking Group in autumn 2013, and Sabadell’s offer comes less than a year after TSB rejoined the stock market, when Lloyds sold off 50% of the business. The takeover still needs the approval of UK regulator the Prudential Regulatory Authority, as well as the European Commission and shareholders. TSB said that if a takeover went ahead, Sabadell would continue to “operate TSB as a robust competitor in the UK banking market, building on the TSB brand name”. Lloyds had been ordered to sell the bank by European regulators as a condition of its government bailout during the UK financial crisis of 2007 to 2009.

IRELAND’S EARLY REPAYMENT OF OVER 18 BILLION EUROS

The National Treasury Management Agency (NTMA) in Ireland has completed a third and final early repayment of over €18 billion to the international monetary fund (IMF) loan facility. Commenting on the transaction, the Minister for Finance Michael Noonan T.D. stated: “Following my instruction last week, the NTMA has completed the third and final early repayment of Ireland’s IMF loan facility with a payment of 5.2 billion in special drawing rights (SDR).” SDR is an international reserve asset created by the IMF, which is based upon four key international currencies – the euro, Japanese yen, pound sterling and the US dollar. Noonan continued: “This is the end of the process which began last September when I negotiated the replacement of over €18 billion in IMF loans with cheaper market funding with my fellow EU Finance Ministers, the EU Institutions and our bilateral loan providers. “The €1.6 billion in proceeds from the sale of the Bank of Ireland preference shares and the €400 million due from the repayment of the Permanent TSB contingent capital instrument were used to part-finance this repayment.”

AIA news, views and comments

NEW INTERNATIONAL FINANCIAL SERVICES STRATEGY IN IRELAND Taoiseach Enda Kenny, Tánaiste Joan Burton and Minister of State for International Banking (including IFSC) Simon Harris have launched ‘IFS2020 - a new strategy for Ireland’s International Financial Services Sector’. The strategy represents a new action oriented approach to growing and developing the international financial services sector, based on the very successful Action Plan for Jobs model. It sets out a clear vision for the sector for the next five years and an ambitious target to create 10,000 net new jobs in the sector by 2020. A significant number of these jobs created will be in the regions, reflecting the increasing national profile of the sector, with one third of jobs currently outside Dublin. Key priorities in the strategy include: • leveraging the unique ICT and international financial

services (IFS) clusters so that Ireland becomes a global leader for fintech; • increasing the profile of Ireland as a location for specialist international financial services by convening a major IFS summit in Ireland in 2016, developing a strategic programme of trade missions and international promotion for the sector, and developing a single banner brand for overseas engagement; • actions to enhance its IFS ecosystem and competitiveness, including in the areas of skills, innovation, physical infrastructure and regulation; and • the creation of a new implementation framework driven by a High Level Public Sector Implementation Committee and a new IFS Industry Advisory Committee, which will replace the IFSC Clearing House Group.

NEW NMW RATES ANNOUNCED From Thursday 1 October 2015, the adult rate of the national minimum wage (NMW) will rise by 20 pence from £6.50 to £6.70 per hour, as recommended by the Low Pay Commission (LPC) in March 2015. It also plans to implement a higher apprenticeship rate than recommended by the LPC. From 1 October 2015: • the adult rate will increase by 20 pence to £6.70 per hour;

• the rate for 18 to 20 year olds will increase by 17 pence to £5.30 per hour; • the rate for 16 to 17 year olds will increase by 8 pence to £3.87 per hour; • the apprentice rate will increase by 57 pence to £3.30 per hour; and • the accommodation offset increases from the current £5.08 to £5.35.

FOUR ARRESTED ON SUSPICION OF MONEY LAUNDERING Four men have been arrested in London and Hampshire on suspicion of money laundering offences. Three of the men were arrested and a quantity of cash seized by HM Revenue and Customs (HMRC) criminal investigators in the London Borough of Kensington and Chelsea on Wednesday 18 March 2015. A fourth man was arrested later the same day near Romsey, Hampshire. The scale of the suspected crime is as yet unknown. Colin Spinks, assistant director of criminal investigation at HMRC, said: “We will not hesitate to investigate those suspected of money laundering

offences. Anyone with information about alleged financial crime can contact the Customs Hotline on 0800 59 5000.” As part of the operation, HMRC investigators searched four residential addresses; one in west London; two near Romsey, Hampshire; and one in Southampton, Hampshire. A business premises near Romsey, Hampshire was also searched. During the property searches, investigators seized business records and a further quantity of cash. All four men were interviewed by HMRC and released on bail until July 2015. Investigations are ongoing.

ISSUE 79: JANUARY/FEBRUARY 2015 INTERNATIONAL ACCOUNTANT

[FEATURE] Budget

BUDGET SUMMARY

he chancellor of the exchequer, George Osborne, delivered his sixth Budget on Wednesday 18 March 2015; he will certainly hope that it is not his final Budget. With just 50 days to go before the general election, this was always going to be a Budget heavy on political positioning and sound bites, but relatively light on substantive new content. Most of what was included had already been pre-announced or leaked to the national press. Bear in mind that Budget proposals are always subject to possible amendment; and given the proximity of the general election on 7 May, this yearâ&#x20AC;&#x2122;s proposals may not all become law. The more important Budget (or Budgets), from an economic and tax perspective, will come after the election.

The end of the tax return In what will be a shock to many, the government will abolish the tax return for millions of individuals and small business through the introduction of digital accounts. It appears that 15m taxpayers will be brought within the new regime by 2016, and 50m taxpayers by the end of 2020. The precise scope of the proposals are unclear, but it appears that those business with corporation tax, VAT and PAYE liabilities will also be included. The tax return will be replaced by a secure digital tax account that allows taxpayers to make real time changes to their information and pay any tax due. HMRC will pre-populate the digital account with the information it has received (eg earnings and taxable benefits from the employer, pension income from the insurer, and bank and building society interest from financial institutions). It will be possible to link business accounting software with the digital tax account by 2020, feeding data directly into the digital tax account; and agents will be able to access the digital tax accounts on behalf of their clients. A roadmap setting out the policy and administrative changes will be published later this year.

INTERNATIONAL ACCOUNTANT ISSUE 80: MARCH/APRIL 2015

Digital tax accounts The government will consult over the summer on a new payment process to support the use of digital tax accounts, which will allow tax and National Insurance contributions to be collected outside of PAYE and self-assessment. Currently, it is only possible to set up a regular weekly or monthly payment plan if the taxpayer has a direct debit payment plan set up and files his tax return online using the free HRMC software. The digital tax account will open up a ‘pay as you go’ option for a much greater number of taxpayers, facilitating more regular tax payments from taxpayers outside of the PAYE system. This will be legislated for in the next parliament.

Abolition of the £8,500 threshold for benefits in kind The £8,500 earnings threshold that determines whether employees pay income tax on all their benefits in kind and expenses, and whether employers pay Class 1A National Insurance contributions, is to be abolished for 2016/17 onwards. Currently, an employee in so-called lower paid employment (ie whose earnings for the tax year are less than £8,500) pays tax only on certain employment benefits, eg living accommodation, vouchers and credit tokens. The abolition of the threshold will mean all employees will be taxed on their benefits and expenses in the same way. The employer’s NIC treatment will follow the income tax treatment. New exemptions will be introduced to cover benefits for ministers of religion earning less than £8,500 and employees who are carers; the latter will cover board and lodging on a reasonable scale that is provided in the home of the person being cared for.

Exemption for trivial benefits in kind A statutory exemption is to be introduced for 2015/16 onwards that will allow employers to identify and treat certain low value benefits provided to employees or former employees as trivial. These benefits will then be exempt from income tax and Class 1A National Insurance contributions and will not need to be reported to HMRC. A benefit will be trivial if:

• the benefit is not cash or a cash voucher; • the cost of providing it does not exceed £50; • the benefit is not provided under salary sacrifice arrangements or any other contractual arrangements; and • it is not provided in recognition of particular services performed, or to be performed, by the employee. An annual cap of £300 will be introduced for office holders of close companies and employees who are family members of those office holders.

Employee expenses: dispensations The current system whereby an employer can apply to HMRC for a dispensation to pay expenses free of tax in certain circumstances will be scrapped for 2016/17 onwards. Instead, expenses provided to employees will automatically be exempt in any case where the employee would have been eligible for a deduction, had he incurred and paid the equivalent expense himself. The exemption will also allow the employee to be paid a scale rate, rather than be reimbursed the actual expense he has incurred. This can either be a rate set by HMRC or a rate that the employer has agreed with HMRC. The exemption will also apply to benefits in kind provided by employers in respect of expenses incurred by their employees. It will not apply to expenses or benefits provided as part of a salary sacrifice arrangement, or to other arrangements that replace salary with expenses. Similar rules will apply for NIC purposes.

Voluntary payrolling Legislation is to be introduced to allow HMRC to make changes to the PAYE Regulations to provide for voluntary payrolling of certain benefits in kind. The intention is that employers will be able to opt to payroll benefits for cars, car fuel, medical insurance and gym membership for 2016/17 onwards. Where employers do so, they will not have to make a return on Form P11D for these benefits. Instead, they will report the value of the benefits through Real Time Information, and that value will count as PAYE income liable to deduction using the PAYE tax tables. The

amended Regulations will determine the value to be placed on the benefit for this purpose.

Employment intermediaries The government is concerned at the growing use of overarching contracts of employment that allow some temporary workers and their employers to benefit from tax relief for home-to-work travel expenses, relief not generally available to other workers. The rules will be changed to restrict travel and subsistence relief for workers engaged through an employment intermediary, such as an umbrella company or a personal service company, and under the supervision, direction and control of the end user. This will take effect from 6 April 2016, following consultation.

NICs for the self-employed Class 2 contributions will be abolished in the next Parliament. Class 4 contributions will be reformed to introduce a new contributory benefit test. The government intends to consult on the proposals later in 2015.

Pensions It is intended to introduce legislation in the next parliament to reduce the pension lifetime allowance from 6 April 2016 from £1.25m to £1m, accompanied by fixed and individual protection arrangements. From 2018, the allowance will rise in line with the consumer prices index. It is intended to introduce legislation in a future Finance Bill, to be effective from April 2016, to allow those already in receipt of an annuity to sell to a third party and take the proceeds directly, or to draw them down over a number of years. Income tax would be at the individual’s marginal rate. From 6 April 2015, beneficiaries of individuals who die under the age of 75 with a joint life or guaranteed term annuity will be able to receive any future payments from such policies tax free, where no payments have been made to the beneficiary before 6 April 2015. The tax rules will also be changed to allow joint life annuities to be paid to any beneficiary. Where the individual was over 75, the beneficiary will pay their marginal rate of income tax. n

ISSUE 80: MARCH/APRIL 2015 INTERNATIONAL ACCOUNTANT

[FEATURE] BUSINE SS R E SCUE

10 INTERNATIONAL ACCOUNTANT ISSUE 80: MARCH/APRIL 2015

START−UP ADVICE Richard Simms sets out the top tips that advisers can pass onto their start-up clients.

ccording to research conducted by the think tank Centre for Entrepreneurs, 2014 saw a growth in UK start-ups over the previous year. 2014 saw a record 581,173 businesses file at Companies House, over 50,000 more than in 2013. The biggest increase was seen in Greater London with 184,671 registered new businesses. However, other UK cities saw peaks in figures, with Birmingham showing 18,337 and Manchester showing 13,054 start-ups. The Federation of Small Businesses (FSB) has noted that there have never been such strong opportunities for small and medium sized enterprises (SMEs) and entrepreneurs. With the UK offering the third lowest start-up costs in the world, it is positive to see entrepreneurs taking advantage of this and setting out to run and own a business. It is also positive for the employment rate; since 2010, private sector jobs have helped to provide over 2 million people with employment. It was announced in the Autumn Statement that the UK’s economic recovery has improved more quickly than expected and that we have the fastest growing economy in the G7. With such a strong and steady growth, accountants need to be aware of the different areas about which a start-up client may seek advice. Accountants must be prepared to expand the topics that they advise on, in order to support their start-up clients. To assist AIA accountants with this, we have compiled a number of key areas about which we believe they should be able to provide advice.

The business plan

RICHARD SIMMS Managing Director, FA Simms & Partners Ltd

A business plan is a key staple of any business, giving direction and strategy from the beginning of its existence. A business plan is needed in many circumstances and, by preparing one that covers both financial and non-financial

information, it can be used in any situation it is requested. Producing a business plan is a common sense service that accountants provide. It is a good exercise to undertake in order to fully understand your client’s business and the direction it wants to take it in. By having this knowledge, if a client seeks a consultation from you with regards to its business, you will have a good idea of how the business is run and where possible issues may lie; and offer possible solutions to these problems. Another important factor of a business plan is that it should be updated as the company grows. If the accountant is involved in this process, they will be close enough to the company to provide appropriate advice when it is needed.

Seeking investment With the development and increase in popularity with non-bank finance options, clients need advice on the best and most appropriate option for the business and its clients. Obtaining this advice from their accountant will be the most obvious course of action to take, especially from a start-up client, as this advice will be received from a trusted source. By understanding the various options and who they are most appropriate for, you will be able to direct your clients in the most appropriate direction for their needs. This service will show that you are dedicated to supporting your clients in every venture of their business.

Marketing A core aspect of all businesses is marketing; how will people know you’re there unless you market your company? This is another area that comes under the consultancy umbrella for an accountant. Even if you know of a company that you can recommend to your clients, this will be a big step forward in them achieving a marketing goal for their company. The best type of marketing is dependent on the product or services, as

not all routes will be suitable for everyone. By having a general understanding of all the marketing platforms available, you can advise on the best direction for your clients to take.

Company and management accounts An accountant will prepare and file statutory end of year accounts. Using an accountant for this will ensure that they have been done correctly and on time. Seeing an accountant once a year is often too late, though, if the business has been experiencing problems with trading or finance. All businesses are recommended to give regular updates of their management accounts to the company directors, so as to be transparent about how their business stands. This is an important area for start-ups. The early stages of a business are crucial in creating longevity and a strong structure to go with it. By having monthly updates with regards to cash flow, this will highlight situations that have been positive for the business, as well as weaknesses and threats they may have experienced. This information will help to structure a realistic cash flow forecast for the business. It can begin to see when peaks and troughs of trading occur, and so account for them in its cash flow.

Setting realistic goals When looking back, many failed business owners will say that their initial targets and goals were unrealistic, and this was undoubtedly a key reason for them not surviving. Having the input of an accountant will help to set goals within an achievable remit, which will help to give clarity to what is actually achievable within a specific time period. By working towards a set of goals, this will give a business purpose and a sense of achievement. This will help to show your clients that you have a genuine interest in their business and in them doing well within their trade. If you have any questions regarding the topic of this article you can contact F A Simms & Partners on our dedicated Business Rescue & Insolvency AIA helpline: 0845 070 5959. n

ISSUE 80: MARCH/APRIL 2015 INTERNATIONAL ACCOUNTANT 1 1

[FEATURE] F OR EIGN E XCH A NGE

PLAN O David Johnson urges readers to plan for currency volatility or, if they don’t take action, to pray for good luck instead.

ccording to the Bank for International Settlements, $5.3 trillion worth of transactions passes through the global foreign exchange markets in an average day. Written in another way, that is $5,300,000,000,000 each day. It really is a number almost too large to comprehend, and it puts Apple’s $74.6 billion record breaking quarter into sharp perspective. The vast majority (probably more than 95%) of this volume is taken up with investment and speculative transactions. Indeed, the part of the foreign exchange market involved in physically settling contracts, paying for invoices and converting funds across corporate accounts is a mere $265 billion per day. Peanuts, I am sure you will agree.

The Swiss example I should explain that I mention these mind-boggling numbers to illustrate the point that it is very difficult to manipulate the foreign exchange markets through the force of buying power alone. The Swiss National Bank (SNB) offered us a prime example of that. Faced with the threat of quantitative easing from the European Central Bank, the SNB abandoned its target of 1.20 in the Euro-Swiss Franc exchange rate because it felt that it would not have been able to maintain its spending power. The result was a massive 30% increase in the value of the Swiss Franc in a matter of minutes, followed by a rebound of roughly half of that strength in the hours that followed. From a purely academic perspective, this is a very interesting event. From a commentator’s

1 2 INTERNATIONAL ACCOUNTANT ISSUE 79: JANUARY/FEBRUARY 2015

perspective, the SNB looked reckless; or perhaps it just surrendered or capitulated when its Canute-like stance proved untenable. From a trading perspective, it was very exciting; and the sort of “fast market” activity that we only see once every few years. From a corporate perspective, any business that relies upon being able to buy affordable Swiss Francs could have seen its annual profits wiped out in an instant. That isn’t interesting or exciting; it would be either bank-breaking or just plain terrifying. Some companies did indeed fold as a result. This is not “just one of those things”, as one commentator put it. Such rapid volatility isn’t an everyday occurrence. However, exchange rates are constantly on the move and each tick up or down is increasing or diminishing company balance sheets around the world second by second. In an ideal world, everything a company does in cross-border trade would be neatly hedged and the profits locked down. That would ensure no leakage due to exchange rate fluctuations and would enable accurate forecasting. Sometimes companies do manage their currency risk with Swiss watch precision and Japanese efficiency; but circumstances, changes of supplier, unexpected orders, protracted negotiations and many other factors can get in the way of such sublime simplicity. So if it can’t be perfect every time, what can be done to protect companies against the rigours and unexpected events that the currency market throws out? I suggest this falls into two main categories.

DAVID JOHNSON Founding director, Halo Financial

R PRAY? Planning Where possible, making a plan – based on cash flow forecasts and as far ahead as is feasible – is the best place to start managing currency risk. Knowledge of incoming and outgoing foreign currencies will enable companies to buy or sell at opportune moments, to swap currencies to improve liquid cash, and to set limits through automated orders or perhaps options to ensure that risk is managed and opportunities are not missed. Some companies use these projections in order to set a base or cost-level exchange rate per currency pair. With that figure established, they can publish sales prices, negotiate contracts and plan revenues with a degree of confidence. Where that “base” rate is set will have an impact on the company’s profitability and on its competitiveness. Setting a rate which is very wide of the actual market rate offers some protection against exchange rate volatility. However, it can mean that the company’s competitors, which may have priced more aggressively or hedged their position, can undercut their price. To set a more competitive rate may make a company’s products or services more attractive to its clients. They may, though, run a greater risk of foreign exchange loss if the market moves by a relatively small amount. This is a balancing act for which market expertise is a very worthwhile asset.

Managing exchange rate risk? Take as an example a company that is paying USD invoices and has a cost price of $1.50 to the pound. With the right tools, it is able to protect that level to ensure it never gets a worse rate than $1.50, no matter what happens in the future. This can be done either through a stop-loss order (a cost-free market order) or through an option product (which may carry a premium or penalty clauses). This gives the accounts department the assurance that, whatever happens, the cost level is secure and

that any advantage gained through exchange rate volatility is a bonus. Traders in the foreign exchange market use technical analysis (chart based) to calculate the forecast ranges for exchange rates. It would be prohibitively expensive for most SME businesses to employ an in-house technical analyst, but this kind of analysis can be accessed through good foreign exchange brokers. A company which wants to lock in exchange rates can do so at any stage. Most brokers and some banks will offer forward contracts which allow the purchase or sale of a set amount of currency for a delivery date up to two years into the future at a predetermined exchange rate. There is usually a need to place a deposit (part payment) upfront and to settle the balance either in full or in drawn down tranches as necessary. The advantage of having a fixed exchange rate for costing and budgeting purposes is obvious. If cash flow isn’t a problem and the company has a currency account, funds can be exchanged on immediate (spot) transactions and the purchased funds held until an appropriate date in the future. Few companies have that kind of free cash in these times, though.

Planning, planning, planning In essence, a risk protected currency flow will aid financial planning for the whole company. That can easily be achieved if a company enlists some form of expertise in the foreign exchange function through a trusted ally. With that attained – whether Greece exits the euro; the Russian and Ukrainian dispute continues to disrupt oil and energy markets; or the UK votes for a UKIP/Monster Raving Loony Party coalition at the general election – the company that has protected itself is not vulnerable to events. That has to be a better position than hoping and praying. Halo Financial is the preferred FX partner of the AIA. For more information please visit www.aiaworldwide.com/ halo-financial-fx-resources. n

ISSUE 79: JANUARY/FEBRUARY 2015 INTERNATIONAL ACCOUNTANT 13

[FEATURE] T ECHNOL OGY

IT BY NUMBERS Gary Turner explains why accountants shouldn’t fear the cloud.

14 INTERNATIONAL ACCOUNTANT ISSUE 80: MARCH/APRIL 2015

A GARY TURNER Managing director, Xero

dapting to a new IT landscape can help accountants to deliver more personalised services and open the door to new revenue opportunities. After years of being underserved by the technology market, the huge gulf between small businesses and large enterprises has shrunk considerably, with cloud technology at the heart of this quiet revolution. Until recently, most owners had to rely on basic tools, such as spreadsheets or complicated desktop software packages, to manage day to day activities. This meant that if things went wrong, they were left feeling pretty isolated. The same was often true of accountants that run their own small businesses, most of whom have lacked the budget and technology necessary to provide anything other than basic financial services. Now, a burgeoning market for cloud or “software as a service” (SaaS) technologies is seeing more and more small firms connecting essential applications such as PayPal and CRM with their online accounting platforms. With only an internet connection, they have access to a whole range of sophisticated business tools, as well as the flexibility to work from any location. Unsurprisingly, this is prompting many business owners to look to their existing provider or seek out accountants that can offer value added, personalised services – and on a more regular basis. This continued and growing demand was highlighted by a 2014 OnePoll survey of 250 accountants. Almost half (48%) of the practices questioned said the reason they were planning to switch to cloudbased services was in direct response to client demand. Despite the obvious commercial opportunities for the accountant, however, this transition is much more than just a technology switch. This is not least because it requires shifting practice management, tax, accounts production and bookkeeping systems online. Moreover, by moving existing clients to online accounting and opening the door to new customers, accountants will invariably find themselves refocusing from predominantly compliance based work and becoming trusted business advisors – and they must adapt their operations accordingly.

Strategic services From a commercial perspective, the ability to use online accounting technology to offer higher value advisory services that go beyond the basic tax and compliance package gives accountants scope to grow revenue and work more efficiently. Faster processes driven by better data analysis means less time spent on basic, time consuming activities. The challenge here is that, from a pricing perspective, this can create a potential issue: having the tools to complete a job more quickly could leave a gap in revenues. For this reason, many cloud accountants are introducing more consultative services and moving towards pricing on value, rather than hours spent on the job. This might include, for example, adding services like management accounting, data analysis and business consulting – all of which go a long way to help clients achieve their financial and business aims. From the accountants’ side, having shared access to data also makes it more practical to spend time talking to clients about what their financial numbers really mean and to focus on the decisions that can be made to move their businesses forward, rather than wasting time trying to get the numbers right and finding and fixing those hard-to-find data entry errors.

Tactical transition For some new cloud accountants, overcoming initial client resistance – as well as pricing for new, consultative services – may be challenging. Equally, in the era of Skype and Google Hangouts, there can be a need to set boundaries when a client sends instant messages or calls and expects an instant response. In order to get the most out of cloud accounting, accountants must immerse themselves and their practices in the technology. Taking advice from an established software provider that has walked many other firms through the transition can pay dividends. Before recommending cloud based accounting to clients, it is also well worth adopting it for the practice’s own accounts. Having used it within the practice, accountants not only gain the knowledge and experience needed when working with clients on the same platform, but will also discover at first

hand the broader benefits of working in the cloud. For transitioning practices, moving clients over in phases can also make the process much smoother. As a starting point, this could mean identifying which clients would be most receptive to the technology and which would benefit the most. Firms of less than two years old or those which are particularly tech-savvy and have fewer than ten employees can be good initial candidates. Likewise, it is also well worth identifying those which are currently struggling with their accounts using Excel spreadsheets as, using online accounting, they can import existing data and carry out processes which previously took days in a matter of hours.

Long-term outlook As awareness of cloud accounting grows, partnering with a well-known, established technology vendor offers accountants the opportunity to market strategic services that make a significant difference to small business clients. For many firms, this more proactive online accounting service offers a unique selling point over larger firms. Some clients have, of course, grown accustomed to working with more traditional firms. However, offering them new ways of working – acting as virtual CFOs or introducing monthly reports and rolling forecasts, for instance – can re-energise an accountant’s relationship with customers. In the longer term, practices become less reliant on compliance work and no longer need to pay significant amounts of money for desktop software, making them less vulnerable to competition from more agile counterparts. Most importantly of all, it becomes easier to boost service levels and provide timely, strategic advice – without having to increase the number of hours spent serving clients and physically travelling around. From a commercial perspective, online collaboration can also mean opening the doors to customers outside of the accountant’s usual target market and geographical reach. Whereas a practice may have all of its clients within in a 20 to 30 mile radius, with online partnership those clients could be UK-wide. n

ISSUE 80: MARCH/APRIL 2015 INTERNATIONAL ACCOUNTANT 1 5

[FEATURE] F inancial reporting

SMALL CHANGES

BIG RESULTS Steve Collings reports on the significant period of change which is about to strike financial reporting. 16 INTERNATIONAL ACCOUNTANT ISSUE 80: MARCH/APRIL 2015

he last year has seen sweeping changes being made to the way in which financial statements in the UK and Republic of Ireland are prepared, with the introduction of a new financial reporting framework, FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland. FRS 102 is part of a suite of four standards which fit together as follows: • FRS 100 Application of Financial Reporting Requirements; • FRS 101 Reduced Disclosure Framework; • FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland; and • FRS 103 Insurance Contracts. Financial Reporting Exposure Draft (FRED) 56 was published as draft FRS 104 Interim Financial Reporting by the Financial Reporting Council (FRC) on 12 November 2014 and the comment period closed on 12 January 2015. It is expected to be published as a final FRS by the end of March 2015. With the exception of FRS 104, all of these FRSs come into mandatory effect for accounting periods commencing on or after 1 January 2015 for companies which do not apply the Financial Reporting Standard for Smaller Entities (FRSSE) or micro-entities legislation. The significant changes brought about by FRS 102 do not end there. Companies at the smaller end of the scale, which report under the FRSSE, should also be prepared for some fundamental changes in the form of the EU Accounting Directive.

EU Accounting Directive

STEVE COLLINGS Audit and Technical Partner, Leavitt Walmsley Associate Limited

Directive 2013/34/EU of the European Parliament and of the Council was issued on 26 June 2013 and brought about a significant amount of change for companies that will fall under its scope; namely smaller companies and micro-entities. When the EU Accounting Directive (the Directive) was issued, it had to be incorporated into UK GAAP; therefore, the FRC amended both the FRSSE (effective April 2008) and the FRSSE (effective January 2015) so as to include the requirements. This was because the micro-entities legislation was effective for accounting periods commencing on or after 30 September 2013 for accounts filed with the Registrar of Companies (Companies House) on or after 1 December 2013. The revised versions of both FRSSEs

were published by the FRC on 29 April 2014. The impact of the Directive is wide reaching and the Department for Business, Innovation and Skills (BIS) has until 20 July 2015 to transpose the Directive into UK company law. In recognition of this, BIS issued a consultation on 29 August 2014 which outlined how it intends to implement the new Directive. At the same time, the FRC also issued a consultation document as to the potential impact the Directive will have on accounting standards in the UK and Republic of Ireland. Following the consultation stages, BIS issued its response and draft regulations in January 2015. It is expected that the FRC will issue exposure drafts of the new accounting standards in the first quarter of 2015.

Impact of the Directive on company law In January 2015, BIS issued its response and confirmed that the Statutory Instrument is likely to come into force early in 2015. BIS has also stated that companies will have to apply the new financial reporting regime for financial years commencing on or after 1 January 2016. Earlier adoption of the new regime will be available where this enables a company to access a less burdensome reporting regime. The most notable change brought about is an increase in the thresholds which determine the size of small companies. BIS has chosen to take advantage of the maximum thresholds that the Directive makes available to member states, which will allow 11,000 medium-sized companies to be recategorised. This will enable them to take advantage of the small companies regime and permit them to make fewer disclosures than would otherwise be the case. BIS has also confirmed that it will apply mandatory increases in the thresholds for medium-sized and large companies. The new regime is summarised in the table below. These qualifying conditions above are met by a company or a group in a year in which it satisfies two or more of the turnover, balance sheet total and employee head count criteria. Section 382(4) of Companies Act 2006 says that if a company has a short accounting period (where, for example, the company is a new startup), the turnover figure above must be proportionately adjusted.

ISSUE 80: MARCH/APRIL 2015 INTERNATIONAL ACCOUNTANT 1 7

TURNOVER

BALANCE SHEET TOTAL

AVERAGE NO. OF EMPLOYEES

Micro-entity

< £632,000

< £316,000

< 10

Small company

< £10.2 million

< £5.1 million

< 50

Small group

< £10.2 million net OR < £5.1 million net OR < £12.2 million gross < £6.1 million gross

< 50

Medium-sized company

< £36 million

< £18 million

< 250

Medium-sized group

< £36 million net OR < £43.2 million gross

< £18 million net OR < £21.6 million gross

< 250

Large company

≥ £36 million

≥ £18 million

≥ 250

Large group

≥ £36 million net OR ≥ £43.2 million gross

≥ £18 million net OR ≥ £21.6 million gross

≥ 250

Reference to “balance sheet total” in the Regulations refers to fixed assets plus current assets (ie the aggregate of the amounts shown in the company’s balance sheet). The number of employees in the table above means the average number of employees employed by the company in a year. This figure is calculated as follows: 1. For each month in the financial year, find the number of persons employed under contracts of service by the company in that month (whether throughout the month or not). 2. Add together the monthly totals. 3. Divide by the number of months in the financial year.

Disclosure notes Under the new small companies regime (not the micro-entities regime), there will be a maximum of 13 mandatory disclosure notes. However, care must be taken where these disclosure notes are concerned, because the directors of a company are still duty bound to ensure that the financial statements give a true and fair view. Where the application of the mandatory disclosures does not enable the financial statements to give a true and fair view, the directors must include the necessary disclosures in order to achieve this. This is likely to prove problematic for smaller clients, who may require assistance from their accountant to ensure that the financial statements give a true and fair view. The 13 mandatory disclosure notes are as follows: 1. accounting policies adopted; 2. fixed assets revaluation table; 3. fair valuation note; 4. financial commitments, guarantees or contingencies not included in the balance sheet; 5. the amount of advances and credits granted to members of the administrative, managerial and supervisory bodies (along with supporting information); 6. exceptional items;

18 INTERNATIONAL ACCOUNTANT ISSUE 80: MARCH/APRIL 2015

7. amounts due or payable after more than five years and entire debts covered by valuable security; 8. average number of employees during the financial year; 9. fixed asset note (in addition to the mandatory revaluation table); 10. name and registered office of the undertaking drawing up the consolidated financial statements of the smallest body of undertakings of which the undertaking forms part; 11. nature and business purpose of arrangements not included in the balance sheet; 12. nature and effect of post balance sheet events; and 13. (limited) related party transactions. The Directive allows member states the option of requiring small undertakings to disclose: 1. fixed asset note (in addition to the mandatory revaluation table); 2. name and registered office of the undertaking drawing up the consolidated financial statements of the smallest body of undertakings of which the undertaking forms part; 3. nature and business purpose of arrangements not included in the balance sheet; 4. nature and effect of post balance sheet events; and 5. (limited) related party transactions. BIS has decided that the above five optional disclosure notes are to be made mandatory in the UK, because it does not view them as overly burdensome and they are considered important to an overall understanding of the financial statements of a small company.

Abridged and abbreviated financial statements Part 1 (general rules and formats) of Schedule 1 (Companies Act individual accounts) to the Small Companies Accounts Regulations is amended by Regulation 16. This allows a small company to prepare “abridged” accounts, provided that this has been approved by all of the company’s shareholders.

When an abridged balance sheet is prepared (using either format 1 or format 2), it will only show those items in the Companies Act formats preceded by letters and roman numerals. Some points to note are as follows: • In the case of a format 1 balance sheet, note (5) of the notes to the formats must be complied with. • In the case of a format 2 balance sheet, notes (5) and (10) of the notes to the formats must be complied with. • All of the members of the company must have given their consent to the company drawing up an abridged balance sheet. An abridged profit and loss account can be drawn up (again provided all members agree). The revised Companies Act only provides for two possible formats (format 1 and format 2). Formats 3 and 4 of the profit and loss account have been abolished, largely because they were rarely used in practice. In preparing an abridged profit and loss account (where the directors consider it appropriate to the company’s business), the company can combine under one item called “Gross profit or loss”: • items 1, 2, 3 and 6 in the case of a format 1 profit and loss account; and • items 1 to 5 in the case of a format 2 profit and loss account. (The item numbers referred to above are the items from the statutory formats laid out in the Companies Act 2006.) Companies that were a charity at any time during the accounting period will not be able to prepare an abridged profit and loss account, or an abridged balance sheet. In respect of abbreviated financial statements (ie those accounts traditionally submitted to Companies House), Regulation 21 repeals Schedule 4 SI 2008/409, which requires abbreviated accounts to be delivered to the Registrar. This is to reflect the fact that small companies are no longer permitted to file accounts which are different to those which are prepared and sent to shareholders. The revised section 444(1) says: “The directors of a company subject to the small companies regime— a. must deliver to the registrar for each financial year a copy of a balance sheet drawn up as at the last day of that year, and b. may also deliver to the registrar— (i) a copy of the company’s profit and loss account for that year, and (ii)a copy of the directors’ report for that year.” Where the company’s profit and loss account is delivered, the directors must also deliver a copy of the auditor’s

report (and any directors’ reports). This will not apply if the company is exempt from audit. In addition, if the balance sheet or profit and loss account is abridged, the directors must also deliver to the Registrar a statement by the company that all the members of the company have agreed to the abridgement. Where the directors of a company decide not to file the profit and loss account or a directors’ report, then the copy of the balance sheet filed at Companies House must contain (in a prominent position) a statement that the company’s annual accounts and reports have been delivered in accordance with the provisions applicable to companies subject to the small companies regime. This requirement is contained in the revised section 444(5). For medium-sized companies, section 445(1) requires a medium-sized company to deliver to the Registrar a copy of: • the company’s annual accounts; • the strategic report; and • the directors’ report. The auditor’s report on those accounts (and on the strategic report and directors’ report) must also be delivered to the Registrar unless the company is exempt from audit and the directors have taken advantage of that exemption. The concept of abbreviated for mediumsized companies is also abolished by the repealing of section 445(3) and (4).

Public companies Where a company is in the same group as a public company but is not itself a listed company, then the new regime will allow that company to have access to the small or medium-sized companies regime. In addition, a parent which is itself included in the group accounts of a larger group may also be able to claim exemption from preparing group accounts, provided that it is not a company admitted to trading on a regulated EEA market and the only reason why it would otherwise not qualify as small is because it is a public company.

Financial statement layouts The new regime will allow companies the flexibility in how their profit and loss accounts and balance sheets are prepared. Where companies take up this concession, they must ensure that the information provided in the profit and loss account and the balance sheet is at least equivalent to the information which would otherwise be required by the standard formats. This concession is going to be extremely helpful for companies which are members of a group reporting under EU-endorsed IFRS and which take advantage of FRS

101 Reduced Disclosure Framework. While FRS 101 does allow qualifying entities reduced disclosures, it still requires that Companies Act accounts are prepared. Therefore, at the moment it can cause difficulties when it comes to consolidating the current Companies Act financial statements in with accounts prepared under EU-endorsed IFRS.

already been paid, as well as those which can be claimed. This section of the Act has been changed because the previous version did not allow the investor to use the equity method in their individual accounts. (They could only use cost-based and fair value measurements.)

Goodwill

Further points to note

BIS is going to change the maximum period of goodwill where, in exceptional circumstances, the useful economic life cannot be reliably estimated. The maximum period which goodwill can be written off over under the new regime will be 10 years. The August 2014 version of FRS 102 does, however, require goodwill to be written off over a maximum of five years where management is unable to ascertain a reliable estimate of the goodwill’s useful economic life.

The definition of “turnover” will not be amended to include other sources of income. However, for charities, BIS recognises that often these will receive a significant proportion of their income from sources other than the sale of goods and rendering of services. Therefore, BIS is still in consultation with the Charity Commission concerning this issue. The government launched a discussion document in December 2014 Auditor regulation: discussion document on the implications of the EU and wider reforms. Section 4.6 of this discussion document outlines a consultation that the government is carrying out on the small companies’ audit exemption thresholds. The government has confirmed that it will not take action to decouple the link between the small company thresholds for accounting and audit purposes as part of the implication of the Directive. The preferred option is for the audit exemption thresholds to track those of the small companies regime. The final outcome of whether or not small company thresholds will remain the same as audit exemption thresholds will all depend on the outcome of the stakeholder views received. If the government decides, in light of the responses to that document, that specific audit exemption thresholds should be introduced into the Companies Act 2006, this can be legislated for in 2015.

Information on subsidiaries For group companies, information relating to subsidiaries within the group which have been consolidated with the parent’s consolidated financial statements will only be required to be disclosed as a note to the financial statements.

Directors’ reports for microentities Companies which qualify as a microentity (see criteria above) and which choose to adopt the use of the microentities legislation will no longer be required to prepare a directors’ report. Further simplifications are planned for the financial reporting regime for microentities by the FRC.

Use of the equity method in individual financial statements Part 2 of the Regulations Accounting principles and rules includes a new section 29A(1), which now allows the use of the equity method for participating interests. Essentially, the proportion of profit or loss attributable to a participating interest which is recognised in the profit and loss account may be that proportion which corresponds to the amount of any dividends. However, where the profit attributable to a participating interest and recognised in the profit and loss account exceeds the amount of any dividends, the difference is taken to a reserve account and is not distributable as a dividend to shareholders. For clarity, where the Regulations refer to “dividends” in this respect, the meaning includes dividends which have

Conclusion Clearly financial reporting, across the board, is undergoing a significant period of change for all concerned. Further articles over the coming months will be published regarding this issue and (at the time of writing) we are awaiting Exposure Drafts from the Financial Reporting Council as to how they will incorporate the implications of the EU Accounting Directive into GAAP which are due out in February/ March 2015, with final standards expected in the summer of 2015 which will be effective for accounting periods commencing on or after 1 January 2016 – so not much time to plan for the significant changes ahead. n

ISSUE 80: MARCH/APRIL 2015 INTERNATIONAL ACCOUNTANT 19

[FEATURE] T ECHNOL OGY SEC T OR

JULIAN FROST Technology partner, BDO

OPEN SESAME? Julian Frost takes a look at the 2015 global tech landscape in the wake of Alibaba’s mega float

20 INTERNATIONAL ACCOUNTANT ISSUE 80: MARCH/APRIL 2015

he Alibaba flotation in Q3 2014 went down as one of the milestone deals of last year. It caused something of a pause on deal activity as the sector held its collective breath, waiting to see how the market would react. In 2015, the company is continuing to attract the attention of investors, peers and competitors across sectors – be it as a result of its investment in domestic smartphone maker Meizu, its latest move to disrupt the technology, media and telecom (TMT) space, or its deal with peer-to-peer finance firm Lending Club. So what can we learn from the Alibaba Effect, and what could it mean for other tech listings, mergers and acquisitions in 2015?

IPO floodgates failed to open Immediately following the flotation, the market cooled. Companies delayed their listings for fear of interest being detracted by the megadeal, but also to see how the market would react. This meant initial public offering (IPO) activity was down 25% year-on-year by November 2014. With the dust having settled on the Alibaba deal and it being deemed a success, many expected a resurgence in tech IPOs – although this didn’t always materialise, because of macroeconomic uncertainty, volatility in the markets and political instability. However, the final quarter of last year was not all doom and gloom. We saw a much needed festive flurry of deals line up in the final month of 2014, relieving a December drought and we’re

continuing to see the pipeline rebuild in the early parts of this year.

The ripple effect Despite this constrained deal activity, we saw some evidence of increased activity in some tech subsectors, particularly in application software. Last year, we predicted that 2015 should be a more positive year for IPOs as a whole, as a number of companies, which delayed their 2014 flotations against a backdrop of market volatility, started to make amends. Already we’ve seen the highest profile cloud storage vendor The Box, which delayed float from October 2014, reach $175 million on the Nasdaq in late January 2015. I certainly look forward to seeing who will be next.

ISSUE 80: MARCH/APRIL 2015 INTERNATIONAL ACCOUNTANT 21

DEAL VOLUMES BY SECTOR TMT deal values increased to $510.1bn in 2013 from $331.1bn in 2012. The positive first nine months of 2014 suggests deal values could be as high as $800bn by the end of the year. Telco deal values also increased by 23.0% of all deals, up from 14.5% in 2012

600

2013 2012

500

US$bn

400

300

200

100

0 TMT

Energy, mining and utilities

Consumer

Financial services

Industrials and chemicals

Pharma, medical and biotech

Real estate

Business services

Other

Transport

Leisure

TECH IPOS BY GEOGRAPHY: 2009 TO 2015E Source: Bloomberg, BDO Estimates

300 While there will be a slight decline in Asian IPOs in 2014, a potential change in Asian exchange listings in 2015 could see Asian listings outpace the US.

250 200 150

However, the recent Hong Kong/Shanghai bourse venture delay will be a blow to those hoping for reform within Asian exchanges.

100 50 0 2009 Asia

2010

2011

Australasia

South America

2012

Eastern Europe

2013

2014e

Middle East & Africa

2015e North America

Western Europe

Tide of M&A growth In a similar story to IPOs, a combination of macroeconomic uncertainty and Alibaba induced caution has meant that 2014 was a poor year for the volume of both tech mergers and acquisitions. With investors’ eyes on how Alibaba would perform, Chinese venture capital fundraising plummeted to $403 million in Q3, a fraction of the $3.78 billion raised in Q2. This year, we predict that tech M&A will have a brighter outlook. Individual subsector hot spots were prominent in

driving M&A in Q4 and we expect this throughout Q1 2015. Chief amongst these in the final quarter of the year was FinTech, the tech payments sector which continues to come to the fore. Hot on the heels of Apple Pay’s launch in November last year, more recently we saw Hub24’s acquisition of Paragem for $2 million.

Riding the wave It’s clear that fewer tech deals were sparked during those turbulent times in late 2014. In fact, many companies

22 INTERNATIONAL ACCOUNTANT ISSUE 80: MARCH/APRIL 2015

have found themselves in uncharted waters, with caution sweeping the markets and macroeconomic uncertainty compounding uneasiness. Many factors came into play here, but it’s clear that some firms either held back their deals or preferred to secure new backing to remain private. We are hopeful for a more positive 2015, but while the overall outlook remains unclear, careful consideration is as important as ever. n Julian Frost is leader of BDO’s global technology team and technology partner at BDO UK.

[DIARY DATES]

Events Face−to−face events LONDON

MANCHESTER

21 April 2015 Budget 2015 Seminar Microsoft, Cardinal Place, 80–100 Victoria Street, London, SW1E 5JL 18:30 to 20:30 2 CPD units

14 April 2015 Budget 2015 Seminar Ramada Salford Quays, 17 Trafford Road, Salford Quays, Manchester, M5 3AW 18:30 to 20:30 2 CPD units

19 May 2015 Intellectual Property Seminar – Dave Hopkins, Intellectual Property Office Microsoft, Cardinal Place, 80–100 Victoria Street, London, SW1E 5JL 18:30 to 20:30 2 CPD units 9 June 2015 Accountancy & Tax Conference Holiday Inn Bloomsbury, Coram Street, London, WC1N 1HT 09:00 to 17:00

12 May 2015 Intellectual Property Seminar – Dave Hopkins, Intellectual Property Office Ramada Salford Quays, 17 Trafford Road, Salford Quays, Manchester, M5 3AW 18:30 to 20:30 2 CPD units 20 October 2015 Charity Accounting Seminar – Jeff Prescott, Charities Commission Ramada Salford Quays, 17 Trafford Road, Salford Quays, Manchester, M5 3AW 18:30 to 20:30 2 CPD units

7 CPD units 8 September 2015 Finance for SMEs Conference Holiday Inn Bloomsbury, Coram Street, London, WC1N 1HT 09:00 to 17:00 7 CPD units 27 October 2015 Charity Accounting Seminar – Jeff Prescott, Charities Commission Holiday Inn Bloomsbury, Coram Street, London, WC1N 1HT 18:30 to 20:30 2 CPD units

NOTTINGHAM 11 June 2015 Accountancy & Tax Conference The University of Nottingham, University Park, Nottingham, NG7 2RD 09:00 to 17:00 7 CPD units 10 September 2015 Finance for SMEs Conference The University of Nottingham, University Park, Nottingham, NG7 2RD 09:00 to 17:00 7 CPD units

26 November 2015 Business Management & Development Conference The University of Nottingham, University Park, Nottingham, NG7 2RD 09:00 to 17:00 7 CPD units

DUBLIN 16 June 2015 Accountancy & Tax Conference Camden Court Hotel, Camden Street, Dublin 2 09:00 to 17:00 7 CPD units 15 September 2015 Practice Management & Development Conference Camden Court Hotel, Camden Street, Dublin 2 09:00 to 17:00 7 CPD units 1 December 2015 Accountancy & Tax Conference Camden Court Hotel, Camden Street, Dublin 2 09:00 to 17:00 7 CPD units Please note that AIA will adhere to the above programme in as far as possible. However, events may be subject to change and you should always refer to the website for the most current information: www.aiaworldwide.com/events.

24 November 2015 Business Management & Development Conference Holiday Inn Bloomsbury, Coram Street, London, WC1N 1HT 09:00 to 17:00 7 CPD units

SMALL PRACTICE/FEES wanted North west London accountant looking to buy practice or block of fees. send details in confidence to stuart.ika@talktalkbusiness.net

ISSUE 80: MARCH/APRIL 2015 INTERNATIONAL ACCOUNTANT 23

New CPD courses Network Leadership by Ai Khim Tuang – £70 Leaders today operate in a dynamic environment. Technological advancements and increased competition from globalisation have changed forever the way we work in organisations. In this new world of projects and teams, the top down, command and control leadership approach is no longer effective; to be a successful leader you need a new set of skills and techniques. Network leadership is not just a new way to lead, but also a new way of thinking. It is non-linear, dynamic and very much relationship based. It is a leadership style that focuses on improving others’ performance and bringing together other people’s contributions to improve overall effectiveness and organisational performance. This new CPD course helps you and your organisation adapt and make the most of this new approach.

Modelling Real World Complexities by Grant Thornton – £70 Financial models are powerful tools but not without their limitations. Ignoring the complexities and uncertainties of the real world can lead to unrealistic results. This course explains how to decide which complexities to include in your financial models and how to include them. You’ll be looking at what effect variable inputs, economic factors and scenario based inputs can have on models. The course also takes a look at the vital importance of the way in which data is presented, and how this can be a strength rather than a weakness. For more information on these courses please go to www. aiaworldwide.com/online-cpd

Full details and booking Full event listings and booking details are available at: www.aiaworldwide.com/events Alternatively you can contact the AIA Events Team on T: +44(0)191 493 0268 E: events@aiaworldwide.com

Online CPD courses COURSE TITLE

CPD UNITS

COST

NEW: Tax Tips Partnership Tax Tips for Accountants

£70.00

Property Tax Tips for Accountants

£70.00

Self-assessment Tips for Accountants

£70.00

Tax Investigations Tips for Accountants

£70.00

Anti-Money Laundering

£70.00

Assessing Going Concern

£25.00

Automatic Enrolment – A Guide for Accountants

£70.00

Corporate Governance

£70.00

Ethical Compliance

£70.00

Ethical Issues for Accountants

£70.00

Ethical Issues in Professional Relationships (Module from Ethical Issues for Accountants)

FREE

Forensic Accounting

£70.00

Getting to Grips with IFRS102

£70.00

Intellectual Property and New Ideas

£70.00

Managing the Transition to New UK GAAP

£70.00

Accounting and Governance

For more information on these courses please go to

24 INTERNATIONAL ACCOUNTANT ISSUE 80: MARCH/APRIL 2015

CPD UNITS

COST

Managing your Transition to IFRS

£70.00

Preventing Financial Crime

£70.00

Professionalism and Ethics for Accountants

£70.00

Risk Management

£70.00

Understanding New UK & Ireland GAAP

£70.00

Data Protection

£70.00

Employment Law for Accountants

£70.00

Equality and Diversity

£70.00

Freedom of Information

£70.00

Health and Safety

£70.00

Alternative Finance

£70.00

Building a Financial Model

£70.00

Financial Control in SMEs

£70.00

Financial Management in Turbulent Times

£70.00

Introduction to Financial Modelling

£70.00

Managerial Megatrends and Financial Controls

£70.00

COURSE TITLE

Business Compliance

Finance

www.aiaworldwide.com/online-cpd

Online CPD courses CPD UNITS

COST

Strategic Financial Management

£70.00

Working Capital Optimisation and Cash Flow Management

£70.00

COURSE TITLE

Financial Briefings (Republic of Ireland)

CPD UNITS

COST

Due Diligence in Mergers and Acquisitions

£70.00

Growing your Company through Acquisition

£70.00

Selling a Business

£70.00

COURSE TITLE

Capital Acquisitions Tax

£25.00

Practice Management

Capital Gains Tax

£40.00

Building and Growing your Firm

£70.00

Planning for your Firm

£70.00

Practice Models and Networks

£70.00

Promoting your Professional Practice

£70.00

Succession Planning

£70.00

Advanced Negotiation for Accountants

£70.00

Management Control Activity Based Management

£70.00

Business Performance Management

£70.00

Dynamic Budgetary Control

£70.00

Key Performance Indicators

£70.00

Making Budgeting Work in the Real World

£70.00

Becoming an Expert Witness

£70.00

Managing through a Recession

£70.00

Communicating Complex Ideas

£70.00

Outsourcing

£70.00

Conversations with Customers

£70.00

The Road to Continuous Improvement

£70.00

Customer Service

£70.00

Decision Making for Managers

£70.00

Developing Your Professional Career

£70.00

Management Thinking Coaching Skills for Accountants

Professional Skills

Conducting Performance Appraisals

£70.00

Effective Communication

Corporate Social Responsibility

£70.00

Enterprise & Entrepreneurship

£70.00

Grammar and Effective Writing for Accountants

£70.00

Innovation for Accountants

£70.00

Managing Workload for Accountants

£70.00

International and Remote Working

£70.00

Negotiation Skills – The Principles

£70.00

Leadership Skills for Accountants

£70.00

Negotiation Skills for Accountants

£70.00

Managing Change and Transformation

£70.00

Managing Risk in Social Media

£70.00

Managing from within the Team

£70.00

Project Management for Accountants

£70.00

Managing High Performing Teams

£70.00

Problem Solving for Accountants

£70.00

Managing Professionals for Results

£70.00

Social Media for Accountants

£70.00

Market Analysis for Accountants

£70.00

Recruitment and Selection

£70.00

The Professional Training Academy

Thinking Strategically for Accountants

£70.00

The Excel Club 2007 & 2010

£110.00

Working in Accounting and Finance Teams

£70.00

The Excel Club 2013

£140.00

Basic of IRFS Reporting

£90.00

Writing a Business Plan

£70.00

Power Pivot for the Excel User

£90.00

£70.00

Mergers and Acquisitions Buying a Business

For more information on these courses please go to

www.aiaworldwide.com/online-cpd ISSUE 80: MARCH/APRIL 2015 INTERNATIONAL ACCOUNTANT 25

[TECHNICAL]

TECHNICAL

2014/15 HONG KONG BUDGET HIGHLIGHTS ONE−OFF MEASURES

2014/15

2015/16

Types of tax

Salaries tax, tax under personal assessment and profits tax

Amount waived

75% of tax for 2012/13, capped at $10,000

75% of tax for 2013/14, capped at $10,000

Cash handout

Nil

PROPERTY TAX

2014/15

2015/16

15%

No change

2014/15

2015/16

STAMP DUTY

Stock Transactions Hong Kong Stock

0.2% per transaction (payable half by vendor and half by purchaser)

Property Transactions (Table 1) Property Consideration $0 - 2,000,000

$100

$2,000,001 - 2,351,760

$100 + 10% of excess over $2,000,000

$2,351,761 - 3,000,000

1.5%

$3,000,001 - 3,290,320

$45,000 + 10% of excess over $3,000,000

$3,290,321 - 4,000,000

2.25%

$4,000,001 - 4,428,570

$90,000 + 10% of excess over $4,000,000

$4,428,571 - 6,000,000

$6,000,001 - 6,720,000

$180,000 + 10% of excess over $6,000,000

$6,720,001 - 20,000,000

3.75%

$20,000,001 - 21,739,120

$750,000 + 10% of excess over $20,000,000

Above $21,739,120

4.25%

No change

Property Transactions on or after 23 Feb 2013 (Table 2) Double Stamp Duty Property Consideration $0 - 2,000,000

1.5%

$2,000,001 - 2,176,470

$30,000 + 20% of excess over $2,000,000

$2,176,471 - 3,000,000

3.0%

$3,000,001 - 3,290,330

$90,000 + 20% of excess over $3,000,000

$3,290,331 - 4,000,000

4.5%

$4,000,001 - 4,428,580

$180,000 + 20% of excess over $4,000,000

$4,428,581 - 6,000,000

$6,000,001 - 6,720,000

$360,000 + 20% of excess over $6,000,000

$6,720,001 - 20,000,000

7.5%

$20,000,001 - 21,739,130

$1,500,000 + 20% of excess over $20,000,000

Above $21,739,130

8.5%

Stamp duty in Table 1 (instead of Table 2) continues to apply to residential property acquired by a Hong Kong Permanent Resident who does not own any other residential property in Hong Kong at the time of acquisition or fulfillment of other conditions.

BUYER’S STAMP DUTY (BSD) Residential Property Transactions on or after 27 Oct 2012

2014/15

2015/16

15%

No change

Buyer’s Stamp Duty is also imposed on acquisition of residential properties on or after 27 Oct 2012 by any person (including companies) except a Hong Kong Permanent Resident.

26 INTERNATIONAL ACCOUNTANT ISSUE 80: MARCH/APRIL 2015

TECHNICAL PROFITS TAX RATES, DEDUCTIONS AND ALLOWANCES

2014/15

2015/16

Tax rate Corporations

16.5%

Unincorporated businesses Royalties to non-residents - Deemed assessable profits rate - Effective tax rate

15% 30% or 100% 4.95% or 16.5%

Deductions Charitable donations Intellectual property rights

Up to 35% of assessable profits 100% or 20% write-off for 5 years

Depreciation allowances Allowances for plant and machinery - Initial allowance - Annual allowance Commercial building allowance Industrial building allowance - Initial allowance - Annual allowance

60% 10%, 20% or 30% 4% 20% 4%

Manufacturing plant and machinery, and computer hardware and software

100% immediate write-off

Building refurbishment

20% write-off for 5 years

Environmental protection installations

20% write-off for 5 years

Environmental protection machinery

100% immediate write-off

Environment-friendly vehicles

100% immediate write-off

SALARIES TAX RATES, DEDUCTIONS AND ALLOWANCES

Standard tax rate Progressive tax rates

No change

2014/15

2015/16

15% First $40,000 - 2% Next $40,000 - 7% Next $40,000 - 12% Remainder - 17%

No change

Personal allowances* Single taxpayer

$120,000

Married couple

$240,000

1st to 9th child (year of birth)

$140,000 each

1st to 9th child (other years)

$70,000 each

$100,000

$120,000

No change

Single parent

$200,000

Dependent parent / grandparent Aged 55 to 59

- Basic

$20,000

- Additional, living with taxpayer

$20,000

Aged 60 or above - Basic

$40,000

- Additional, living with taxpayer

Disabled dependent

$66,000

Dependent brother / sister

$33,000

No change

Deductions Charitable donations

Up to 35% of assessable income

Self education expenses

Up to $80,000

Home mortgage interest (up to 15 years)

Up to $100,000

Elderly residential care expenses

Up to $80,000

Contributions to recognised retirement schemes

Up to $17,500

No change

Up to $18,000

* Personal allowances are only applicable to progressive tax rates calculation.

ISSUE 80: MARCH/APRIL 2015 INTERNATIONAL ACCOUNTANT 27

[TECHNICAL]

TECHNICAL SPECIAL STAMP DUTY (SSD)

2014/15

2015/16

Residential Property Transactions between 20 Nov 2010 and 26 Oct 2012 Period of Ownership 6 months or less

15%

More than 6 months but for 12 months or less

10%

More than 12 months but for 24 months or less

No change

Residential Property Transactions on or after 27 Oct 2012 Period of Ownership 6 months or less

20%

More than 6 months but for 12 months or less

15%

More than 12 months but for 36 months or less

10%

No change

Special Stamp Duty is also imposed on any seller (including companies) for disposal of residential properties acquired during the above relevant periods and resold within specific time limit of ownership.

BUSINESS REGISTRATION FEES

2014/15

2015/16

Fee Main business (1 year certificate) Branch business (1 year certificate)

RATES Percentage charge

Levy Main business (1 year certificate)

$250

Branch business (1 year certificate)

$250

2015/16 No change

First 2 quarters

One-off waiver

$2,000 $73

2014/15 5% on rateable value

No change

Number of quarters Ceiling

$1,500/quarter/tenement $2,500/quarter/tenement

* Levy is reduced to HK$250 effective from 19 July 2013.

DUTY ON ALCOHOLIC BEVERAGE

2014/15

Liquor with an alcoholic strength of more than 30% by volume

100%

Liquor with an alcoholic strength of not more than 30% by volume (except wine)

Wine

Duty-free concessions

2014/15

Cigarettes

$2,455/kg

Chinese prepared tobacco

$468/kg

All other manufactured tobacco except those intended for the manufacture of cigarettes

Environment-friendly petrol private cars Environment-friendly commercial vehicles meeting the Euro V emissions standards Electric vehicles

2015/16

$1,906/1,000 sticks

Cigars

FIRST REGISTRATION TAX ON VEHICLES

No change

1 litre of alcoholic beverages

DUTY ON TOBACCO

Duty-free concessions

2015/16

$2,309/kg

No change

19 cigarettes or 1 cigar or 25 grams of other manufactured tobacco 2014/15

2015/16

45% tax reduction, capped at $75,000/car 30%, 50% or 100% tax reduction, depending on types of vehicles and subject to vehicle-class-specific caps per vehicle

Tax reductions will terminate on 1st April^

Exempt^^

No change

Other private vehicles

Taxable value

Rates

First $150,000

40%

Next $150,000

75%

Next $200,000

100%

Remainder

115%

No change

^ Announced by The Environmental Protection Department on 24th February 2015. ^^ Exemption extended to 31st March 2017

The information contained in this publication is based on the Budget proposals announced by the Financial Secretary on Wednesday, 26 February 2015. The Budget proposals will be subject to review and modification by the Legislative Council prior to the enactment of the legislation.

28 INTERNATIONAL ACCOUNTANT ISSUE 80: MARCH/APRIL 2015

[TECHNICAL]

TECHNICAL INTERNATIONAL IFAC WELCOMES REVIEW GROUP REPORT TO ENHANCE GOVERNANCE ARRANGEMENTS FOR PUBLIC SECTOR ACCOUNTING STANDARDS The International Federation of Accountants (IFAC) welcomes the release of the International Public Sector Accounting Standards Board (IPSASB) Governance Review Group report on the future governance of the IPSASB, which is an important milestone in further strengthening its governance and credibility. “We fully support the recommendations of the review group, and believe it will strongly enhance the robustness of the standard setting arrangements and ultimately improve the legitimacy and acceptance of the International Public Sector Accounting Standards (IPSASs) across the globe,” said Fayez Choudhury, chief executive officer of IFAC. “High-quality internationally accepted standards provide the necessary foundation for high quality financial reporting in the public sector — an area that needs vast improvement in many jurisdictions around the world, and which leads to better government decision making, transparency and accountability.” Following a public consultation early last year, the review group made several important recommendations, including that: • a governance body, the Public Interest Committee, be established to ensure that the public interest is served by the standard setting activities of the IPSASB; • the committee’s membership should include, but not be limited to, individuals from the IMF, OECD, World Bank Group and INTOSAI; • the committee’s objectives should be to review and advise IFAC and the IPSASB on (i) the terms of reference of the IPSASB; (ii) the arrangements for nomination and appointment of IPSAB members; and (iii) the procedures and processes for formulation of the IPSASB’s strategy and work plan and development of IPSASs to ensure that the views of all relevant stakeholders are sought and given due consideration; • the committee should not have a direct role in the development, adoption, and implementation of public sector accounting standards; • IFAC should establish a Consultative Advisory Group (CAG) for the IPSASB; and • a public consultation on the effectiveness of the IPSASB’s reformed governance arrangements should be undertaken no later than 2020. “The recommendations represent strong support for robust and balanced standard setting arrangements, whereby the involvement of the profession, public sector and international organisations ensure that the standards that are produced are in the public interest and are high quality — and can be practically implemented.” Mr. Choudhury added, “IFAC is highly appreciative of the work done by the review group and its members and looks forward to working with these organisations to put the new arrangements in place in 2016.”

IPSASB PUBLISHES IPSAS ON ACCOUNTING FOR INTERESTS IN OTHER ENTITIES The International Public Sector Accounting Standards Board® (IPSASB®) has published the following five International Public Sector Accounting Standards (IPSASs): • IPSAS 34, Separate Financial Statements; • IPSAS 35, Consolidated Financial Statements; • IPSAS 36, Investments in Associates and Joint Ventures; • IPSAS 37, Joint Arrangements; and • IPSAS 38, Disclosure of Interests in Other Entities. These five standards will replace current requirements in: • IPSAS 6, Consolidated and Separate Financial Statements;

• IPSAS 7, Investments in Associates; and • IPSAS 8, Interests in Joint Ventures. A key part of the IPSASB’s strategy to develop high-quality public sector financial reporting standards is to maintain existing IPSASs. IPSASs 6, 7, and 8 are based on International Financial Reporting Standards (IFRSs). Because the underlying IFRSs have changed, the IPSASB has developed IPSASs 34–38 so that convergence with the related IFRSs is maintained to the extent appropriate. These IPSASs also incorporate important guidance to make them appropriate for application in the public sector. “These five IPSASs establish requirements for how public sector entities, including governments, should account for their interests in other entities,” said IPSASB chair Andreas Bergmann. “Accrual based accounting practices provide a comprehensive picture of the financial performance and position of public sector entities. Appropriate accounting for interests in other entities is an important aspect of this comprehensive picture.” The following highlights particular aspects of each IPSAS: IPSAS 34, Separate Financial Statements The requirements for separate financial statements in IPSAS 34 are very similar to the current requirements for separate financial statements in IPSAS 6. IPSAS 35, Consolidated Financial Statements IPSAS 35 supersedes the requirements in IPSAS 6 regarding consolidated financial statements. IPSAS 35 still requires that control be assessed having regard to benefits and power, but the definition of control has changed and the standard now provides considerably more guidance on assessing control. The definition of control focuses on an entity’s ability to influence the nature and amount of benefits through its power over another entity. This new definition of control may impact previous assessments of control, and therefore whether certain entities should be consolidated. IPSAS 35 introduces the concept of “investment entities,” which may be applicable to some sovereign wealth funds. Generally, an investment entity measures its investments in controlled entities at fair value through surplus or deficit. After thorough consultation, the IPSASB decided, for public sector specific reasons, that an entity which controls an investment entity should retain this method of accounting for an investment entity’s investments in its consolidated financial statements, regardless of whether it is itself an investment entity. In contrast with IPSAS 6, IPSAS 35 no longer permits an exemption from consolidation for temporarily controlled entities. Consistent with the IPSASB’s policy of reducing unnecessary differences between IPSASs and Government Finance Statistics reporting guidelines, the IPSASB has aligned the principles in IPSAS 35 with the Government Finance Statistics Manual 2014 (pre-publication draft) where feasible. IPSAS 36, Investments in Associates and Joint Ventures IPSAS 36 explains the application of the equity method of accounting, which is used to account for investments in associates and joint ventures. The requirements are very similar to the current guidance in IPSAS 7. Because equity accounting must now be used when accounting for joint ventures, the title of the standard now also refers to joint ventures. In contrast with IPSAS 7, IPSAS 36 does not permit a different accounting treatment for temporary investments. IPSAS 37, Joint Arrangements IPSAS 37 establishes requirements for classifying joint arrangements and accounting for those different types of joint arrangements. Joint arrangements are classified as either joint operations or joint ventures.

ISSUE 80: MARCH/APRIL 2015 INTERNATIONAL ACCOUNTANT 29

[TECHNICAL]

In a joint operation, the parties to the arrangement have rights to the assets and obligations for the liabilities relating to the arrangement. In a joint venture, the parties to the arrangement have rights to the net assets of the arrangement. These classifications differ from IPSAS 8, which referred to three types of arrangements (jointly controlled entities, jointly controlled operations, and jointly controlled assets). IPSAS 37 requires that an entity account for its interest in a joint operation by recognising its share of the assets, liabilities, revenue, and expenses of the joint arrangement. It also requires that joint ventures be accounted for using the equity method. Previously, IPSAS 8 permitted jointly controlled entities to be accounted for using either the equity method or proportionate consolidation. IPSAS 38, Disclosure of Interests in Other Entities IPSAS 38 brings together the disclosures previously included in IPSASs 6–8. It also introduces new disclosure requirements, including those related to structured entities that are not consolidated and controlling interests acquired with the intention of disposal.

STATEMENT IN RESPONSE TO THE EUROPEAN COMMISSION’S GREEN PAPER ON A CAPITAL MARKETS UNION The IFRS Foundation, which is responsible for the governance and oversight of the International Accounting Standards Board (IASB), supports the goal of the proposed Capital Markets Union (CMU) to increase the role that capital markets play in financing the European economy. A single set of financial reporting requirements can play a fundamental role in the creation of a CMU, providing comparable and transparent information that allows investors to make informed investment decisions without acting as an impediment to companies wishing to raise capital. Feedback to the European Commission’s recent consultation on the use of International Financial Reporting Standards (IFRS) in the European Union has shown high levels of satisfaction among investors and companies. IFRS has also resulted in the financial reports of European companies being understood worldwide. However, as business models, practice and markets change, the IASB works to ensure that financial reporting continues to meet the needs of market participants and has a number of continuing initiatives to improve the usefulness of financial statements produced by all companies, such as its Disclosure Initiative. We will co-operate closely with the European Commission on this important project and will share our views on the Green Paper.

IASB PUBLISHES PROPOSALS TO CLARIFY THE WAY IN WHICH LIABILITIES ARE CLASSIFIED The International Accounting Standards Board (IASB) has published for public comment the Exposure Draft Classification of Liabilities (Proposed amendments to IAS 1), which clarifies how entities classify debt, particularly when it is coming up for renewal. The proposed amendments are designed to improve presentation in financial statements by clarifying the criteria for the classification of a liability as either current or non-current. The proposed amendments do this by: • clarifying that the classification of a liability as either current or non-current is based on the entity’s rights at the end of the reporting period; and • making clear the link between the settlement of the liability and the outflow of resources from the entity. The proposals are open for public comment for 120 days. Comments on the proposed amendments should be sent to the IASB by 10 June 2015. The Exposure Draft can be accessed from the Open for comment section of the IFRS website.

INTERNATIONAL AUDIT REGULATORS EXPRESS

30 INTERNATIONAL ACCOUNTANT ISSUE 80: MARCH/APRIL 2015

CONCERN OVER CONTINUED SIGNIFICANT DEFICIENCIES IN AUDITS OF PUBLIC COMPANIES The recurrence of high levels of deficiencies in key areas of public company audits around the world demonstrates the need for audit firms to pursue initiatives to improve audit quality and the consistency of audit execution, the International Forum of Independent Audit Regulators (IFIAR) reported. IFIAR’s 2014 Survey of Inspection Findings found the highest number of audit inspection deficiencies in the areas of fair value measurement, internal control, and revenue – topics among the core building blocks of audited financial statements. The rate of deficiencies in these audited areas, measured as the percentage of all inspected audits for these areas, also is high: • internal control testing: 24%; • fair value measurement: 20%; and • revenue recognition: 14%. For audits of systemically important financial institutions (SIFIs), including global banks and insurers, the survey found the highest number of deficiencies related to auditing of allowance for loan losses and loan impairments, internal control testing, and auditing the valuation of investments and securities. “We continue to see high levels of inspection deficiencies in vital areas of public company audits. This is a problem for investors and stakeholders around the world,” said Lewis H. Ferguson, IFIAR chair and board member of the US Public Company Accounting Oversight Board. Report on 2014 Inspection Findings IFIAR’s Report on 2014 Inspection Findings Survey summarises key inspection results from audits of public companies, including systemically important financial institutions, submitted by 29 IFIAR members from around the world. These results came from inspection reports issued during the members’ most recent annual reporting periods that ended by July 2014: • The areas with most deficiencies in inspected audits of listed public interest entities, or public companies, relate to auditing fair value measurements; internal control testing; and revenue recognition. • The areas with most deficiencies in audits of systemically important financial institutions, including global systemically important banks and insurers, relate to auditing of allowance for loan losses and loan impairments; internal control testing; and auditing of the valuation of investments and securities. • Audit firms’ own quality control systems had the highest number of inspection findings in the areas of engagement performance; independence and ethics requirements; and human resources. Most of these findings are consistent with the results of IFIAR’s prior surveys, although the survey does not provide an adequate basis for year-over-year trend analysis of the quality of audit performance.

UK AND IRELAND FRC AMENDS FRS 102 RELATING TO PENSION OBLIGATIONS The Financial Reporting Council (FRC) has issued Amendments to FRS 102 – Pension obligations to clarify aspects of the accounting for defined benefit pension plans by UK and Irish entities. The amendments enable sponsoring employers reporting under UK and Irish GAAP to continue with current practice in accounting for defined benefit pension schemes. Specifically: • no additional liability need be recognised for a “schedule of contributions” that has been agreed in order to address a plan deficit when the deficit itself has already been recognised; and • the effect of not recognising an irrecoverable surplus in a defined benefit plan is shown in other comprehensive income, rather than profit or loss.

[TECHNICAL]

TECHNICAL Melanie McLaren, executive director of codes and standards, said about these amendments: “The FRC is pleased to be able to clarify for entities applying FRS 102 for the first time that a practical and proportionate reporting basis can be used.” The amendments have the same effective date as FRS 102, and are applicable to accounting periods beginning on or after 1 January 2015.

FRC CONSULTS ON AMENDMENTS TO UK AND IRISH GAAP Following publication of the government’s decision on the UK implementation of the EU Accounting Directive, the FRC has issued its proposals to amend UK and Irish accounting standards. The proposals will benefit 1.5 million of the smallest companies (“micro-entities”) in the UK by simplifying their reporting requirements. There will also be changes for the 1.5 million other companies that fall within the “small” company size threshold, including improving accounting for financial instruments and supporting the implementation of legislative changes. Listed groups will benefit from greater flexibility and greater efficiency in reporting formats. Melanie McLaren, executive director of codes and standards, said: “Our proposals support the implementation of the new Accounting Directive in the UK and the Republic of Ireland. They simplify reporting for some entities and are intended to assist the directors of small entities in applying their judgement to the new presentation and disclosure requirements of the Accounting Directive. “Overall we believe our proposals provide a consistent framework for reporting by all entities in the UK and Republic of Ireland, building on the legal framework and proportionately tailored to the size of the entity and users’ information needs.” Key aspects of the proposals include: • the withdrawal of the FRSSE (Financial Reporting Standard for Smaller Entities) for accounting periods beginning on or after 1 January 2016; • a new accounting standard for micro-entities offering some simplifications in accounting; • new recognition and measurement requirements for other small companies aligned with new UK GAAP, and disclosure requirements based on the new legal framework; and • greater flexibility in relation to the format of the profit and loss account and balance sheet in FRS 101, allowing the use of IFRS based presentation requirements similar to those used for group accounts. The proposals are intended to be effective for accounting periods beginning on or after 1 January 2016, with early application permitted for accounting periods beginning on or after 1 January 2015. The proposals are open for comment until 30 April 2015 and the final standards and amendments are expected to be issued in July 2015.

MINISTER SIGNS TRANSPARENCY (DIRECTIVE 2004/109/EC) (AMENDMENT) REGULATIONS 2015 (S.I. NO. 44 OF 2015) The Minister for Jobs, Enterprise and Innovation has signed the Transparency (Directive 2004/109/EC) (Amendment) Regulations 2015 (SI No. 44 of 2015), which are effective from 9 February 2015. These Regulations amend Regulation 8 of the Transparency (Directive 2004/109/EC) Regulations 2007 (S.I. No. 277 of 2007) (“the Regulations”) by substituting “Financial Reporting Council” (FRC) for “Auditing Practices Board” (Regulation 8(4)(a)), “Auditing Practices Board” (regulation 8(4)(b), and “Accounting Standards Board” (Regulation 8(5)(d)(ii)). These amendments incorporate the changed FRC organisational structures and responsibilities for setting financial reporting and auditing standards for those entities that are subject to the Regulations. The Regulations also:

• amend Regulation 43 of the Transparency (Directive 2004/109/EC) Regulations 2007 (SI No. 277 of 2007) by inserting a new Regulation 43(3) which permits IAASA to make public in such manner as IAASA considers appropriate, details of: • an administrative measure taken as a result of an examination of information by IAASA under Regulation 42(2) for the purpose of considering whether such information is in accordance with the relevant reporting framework; and • an action taken by an issuer or director in response to an administrative measure taken as a result of an examination of information by IAASA under Regulation 42(2) for the purpose of considering whether such information is in accordance with the relevant reporting framework. This will allow for greater transparency by IAASA in reporting its accounting enforcement activities and, in particular, where infringements of the relevant reporting framework have been identified.

ASIA PACIFIC MASB ISSUES NARROW SCOPE AMENDMENTS TO STANDARDS The Malaysian Accounting Standards Board (MASB) has issued the following pronouncements: 1. Malaysian Financial Reporting Standards (MFRSs) ii. Disclosure Initiative (Amendments to MFRS 101) iii. Investment Entities: Applying the Consolidation Exception (Amendments to MFRS 10, MFRS 12 and MFRS 128) 2. Financial Reporting Standards (FRSs) iii. Disclosure Initiative (Amendments to FRS 101) iv. Investment Entities: Applying the Consolidation Exception (Amendments to FRS 10, FRS 12 and FRS 128) These standards are equivalent to the International Financial Reporting Standards (IFRSs) issued by the International Accounting Standards Board (IASB). ABOUT THE PRONOUNCEMENTS Disclosure Initiative (Amendments to MFRS 101) The Amendments aim to improve the effectiveness of disclosures and are designed to encourage companies to apply professional judgement in determining the information (including where and in what order) to be disclosed in the financial statements. The Amendments mark the completion of the five narrow-focus improvements to disclosure requirements the IASB identified following its 2013 Discussion Forum. The Amendments are effective for annual periods beginning on or after 1 January 2016, with early application permitted. Similar Amendments are also made to FRS 101 Presentation of Financial Statements. INVESTMENT ENTITIES: APPLYING THE CONSOLIDATION EXCEPTION (Amendments to MFRS 10, MFRS 12 and MFRS 128) The Amendments aim to address issues that have arisen in the application of the consolidation exception for investment entities. The Amendments also provide relief in particular circumstances, which will reduce the costs of applying the Standards. The Amendments clarify the exemption from preparing consolidated financial statements for an intermediate parent entity, a subsidiary providing services that relate to the parent’s investment activities, application of the equity method by a non-investment entity investor to an investment entity investee and the disclosures required. The Amendments apply retrospectively and are effective for annual periods beginning on or after 1 January 2016, with early application permitted. Similar Amendments are also made to FRSs.

ISSUE 80: MARCH/APRIL 2015 INTERNATIONAL ACCOUNTANT 31

[TECHNICAL]

TECHNICAL ACRA ISSUES REVISED CODE OF PROFESSIONAL CONDUCT AND ETHICS FOR PUBLIC ACCOUNTANTS AND ACCOUNTING ENTITIES The Accounting and Corporate Regulatory Authority (ACRA) has issued the revised Code of Professional Conduct and Ethics for Public Accountants and Accounting Entities (the ACRA Code). This follows ACRA’s announcement in November 2014, of revisions to the ACRA Code to further strengthen it. The ACRA Code serves as a vital set of guiding principles for public accountants to rely on and enable them to make the right decisions when faced with conflicting choices between economic interests and ethical considerations. In consultation with key stakeholders in the public accounting sector, the effective date of the ACRA Code will be revised to 1 July 2015 instead of 1 February 2015 as previously announced. The change in effective date is in response to feedback from the public accounting profession for more time to prepare for and implement the necessary practices required, so as to meet the requirements of the revised ACRA Code. The ACRA Code is largely based on the Code of Ethics for Professional Accountants, 2013 Edition, issued by the International Ethics Standards Board for Accountants (IESBA) and published by the International Federation of Accountants (IFAC) in May 2013 (2013 IESBA Code), and subsequent final pronouncements to the 2013 IESBA Code up to September 2013, with modifications and provisions that address local needs in Singapore. Provisions are re-numbered to align the numbering with that of the Code of Ethics for Professional Accountants, 2014 Edition. The text in the ACRA Code reproduces, with the permission of IFAC, all or part of the 2013 IESBA Code, and subsequent final pronouncements to the 2013 IESBA Code up to September 2013, issued by IESBA and published by IFAC. Reproduction allowed within Singapore. All existing rights, including the copyright, are reserved outside Singapore. Further information can be obtained from IFAC at www.ifac.org or by writing to permissions@ifac.org.

UNITED STATES 2015 GAAP FINANCIAL REPORTING TAXONOMY ADOPTED AND SUPPORTED BY SEC The Financial Accounting Standards Board (FASB) has announced that the US Securities and Exchange Commission (SEC) adopted the 2015 GAAP Financial Reporting Taxonomy. The FASB staff is responsible for the ongoing development and maintenance of the Taxonomy applicable to public issuers registered with the SEC. The GAAP Financial Reporting Taxonomy contains updates for accounting standards and other improvements to the official Taxonomy previously in use by SEC issuers. The GAAP Financial Reporting Taxonomy is a list of computer readable tags in eXtensible Business Reporting Language (XBRL) format that allows companies to tag precisely the thousands of pieces of financial data that are included in typical long-form financial statements and related footnote disclosures. The tags allow computers to automatically search for, assemble, and process data so it can be readily accessed and analyzed by investors, analysts, journalists, and regulators. The 2015 GAAP Taxonomy is available here. Questions about using this Taxonomy for creating and submitting XBRL tagged interactive data files in compliance with SEC rules should be directed to the SEC. The SEC contact details and guidance are available at the SEC’s portal on XBRL. In early 2010, the Financial Accounting Foundation (FAF), parent organisation to the FASB, assumed maintenance responsibilities for the

32 INTERNATIONAL ACCOUNTANT ISSUE 80: MARCH/APRIL 2015

Taxonomy. The FAF and the FASB, assembled a team of technical staff dedicated to updating the Taxonomy for changes in GAAP, identifying best practices in Taxonomy extensions, and technical enhancements. Those interested in learning more about the 2015 GAAP Financial Reporting Taxonomy are invited to participate in a live CPE webcast called IN FOCUS: 2015 GAAP Financial Reporting Taxonomy, Changes and Beyond, Taxonomy Implementation Guides, and SEC Update. Offered free of charge, the webcast takes place on Thursday, April 2, 2015, from 1:00 to 2:15 p.m. Eastern Daylight Time. Participants in the live broadcast will be eligible for up to 1.5 hours of CPE credit. (Please note that CPE credit is not available for group viewing of the live broadcast.) To register or to learn more about the webcast, log on to www.fasb.org.

FASB ISSUES ACCOUNTING STANDARDS UPDATE TO IMPROVE CONSOLIDATION GUIDANCE FOR LEGAL ENTITIES The Financial Accounting Standards Board (FASB) issued an Accounting Standards Update (ASU) intended to improve targeted areas of consolidation guidance for legal entities such as limited partnerships, limited liability corporations, and securitisation structures (collateralised debt obligations, collateralised loan obligations and mortgage backed security transactions). FASB ASU No. 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis, focuses on the consolidation evaluation for reporting organisations (public and private companies and not-for-profit organisations) that are required to evaluate whether they should consolidate certain legal entities. “Stakeholders were concerned that current guidance in certain consolidation situations does not provide useful information — resulting in users requesting supplemental deconsolidated financial statements to analyze the reporting company’s economic and operational results,” said FASB chairman Russell G. Golden. “This new standard simplifies consolidation accounting by reducing the number of consolidation models, providing incremental benefits to stakeholders. For example, specialised guidance for legal entities will be eliminated by removing the indefinite deferral for certain investment funds, and certain money market funds will no longer have to apply the guidance.” In addition to reducing the number of consolidation models from four to two, the new standard simplifies the FASB Accounting Standards Codification® and improves current Generally Accepted Accounting Principles (GAAP) by: • placing more emphasis on risk of loss when determining a controlling financial interest. A reporting organisation may no longer have to consolidate a legal entity in certain circumstances based solely on its fee arrangement, when certain criteria are met; • reducing the frequency of the application of related-party guidance when determining a controlling financial interest in a variable interest entity (VIE); and • changing consolidation conclusions for public and private companies in several industries that typically make use of limited partnerships or VIEs. The ASU will be effective for periods beginning after December 15, 2015, for public companies. For private companies and not-for-profit organisations, the ASU will be effective for annual periods beginning after December 15, 2016; and for interim periods, beginning after December 15, 2017. Early adoption is permitted, including adoption in an interim period. More information on the standard is available on the FASB website.

Apply for An AIA AudIt ScholArShIp SucceSSful ApplIcAntS receIve: ■ Free AIA e-books ■ Free access to the AIA e-learning study course ■ Free access to AIA events pluS ■ No exam fees ■ No exemption fees contAct AIA 0191 493 0286 www.aiaworldwide.com /Audit recruitment@aiaworldwide.com

CREATING WORLD CLASS ACCOUNTANTS

ARE YOU OBJECTIVE, LOGICAL AND ENQUIRING, WITH STRONG ANALYTICAL SKILLS?

do you WAnt An eXcItInG neW cAreer In AudIt? *You must be resident in the UK/EU and meet the minimum entry requirements.

FREE

APP

Book includes a code to download your free Whillans Calc app

TACKLE SMALL AND LARGE SCALE TAXES Whillans’s Tax Tables 2015-16 Whillans’s Tax Tables provide all the new and revised tax rates, allowances and reliefs.

Order online to receive free postage and packaging www.lexisnexis.co.uk/whillans2015

Reed Elsevier (UK) Limited trading as LexisNexis. Registered office 1-3 Strand London WC2N 5JR Registered in England number 2746621 VAT Registered No. GB 730 8595 20. LexisNexis and the Knowledge Burst logo are trademarks of Reed Elsevier Properties Inc. © LexisNexis 2015 0115-102. The information in this document is current as of February 2015 and is subject to change without notice.