by John McCarthy Consulting Ltd. | Nov 1, 2019 | Blog, News
Some lessons for us all from the Carillion collapse.
A very useful publication was issued recently by the little known Financial Reporting Council Lab called ‘Disclosures on the Sources and Uses of Cash’.
Tucked away in the appendix of the publication is a very interesting explanation of reverse factoring. This financing method had a role to play in the downfall of Carillion as reported by the Financial Times in January 2018.
Reverse factoring is a type of finance transaction akin to factoring. In a traditional factoring arrangement a business will sell its accounts receivables (i.e. invoices it has raised with buyers) to a third party (usually a bank) in exchange for a significant proportion of the cash value of the invoices.
Factoring provides earlier access to cash from sales than would otherwise follow the traditional credit terms.
Reverse factoring is similar to factoring, but it is the purchaser rather than the seller who is the originator of the facility.
In reverse factoring the purchaser of goods organises a facility with their bank or other finance provider. This facility allows suppliers to get their invoices factored, and receive cash at a point before the purchaser intended to pay. This type of scheme is particularly beneficial to smaller suppliers who may not have sufficient financial strength to obtain competitive factoring terms themselves. Sometimes reverse factoring is called by a different name like ‘supplier chain finance’.
Whilst normal payment terms might see a purchaser pay a supplier within 30 days, the switch to a reverse factoring facility might also see the payment terms increase up to 120 days, as the facility provider will agree terms with the originator. Any increase in payment period will have the effect of improving the originator’s working capital cycle.
Unfortunately, in Carrillion’s Annual Report for 2016 the existence of reverse factoring arrangements was not fully disclosed. It can only be presumed to be included on page 116 of the 2016 Annual Report within Note 20 Other Creditors of £760.5m (2015 £561.7m). In 2012 Carillion had announced a switch from paying its suppliers on normal credit terms to paying them, after 120 days. If supplier needed payment earlier, Carillion had arranged a bank to pay them sooner.
The message for readers is: do your clients have financing arrangements like reverse factoring? If so, you need to ensure this is properly disclosed.
A good example of supply chain financing disclosure is in Note 19 Trade and Other Payables on page 177 of the 2018 financial statements of AstraZeneca Plc where it states ‘Trade payables includes $166m (2017: $64m; 2016: $nil) due to suppliers that have signed up to a supply chain financing programme, under which the suppliers can elect on an invoice by invoice basis to receive a discounted early payment from the partner bank rather than being paid in line with the agreed payment terms.’
More on this in our next blog.
For more on accounting matters please see our webinar on ‘Common Errors in FRS 102 Accounting’.
See our completely up to date 2019 AML Policies & Procedures Manual for Accountants.
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by John McCarthy Consulting Ltd. | Oct 29, 2019 | Blog, News
The UK audit regulator has revealed that among the key reasons for launching an investigation into the collapse of Thomas Cook were ‘issues around going concern and goodwill impairment.’
As if on cue, the Irish audit regulator IAASA, has just issued (October 2019) a revision to the audit standard on Going Concern, called ISA 570. This comes into effect for audits of accounting periods that commence on or after 15 December 2019.
The revised standard on Going Concern in Ireland will trigger additional audit work and evidence gathering for auditors in the following areas:
- greater work on the part of the auditor to more robustly challenge management’s assessment of going concern;
- thoroughly test the adequacy of the supporting evidence;
- evaluate the risk of management bias;
- make greater use of the viability statement;
- improved transparency with a new reporting requirement for the auditor of public companies, listed and large private companies to provide a clear, positive conclusion on whether management’s assessment is appropriate;
- to set out the work they have done in this respect; and
- a stand back requirement to consider all of the evidence obtained, whether corroborative or contradictory, when the auditor draws their conclusions on going concern.
This standard arrives at a very important time, in the midst of serious questions being raised about recent corporate collapses in the UK such as the travel company Thomas Cook, BHS and Carillion.
The ongoing FRC investigation into EY’s audit of the financial statements of Thomas Cook Group has raised questions about the sufficiency of the challenge auditors applied to management’s assumptions about going concern and goodwill, and the sufficiency of the audit evidence to support the work that was done.
Answering questions from the UK Business, Energy and Industrial Strategy (BEIS) committee, the FRC director of enforcement, Elizabeth Barrett, told UK MPs that there was sufficient information about potential issues within the audit to merit an investigation.
When asked to specify those concerns, Barrett replied ‘broadly speaking, in particular issues around going concern and goodwill impairment.’
While Thomas Cook had reported impairments to goodwill in 2011, there had been no further reporting on this until 2019, when £1.1bn was written down.
The UK audit regulator (FRC) has also amended the audit standards on going concern and goodwill impairment in recent times.
Support material
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by John McCarthy Consulting Ltd. | Oct 21, 2019 | News
The amendments to FRS 102 that were made and issued as part of the FRC Triennial Review almost two years ago, in December 2017, must now be adopted and put into practice.
The changes could be early adopted as far back as 1 January 2018 and in the case of directors’ loans to a ‘small’ company, from 8 May 2017.
The more significant changes are outlined below and have to be applied for accounting periods commencing from 1 January 2019, for years ended 31 December 2019 – so the clock is ticking to catch up with the rules.
Summary of the key changes
Directors’ loans: For ‘small’ entities, loans from a director or from a director’s group of close family members may be measured at transaction price, provided that the group of persons contains at least one shareholder in the entity receiving the loan. Therefore, the amortisation of long-term Directors’ loans that were previously amortised, can now be reversed.
This simplification is wider than the interim relief that was issued on 8 May 2017 and was given after representations from various professional bodies. The 2017 relief only permitted the simpler treatment if the director was a shareholder. Note that loans from a ‘small’ company to a director do not come within this exemption.
Investment properties: The ‘undue cost or effort’ exemption is gone, meaning that investment properties must now be measured at fair value. For investment properties rented to other group entities, an accounting policy choice is introduced between measurement at cost or fair value. See the application of this choice in our Investment Property web seminar here.
Intangible assets acquired in business combinations: New criteria have been introduced for recognising intangible assets separately from goodwill. This means fewer intangibles are required to be recognised separately. However, recognition is permitted if it is felt to be providing useful information and provided it is done consistently for that class of intangible and for all business combinations.
Basic financial instruments: A principles-based description of a basic financial instrument has been introduced to support the detailed conditions currently specified. This will allow a small number of financial instruments to be considered as basic, even though they may breach the detailed criteria, allowing them to be measured at amortised cost.
For more practical advice and examples on FRS 102 and the Triennial Review Amendments see our webinar here called FRS 102 – the New Regime from 1 January 2019.
The webinar will look at:
- Directors’ loans – ‘small’ entities, relaxation of some of the amortisation requirements;
- Intangibles in a business combination;
- Investment property rented within a group;
- Classification of certain financial instruments;
- Definition of financial institution; and the
- Reconciliation of net debt in statement of cash flows.
To purchase our latest June 2019 AML Manual for only €150+VAT click here and the accompanying AML webinar for €45 on the latest 2018 AML legislation click here.
by John McCarthy Consulting Ltd. | Oct 14, 2019 | Blog
In a rare speech, Sir Donald Brydon, chair of the Future of Audit in the UK, told a packed conference room that he is a little troubled at the current mood that ‘reaches for a shotgun aimed at auditors every time there is a corporate problem’.
Speaking at the first ICAEW Audit & Assurance Faculty Audit Conference on 4 October 2019, Brydon, former chair of the London Stock Exchange, stressed the importance of balancing the responsibility and the blame for company failures between auditors, audit committees and company boards.
Ultimately, Brydon said it was directors and their actions, not auditors, that should be to blame for recent audit failures. He did not name any names but recent failures like Carillion and BHS have likely triggered this response along with other reviews.
The Brydon Future of Audit review, an independent UK government review, received 120 responses – a total of 2,500 pages of comment, while over 100 meetings and roundtables were also held to gather views.
Brydon plans to report back to the UK government on his recommendations by the end of December 2019 and all the consultation responses will be published.
In his speech, Brydon revealed that the review would seek ‘to consider how audit can become a more informative process and product whilst not losing its compliance aspect’.
Brydon insisted that it was not his intention to ‘redesign Western capitalism’, adding that, it was ‘important to note that many people and organisations have expressed their frustrations with what they see as, essentially, a narrow, backward looking and increasingly rules-obsessed approach to audit’.
He said that one of the respondents to the Review ‘compared the audit to a high jump, in which auditors have little incentive to do more than the minimum required to “clear the bar”. I repeat that there is a hunger for audit to be informative and not just evidencing compliance.’
But what does this mean for the future of Irish audit practices? Much of the audit standards that are implemented in the UK, soon follow suit here.
As they say, watch this space.
For more on best practice in Audit , see our up-to-date webinar here.
Also watch out for our new fully updated AML Policies & Procedures Manual June 2019 edition – includes the latest requirements of the Criminal Justice (Money Laundering and Terrorist Financing) Acts, 2010 to 2018 which came into force on 26 November 2018
For on-demand webinars on AML and developments in Investment Property Accounting, FRS 105 – part of the Company Law Update, Common Errors in FRS 102 Accounting, visit our online webinar training website. Once viewing is completed customers will receive a CPD Certificate confirming their learning.
by John McCarthy Consulting Ltd. | Oct 1, 2019 | Blog, News
In July, the Financial Reporting Council (FRC) in London issued a consultation on proposed changes to the UK’s Ethical and Auditing Standards. It closed on September 27, 2019.
The consultation is expected to introduce revisions that will see tougher regulations on audit independence and the provision of non-audit services. Any changes that are approved will come into effect for audits of accounting periods commencing on/after 15 December 2019.
The date these changes may come into effect in Ireland is at present, unclear. Coming up to a 31 December 2019 period end, auditors are expected to be aware of the changes that may impact audits being due to be performed in 2020, before they accept or commence an assignment, so that they can properly accept or reject the audit appointment having checked the independence rules.
The aim of these changes is to place greater emphasis and focus on ethical matters and the public interest within audit firms, and to require reporting where an audit firm does not follow the ethics partner’s advice. This will be achieved by increasing the authority of the ethics partner function within audit firms.
What does this mean for Ethical and Auditing Standards in Ireland?
The IAASA has confirmed that following the FRC consultation, they will review the proposed changes and in due course, will issue a public consultation specific to Irish Standards, that will reflect the changes proposed by the FRC in the UK.
This will likely bring a change to both audit and ethical standards in Ireland.
What will the key changes be?
- A more robust, ‘reasonably informed third-party’ (RITP) test that is ‘objective’ and ‘reasonable’;
- The test would require audit firms to evaluate the effect a proposed action would have on their independence – from the perspective of public interest stakeholders;
- This test would be supported by further material, designed to encourage a more comprehensive assessment considering the spirit and letter of the standard;
- Further detailed amendments to individual standards to clarify what the auditor’s responsibilities are:
- when considering whether or not, the bodies they have audited are compliant with relevant laws and regulations
- when checking there are no material misstatements in the ‘other information’ companies include in their annual financial reports;
- Potential ban on gifts and hospitality both being received and given;
- Potential change to the definition of ‘accounting services’ where it might involve ‘playing the role of management or initiating transactions’; and an
- Absolute prohibition is proposed on the provision of internal audit services, and recruitment services to an audited entity by the auditor of that entity. And its proposed to simplify and clarify the prohibitions on the provision of Information Technology Systems.
Why would a UK change affect Irish audit standards?
Since June 2016, Ireland has had to write its own audit standards. However, they remain very similar to the FRC’s Auditing Framework as it is IAASA policy to make ‘minimal amendments to the UK framework’.
Amendments are most often only made to specify ‘Irish’ rather than ‘UK’ company law, or to remove a conflict with Irish or EU law, or differences in Irish or UK markets. In this way, whatever changes are made in the UK, Ireland is likely to follow suit.
Who writes the Irish accounting standards?
The Financial Reporting Council in London still currently write accounting standards for both the UK and Ireland. Until Brexit, the FRC will continue to write Irish accounting standards – FRS 102 being the main one. Rumour has it that the Financial Reporting Council can’t wait to get rid of FRS 105 the standard for Micro Entities, once Brexit occurs.
Post Brexit, Ireland may have to write their own accounting standards, but capacity-wise, this is a potential problem as FRS 102, for example took ten years to develop!
Support materials
There are 19 webinars on various topics, include ethics and an audit update, on our website – €45 each, or you may purchase two at the same time for €80 or five for €190.
All our webinars are accessible at any time (for 12 months from date of purchase) here.
We have also prepared, ready to use, several engagement and representation letter templates (in Word format) for many types of assignment, which help reduce misunderstandings about engagement scope and liability. These are available to purchase online (bulk purchases of 5 or more templates attract a 20% discount), please click on the relevant links.
Some latest additions may be of interest to you:
by John McCarthy Consulting Ltd. | Jul 29, 2019 | Blog, News
The Criminal Justice (Money Laundering and Terrorist Financing) Acts, 2010 to 2018 requires firms to report suspicious transactions based on the premise that a person ‘knows, suspects or has reasonable grounds to suspect, based on information obtained in the course of carrying on business as designated person’ that another person is involved in money laundering or terrorist financing. This is quite a low bar, as neither proof nor documentary evidence is required.
Suspicious Transaction Reports (STRs) are made internally within the accountancy firm to the Money Laundering Reporting Officer (MLRO) who is the only person designated by the legislation within the firm who may make an external report.
The external report is made the Garda Síochana online at GoAML and is copied to the Revenue Commissioners by post, even if it does not involve taxation.
More details on the reporting requirements are set out in our newly published AML Policies & Procedures Manual, which is available here.
It is fully updated for the Criminal Justice (Money Laundering and Terrorist Financing) Acts, 2010 to 2018 which came into force on 26 November 2018. It retails at €150+VAT.
As regards fulfilling the training requirement, see our on-demand webinars on AML, accessible at any time.
Other webinar topics include Investment Property Accounting, FRS 105, Common Errors in FRS 102 Accounting and the latest on FRS 105 and company law, visit our online webinar training website. Once viewing is completed, customers will receive a CPD Certificate confirming their learning.
