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The impact of ISA changes on the sports sector
Changing International Standards on Auditing and its impact on the sport sector
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Two significant changes to the International Standards on Auditing (ISA) are now in place for year ends from 31 December 2020 onwards. Greater scrutiny, expectations and fines on audit firms means more work and resources are now necessary to complete an audit, and that could affect your bottom line. Tom Wilson, partner at haysmacintyre, covers the key changes and how to prepare for them.
Early in 2020, I wrote an article on the regulatory audit environment and its potential importance. A relatively dry subject but also an important one for Finance Directors working in the sector. The reason why I am revisiting this topic is because two significant changes to the International Standards on Auditing (ISA) are now in place for year ends from 31 December 2020 onwards.
Why should you be concerned about this?
Simple economics: greater scrutiny, expectations and fines on firms means more work and resources are now necessary to complete an audit. There are several areas under particular scrutiny by regulators, but the key areas under reform are going concern and the auditing of key judgements and estimates.
Auditing standard on going concern (ISA 570)
Auditors have had a head start in this area over the last twelve months, and the impact the pandemic has had on income streams and sustainability figure strongly in these assessments. Whilst we have been producing detailed cashflow forecasts with sensitivity to show how the organisation will be able to pay its debts, auditors must demonstrate an organisation’s ability to remain viable in a post-pandemic world. This requirement is more intensive for auditors and more onerous for company directors. There will be less room for the audit partner to use their judgment as ISA 570 requires auditors to provide a robust challenge to the assumption of going concern. On top of this, soft guarantees of funding of budget shortfalls are unlikely to meet the standard of proof. In the instances where there are fewer certain guarantees, there are likely to be more instances of emphasis of matter paragraphs in audit reports.
While the burden of challenge rests with the auditors, it is vital for organisations to be prepared: and documentation of what Finance Directors have done to review the going concern assumption will be required. This is particularly important as we begin to exit the pandemic.
Auditing Standard on accounting estimates and key judgements (ISA 540).
Whilst this standard is not new, this revision is significantly more prescriptive, itemising several new areas auditors must cover. The key changes concern: risk assessments of all significant areas of judgements and estimates within a set of financial statements, assessments of relevant controls surrounding estimates, and the completion of one of three procedures – review of post year end outcomes, review an entity’s calculation or reperformance of the calculation, and corroborate that calculation. There are specific references in the standard to evidencing professional scepticism
challenging bias, meaning auditors must prove that they’ve challenged your judgements.
Why is this important?
It will lead to a fresh look at very subjective areas of financial statements and challenge of historic practices. It will raise the bar to satisfy your audit partner that your policy’s regarding estimated areas of the financial statements are correct. Therefore, your financial statements could be impacted, which may also include commercial consequences. If you are an organisation who is impacted by financial fair play rules, it may also impact your adherence.
One example of an estimate which may be challenged is the amortisation of player contracts, and more specifically, residual value rules. This area of the accounting standard has always been there, even prior to FRS 102, but is rarely used. The reason why is due to the difficulty in substantiating the residual value. There is some logic to using the residual value rules for player amortisation, however justifying what that residual value is will be challenging, especially for certain time periods (particularly in the Bosman era). These valuations are a key focus of the audit regulator and therefore detailed and evidenced valuations of all players on the registration register will be necessary for the accounts to be signed off. Reviewing your book values for impairment and your overall policy may be worthwhile to consider.
Asset valuations will also be scrutinised carefully: property valuations, for example, are open to a number of different estimation and valuation techniques. If you hold investment property, it is likely external valuations will be necessary to corroborate your figures in the financial statements, which could impact bottom line profit. Secondly, valuation of other assets such as intangibles and goodwill could be scrutinised further through impairment reviews to prove their valuation. Again, any write-offs will impact profit and loss. Finally, stock or debtor provisions or provisions for liabilities will come under this standard and justifications will be needed to ensure appropriate valuation of these.
In advance of your year end, it is recommended that you review your accounting estimates and judgements and ensure you can explain how they have been valued for your financial statements. It is worth documenting why you use the methodology you do. Where necessary, consider the need for external valuations or impairment reviews of certain assets.
Ultimately, what seems like two small changes to an obscure auditing standard could have definitive, measurable impact on your financial position if they are not considered in time for your annual audit. ◆
