by John McCarthy Consulting Ltd. | Sep 1, 2024 | Blog, News
An important publication that did not get sufficient attention at the time it was published in March 2024 was the Professional Standards Board Annual Report (PSD) for 2023 from the Chartered Accountants Ireland. The publication explained the following:
In 2023 the summary of the quality reviews carried out had the following results:
| Quality Review Type |
Quality Reviews Completed in Year |
Satisfactory |
Not Satisfactory |
Percentage unsatisfactory |
| Audit |
116 |
87 |
29 |
25% |
| Practice Monitoring |
7 |
6 |
1 |
14% |
| Investment Business |
14 |
14 |
0 |
0 |
| AML UK |
34 |
27 |
7 |
21% |
| AML ROI |
47 |
44 |
3 |
6% |
| Insolvency GB/NI |
4 |
4 |
0 |
0 |
| Insolvency ROI |
9 |
9 |
0 |
0 |
Overall, one in four of the audit quality review outcomes in 2023 were unsatisfactory. The most notable fact is that generally, the firms that fall into this 84% successful category are those who arrange for annual compliance reviews and always have on hand an up-to-date gap analysis of where they stand in relation to quality management and the implementation of cold file reviews.
Quality review outcomes are considered by the Quality Assurance Committee (QAC) (with the exception of UK insolvency quality reviews which are considered by the Insolvency Licensing Committee). Where quality review outcomes are not satisfactory QAC may impose conditions or restrictions on an individual or a firm (or both). Other options can include a range of measures including:
- Monetary fine by way of regulatory penalty;
- Enhanced monitoring via certain regulatory restrictions;
- Licensing conditions imposed by the QAC;
- Quality reviews being repeated more frequently than the required statutory visit cycle; and
- Ongoing outreach (through the PSD Regulatory Bulletin, participation in CPD courses) to all firms providing current information on regulatory matters and common compliance issues.
In extreme cases, QAC may even withdraw a particular licence, registration, or authorisation, (subject, of course, to fair procedure and due process being observed).
Inspections will continue into 2024. It is in every firm’s best interest to avoid receiving an unsatisfactory review. Firms that carry out annual compliance reviews generally get better results on their inspections, so a firm would do well to implement this practice. Your annual compliance review is your firm’s equivalent of an athlete training at the gym to get the best results when they are most needed.
For more on the whole audit quality management (ISQM) process please see our ISQM 1 Toolkit here.
Please go to our website for:
by John McCarthy Consulting Ltd. | Aug 26, 2024 | Blog, News
Last week we looked at the responsibilities of the MLRO (the Money Laundering Reporting Officer) and some of the items that should be on their ‘radar’.
The MLRO should at least annually document how the AML internal quality control process operates. Ideally this might be in the form of a Memo or in a written report from an external provider. The idea is that the report/Memo triggers actionable items that can be followed up and helps provide evidence that the firm is taking a proactive approach to AML.
Last week we looked at the first five items that should get priority attention. This week we look at the remaining six areas of responsibility that need attention from the firm’s management and the MLRO.
The report should also include the following aspects:
- Ensure that evidence is retained of the sample check of Client Due Diligence (CDD) files that were examined as part of the AML Compliance Review to ensure all information is relevant and up-to-date (e.g. identification is still valid, records match that of CRO and RBO websites, all ultimate beneficial owners (UBOs) and directors have been satisfactorily identified etc.)
- Carry out a Sample check of the documentation of clients’ AML risk assessments to ensure that existing risk ratings are still appropriate, relevant and up-to-date
- Check that the AML Policies, Controls & Procedures Manual is up-to date
- Check that the Firm-Wide Risk Assessment is current and up-to-date
- Check that employees understand the role of ML and their individual responsibilities
- Ensure that recommendations from past internal/external inspections are fully implemented
See more in last week’s blog.
In the meantime, please go to our website to see our:
- Anti-Money Laundering Policies Controls and Procedures Manual (March 2022) — View the table of contents
- AML Webinar (December 2023) available here, which accompanies the AML Manual. It explains the latest legal AML reporting position for accountancy firms and includes a quiz. Upon completion you receive a CPD certificate for attendance in your inbox.
- Letters of engagement and similar templates—Please visit our website here where immediate downloads are available in Word format. A bulk discount is available for orders of five or more items bought together.
- ISQM TOOLKIT, or if you prefer to chat through the different audit risks and potential appropriate responses presented by this new standard, please contact John McCarthy FCA by email at john@jmcc.ie.
- We typically tailor ISQM training and brainstorming sessions to suit your firm’s unique requirements. The ISQM TOOLKIT 2022 is available to purchase here.
by John McCarthy Consulting Ltd. | Aug 8, 2024 | Blog, News
Every accounting firm is obliged to carry out money laundering checks on clients and support these checks with appropriate documentation.
In this two-part blog we are going to look at the main focus of the Money Laundering Reporting Officer (MLRO). Practically speaking, for smaller firms the MLRO is the sole practitioner – the buck stops with you.
The MLRO should at least annually document how the AML internal quality control process operates. Ideally, this might be in the form of a memo or in a report from an external provider.
The report should include the following aspects:
- Executive summary for the year highlighting any serious compliance deficiencies, together with details of the remedial action that has been taken.
- Review the number and quality of internal Suspicious Transaction Reports (STRs) and consider more focused training where none have been received.
- Number of external STRs submitted to the Garda on GoAML and the Revenue on ROS.
- Number of new clients declined because of unsatisfactory information.
- Details of staff training during the year including –
- Number of AML courses
- Details of new/existing staff attending;
- Issues/queries/misunderstandings clarified
- Supporting evidence of AML training and proof of understanding with documented quiz assessment results and supporting attendance certificates.
See more in next week’s blog.
In the meantime, please go to our website to see our:
- Anti-Money Laundering Policies Controls and Procedures Manual (March 2022) — View the table of contents
- AML Webinar (December 2023) available here, which accompanies the AML Manual. It explains the latest legal AML reporting position for accountancy firms and includes a quiz. Upon completion you receive a CPD certificate for attendance in your inbox.
- Letters of engagement and similar templates—Please visit our website here where immediate downloads are available in Word format. A bulk discount is available for orders of five or more items bought together.
- ISQM TOOLKIT, or if you prefer to chat through the different audit risks and potential appropriate responses presented by this new standard, please contact John McCarthy FCA by email at john@jmcc.ie.
- We typically tailor ISQM training and brainstorming sessions to suit your firm’s unique requirements. The ISQM TOOLKIT 2022 is available to purchase here.
by John McCarthy Consulting Ltd. | Jul 15, 2024 | Blog, News
Below we compare the differences between FRS 102 (focusing on ‘small’ entities) and FRS 105 (‘micro’ entities) along with some other factors to consider when deciding whether to prepare accounts using the ‘small’ or ‘micro’-entities regime. The ‘small’ and ‘micro’ entities regime thresholds have changed recently. See our separate blog here about these changes.
An entity entitled to and choosing to apply the ‘micro-entities’ regime must apply FRS 105 The Financial Reporting Standard applicable to the Micro-entities Regime. The micro-entities regime is optional and therefore, when preparing their financial statements, entities may wish to consider the differences between applying FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland and FRS 105 when deciding on the most suitable regime. The links given here are to the January 2022 versions of FRS 102/105.
New editions of both standards are expected to be published in the summer of 2024, effective for accounting periods commencing on/after 1 January 2026.
Users of the accounts
The most important aspect to consider is the needs of users. Different stakeholders will have different expectations. For example:
- Suppliers/trade creditors
- Banks and
- Credit rating agencies may require more information than is provided by micro-entity accounts.
The level of information required by FRS 105 is very limited when compared to other standards, so be careful to advise your client about the implications for making a good impression on such stakeholders where that might be important.
Future growth plans
An entity that is entitled to either the ‘small’ or ‘micro-entities’ regime but is close to the size limits should consider carefully any decision on which regime to adopt. This is particularly relevant for a micro-entity if the business is expected to grow to the extent that it will be necessary to switch to the small entities’ regime in the near future. Transition from FRS 105 to FRS 102 Section 1A will involve significant changes to the presentation of the accounts and the accounting policies applied (see below).
Accounting Differences Between FRS 102 and FRS 105
Outlined below are eleven of the key accounting differences between FRS 102 and FRS 102:
|
TOPIC
|
FRS 102
|
FRS 105
|
| Revenue Recognition |
Section 23 completely revised (in the changes published in March 2024) to include a simplified version of the IFRS 15 Five Step Model effective for accounting periods starting 1 January 2026 with early adoption allowed from 1 January 2024.
See our July 2024 webinar on these changes called ‘The Main Changes in Irish GAAP’. |
Section 20 revised in a similar fashion to FRS 102 (in the changes published in March 2024) with the simplified version of the IFRS 15 Five Step Model introduced effective for accounting periods starting 1 January 2026 with early adoption allowed from 1 January 2024. |
| Leasing |
Section 20 is completely revised with the introduction of rules similar to those in IFRS 16, where almost all leases will go on balance sheet, and only certain types of operating lease will remain off balance sheet.
These changes are effective for accounting periods starting 1 January 2026 with early adoption allowed from 1 January 2024. |
No change to the previous regime of only capitalizing finance leases. All operating leases remain as they were before.
See our July 2024 webinar on these changes called ‘The Main Changes in Irish GAAP’. |
| Investment properties |
With the exception of investment property rented to another group entity, a revaluation each year is required, with changes recognised in profit or loss. |
Measured at cost less depreciation and impairment. |
| Property plant and equipment |
Measured at cost less depreciation and impairment but can choose to adopt a revaluation accounting policy for fixed assets of the same class |
Measured at cost less depreciation and impairment. |
| Intangible assets |
Measured at cost less amortisation and impairment but can choose in limited circumstances to adopt a revaluation accounting policy for intangible assets of the same class |
Measured at cost less amortisation and impairment. |
| Development costs and borrowing costs |
These costs can, subject to certain conditions, be capitalised. |
No option to capitalise. Must be expensed to the profit and loss account in the period in which they are incurred. |
| Trade and asset acquisition |
An intangible asset purchased with a business is normally recognised as an asset when separable and arises from a contractual or other legal basis |
An intangible asset purchased with a business must not be recognised separately from goodwill. |
| Financial instruments |
Financial instruments are divided into ‘basic’ and ‘other’ instruments.
The former are mostly measured at amortised cost, the latter mostly at fair value with movements generally recognised in profit or loss.
Entities can instead choose to apply the recognition and measurement requirements of IAS 39 Financial Instruments: Recognition and Measurement and/or IFRS 9.
The exception is directors’ loans which may be measured initially at transaction price. |
No distinction between ‘basic’ and ‘other’ with all financial instruments initially recognised at cost, which will be the transaction price. Subsequent revaluation or measurement of financial instruments at fair value not permitted.
For lending arrangements, simplifications are made in relation to the allocation of interest and transaction costs, and no requirement to calculate an effective interest rate.
Also, there is no requirement to impute a market rate of interest in arrangements conducted at non-market rates. |
| Equity-settled share-based payments |
Recognised at the fair value of the goods or services when received. For arrangements with employees, fair value is measured at the grant date and the expense recognised over the vesting period. |
Not recognised in the accounts until the shares are issued.
|
| Foreign exchange forward contract |
Recognised on the balance sheet as a financial instrument at fair value and the associated debtor or creditor retranslated at the year-end rate. Hedge accounting can be applied in certain circumstances. |
When a trading transaction is covered by a related or matching forward contract, the requirement is to use the rate specified in the contract.
If not matched to a trading transaction the cost of the foreign exchange forward contract will be recognised as a financial asset, unless it is not material in which case it will be recognised immediately as an expense in profit or loss. |
| Defined benefit pension plans |
Net interest on the net defined benefit asset or liability is recognised in the profit and loss account, and is calculated with reference to high quality corporate bonds i.e., the same rate is applied to both the plan assets and liabilities. |
Recognition of the surplus or deficit of the plan on the balance sheet not permitted. Agreed funding of deficit must, however, be recognised as a liability. Contributions payable to the plan accounted for as an expense. |
| Government grants |
Government grants can be accounted for using either the performance model or the accruals model. |
Requirement to use the accruals model.
|
| Deferred tax |
Based on timing differences |
No deferred tax |
Please see our latest CPD Webinar on The Main Changes in Irish GAAP (recorded July 2024).
See our webinar entitled ‘The Main Changes in Irish GAAP’ on the latest changes to FRS 102 here.
For more on the whole ISQM process for audit firms, please see our ISQM 1 Toolkit on our website here.
Please go to our website to see our:
- Anti-Money Laundering Policies Controls and Procedures Manual (March 2022) — View the table of contents
- AML Webinar (December 2023) available here, which accompanies the AML Manual. It explains the latest legal AML reporting position for accountancy firms and includes a quiz. Upon completion you receive a CPD certificate for attendance in your inbox.
- Letters of engagement and similar templates—Please visit our website here where immediate downloads are available in Word format. A bulk discount is available for orders of five or more items bought together.
- ISQM TOOLKIT, or if you prefer to chat through the different audit risks and potential appropriate responses presented by this new standard, please contact John McCarthy FCA by email at john@jmcc.ie.
- We typically tailor ISQM training and brainstorming sessions to suit your firm’s unique requirements. The ISQM TOOLKIT 2022 is available to purchase here.
by John McCarthy Consulting Ltd. | Jul 15, 2024 | Blog, News
As we discussed in last week’s blog, the Financial Reporting Council announced some important changes to FRS 102 in March 2024.
These changes are effective for accounting periods commencing 1 January 2026, with early adoption allowed. There were no lease accounting changes to FRS 105, but this article focuses on FRS 102. See last week’s blog for the Revenue Recognition changes to FRS 102.
Lease Accounting Changes
IFRS 16 first introduced an on-balance sheet model for lessees five years ago in 2019. FRS 102 is doing something similar now. Essentially, it means that companies will need to recognise a lease liability on the balance sheet and a corresponding right of use asset for those operating lease commitments that are currently expensed to the profit or loss.
The lease liability will be calculated using the present value of the company’s payment obligations over the remaining lease term based on a bank quotation for an interest rate for a right of use asset for the same amount.
There are recognition exemptions available for ‘low value’ or ‘short leases’ as well.
Implications of these changes
- Balance sheet – there will be an increase in total assets and total liabilities.
- Income statement – we are going to see amortisation charges for leases increase over the life of the lease unless the company is already measuring the respective asset categories on a ‘fair value basis’ where they will continue to do so using the effective interest rate.
- Operating lease expenses currently in the profit or loss will be replaced by a combination of depreciation plus finance lease interest expenses which will ultimately lead to an increase in EBITDA.
- Cash flow statement – the cash paid under the lease will remain the same, but the classification in the cash flow statement will lead to:
- An increase in cash flows from operating activities
- An increase in the outflows from financing activities
- Impact on financial ratios especially those linked to EBITDA, gearing, and net debt. Companies may need to examine more closely their:
- Debt covenants;
- Incentives; and
- other obligations that involve these EBITDA measures.
Other Disclosure Changes
Additional disclosures will also be required – both qualitative and quantitative information for lease commitments. Additionally, those companies that avail of the recognition exemption for ‘short term’ or ‘low value’ leases will need to disclose the precise details of the leases involved.
Simplification
There is a useful simplification to do with the use of discount rates. IFRS 16 requires the use of an ‘incremental borrowing rate’ (IBR), and this is where the rate implicit in the lease can’t be determined.
FRS 102 allows for the IBR too, but as an ‘easier’ alternative permits the use of an ‘obtainable borrowing rate’ (OBR) which is a much less complicated alternative. In cases where neither of these are available, FRS 102 allows for a gilt rate, but this is expected to be a rare occurrence.
Comparatives
The standard allows for the modified retrospective approach with regard to comparatives, meaning there is no need to restate comparatives.
Planning Ahead
Companies need to prepare in advance for the advent of the new FRS 102 leasing requirements by taking the following steps:
- Gather data on existing operating lease arrangements;
- Explore the implications of the potential discount rates that could be used;
- Start performing an initial impact assessment;
- Gauge what impact the leasing changes will have on their:
- Financial ratios;
- Primary statements;
- Balance sheet valuations; and
- Tax liabilities, not ignoring deferred tax.
See our webinar entitled ‘The Main Changes in Irish GAAP’ on the latest changes to FRS 102 here.
For more on the whole ISQM process for audit firms, please see our ISQM 1 Toolkit on our website here.
Please go to our website to see our:
- Anti-Money Laundering Policies Controls and Procedures Manual (March 2022) — View the table of contents
- AML Webinar (December 2023) available here, which accompanies the AML Manual. It explains the latest legal AML reporting position for accountancy firms and includes a quiz. Upon completion you receive a CPD certificate for attendance in your inbox.
- Letters of engagement and similar templates—Please visit our website here where immediate downloads are available in Word format. A bulk discount is available for orders of five or more items bought together.
- ISQM TOOLKIT, or if you prefer to chat through the different audit risks and potential appropriate responses presented by this new standard, please contact John McCarthy FCA by email at john@jmcc.ie.
- We typically tailor ISQM training and brainstorming sessions to suit your firm’s unique requirements. The ISQM TOOLKIT 2022 is available to purchase here.
by John McCarthy Consulting Ltd. | Jul 15, 2024 | Blog, News
In March this year the Financial Reporting Council announced some important changes to FRS 102.
These changes are effective for accounting periods commencing 1 January 2026, with earlier adoption allowed. There are also supplier finance arrangements which come into effect for accounting periods starting on 1 January 2025, but these are not common in SMEs, and so they will not be discussed in this blog.
Revenue Recognition Changes
The 5 Step model is being introduced into FRS 102 and is based on IFRS 16 and provides a structured approach, with appropriate simplifications in FRS 102. Revenue accounting changes were also announced to FRS 105, but this article focuses on FRS 102.
The basic scenario is to recognise revenue when promises are made regarding when the control of the goods and services is transferred to the customer, rather than when the risks and rewards are transferred.
Clients will need to:
- Review the contracts that they have with their customers to identify each promise and understand what they’ve promised to do.
- Determine a transaction price for each transaction then allocate the transaction price to each promise made under the contract.
- Recognise the revenue as and when the client satisfies each of the promises under the contract.
Likely Impact
The impact will vary depending on the company’s accounting structure, size, and complexity of their business as well as the industry that the client operates in.
For example, clients in the retail or hospitality industries usually have more straightforward contracts with simple promises e.g. the sale of consumables/services, and there may be minimal changes.
In other sectors such as software, technology or communications there might be more significant impact as contracts in these sectors tend to be more complex, involving various deliverables or long-term arrangements and, in some cases, they can have multiple promises.
A simplification in FRS 102 allows companies to combine similar contracts using a portfolio approach as opposed to recognising contracts on a contract-by-contract basis.
Likely Changes
The most likely impacts will be in areas like:
- Key performance indicators like EBITDA;
- Sales targets;
- Incentives or bonus structures that are linked to revenue, which may then have a knock-on effect on
- Negotiations with customers;
- Pricing strategies;
- Debt covenants; and
- Interest cover.
It will be necessary to consider the wider implications of this standard sooner rather than later. A detailed review (including a detailed review of sales contracts and revenue streams) on accounting policies, contract structures, and operations will be necessary.
See our webinar entitled ‘The Main Changes in Irish GAAP’ on the latest changes to FRS 102 here.
For more on the whole ISQM process for audit firms, please see our ISQM 1 Toolkit on our website here.
Please go to our website to see our:
- Anti-Money Laundering Policies Controls and Procedures Manual (March 2022) — View the table of contents
- AML Webinar (December 2023) available here, which accompanies the AML Manual. It explains the latest legal AML reporting position for accountancy firms and includes a quiz. Upon completion you receive a CPD certificate for attendance in your inbox.
- Letters of engagement and similar templates—Please visit our website here where immediate downloads are available in Word format. A bulk discount is available for orders of five or more items bought together.
- ISQM TOOLKIT, or if you prefer to chat through the different audit risks and potential appropriate responses presented by this new standard, please contact John McCarthy FCA by email at john@jmcc.ie.
- We typically tailor ISQM training and brainstorming sessions to suit your firm’s unique requirements. The ISQM TOOLKIT 2022 is available to purchase here.
