by John McCarthy Consulting Ltd. | Nov 6, 2017 | News
The Companies (Accounting) Act, 2017 came into effect from 9 June 2017. It applies for accounting periods commencing on/after 1 January 2017 but early adoption is allowed for in Section 14 for accounting periods starting on/after 1 January 2015.
Early adoption of the Companies (Accounting) Act, 2017 may look attractive, but there are several accounting and company law disadvantages also. Here we look at the pros and cons of adopting this legislation for the financial year commencing 1 January 2016, compared to postponing implementation to a financial year commencing 1 January 2017.
Illustrated below are some of the implications of early versus delayed adoption, for a ‘micro’, ‘small’ and ‘medium’ size company:
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Adopt new rules for accounting period commencing from 1 January 2016
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Keep old rules for accounting period commencing 1 January 2016
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Disclosure
· As best practice, include a note saying that the provisions of the Companies (Accounting) Act, 2017 have been early adopted.
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Disclosure
· Notes to the financial statements would remain silent about the Companies (Accounting) Act, 2017.
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Size thresholds
· Avail of the new ‘micro’ and ‘small’ company thresholds for audit exemption, abridged financial statements filing at the CRO and group consolidation exemption.
· The number of ‘small groups’ that don’t need to have an audit nor consolidate will grow under the new provisions.
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Size thresholds
· Cannot prepare ‘Micro’ company accounts and must follow the old thresholds for ‘small company’ abridged financial statements and the old consolidated financial statements exemption.
· See below for other positive impacts on ‘small’ entities.
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Adopt new rules for accounting period commencing from 1 January 2016
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Keep old rules for accounting period commencing 1 January 2016
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Micro company accounting
· Because the provisions of the Companies (Accounting) Act, 2017 have been early adopted, the Micro Entities Regime under FRS 105 is available to the company (provided it fulfils the ‘micro company’ size criteria) for the YE 31/12/2016, along with the rules in Schedule 3B of the amended Companies Act, 2014 which include:
· Exemption from disclosing in the shareholders’ and abridged financial statements the directors remuneration and directors’ debit and credit loans as set out in Sections 305-309 of the CA 2014.
· Exemption from producing a Directors Report and Statement of Cash Flows in both the shareholders’ and abridged financial statements.
· File an abridged balance sheet with the notes only being required if the company has borrowings or guarantees.
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Micro company accounting
· FRS 105 and Micro Companies Regime in Schedule 3B of the Companies (Accounting) Act, 2017 is not available for the YE 31/12/2016.
· Must disclose in the shareholders’ and abridged financial statements the directors remuneration and debit and credit loans as set out in Sections 305-309 of the CA 2014.
· Exempt from producing a Directors Report but must produce a Statement of Cash Flows in both the shareholders’ and abridged financial statements.
· File the abridged financial statements under the unamended CA 2014 which requires more extensive notes than under FRS 105.
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‘Small’ entity Abridged financial statements
· Include all the notes from the Shareholders’ Accounts plus the ‘Statement of Changes in Equity’, and including P&L notes, even though the P&L itself does not get published.
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‘Small’ entity Abridged financial statements
Retain the old rules for one last financial year so that you don’t have to include all the notes including the P&L notes in the abridged accounts.
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Employee numbers
There is no longer any need to include the note about employee numbers broken into appropriate categories – this is a new exemption for ‘small’ entities introduced by the Companies (Accounting) Act, 2017.
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Employee numbers
Need to include the note about employee numbers broken into appropriate categories.
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Adopt new rules for accounting period commencing from 1 January 2016
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Keep old rules for accounting period commencing 1 January 2016
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Fixed assets and reserves
· Drop the comparative expanded note for fixed assets and reserves and similar items in the shareholders’ and abridged accounts.
Statement of Cash Flows
· May exclude the Statement of Cash Flows under Section 1A of FRS 102 due to early adopting the Companies (Accounting) Act, 2017 and use Section 1A of FRS 102.
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Fixed assets and reserves
· Repeat the comparative expanded note for fixed assets, reserves and similar items in the shareholders’ and abridged accounts.
Statement of Cash Flows
· Include the Statement of Cash Flows under FRS 102 (excluding Section 1A) due to not early adopting the Companies (Accounting) Act, 2017.
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Medium companies
· Medium sized companies that early adopt the provisions of the Companies (Accounting) Act, 2017 will no longer be able to abridge their financial statements nor avail of audit exemption. They will also have to disclose their full profit and loss account with profit margins and turnover.
· Medium companies will now also be required to prepare group accounts as the exemption from preparing consolidated financial statements on the basis of size for Irish parent companies has been restricted to the ‘small’ company threshold.
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Medium companies
· Medium companies will retain the old size thresholds.
· Medium sized companies that do not early adopt the provisions of the Companies (Accounting) Act, 2017 will continue to abridge their financial statements and avail of audit exemption for the 2016 financial year.
· This may be of little benefit as when they file their financial statements for the YE 31/12/2017, the 2016 comparative numbers will get disclosed under the new rules.
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For a more detailed analysis of the effects, please call us for a specific consultation.
To hear more about the latest Company Law developments, come to our next CPD course on the topic on Wednesday 29 November 2017.
We also have other CPD courses in November and December 2017.
Click here for details and booking on all coures.
by John McCarthy Consulting Ltd. | Nov 6, 2017 | News
Do your client landlords offer some tenants rent free periods in their lease agreements? Or have your clients who are tenants accepted an incentive form a landlord to fit out their shop or pay some or all of their legal fees when moving into new premises?
To hear more about this topic, come to our:
Audit Update on Monday 4 December 2017 or the
Accounting Update for the Busy Accountant on Monday 27 November 2017
These types of transaction come within the definition of ‘Operating lease incentives’ under Section 20 of FRS 102.
They are often in the form of cash-back or rent-free initial periods and are frequently offered to lessees to encourage them to enter a lease. Under old Irish GAAP, the effect of such incentives was spread over the shorter of either the lease term or the period after which market rent is expected to be payable (this is typically a ‘break’ point in the lease).
However, under New Irish GAAP, paragraph 20.15A of FRS 102 requires incentives to be spread by lessees over the lease term. This will often have the effect of reducing the amount of incentive recognised in profit or loss in early years, which will decrease profits and may lead to improved tax cash flow. Similar requirements are set out for lessors.
Note that for lessors, a transitional option within paragraph 35.10(p) allows them to retain the old Irish GAAP (known as UITF 28) treatment for existing lease incentives, so they need not suffer a detrimental tax cash flow as a result.
To hear more about this topic, come to our:
Audit Update on Monday 4 December 2017 or the
Accounting Update for the Busy Accountant on Monday 27 November 2017
by John McCarthy Consulting Ltd. | Oct 25, 2017 | News
A landmark EU data protection judgment in 2014 on the ‘right to be forgotten’, has affected the ability to use Google and other well-known search engines to carry out anti-money laundering (AML) due diligence.
On its own, Google is not a sufficient anti-money laundering (AML) risk screening tool, as some search results could be incorrect or out of date. But now considering the 2014 ‘right to be forgotten’ case (see more below), Google may no longer reliably tell you if your customer is a known criminal, who could pose a risk to your business.
If your customer is determined to find a way round due diligence checks, they can easily do so. With websites like www.replaceyourdoc.com where fake ID may be purchased, at least the same amount of resources need focused on ongoing monitoring, and on training staff to recognise ‘red flags’, as you do on initial AML screening.
The ‘right to be forgotten’ case relates to Mario Costeja González, a Spanish citizen who in 2010, lodged a complaint against Catalonia’s leading daily La Vanguardia. In 1998 the paper printed an auction notice relating to the forced repossesion of his home. González argued that since the issue had been completely resolved in the intervening twelve years, the information was now irrelevant and should be removed, both from the paper’s digital archives and from the search results of Google Spain or Google Inc. The ruling by the European Court of Justice (ECJ) followed a referral from the Spanish courts.
The judgement found that even if the physical server of a company processing the data is located outside Europe, EU data protection rules apply to search engine operators if they have a branch or a subsidiary in a Member State. Search engines are deemed to be controllers of ‘personal data’ (data about living human beings).
Following this judgement, individuals have the right, based on certain conditions, to ask search engines to remove links with personal information about them. This applies where the information is inaccurate, inadequate, irrelevant, or excessive for the purposes of the data processing.
In this case, the court found that González’s right to data protection was not trumped by Google’s economic interests, and so the ‘right to be forgotten’ (or, technically, ‘the right to erasure’) was born in its modern form. (It should be noted that the court also stressed that the right to be forgotten is not absolute and must be balanced against other rights like the freedom of expression.)
This has obvious implications for entities conducting adverse media searches as part of their AML customer due diligence process, although the rules don’t apply to politically exposed person (PEP), sanctions and watch lists, where they are maintained by independent providers and authorities.
Most AML legislation relating to customer due diligence, allows entities the defence of have followed proper procedures and lack of reasonable grounds for suspicion. There is no case law yet, but the likelihood is that if an entity found itself under investigation by a regulator for providing services to a money launderer, but could demonstrate that it had conducted thorough due diligence and missed information only because it had been removed from search results under the right to be forgotten, this would be sufficient to avoid prosecution.
To hear more about the latest in AML legislation and procedures and to benefit from our up to date training, come to our next CPD Seminar on Anti-Money Laundering at the Talbot Hotel Stillorgan, County Dublin on Tuesday 28 November 2017.
More details of all our courses are on Ticket Tailor here.
by John McCarthy Consulting Ltd. | Oct 20, 2017 | News
The advent of new Irish/UK GAAP is one of the biggest technical challenges faced by accountants and auditors for many years.
To hear more about this topic, come to our:
This article seeks to alert readers to the first pronouncements by the CAI Professional Standards Department (PSD) and the ICAEW Quality Assurance Department (QAD) about FRS 102 reviews. These indicate that reviews of FRS 102 financial statements were generally reasonable, although they found several cases where documentation relating to the impact of transition was weak.
Auditors and prepares please take note of the following problem areas which reviewers found:
Primary statements
In some cases, the totals in the Statement of Financial Position, Total Comprehensive Income Statement and the Statement of Changes in Equity (SOCIE) don’t agree. Errors were also spotted in presentation of non-controlling interests (NCI), and in some cases, there was no disclosure of NCI, where it would have been relevant.
Misclassifications also occurred between profit or loss, other comprehensive income, and equity.
Accounting policy disclosures
Accounting policy disclosures are, generally, more detailed under FRS102. At one end of the scale many smaller SME clients have accounting policies that are largely unchanged from the previous audit year. At the larger company end, the policies were often up to date but sometimes incomplete.
Common omissions were:
- Significant judgements and key sources of estimation uncertainty in relation to amounts recognised in the financial statements (FRS 102.8.6 to 8.7);
- Where relevant, material uncertainties related to events or conditions that cast significant doubt upon the entity’s ability to continue as a going concern (FRS 102.3.8 to 3.9);
- The measurement basis (or bases) used for financial instruments and the other accounting policies used for financial instruments that are relevant to an understanding of the financial statements (FRS 102.11.40). See further in the paragraph below;
- Disclosures relating to creditors required by CA 2014 Schedule 3, such as terms of payment/repayment and the rate of any interest payable on debts.
On transition it is recommended that firms should review the impact of FRS 102 on accounting policies, ideally on a line by line basis e.g. mentioning the use of ‘fair value’ measurements rules for revenue and income (FRS 102.23). Also, remember to ask exploratory questions and look out for key indicators where accounting policy changes are more likely to be important, such as business combinations and goodwill, financial instruments, investment property and deferred tax.
Transition disclosures
Many entities have had little or no transition adjustments, although the impact of FRS 102 is not always clearly disclosed. If there are no transition adjustments, it is best practice to state this fact.
Better disclosure is sometimes needed where entities have numerous or complex transition adjustments. Disclosures also need to explain separately, any errors identified and corrected as part of the transition.
Financial instruments (including financing transactions and derivatives)
Disclosures around financial instruments often need some improvement, despite the fact that most private companies appear to have only to deal with basic financial instruments.
In particular, disclosures around long-term debt terms often need enhancing to include details of interest rate, maturity, repayment schedule and any associated restrictions, the debt places on the entity.
Financing transactions are a new concept which some firms are struggling with, although these transactions are fairly common in private entities. The reviewers say they sometimes have doubts about the presentation or the measurement of loans due to directors or group companies with no (or low) interest rates, which usually fit the definition. Firms should be challenging presentation of such loans as long term, when there is no formal written agreement setting out a repayment schedule at the year end.
Reviewers have not seen many examples of discounting, where loans (including financing transactions) are treated as long term. The impact is often argued to be immaterial, although it is suspected that difficulty with the calculations may be a factor.
Reviewers occasionally came across derivative financial instruments in private entities, for which recognition is mandatory in Irish/UK GAAP for the first time under FRS 102. These are mostly forward currency contracts. When no derivatives are recognised, it’s not always clear whether this is appropriate, either because the disclosures need enhancing, or because the firm may not have asked all the right questions and needs to gain a better understanding of its client.
Business combinations and goodwill
Some improvements are needed in goodwill disclosures. Useful life needs to be disclosed along with the reason for choosing that period. Disclosure of the reason was often missing when particularly important, because the useful life exceeded 10 years.
Some entities continued to assume that goodwill has an indefinite useful life (despite this no longer being allowed), even disclosing this as a departure from FRS 102. It is difficult to see that departure from the requirement to amortise goodwill is justified, particularly when no reason is disclosed.
Disclosures relating to business combinations are sometimes very weak. Detailed disclosure requirements omitted include the:
- name/description of combining entities;
- date of acquisition;
- percentage of voting instruments obtained;
- cost of combination; and
- amounts of assets and liabilities acquired.
There is little recognition of other intangibles as a result of business combinations. Restatement of business combinations in the year before first time adoption (post transition date) is also rare. Reviewers sometimes doubt the extent of firms’ enquiries and review of current and prior year business combinations to identify possible other intangible assets.
The reviewers came across significant errors in recognition of goodwill. Some firms did not know that Irish/UK GAAP no longer permits goodwill to be adjusted, when an entity increases or decreases its stake in a subsidiary, where there is no change in control (i.e. when the other entity was a subsidiary both before and after the transaction).
Any such transactions in the year before first time adoption (post transition date) should give rise to a transition adjustment. The difference between cost/proceeds and share of net assets acquired/ disposed, which could have been recognised as an addition or disposal of goodwill under old Irish/UK GAAP, is now recognised directly in equity.
Investment property and property, plant and equipment (PPE)
Gains and losses on investment property and PPE are sometimes incorrectly presented. Errors include taking investment property gains to Other Comprehensive Income rather than profit or loss and vice versa, in respect of PPE revaluations. In some cases, the disclosure of the current accounting policy and transition was unclear, where entities transitioned PPE using a past revaluation or fair value as deemed cost.
Deferred tax
Deferred tax was not always recognised on unrealised gains in investment property or PPE when it should have been. Deferred tax should be recognised on all timing differences between taxable profits and total comprehensive income. Any unrealised gains of this nature existing at the transition date would give rise to a transition adjustment.
Errors occurred in presentation of the movement in the deferred tax provision. The deferred tax impact should be recognised as expense/income in the same component of total comprehensive income as the underlying transactions; apart from deferred tax arising on fair value adjustments as part of a business combination, in which case the goodwill is adjusted by the amount of deferred tax.
Don’t always blame the software
Problems with implementation of FRS 102 tend to stem primarily from weaknesses at a whole-firm level, including insufficient CPD, over-reliance on software and policies around preparation and review of financial statements.
While most firms visited had undertaken FRS 102-related CPD, in some cases further training is needed. This could be targeted on certain aspects, or a general refresher. Repetition of key messages in ongoing CPD helps them to sink in. Refresher training now should also pick up on the more recent developments in guidance and understanding of FRS 102 throughout the profession.
Accounting software is an invaluable tool, but is not fool proof and can’t do the whole job on its own. Some firms place too much reliance on their software, being quick to blame it for not picking up errors and omissions.
Comments from firms often focused on problems with the latest updates, including software not prompting or automating the required primary statements or disclosures; mapping problems leading to presentation errors; and inflexible accounts formats. Firms that plan ahead and implement enhanced review procedures, for example on first time adoption accounts, and make full use of disclosure checklists, have more chance of identifying problems at an early stage.
In some cases, the problems revealed by the reviews highlight the need for firms to obtain a better understanding of their clients. This means asking the right questions to ensure all the appropriate items are identified and recognised in the accounts. Knowing what questions to ask, ties in with CPD and familiarity with the standard.
And finally, if mistakes are made, it’s important to learn from them. Identification of root causes is an essential part of the process and this helps ensure the same mistakes aren’t repeated. A software weakness is unlikely to be the whole story.
Audit Update on 4 December 2017
Accounting Update for the Busy Accountant on 27 November 2017
by John McCarthy Consulting Ltd. | Oct 11, 2017 | News
Readers may have heard by now that there is a new audit reporting requirement about going concern contained in a new style of audit opinion. For companies and credit unions with a reporting period commencing on or after 17 June 2016 (in effect 30 June 2017 year-ends onwards), auditors must now include a specific conclusion in the auditor’s report on going concern.
This change happened in June 2016, when IAASA (the Irish Auditing and Accounting Supervisory Authority) took over the setting of auditing standards for Ireland. Subsequently in January 2017, IAASA issued a new single Ethics Standard and a new ISQC1. It also published a new suite of ISAs (Ireland), including the International Standard on Auditing (ISA) 700 (Ireland) on ‘Forming an Opinion and Reporting on Financial Statements’ and ISA 570 on ‘Going Concern’ which were both updated.
The new audit report significantly places the audit opinion at the beginning of the report and the Bannerman paragraph, is placed last of all. Locating the audit opinion paragraph at the beginning is a plus, as it is more likely to be read now than in the past.
However, one potentially unfortunate side effect of the new style report could lead to misunderstandings. The use of sentences with double-negatives, could cause confusion. In the old-style audit report, any special mention of going concern was only given in the event where there was a concern (such as in an Emphasis of Matter paragraph). Now there is a direct reference to going concern, but using double negatives. Here is the wording:
‘Conclusions relating to going concern
We have nothing to report in respect of the following matters in relation to which the ISAs (Ireland) require us to report to you where:
- the directors’ use of the going concern basis of accounting in the preparation of the financial statements is not appropriate; or
- the directors have not disclosed in the financial statements any identified material uncertainties that may cast significant doubt about the company’s ability to continue to adopt the going concern basis of accounting for a period of at least twelve months from the date when the financial statements are authorised for issue.’
Situations could easily arise where the page break, coming between the opening text and the first bullet point or a page break between the first and second bullet point, could confuse readers who see the words ‘the directors have not disclosed….’. If readers do not take their time to read the audit report carefully, there could be misunderstandings with unfortunate consequences.
It’s worth mentioning this, in advance, to clients and other users like financial lenders, sooner rather than later as they could be taken aback by this style of language and especially the specific reference to going concern.
To hear more about the latest style of audit report and the latest interesting changes to the auditing profession, come to our next Audit Update course on 4 December 2017.
Further details here.
