by John McCarthy Consulting Ltd. | Nov 13, 2015 | News
The Consultative Committee of Accountancy Bodies (CCAB) in the UK has issued two new guides entitled ‘Accountants and Counter-Terrorist Financing and ‘Staying Safe within The Money Laundering Regulations’ for its accountant members.
These latest updates act as a useful reminder of some 13 essential steps that every accounting entity and Money Laundering Reporting Officer (MLRO) should already be implementing.
It is worth re-visiting these essential steps now. The guide states that you should:
1. Know your client and their business;
2. Appoint a MLRO and train your staff as to their obligations (as part of the training, the staff need to complete some form of assessment to prove they have understood the training);
3. Record and monitor details of the client’s identity;
4. Monitor money laundering identity evidence and report to the MLRO and
5. Record the MLRO’s decisions to report externally or not.
Being practical about all this means that there are eight things relating to AML for every client that need to be in place at all times:
1. Risk assessment (RA) of the client and their business;
2. Evidence of identity that the client actually exists (photo and address ID);
3. List of the names of the management of the entity;
4. Based on RA – get evidence of identity for management;
5. List of beneficial owners (BO)> 25% of capital/profits/votes;
6. Based on RA – get evidence of identity for BO – these must always be individuals;
7. Sufficient Know Your client (KYC) information about the company to help understand what is ‘normal’ for the client and
8. Written evidence should be available that steps 1-7 are always up to date.
When the client is an individual, you need to have evidence that numbers 1, 6, 7 and 8 are in place.
Last of all, carry out a regular documented review (called an Annual Compliance Review) of all the above and retain evidence of this review, even if there is no need to change the risk rating or due diligence carried out on your clients.
To hear more about your AML risks and responsibilities come to our three hour CPD course on 16 December 2015 at the Camden Court, Hotel Dublin 2, from 9.30am to 12.30pm. For booking and more information go to EventBrite
by John McCarthy Consulting Ltd. | Nov 12, 2015 | News
Bad Debts and FRS 102 – Specific Documentation Please
Things were a lot simpler five hundred years ago in 1515 and that’s an understatement. Luca Pacioli, generally recognised as the father of modern accounting, had two years left to live and accounting for bad debts was much less complex then than under the new FRS 102.
For accounting periods commencing on or after 1 January 2015, the accounting rules have changed for measuring and recognising bad debts. Under old Irish/UK GAAP bad debts were dealt with under the rules for provisions in FRS 12. Provisions in FRS 102 are covered by Section 27 ‘Impairment of Assets’ but the scope section specifically excludes ‘financial assets within the scope of Section 11 Basic Financial Instruments or Section 12 Other Financial Instruments Issues’.
As regards specific bad debt provisions the concept under new GAAP is that a bad debt is seen as an impairment of an asset while under the old rules it was regarded as a provision in case a debt goes bad. It is not acceptable under FRS 102 to make a general bad debt provision.
Because the comparatives for 2014 will also need to change, (and they will have been prepared under old GAAP) there will be a potential impact on the figures already calculated and a knock-on effect on the amount that is tax deductible. The Revenue Commissioners have introduced a five year spreading mechanism in Section 42 FA 2014 which amends Schedule 17A TCA 1997 for these and similar types of difference.
The comments here are based on the Financial Reporting Council (FRC) Staff Education Note 3 (there are 16 SENs issued to date and all are well worth reading).
Current Irish and UK accounting standards
There is a general requirement in Irish/UK company law that current assets must not be stated at more than their net realisable value. For those entities not applying FRS 26, there is little detail in current UK accounting standards on impairment of current financial assets (as opposed to fixed assets and goodwill, which are covered by FRS 11 Impairment of Fixed Assets and Goodwill). The route to justifying the quantum of bad debt provisions in the future is more complex.
FRS 102
The requirements in Section 11 of FRS 102 for impairment of financial assets make it clear that to record a write down (which a provision, in effect, is), there needs to be objective evidence, for an asset or group of assets, that there is an impairment. It would be wise to document that objective evidence, especially if your financial statements are subject to audit.
The standard gives a (non-exhaustive) hierarchy in paragraphs 11.22 and 11.23 of examples of objective evidence, which includes adverse changes in industry conditions. A blanket percentage (or general provision) applied to the whole sales ledger, while prudent, can no longer be justified in terms of the language in FRS 102.
As SEN 3 states ‘it may not be sufficient to only use days past due to calculate bad debt provisions (i.e. impairment losses on trade debtors). It is likely that the debtors will need to be stratified by more than just days past due, in order to reflect other credit risk characteristics, and the formula needs to reflect actual experience of delinquency, which is expected to continue. Such formulae would need to be kept under active review, and reflect changes in credit risk characteristics, such as a change in the customer base, not just historical loss experience.’
The bottom line is to retain certain documented experience of bad debts e.g. debts that age past 120 days which may often not be settled, so that a provision could be put in place for some or all of those balances.
by John McCarthy Consulting Ltd. | May 26, 2015 | News
There are some unintended consequences arising from the ‘big bang’ method of implementation of the Companies Act 2014 which auditors, accountants and other professionals need to be aware.
On 1 May 2015 the Irish Minister for Jobs, Enterprise and Innovation, Mr Richard Bruton signed the commencement order providing that the Companies Act 2014 (the “Act”) (subject to certain exceptions) will commence with effect from 1 June 2015.
The Ministerial Order (SI 169 of 2015) commencing the Companies Act 2014 is now available in the online version of the Irish Statute Book http://goo.gl/4Y7OsC
Virtually all of the Act comes into force on 1 June 2015, with some exceptions, shown below.
Financial statements approved on after 1 June 2015
The implementation of the Act means that if financial statements are approved on/after 1 June 2015 and the legislative citation quoted in those financial statements is the ‘Companies Act, 2014’, then the provisions of the new act will apply, including those relating to the newly enhanced criteria for audit exemption for certain ‘small’ companies (including those limited by guarantee and dormant companies with no ‘significant ‘ transactions, as defined), as well as ‘small’ groups, as defined in the 2014 Act.
The implications of this form of ‘big bang’ implementation will take some time to digest fully but here are some initial comments:
1. There may be an incentive for some companies to delay signing off their financial statements until 1 June or later, but if by doing so, they miss their Annual Return Date (ARD) they will lose the audit exemption and, as well as triggering a financial penalty for late filing, will also incur a statutory company audit for one financial year under Section 363 – the very thing they were trying so hard to avoid!
2. If the financial statements are signed off on/after 1 June 2015 the correct legislative citation to use is the ‘Companies Act 2014’.
3. It is possible that some ‘small’ companies limited by guarantee (as defined in the new Act) may have commenced their audits of accounting periods ending, for example, on 31 December 2014, before implementation of the new Act on 1 June 2015 i.e. there was no opportunity to file a notice on the company ‘blocking’ audit exemption (as such a block was unnecessary because guarantee companies had compulsory audits).
Under the new Section 1218 Companies Act, 2014, where notice is served on the company, in writing, by at least one member of a guarantee company under that section, a request may be made for an audit under company law, in spite of the company, being entitled to claim audit exemption.
Because of the ‘big bang’ implementation of this new Act, some members of guarantee companies could retrospectively decide to scrap the audit for 2014 (out of sheer convenience or for some other reason), perhaps against the wishes of certain members. Those disaffected members who did want to have an audit could argue that the new Act is unconstitutional as it did not allow them the opportunity to lodge a notice in time to block the audit exemption.
4. In the circumstances, in paragraph 3 above, where the auditor initially contracted for an audit to be carried out and, before the conclusion of the audit, is informed that the members wish to change the assignment to a lesser level of assurance such as a review or a related service, the auditor should carefully read ISA 210 ‘Agreeing the Terms of Audit Engagements’, paragraphs 14 to 17, before complying with such a request. The supporting Application Guidance in paragraphs A29 to A33 of ISA 210 is also essential reading. Here is an extract from part of that guidance (my italics):
‘A32. Before agreeing to change an audit engagement to a review or a related service, an auditor who was engaged to perform an audit in accordance with ISAs (UK and Ireland) may need to assess, in addition to the matters referred to in paragraphs A29-A31 above, any legal or contractual implications of the change.
A33. If the auditor concludes that there is reasonable justification to change the audit engagement to a review or a related service, the audit work performed to the date of change may be relevant to the changed engagement; however, the work required to be performed and the report to be issued would be those appropriate to the revised engagement. In order to avoid confusing the reader, the report on the related service would not include reference to:
(a) The original audit engagement; or
(b) Any procedures that may have been performed in the original audit engagement, except where the audit engagement is changed to an engagement to undertake agreed-upon procedures and thus reference to the procedures performed is a normal part of the report.’
Provisions coming into effect for accounting periods commencing on/after 1 June 2015
The Statutory Instrument (SI 169 of 2015 http://goo.gl/4Y7OsC) also clarifies that certain accounting-related provisions come into operation on the first day of the next financial year of a company that falls on or after 1 June 2015). Those provisions are:
- Section 167 – the requirement to establish an audit committee;
- Section 225 – the requirement to prepare a Directors’ compliance statement;
- Section 305(1)(b) – the disclosure in a company’s financial statements of gains made by directors on the exercise of share options;
- Section 306(1) – the disclosure in financial statements of the amounts paid to persons connected with a director;
- Section 326(1)(a) – the disclosure in a Directors’ Report of the names of persons who at any time during the year were directors of the company; and
- Section 330 – the statement in a Directors’ Report on relevant audit information.
Exceptions to the implementation of the Companies Act, 2014
Certain sections of the Companies Acts 1963 to 2013 are being deferred or preserved. These are:
- the repeal of Part V of the Companies Act 1990 – the prohibition of insider dealing on non-regulated markets – is being deferred and therefore this law continues until further notice;
- certain technical provisions relating to mergers of public limited companies are preserved; and
- the repeal of the Bank of Ireland Acts is deferred pending the re-registration of Bank of Ireland as a company under the Act.
by John McCarthy Consulting Ltd. | Feb 11, 2015 | News
Many accountants will probably be wondering how they broach the potentially sleep-inducing subject of implementing new accounting rules with their clients.
Potentially this is the single biggest change to accounting rules ever. Why? Mainly because it affects all entities that are not listed (i.e. around 99% of companies) and many will, for the first time, have to account for financial instruments using ‘fair value’ and ‘amortised cost’ measurement rules. In a recent UK survey, it was estimated that the conversion process could take between 5 to 7 hours per client!! So the importance of having meetings with clients to discuss this topic and the cost implications cannot be underestimated. In order to help assist you with these meetings, we have prepared an FRS 102 ‘toolkit’ that contains three elements.
Below is an extract from a draft letter to clients that we have prepared for accounting firms. It comes free of charge in a bundle with our ‘FRS 102 Transition Checklist’ (retailing for €60+VAT or £48 (no VAT, if UK VAT number quoted) and along with our other free publication ‘Most Common Potential Differences Between FRS 102 and old Irish/UK GAAP’. Orders to john@jmcc.ie
Here is the beginning of the letter:
‘Dear Client
We have an ongoing dedication to keeping our clients abreast of the latest changes in the business arena. You may have heard of recent changes announced to the accounting rules for companies in Ireland and the UK called ‘FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland’.
FRS 102 is a single accounting standard that replaces existing Irish Generally Accepted Accounting Practice (Irish GAAP) for private companies and non-profit entities (and certain other entities) for accounting periods that commence on or after 1 January 2015.
This change means that for accounting periods ended 31 December 2015 and later, you will notice differences in measurement and presentation of certain items in your financial statements. Also some of the 2014 comparative items (already reported under the ‘old’ rules) will need to be re-presented in order to comply with the new rules.
Changes to the numbers
Your organisation will need to be prepared for the changes arising on first implementation of FRS 102 because:
· reported profits could change;
· the balance sheet could be significantly affected, and
· the financial statements will look different.’
End of extract from sample letter.
The draft letter is free of charge, in a bundle with our:
· ‘FRS 102 Transition Checklist’ and
· along with our other free publication ‘Most Common Potential Differences Between FRS 102 and old Irish/UK GAAP’.
All the above for €60+VAT or £48 (no VAT, if UK VAT number quoted)
Sample contents pages for the ‘FRS 102 Transition Checklist’ and the ‘Most Common Potential Differences Between FRS 102 and old Irish/UK GAAP’ are available to view before you decide to purchase on our website at www.jmcc.ie
Orders with e-mail address for electronic delivery to john@jmcc.ie
by John McCarthy Consulting Ltd. | Nov 21, 2014 | News
Groups, stand alone companies and company directors may have, in the past, relied on informal arrangements and verbal agreements. They may now wish, as a result of the rule changes in FRS 102, to introduce more formal documentation to ensure their intentions are reflected in the contractual terms and in the accounting, so as to reduce any unintended consequences of these loans.
This latest blog in our series on the new accounting standard FRS102 considers the impact of its rules on an area that will impact most SMEs, namely, the accounting treatment for intercompany and directors’ loans.
This standard will impactnearly all privateentitiesinonewayoranother, fom 1 January 2015 and this particular topic of inter-company and directors’ loans will prove to be one of the most tortuous to explain to clients.
It is quite common for groups to manage their finances by setting up loans between parent and subsidiaries, or directly between subsidiaries. Many private companies in Ireland are owner-managed and long term loans between many company directors and their companies are very common.
These arrangements are mainly for commercial reasons and often allow cash to be used where it is most needed and may well be cheaper than using external finance, especially if the entity receiving the loan is perceived as risky so that the rate it could borrow at externally would normally be higher.
Often, though, the loans are not on any documented commercial terms. Perhaps they bear a low interest rate or more often no specified interest rate and no set repayment terms. This lack of formality in their repayment arrangements and these non-commercial aspects of intra group and directors’ loans can have ‘interesting‘ accounting consequences under trong>FRS102.
Initial recognition
Inter company loans, like all financial assets and liabilities, are within the scope of either Section 11 (‘Basic Financial Instruments’) or section 12 (‘Other Financial Instruments Issues’) of FRS 102. Most are likely to be in Section 11, being debt instruments .Most loans to and from subsidiaries that are repayable on demand are explicitly listed in section 11 as likely to fall within its scope.
These basic instruments are initially measured at ‘the present value of the future payments discounted at a market rate of interest for a similar debt instrument’. After this initial recognition they are measured at amortised cost using the effective interest method, which means an interest charge is recognised systematically over the life of the loan, giving a constant rate of return.
When a company adopts FRS102 for the first time, it must assess all of its accounting policies and ensure that the assets and liabilities on its transition date balance sheet (i.e. in most cases 1 January 2014) are measured in accordance with the standard (except where there are specific exemptions). The amortised cost method will, in most cases, cause interest charges/income to be recognised in spite of the absence of cashflows.
Where zero-coupon loans have previously been held, unadjusted, at their face value, the balances will need to be revisited to re-present them using the amortised cost rules in FRS102.
Example
Let’s take the example of Director A, a director of a Company B, a private company, which adopts FRS 102 in its December 2015 accounts and, therefore, has a 1 January 2014 transition date.
Let’s assume that at the beginning of 2012, B took a €100,000 interest free loan from A, its director, with a five-year fixed term. Assuming it can determine that a market rate of interest at the time would have been 12%. It goes back to the inception date in 2012 to establish what the accounting would have been from the outset. The revised presentation of the loan in the accounts under FRS 102 would be as follows:
| Year |
Opening balance |
Interest at 12% |
Closing balance |
| 2012 |
56,743 |
6,809 |
63,552 |
| 2013 |
63,552 |
7,626 |
71,178 |
| 2014 |
71,178 |
8,541 |
79,719 |
| 2015 |
79,719 |
9,567 |
89,286 |
| 2016 |
89,286 |
10,714 |
100,000 |
The 2013 closing value of €71,178 will be used as the carrying value of the liability in the transition date balance sheet at 1 January 2014, and the accounting continues from there.
FRS 102 is silent about the treatment of the difference of €28,822, According to the book ‘Manual of Accounting – New UK GAAP’ published by PwC in November 2013, (page 11014) states: “…in practice Director A would simply recognise the additional amount as part of the cost of investment in entity B…” Similarly B would recognise the loan liability at €71,718 and record the difference of €28,822 in equity as a capital contribution from the Director.
These numbers would of course, need re-adjustment as the discounted loan unwinds coming closer to maturity.
Protective measures
Few clients will find these accounting rule changes understandable or worthwhile. One response that is likely to be seen in practice is to ensure that there is documentation of all intercompany and director loans to include a term stating that they are ‘repayable on demand’, since section 12 of FRS 102 makes it clear that the fair value of an amount repayable on demand is not less than its face value.
Choosing to include this term, though, does mean that the receiving entity (‘B’ in this example) must show the whole loan amount as a current liability, which could damage the appearance of its balance sheet and thus hamper its ability to raise external finance in the future.
If a loan does not specify any terms, the default would normally be to assume it is repayable on demand, since the borrower has no enforceable right to avoid repaying the money.
Groups and company directors that have in the past relied on informal arrangements and verbal agreements may wish, then, to introduce more formal documentation to ensure their intentions are reflected in the contractual terms and in the accounting, and to help avoid any unintended negative consequences of these loan arrangements.
Relate Software Seminars – 2 – 4 December 2014
Meet John at the Relate Software Seminars taking place in Dublin, Galway and Cork on 2, 3 and 4 December respectively to hear more about this topic. Bookings with Relate at http://relatesoftware.selltickets365.com/
John McCarthy Consulting Seminars 15 and 17 December 2014
Some FRS 102 courses are taking place in Dublin on 15 and 17 December 2014, presented by John McCarthy, using journal entries to show how to prepare the first transition adjustments and the first set of FRS 102 financial statements.
- Camden Court Hotel, 15 December 2014 https://www.eventbrite.ie/e/frs-102-the-journal-entries-dublin-city-tickets-14533001599
- Red Cow Moran Hotel, 17 December 2014 https://www.eventbrite.ie/e/frs-102-the-journal-entries-dublin-red-cow-tickets-14532855161
NEW – FRS 102 Transition Checklist
This comprehensive FRS 102 Transition Checklist pdf publication will be available shortly for €50/ £40 + VAT . It will help users flag and address the issues that will arise on transition to the new accounting standard, which is effective for accounting periods commencing 1 January 2015 and will require the comparatives aligned with FRS 102 from the transition date which for December year ends is 1 January 2014. Watch for our upcoming blog announcing this publication.
John McCarthy FCA, Dip. IFRS, Dip. Insolvency, Certificate in Irish and UK GAAP is Director of John McCarthy Consulting Limited.
He offers consulting and training services to the accounting profession on audit, accounting, insolvency and practice management issues.
