In this issue
Contributors 2 Meet the team
IFAC unveils plan to fight economic crime
AIA scholarships for four Commonwealth students
the work of a professional accountant, which encompasses the knowledge of all prior study.
Navigating tax in an e-world
Managing indirect tax in an online retail environment when there are multiple selling channels, and a global supply and customer base, is incredibly complex. Oliver Froehlich (Vertex) considers the impact of indirect tax in an online retail environment with a global supply and customer base.
Developments in Auditing and Assurance
We have now had two sittings of the new Developments in Auditing and Assurance. These notes are intended to give some additional guidance to students attempting the Developments in Auditing and Assurance paper in November 2022.
Multidisciplinary Case Study
This provides study guidance for candidates who are preparing to sit the Multidisciplinary Case Study exam in November 2022. The objectives of the paper are to ensure that students can apply professional judgement relating to
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14 SMPs and the sustainability agenda
The UN Sustainable Development Goals define sustainability as ‘a commitment to eradicate poverty and achieve a sustainable world by 2030 and beyond, with human wellbeing and a healthy planet at its core’. Salvador Marin and Paul Thompson (European Federation of Accountants and Auditors for SMEs) consider the emergence of the sustainability agenda and its implications for SMEs.
BusinessaspectsofESG 22 A sustainability journey
In the past couple of years, the topic of environmental, social and governance (ESG) aspects of a business has been extensively discussed and covered across the global media. Ganesh Ramaswamy (Kreston) considers the environmental, social and governance agenda and its implication on tax.
The impact of rising costs
The new era of R&D tax relief
With a more rigorous approach to compliance and new legislations set to come into play in 2023, HMRC has increased its focus on research and development (R&D) tax relief. Jen Badger (WhisperClaims) explains the key issues to understand in the new era of R&D tax relief compliance and the value of tax claims preparation.
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High inflation has become a reality around the world, and in some countries it has escalated at the fastest pace in 40 years. Inflation may be inherent in any economy, but today, economists’ concerns around its impact are heightened because the rising trend has been so sustained. Christine McAlarney (CBIZ and Mayer Hoffman McCann) asks how organisations can cope with the impact of rising costs and inflation on corporate budgets.
Datesforyourdiary 27 Upcoming events
28 Global updates
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Looking to a sustainable futureAngela Partington Editor, IA
We are going through some turbulent times in the UK at the moment. There has been the sad passing away of Queen Elizabeth II, followed by King Charles III acceding to the throne. Meanwhile in political circles, our new Conservative prime minister Liz Truss and chancellor Kwasi Kwarteng appear to be taking the UK through a fundamental shift in economic policy –which has not gone unacknowledged either by the international markets or the UK electorate. We will watch with interest to see how things unfold.
But as in all times of change, it is important to look ahead. The Association of International Accountants is proud to be a Silver Sponsor of the 21st World Congress of Accountants, which will take place in Mumbai from 18 to 21 November. The Congress seeks to celebrate ideas for the future, and this year will dwell upon the theme ‘Building Trust Enabling Sustainability’. It will celebrate the important part that the accountancy profession is playing as a protector of public interest, and how the profession can play an instrumental role to enable sustainable economies for the future.
In their article on page 14, Salvador Marin and Paul Thompson from the European Federation of Accountants and Auditors for SMEs (EFAA) consider the emergence of the sustainability agenda and its implications for small and medium-
sized accountancy practices (SMPs).
Small and medium-sized enterprises collectively account for a significant share of environmental and social impacts by private sector business. The accountancy practices that provide professional services to them stand to play a vital role in making economies worldwide sustainable. The article explains how the EFAA, in collaboration with members like AIA, is helping SMPs to get ready.
On page 22, Ganesh Ramaswamy extends this theme when he considers the environmental, social and governance agenda and its implication on tax.
We must acknowledge that we are embracing this challenge in difficult times, of course. High inflation has become a reality around the world, and in some countries it has escalated at the fastest pace in 40 years. On page 26, Christine McAlarney asks how organisations can cope with the impact of rising costs and inflation on corporate budgets.
Meanwhile, with a more rigorous approach to compliance and new legislations set to come into play in 2023, HMRC has increased its focus on research and development (R&D) tax relief – a fact that should be welcomed by accountancy practices. On page 18, Jen Badger explains the key issues to understand in the new era of R&D tax relief compliance and the value of tax claims preparation.
And on page 20, Oliver Froehlich considers the impact of indirect tax in an online retail environment with a global supply and customer base.
Contributors to this issueSALVADORMARIN
Salvador Marin is President of the European Federation of Accountants and Auditors for SMEs, with professional background in academia, business and practicePAULTHOMPSON
Paul Thompson is Director of the European Federation of Accountants and Auditors for SMEs and serves on the SME Implementation Group, an advisory body to the IASB.
Ganesh Ramaswamy is an international tax spokesperson and a associate at Kreston Rangamani and is based in Kerala, India.JENBADGER
Jen Badger is Operations Director at WhisperClaims. She previously spent five years working for a large R&D consultancy in the UK.
Oliver Froehlich is European e-commerce manager for Vertex, with a focus on setting-up and growing the e-commerce market share within the European region.
Christine McAlarney is a Managing Director at CBIZ MHM. She has more than 18 years of experience providing audit and financial reporting services.
IFAC unveils plan to fight economic crime
The International Federation of Accountants (IFAC) has unveiled its Action Plan for Fighting Corruption and Economic Crime, outlining the global profession’s approach to fighting corruption, working across all sectors.
Launching the Action Plan, IFAC said that it provides ‘a framework for how we can enhance the accountancy profession’s role in combating corruption and economic crimes’.
The framework is organized into five pillars, which are:
● harnessing the full potential of education and professional development;
● supporting global standards;
● contributing towards evidence-based policy making;
● strengthening impact through engagement and public partnership; and ● contributing expertise through thought leadership and advocacy.
IFAC said: ‘These five pillars are broad enough to provide a consistent framework for actions to support the plan as it evolvesINTERNATIONAL
over time. The boundaries between the different pillars are not meant to be clear cut.
‘The pillars are founded on the need for a whole ecosystem approach, with the global accountancy profession as a core part and contributor to that ecosystem. Other key factors include political leaders, government agencies, civil servants, business leaders, as well as company management and those charged with governance, global policymakers, law enforcement, other regulated professionals (such as lawyers),
and individual citizens and taxpayers. These actors all must work together in an increasingly global – yet still largely domestic – policy framework of treaties, legislation and regulations.’
It added: ‘While many of the actions will be conducted by IFAC, it is an action plan for the whole profession. We hope that professional accountancy organisations (PAOs), network partners and individual professional accountants support this Action Plan and continue to engage on how to maximise the profession’s contributions.’
Accountants must read Register of Overseas Entities small print
Accountants are being urged to make sure they understand their obligations when filing clients’ details to the new Register of Overseas Entities.
Part of the Companies House reforms that came into effect on 1 August 2022, the introduction of the Register is an attempt by the government to reduce money laundering and other financial crime utilising the UK’s financial system.
In short, any overseas entities that wants to buy, sell or transfer property or land in the UK must register with Companies House and declare who their registrable beneficial owners or managing officers are.
Importantly, overseas entities must state that they have complied with their duty to take reasonable steps to identify
(and provide information about) their registrable beneficial owners. Providing false or misleading information is a criminal offence.
A UK-regulated agent must complete verification checks on all beneficial owners and managing officers of an overseas entity before it can be registered. The agent must be based in the UK and supervised under the Money Laundering, Terrorist Financing and Transfer of Funds Regulations 2017. They can be an individual or a corporate entity, such as a financial institution or legal professional.
The Department for Business, Energy and Industrial Strategy (BEIS) has produced guidance for those who may undertake verification on behalf
of an overseas entity. But BEIS warns agents that ‘there are differences between what’s required under the Money Laundering Regulations (MLRs) by way of client due diligence and what is required by way of verification under the [new] Regulations. As such, a relevant person cannot only do what they would normally do under the MLRs and as set out in related industry guidance.’
BEIS said that ‘there is no risk-based approach to verification … so relevant persons must be confident they’ve seen documents and/ or information from reliable, independent sources to verify each piece of relevant information’. This places significant responsibility on the ‘relevant persons’ under the legislation, it said.
AIApartnerswith leadinginformation resource
AIA is pleased to announce its new strategic partnership with Croner-i, an information resource for tax and accounting, HR and compliance professionals.
Croner-i Navigate-Business offers a concise package for businesses that need a range of resources in one easy-to-access place. Through this partnership, AIA members can enjoy up to a 20% discount off the platform today, including a full suite of resources that will ease the dayto-day administrative pressures of owning and managing a growing business.
Announcing the partnership, AIA Director of Sales and Marketing, Carl Jepson said: ‘We are thrilled to enter into a strategic partnership with Croner-i. The partnership will offer AIA members free and exclusive use of Navigate-Business Lite, which is designed to ensure you make business decisions with all the facts to hand.
‘The new digital platform will help our members to keep their business compliant, get things done faster, and enjoy more time to focus on any key projects.’
To find out more, or to discuss package options, contact Croner-i at bit.ly/3LZ9Oa6.
AIA scholarships for four Commonwealth students
AIA is proud to announce that four successful applicants have begun the newly introduced AIA Scholarship Programme, funded by The AIA Educational and Benevolent Trust. The scholarships programme aims to support students with strong career aspirations in accountancy or audit to obtain the AIA professional qualification with full financial assistance. It represents one of the steps that AIA is taking to develop financial education and provide students with a real chance to fulfil their potential, by utilising the Trust Fund available.
The AIA Scholarship Programme’s successful applicants are Gabriel Kayode Olaoye from Nigeria, Jonathan Taylor from Grenada, and Jotham Mativo Wambua and Henry Bogita Matagaro, both from Kenya. All showed the passion, drive and willingness to learn in order to develop their future career and make a difference within the accountancy profession.
The AIA Scholarship Programme offers awards to students from the UK and the Commonwealth.
The UK Scholarship is available through the AIA Accountancy Scholarship UK, two of which are given with priority to applicants from lower socio-economic backgrounds to support the AIA’s commitment to Access Accountancy. All course and exam fees for the AIA professional qualification on either the accountancy or audit route are covered by AIA Achieve Academy.
The AIA Commonwealth Scholarship is part of the AIA’s aim as a Commonwealth
Accredited Organisation to support education and economy through financial education and professional skills. This award also covers all course and exam fees for the AIA professional qualification on either the accountancy or audit route.
The AIA Scholarship Programme provides a great opportunity for fully funded learning and we encourage applications from a diverse range of candidates.
The AIA Scholarship Programme will be open to applicants, both in the UK and Commonwealth, on an annual basis. Applications for 2023 programme will be opening in the coming months.
Carl Jepson, Director of Sales and Marketing, said: ‘AIA is keen to contribute to long-lasting change in the global accountancy profession.
‘This Scholarship Programme represents one of the steps we are taking to develop financial education and provide students with a real chance to fulfil their potential. AIA would like to congratulate the four successful students and wish them every success on their accountancy journey.’
AIA ENIC international qualification comparison published
The new AIA professional qualification has been independently assessed by the UK National Information Centre (UK ENIC, formerly NARIC) for global qualifications and skills, ensuring that it remains at the appropriately high specification.
AIA first commissioned the independent evaluation and benchmarking of the updated AIA Professional Qualification for assessment in November 2021 , in relation to the Regulated Qualifications Framework (RQF) in the UK.
The overall aim of this benchmarking exercise was to facilitate wider understanding of the comparable educational levels of all three levels of the programme and the AIA International Accountant designation.
The report found the following comparability in the context of the UK education system, as show. In 2022, AIA commissioned an additional independent evaluation and benchmarking of the updated AIA Professional Qualification for assessment in relation to four international qualifications frameworks: India, Malaysia, United Arab Emirates and the People’s Republic of China.
An in-depth comparison of the AIA Professional Qualification content and assessment was conducted as part of the comparative analysis in the context of the UK system in 2021. The findings and recommended levels of comparability of the AIA Professional Qualification and the three exit qualifications against the RQF in 2021 were used to determine an appropriate range of reference points in the international education systems. A comparative analysis was subsequently conducted against framework level descriptors and qualification levels in China.
The report found the following comparability in the above frameworks
AIA Qualification / Designation
Comparable Chinese Qualification Levels1
Certificate in Accountancy Junior College (Zhuanke) Graduation Certificate standard
Diploma in Accountancy Chinese Bachelor degree standard
Advanced Diploma in Accountancy Chinese Master’s degree standard
International Accountant (IA) Chinese Master’s degree standard
Professional Qualification for Statutory Auditors Chinese Master’s degree standard
as shown. The assessment of the qualification used a well-established methodology for benchmarking qualifications to examine each qualification’s entry requirements, duration, structure, content, learning outcomes, modes of learning, assessment and associated outcomes.
AIA President Shahram Moallemi said, ‘As part of the AIA’s ongoing qualification evaluation cycle, UK ENIC recently completed an independent review and found the AIA Professional Qualification to be comparable to a Master’s degree or postgraduate diploma across four international jurisdictions. The assessment and findings will help individuals and organisations to accurately assess the AIA Professional Qualification, make further international comparisons and reassure those using the services of AIA members that they can expect the highest standards.’
AIA also maintains its recognition as a for statutory auditors in the
UK, as a Prescribed Body under the Companies (Auditing and Accounting) Act 2014 in the Republic of Ireland, and as a supervisory body under the UK and ROI Money Laundering Regulations.
AIA Qualification / Designation Comparable RQF level
Certificate in Accountancy
Diploma in Accountancy
Advanced Diploma in Accountancy
International Accountant (IA)
Recognised Professional Qualification (Qualification as a Statutory Auditor in the United Kingdom)
Disciplinary Committee Outcomes
● Failure to supply sufficient information to facilitate a meaningful monitoring review within the period specified by AIA.
● Failure to comply with the ruling of the Disciplinary Committee.
Member found to be in breach of AIA Public Practice Regulations 12.1 and 12.2 and Complaints, Disciplinary & Appeals Regulation 184.108.40.206
The member is excluded from AIA Membership effective from 9 September 2022.
● Failure to cooperate with arranging or following a monitoring visit.
● Failure to cooperate with the Disciplinary Committee ruling of 30 May 2022.
● Failure to complete an annual membership and practice return.
Member in breach of Public Practice Regulations 12.1 and 12.2; Compliant, Disciplinary and Appeals Regulations 4.1 and Membership Regulation 20.1
The member is excluded from AIA Membership effective from 9 September 2022.
AIA’s work on green finance and sustainability
AIA plays two distinct roles in promoting green finance and sustainability. As a professional body, we are committed through our policy agenda to act as an authoritative voice within the accountancy sector to raise standards and education in green finance and sustainability. We also ensure that our members have the skills, knowledge and tools to promote sustainable business practices.
The government, the Green Finance Institute, and a number leading financial professional bodies, including AIA, are signatories of the green finance education charter, designed to embed green finance and sustainability into the core curricula, new qualifications and the continued professional development of accountants.
Each of the signatories acknowledge the collective responsibility of the global community, including the banking, finance and professional services sectors, to deliver Article 2.1c of the Paris Agreement and the UN Sustainable Development Goals
AIA responds to EU Sustainability Reporting Standards
AIA has responded to the European Commission’s proposals outlining the adoption of EU Sustainability Reporting Standards (ESRS) linked to a Corporate Sustainability Reporting Directive (CSRD). Many SMEs – and the small practitioners (SMPs) supporting them through the provision of advisory, accounting and assurance services – stand to be impacted directly or indirectly, by the CSRD and the EFRAG’s ESRS. Our response is focused on the impact and implications for SMEs and SMPs. And our response is principle-based.
The proposal for a Corporate Sustainability Directive (CSRD) requires that the European Financial Reporting Advisory Group (EFRAG)’s Technical Advice is prepared with ‘proper due process, public oversight and transparency, and with the expertise of relevant stakeholders, and it is accompanied by cost-benefit analyses that include analyses of the impacts of the Technical Advice on sustainability matters’, contributing to the delegated acts through which the EU Sustainability Reporting Standards (ESRS) will be adopted in the EU.
In order to meet the ambitious deadlines for submitting the first set of draft Standards to the European Commission by November 2022 and to benefit from the longest public consultation period possible, the EFRAG Sustainability Reporting Board launched a public consultation on the basis of the exposure drafts prepared under the sole responsibility of the Project Task Force on European sustainability reporting standards. These exposure drafts correspond to the first set of standards required under the CSRD proposal and cover the full range of sustainability matters: environment, social, governance and cross-cutting standards.
In submitting our response, we have collaborated with other members of the European Federation of Accountants and Auditors for SMEs (EFAA), with particular input from the Accounting, Assurance and EU Professional Regulation Expert Groups.
The EFAA represents accountants and auditors providing professional services primarily to SMEs both within the EU and Europe as a whole. Constituents are mainly SMPs, including a significant number of sole practitioners. EFAA’s members, therefore, are SMEs themselves, and provide professional services (e.g. audit, accounting, bookkeeping, tax and business advice) to SMEs. EFAA represents 15 national accounting, auditing and tax advisor organisations with more than 380,000 individual members.
Developments in Auditing and Assurance
These notes are intended to give some additional guidance to students attempting the Developments in Auditing and Assurance paper in November 2022.
We have now had two sittings of the new Developments in Auditing and Assurance. The paper has changed somewhat from the old Paper 15 Professional Accountant in construct and emphasis, although the content is broadly similar and the key factors leading to success in the paper apply. Advice from past papers in your study pack will help you and there is material on the student online support from previous diets that will also prove helpful.
Although the world of auditing is changing and developing, many of the issues that were important in previous papers remain so now. I have amended this material for this sitting and I urge you to engage with it online!
The paper is examining your ability to analyse issues and then develop appropriate audit or other responses, as well as demonstrating your ability to critically appraise current practice and future developments. To enable the examiner to test these skills, the Developments in Auditing and Accounting paper is based around a complex real-world scenario from which audit and assurance issues arise.
The paper is split into three questions, all of which are compulsory, and which may or may not always relate to the same scenario. The first question, worth 50% of the marks, will always be based on this scenario.
The key skill that you are being assessed on within this question is the ability to apply your professional knowledge and skills to the specific issues arising in the audit/assurance engagement described. To maximise your marks, you must address the specific issues in the scenario against relevant professional auditing standards, professional codes or quality guidance and illustrate that you appreciate the key risks and problems within the issue. In both prior sittings of this paper, the examiner has noted that students have not related the answer to the scenario and have tended to describe, rather than analysing and applying. This is a key weakness as it means that many of the marks for the answers are missed and the higher skills required in the paper are not demonstrated.
The scenario will give details of an entity subject to an audit or assurance assignment. Students will be asked to place themselves within a professional service team – usually as the audit manager or engagement partner – and to respond to the issues raised from this practical perspective.
Always these topics represent the audit of an accounting estimate. Therefore you should be applying the ideas of ISA 540 Audit of Accounting Estimates (revised), reflecting the move by IFAC to embed increased professional scepticism and evidence of management challenge in the work done. They also always require an ability to assess risk and management bias within the context that the entity is operating, and for the specific accounting balance or issue being explored. You must appreciate the impact that the context in which the entity operates has upon these risks. This is assessing your ability to identify risks and develop appropriate responses in the professional assignment.
The examiner tries to ensure that the issues examined are as relevant as possible and will therefore contextualise the entity in challenges that are contemporary and should be familiar to the student. The examiner also will ensure that the entity described is in a business that most students should be able to relate to. All the detailed information that students require to analyse risks and understand the unique problems facing the entity will be detailed in the scenario – and so some diligent reading initially to extract the key issues is advised! Credit will be given in the answers if students include additional understanding from their own studies but there will be sufficient information given in the scenario to explore the issues in depth.
The key weakness in answers is a lack of development of issues. This may reflect some lack of reading of the scenario or a lack of detailed knowledge of the relevant standards being examined. Whilst lack of knowledge can only be resolved by detailed preparation (see my online article), lack of application can be resolved by exam technique. As the paper is 70% application and 20% evaluation and synthesis rather than knowledge recall, your answers must reflect this.
I advise students to ensure that they understand the key issues in accounting standards, auditing standards, professional codes, quality standards, etc. and then apply these to the question diligently.
Reiterating the question does not score marks and merely stating the theory without application also results in low marks.
The examiners’ main observation on the performance of most papers concerned the lack of
depth in the answers. You need to make explicit links between the professional requirements applicable to the issue and the issue as described. Side headings are useful. You can either structure the answer around the individual issues within the question that are applicable or against the sections of the standard/code you are using to determine your professional response – but only include those sections that are relevant!
Your preliminary analysis of the scenario should always apply the indicators of problems in ISA 315
Identifying the Risks of Material Uncertainty (revised) and ISA 570 Going Concern Both of these standards have been revised in recent years and you must be familiar with the emphasis that the new standards place on the audit approach. You are particularly directed to the move away from the exploration of Business Risk in ISA 315 to a framework of assessing inherent risk by considering complexity, subjectivity, change and susceptibility of a balance to misstatement – either by manipulation or by error.
I summarise a useful set of headings to help you to focus your answers extracted from these standards:
a. The following aspects of the entity and its environment:
i. the entity’s organisational structure, ownership and governance, and its business model, including the extent to which the business model integrates the use of IT;
ii. industry, regulatory and other external factors; and
iii. the measures used, internally and externally, to assess the entity’s financial performance.
b. The applicable financial reporting framework, and the entity’s accounting policies and the reasons for any changes thereto.
c. How inherent risk factors affect susceptibility of assertions to misstatement and the degree to which they do so, in the preparation of the financial statements in accordance with the applicable financial reporting.
If you have a good knowledge of the details of these standards, you will have good template for analysing any assurance/audit engagement
– and hence any Developments in Auditing and Assurance scenario.
You must also ensure that you understand what the overall context is for the question. To that end ensure you identify the following:
● What role have you been assigned (audit manager, engagement partner, ethics partner)?
● What sort of firm are you working for? Is it an international LLP? Does it have a lot of offices nationally or internationally? Does it have offices near the client and its operational bases?
● Are there any issues with staff changes? Are there any indicators of problems with quality or competence of the staff?
● Are there any development issues in the light of new standards or practices?
● What aspect of the engagement does each sub part of the question require you to address?
● How do the issues you have identified in your planning relate to and affect these? Are any specific accounting standards or issues being explored in the question? What are the issues in applying those standards in practice and what issues in the question may make these difficult?
● Is there management bias? How will it potentially affect the way in which the accounting estimates are treated?
If the question asks for specific guidance on the conduct of the audit work, be as specific as possible around the evidence that you will obtain – and link this into the ideas from the standards.
The paper focuses on complex issues and your ability to synthesise information. This means that you will be pulling information from a lot of sources in the question and from a lot of different auditing and accounting and other professional standards. This reflects the real world of a working auditor –it is rare to get a real-life problem which nicely sits in only one aspect of accounting or auditing!
Having identified the issues from the scenario and decided upon the correct response for the question, write the answer clearly showing the link between the two. As stated above side headings are useful to structure the answer and clearly demonstrate the links between professional standards and how this applies to the issue you are addressing.
● Ensure that you address the specific requirements of the question.
● Use side headings, including an introduction and conclusion or recommendations (depending upon the requirements) to sign post the marker around the answer.
● Use full sentences, not bullet points.
The Developments in Auditing and Assurance paper is not designed to trip you up or to trick you. The examiner has written a scenario that allows you to show your professional knowledge and skills and that you have the necessary competence to be in charge of an audit or assurance assignment in the real world. ●
Youwill bepulling information fromalotof differentsources inthequestion.
Multidisciplinary Case Study
This article provides study guidance for candidates who are preparing to sit the Multidisciplinary Case Study exam in November 2022.
Theobjectives of the Multidisciplinary Case Study paper are to ensure that students can apply professional judgement relating to the work of a professional accountant, which encompasses the knowledge of all prior study. The paper combines and consolidates the aims of the other papers in the syllabus but is not aimed at students studying for the registered qualified accountant status who attempt an
audit focused multi-disciplinary case. After successfully completing this paper students should be able to:
● apply knowledge gained from the other papers in the AIA curriculum to a practical case study; ● analyse relevant and significant information from a combination of pre-seen and unseen materials that describe a practical situation;
prepare clear, logical and comprehensive responses that meet the needs of the designated recipients, as identified in the case study and its associated requirements; and ● communicate in a clear and concise manner to a designated reader.
This paper requires existing skills, which have been assessed earlier in the curriculum, to be applied in a more practical setting than is possible in a more traditional exam.
The paper will comprise a pre-seen scenario that will be made available via the AIA website six weeks before the date of the examination. Students will be free to read and study the materials provided, to research the background to the entity’s circumstances and to discuss the materials with colleagues. The content of the scenario will not indicate the precise form that the final requirement will take, although it is recognised that students will be able to think ahead and to pre-empt the requirement to some extent. It should be borne in mind that students will have already demonstrated their competence with respect to the technical aspects of the curriculum and so any advantage that can be obtained from the pre-seen case will not dilute the standard required of a successful exam candidate.
The pre-seen materials will be supplemented by an unseen component, which will not be made available until the examination itself. This will provide further facts that will be required in order to satisfy the requirement.
The requirement itself will require the preparation of a specific document, such as a report or a memorandum, that is addressed to a specific reader or readers. The document will draw upon the case and will require the ability to make use of the background information gleaned from the pre-seen scenario, as well as the ability to assimilate the new material from the unseen content.
Candidates are reminded that the marks are awarded for their ability to apply their technical knowledge from prior to AIA study to the case study scenario and to formulate and communicate an appropriate professional response to this. It is not possible to pass the paper based upon pure technical knowledge. The quality of the professional judgement shown in, for example, prioritising relevance and developing appropriate professional responses, is critical to success.
Candidates are expected to demonstrate application and critical analysis skills within their answers. They are reminded that this examination is the capstone of their professional examinations and will explore all aspects of work as an audit practitioner. This encompasses all aspects of technical knowledge presented as part of a practical scenario. It is not possible to predict the technical areas to be examined from the seen material and candidates should prepare themselves for some aspect of audit related work for the client presented in the case study. The AIA is satisfying itself that you are technically competent and professional in your approach to your clients to allow you to assume the status of a professional accountant.
Answers should be presented and written in a professional language appropriate for the intended audience. The answers should be structured
logically with the use of accepted conventions for the document style. Ideas should be expressed with clarity and accuracy and use information from the case study as evidence to explain the issue or support its importance. The recognition of problems and the suggestions for action should reflect generally accepted auditing practice (where appropriate) and demonstrate consideration and understanding of technical skills expected of qualified practising accountants. The answers should comply with International Ethical Standards issued by the International Ethics Standards Board (IESBA) and the Ethical Standards (ESs) published by the Auditing Practice Board.
Candidates should look at the previous case study set for May 2022 to understand the format of the paper.
The ‘preseen’ material of the MDCS will give details of a company or organisation that you will engage in professional work for. You may be working within the organisation in the finance department or within some other part of the organisation or you may be an external consultant. The role that you are given will influence the tone of your report and the type of tasks that you are asked to do.
You should ensure that you analyse the information given to you to develop a picture of the organisation (products, market niche, strategy, internal risks and control environment) and research the wider business context to understand any external risks and challenges. Identifying similar companies from real life and researching into their challenges and opportunities may prove helpful. Please remember that not all of the information given to you may prove to be relevant for the examination but prepare as though it might be! Also remember that the information you are being given may be in draft format and subject to change or may have been incorrect. Organisational information is not always accurate and sometimes employees and directors are deliberately misleading. The case study aims to replicate the practical experiences that accountants have day to day.
As the examination aims to replicate your reallife experiences of working as an accountant, you need to ensure that you are familiar with practical aspects of working in a team and within an organisational structure, as well as your technical accounting, finance, ethics and business decision making knowledge. The case study specifically aims to explore your understanding of corporate strategy and how it impacts on the work of the accountant.
You should ensure that you are comfortable with writing standard professional documents. As an accountant, you will have to be able to write reports to a professional standard and the MDCS aims to
Thepaper willcomprise apre‑seen scenariothat willbemade availablesix weeksbefore theexamination.
ensure that qualified members of the AIA are able to do this.
The examination will require you to demonstrate your ability to support and advise directors and colleagues and your competence in providing relevant and sensible advice.
You will be required to demonstrate your commitment to the ethical standards articulated by the Auditing Practices Board (APB) in the Code of Ethics and you should ensure that any responses you give comply with these codes.
The MDCS is an ‘open’ style of examination where there are a number of possible approaches and interpretations that you may take. You should aim to show your professional competence and a key aspect of this is demonstrating your technical knowledge through appropriate application in the practical scenario you are presented with.
Plan and structure your answer to allow you to produce a professional document as specified by the question. Ensure that you answer the question in the format asked and that the document looks realistic. A letter should be headed as a letter and a memo presented as a memo, for example.
You will not earn marks for repeating what is in the case study. The marks are given for applying your technical knowledge to the case study so ensure that you do not restate the case study.
This allows the examiner to see if your approach to answering the question was correct even if your final answer was incorrect. If detailed and clear workings are included, then part marks will be awarded. Any workings written on individual sheets of paper should be inserted into the exam script. These workings should generally be given in the appendices to any report requested
The MDCS requires you to produce a professionally relevant document and therefore there is only one question. The requirements will be broken down into specific information required in the document and the examiner may give an indicative weighting to that. You must ensure that you consider all of the requirements and fulfil them to the best of your ability.
You must allocate time specifically to the questions you intend to answer, ensuring that you effectively manage the time available. Use the first hour to review the case and plan your answer. Allocating
time appropriately is important, as the first marks in a question are always the easiest to collect.
You must be prepared to answer questions on all of the papers listed in the syllabus. The MDCS combines and consolidates the learning outcomes of all papers in the syllabus. However, you must be careful with the ‘voice’ you use in applying your knowledge. The MDCS focuses upon your work as a professional accountant within the organisation or an accounting adviser in a professional practice and you should ensure you write in this role. This is especially important as you need to be clear if you work for the organisation or not!
The MDCS is examining your practical application of knowledge to your professional practice. In this respect, you are practising your exam technique with any professional work you do. Bring those skills of common sense and experience to your response to the scenario.
It is appropriate to think about what you would do at work as a start point. Identify the role that the case study asks you to take and then design an appropriate document structure to deliver the desired information. You must ensure you tailor your response to the audience. You may be writing to your shareholders, your board or to CFO or other colleague, and these have slightly different levels of accounting knowledge that you can assume. This should be evidenced in the style of writing you adopt. Side headings are generally acceptable in reports and letters and you can use bullet points for emphasis but should always write in full sentences.
You should increase your knowledge and ability to pass the MDCS by researching the information provided in the pre-seen material. You should also ensure that you are remaining up to date around technical developments in accounting and governance and are familiar with developing strategic issues facing organisation. For this reason, you must keep up to date with the technical pronouncements on the AIA website and follow these up in the FRC and IFAC websites. You are being assessed for your professional competence and your ability to stay informed is a key aspect to this.
You must ensure that you are up to date on current accountancy issues, including International Standards on Financial Reporting Standards
Theexamination willrequireyou todemonstrate your competence inproviding relevantand sensibleadvice.
defined in the syllabus. You should have an understanding of and engagement with appropriate IFRS. Most IFRS contain definitions, criteria and other requirements which can be learned and applied to the scenarios in the exam papers. These demonstrate not only your knowledge of IFRS but also your ability to apply that knowledge in practice.
Candidates are expected to be competent in the assessment of risk and provision of strategic advice to organisations, as well as their ability to give advice for investment and strategic decision making.
You must get plenty of practice in answering case study questions. A good answer to a case study does not just cover the theoretical aspects of the topic but also addresses the answer in the context of the case study and demonstrates the ability to apply that knowledge in practice
Make sure you know how to answer the question by interpreting the command words correctly. Remember to request a copy of the ‘Teaching and Learning Guide’, which contains definitions of the command words.
Time management is a continual problem for candidates generally. If you spend too much time on one aspect of the requirements, then this will affect the time you have left to complete the remaining elements.
Some candidates are able to demonstrate that they understand the basics of a particular issue but then fail to apply that understanding to the scenario or case study in the question. You must be able to apply that knowledge.
Another area of weakness concerns the common misunderstanding of a question’s requirements. Some candidates demonstrate a lack of understanding in terms of what is meant by the command words and this in turn affects how they answer the question.
Candidates must ensure that they have a good understanding of the complete syllabus as you will be tested on applying your knowledge in practice to different and complex situations. However, the most significant issue which causes failure of the paper relates to answers which are under-developed and not related to the specific issues in the case study.
This is the second sitting of the new AIA MDCS and the following is intended as additional support to students attempting this new style of examination.
You should attempt the past paper first as though it is your real paper. Engage in relevant research around the company from just the unseen
element of the material and then look at the seen material plus the requirements. You should then reflect upon whether your preparation would have been sufficiently wide to cover all possible angles in the requirements. You will not always be the external auditor for the company, as professional accountants provide wider assurance and consultancy support which draw on the skills required within audit.
Your preparation for the Case Study should reflect the type of preparation a professional accountant would engage in when getting to know their client and you may find helpful the guidance in ISA 315, Identifying and Assessing the Risks of Material Misstatement through Understanding the Entity and Its Environment.
However, you must ensure that you have considered the key elements from audit assignments which include the assessment of all aspects of business risk, the ability to critically evaluate control systems and the control environment. You must suggest improvements to these, the ethical considerations around client conduct, the key challenges in accounting and decision making, including accounting estimates, accounting for complex issues and the techniques of investment appraisal.
The case study reflects a fictional company but is based in real events. You should use the additional newspaper articles as clues for context and external risks facing the company. Although these articles are fictionalised and may reflect historic challenges relevant to the industry or country of operation, you should consider them as current. You can research into the reality of these events as part of your knowledge of the business.
As you will aware, sustainability and ethical conduct by organisations is becoming increasingly important. Organisations must manage their reputations through complying with acceptable business practice in their stakeholder relationships and this is a key area affecting the strategic direction. The ethics paper is therefore key as prior knowledge to inform your analysis and you must ensure that you are able to appraise the validity of organisational conduct from an ethical and sustainable perspective.
The case study also reflects contemporary challenges in accounting and reporting and the following additional links may support your wider reading:
● Guidance on Board Effectiveness (bit.ly/2urwHwc)
● Guidance on Audit Committees (bit.ly/2PVJCT8)
● Guidance on Risk Management and Internal Control (bit.ly/3LMPIzZ)
● Ethical Standards (bit.ly/2LuS8Eb)
Youwillbe testedon applyingyour knowledge inpractice todifferent andcomplex situations.
SMPs and the sustainability agenda
Salvador Marinand Paul Thompsonconsider the emergence of the sustainability agenda and its implications for SMEs and SMPs.
SalvadorMarin President,EFAA PaulThompson Director,EFAA
Sustainability is not just about the environment. The UN Sustainable Development Goals define sustainability as ‘a commitment to eradicate poverty and achieve a sustainable world by 2030 and beyond, with human wellbeing and a healthy planet at its core’ (see https://sdgs.un.org/goals ).
Sustainable development is a core principle of the Treaty on European Union. It is also a priority objective for the Union’s core policies. Small and medium-sized enterprises (SMEs) collectively account for a significant, if not majority, share of environmental and social impacts by private sector business. Consequently, SMEs, and the small and medium-sized accountancy practices (SMPs) that provide professional services to them, stand to play a vital role in making economies worldwide sustainable.
In this article, we examine the role of SMPs in relation to the sustainability agenda and the implications in terms of capacity and competition. We then look at how the European Federation of Accountants and Auditors for SMEs (EFAA), in collaboration with members like AIA, is helping SMPs to get ready.
Box 1: Role of SMPs in sustainability summarises the various ways in which SMPs can contribute towards sustainability as explained in EFAA’s ‘ Call to Action: SMPs Supporting Creation of the Sustainable Economy’ (see bit.ly/3BlqVzb).©Gettyimages/iStockphoto
SMPs will need to build the capacity to provide high quality sustainability services as soon as possible. In the coming few years, sustainability reporting and assurance will grow exponentially in its incidence and sophistication. This is especially the case in the EU and jurisdictions, like the UK, that are heavily influenced by EU regulation.
In July 2022, the EU finalised its Corporate Sustainability Reporting Directive, which will mandate sustainability reporting for some 50,000 EU companies in the foreseeable future. See Box 2: The key provisions of the Corporate Sustainability Report Directive
And whether SMEs like it or not, they will be impacted as larger companies in their value chain, and banks extending them credit, demand sustainability information to fulfil their own reporting obligations. This is particularly the case with European sustainability reporting standards under development by the European Financial Reporting Advisory Group (EFRAG), the recently appointed technical advisor on sustainability reporting to the EC.
This presents an enormous opportunity to SMPs – to expand the suite of professional services offered to SMEs – but presents an equally large challenge and responsibility, that of building the capacity to provide high quality sustainability reporting and assurance services. SMPs have the necessary core competences and ethical compass, thanks to their robust education and training, their continuing professional development (CPD) and their commitment to an ethical code. But they will need to develop new skills and competences – developing subject matter expertise in ESG and sustainability, as well as honing soft skills, such as their ability to lead and collaborate. They will also need to attract and retain new talent. But more than that: they will need to transform their practice as we discussed at the 2022 EFAA International Conference (see bit.ly/3ePntEj).
Building the capacity is key to being competitive in the market for sustainability reporting and assurance services. The market for financial statement audit is highly concentrated in many EU member states with a handful of firms dominating the market. This concentration – which may adversely impact competition and choice and, in turn, quality of service – may be repeated in the market for sustainability reporting and assurance services. Of course, competition will also come from beyond the accountancy sector. There is a rapid growing number of consultants muscling in on the market, some reputable sustainability
experts, many without professional training and an ethical compass like the Code of Ethics.
EFAA is the unique voice for SMPs in Europe, helping to shape policy, regulation and professional standards to ensure they are relevant and scalable for SMPs and SMEs. EFAA also helps SMPs to continually adapt and transform to stay competitive and relevant. Our efforts to help SMPs to play their part in the sustainability space fall into three categories.
EFAA advocates for the role of SMPs in supporting sustainability, seeking to raise
Box1:RoleofSMPsinsustainability SMPs can support the creation of a sustainable economy in the following ways:
1. Advise on sustainable business practices: SMPs can encourage and advise their clients on how they can adopt sustainable business practices and improve their sustainability performance. This advice may include how to reduce their carbon footprint and how to comply with health, safety and environmental regulations. If they are to provide such advice to clients, then SMPs themselves need to ‘practice what they preach’ by adopting such practices themselves.
2. Adopt sustainable business practices: SMPs themselves have a responsibility to change their way of working so that they become more sustainable. Hence, they need to embrace sustainable business practices. Such practices include reducing their carbon footprint and providing a safe and inclusive place to work. Digital technologies can help; for example, remote working can reduce carbon emissions.
3. Prepare sustainability reports: SMPs have traditionally prepared the financial information and reports, both for management and external reporting purposes, for clients that lack the in-house expertise or capacity to do so themselves. Going forward, SMPs can expect increasing numbers of clients to ask them to also prepare sustainability information and reports.
4. Provide assurance on sustainability information: SMPs sometimes provide audit and other forms of assurance on financial information and reports of clients. Going forward, SMPs can expect an increasing number of clients to seek assurance on their sustainability information and reports.
Source: ‘Call to Action: SMPs Supporting Creation of the Sustainable Economy’, EFAA, 19 July 2021
SMPswillneedtobuildthe capacitytoprovidehighquality sustainabilityservicesassoon aspossible.
● Reporting requirements will apply to all large companies, all listed companies (except listed micro enterprises) and non-EU companies with branches or subsidiaries in the EU above certain thresholds.
● Listed SMEs will have an option to use simpler, proportionate standards and the possibility to opt out for two years after entry into application. The Corporate Sustainability Reporting Directive also specifies reporting requirements for listed SMEs.
● Reporting is to be phased in starting with public interest entities PIEs with over 500 employees from 1 January 2024 (first reports to be published in 2025); large undertakings from 1 January 2025 (first reports in 2026); listed SMEs from 1 January 2026 (first reports in 2027; deferral to 2029 possible); and non-EU companies with branches/subsidiaries from 1 January 2028 (first reports in 2029).
● European sustainability reporting standards (ESRS) will take account of the difficulties that undertakings may face gathering information from undertakings in their value chain, especially from unlisted SMEs. The standards shall not specify information to be obtained from unlisted SMEs that goes beyond that required for listed SMEs.
● Reports will need to be subject to independent assurance, from auditors or certifiers, initially limited assurance.
Source: Final text of the Corporate Sustainability Reporting Directive, European Commission, 30 June 2022.
awareness of the issues involved. After issuing a Call to Action ‘SMPs supporting creation of the sustainable economy’ in July 2021, we teamed up with IFAC in December 2021 to host a global webinar to alert SMPs to the need to prepare for the sustainability tsunami. We also created a new section on our website ‘SMPs supporting sustainability’ (see bit.ly/3S3fLVj ) and a twice monthly e-newsletter ‘Latest from Brussels’.
SalvadorMarínisPresident ofEFAAforSMEs,andhis professionalbackground spanspractice,global businessandacademia.
EFAA predicted that sustainability reporting would grow exponentially in its incidence and sophistication – going from ‘margin to mainstream’ – and that this would require SMPs to build their capacity to offer high quality sustainability services. In 2019, we joined the INTEgrated REporting for SMEs Transparency (INTEREST) ERASMUS+ Strategic Partnership, a consortium of universities and non educational partners from across the EU that publishes education and training materials to support integrated reports for SMEs (see bit.ly/3xnQXiP).
We use a variety of media to share developments, news and resources on sustainability reporting and assurance, as well as on how SMPs can transform their practices through digitalisation and diversification.
EFAAbelievesthatSMPshavea crucialroletoplayinsupporting thepursuitofsustainability.
EFAA is also busy in the policy and standard setting arena. In April 2021, EFAA published a position statement in response to the then proposed Corporate Sustainability Reporting Directive (CSRD). While broadly welcoming the proposals, EFAA expressed some concerns. The final CSRD alleviates many, but not all, of these concerns.
EFAA is also an active member of EFRAG’s new Sustainability Reporting Pillar and represents SMEs and SMPs on their Sustainability Reporting Board (SRB), responsible for handing over the ‘core’ set of European sustainability reporting standards in mid-November 2022. EFAA, with input from AIA, has argued that the standards are too complex and burdensome, that SMPs lack the capacity to support SMEs, and urging EFRAG to fast-track development of standards for voluntary use by unlisted SMEs.
EFAA is also insisting on greater representation of SMEs and SMPs on both the EFRAG SRB and International Sustainability Standards Board (ISSB). The ISSB is developing the global baseline and is building scalability into their core standards rather than have a separate standard for SMEs.
EFAA and its member organisations believe that SMPs play a crucial role in supporting the pursuit of sustainability. This presents a significant challenge, opportunity and responsibility. SMPs have proven repeatedly that they can overcome similar challenges, leverage opportunities and fulfil their responsibilities. Equally, EFAA and its member organisations also have a key role to play –by helping EFRAG to develop sustainability reporting standards that are proportional for SMEs, clarify what is required, and embracing the principles of ‘Think Small First’ and ‘Smart Regulation’ and helping SMPs to play their part.
EFAA, as the primary and unique voice for SMPs in Europe, calls on SMPs to seize the opportunity by reaching out to their SME clients now. This is the profession’s responsibility, as well as in its own interest. But, more importantly, this is in the public interest. ●
The new era of R&D tax relief
Jen Badger explains the key issues to understand in the new era of R&D tax relief compliance and the value of tax claims preparation.JenBadger OperationsDirector,WhisperClaims
HMRChas increasedits focusonR&D taxrelief–a factthatshould bewelcomed byaccountancy practices.
Witha more rigorous approach to compliance and new legislations set to come into play in 2023, HMRC
has increased its focus on research and development (R&D) tax relief – a fact that should be welcomed by accountancy practices.
Those advisers recognised as pushing the R&D tax relief boundaries are likely to face extra scrutiny. This is the perfect opportunity for accountants to expand their range of services, build on existing expertise and develop new understanding to add value for clients and generate revenue in the process.
Dealings with HMRC are part and parcel of any accountant’s daily activity. So why are the rumours surrounding HMRC’s current focus on R&D tax relief claims taking the industry by surprise? Most trusted accountants are aware of the ‘rogue’ element and the impact that can have on their clients. Therefore, any compliance activity that brings a new level of accuracy and validity to R&D tax relief claims is to be welcomed.
As a trusted adviser, an accountant will already have an in-depth knowledge of the claimant’s business – a great foundation for the R&D tax advice process. The key is to build – or build on – a good understanding of the R&D tax scheme and implement robust processes. Ensure that the practice has advisors who can guide
their clients through the qualifying criteria. If the firm needs to develop those skills, it really isn’t that daunting – if you have the right tools at hand to assist.
One of the most important and valuable aspects of this process is working closely with a client to help the business understand the scheme because it is the claimant that must judge eligibility. These individuals know the business, they are competent professionals and they have the in-depth knowledge required to identify innovation within their field. The adviser’s role is to challenge them on the level of innovation to ensure the claim is valid.
Technology, designed by R&D tax relief experts, already exists on the market to help accountants streamline the claims process and build trust with their clients, pulling on their knowledge with prompts to ensure that the claimant’s work fits the criteria for technical or scientific innovation.
It can also help accountants to be rigorous when it comes to the extent of the claim. For example, very few companies invest heavily in R&D, especially over an extended period. Therefore, a cut-and-paste year-on-year claim is not likely to go down well with HMRC. Using R&D tax claims preparation technology ensures that each claim being submitted for the client is unique.
Companies making excessively high claims, or claims from companies that are not in a sector likely to undertake innovation or R&D, have
RESEARCH AND DEVELOPMENT
From 2023, HMRC’s R&D tax relief claim requirements will increase. Advisors will no longer simply be able to enter a number into the CT600 without supporting justification. HMRC wants information and it will demand that every claim must be signed by both an advisor and a named officer within the claiming company.
Evidence may not have been part of the R&D tax relief process to date, but for most trusted advisers providing a project writeup to support every claim has been the best practice since the scheme’s inception. In addition to being a far more robust approach, this proactively addresses any queries that HMRC may have. The process also helps accountants and clients to accurately assess every part of the claim. Supporting evidence typically also includes a couple of representative projects that would make up 50% of the claim value.
At every stage of discussion, it is important to remind the client that R&D tax relief is about innovation. This includes the challenges, how they were addressed, where things went wrong, and how the company overcame the problems. If it is easy, it is not R&D. While it is the client that is the subject matter expert and has the business knowledge, it is the role of the accountant to press for information and ensure the claim is genuine.
always raised an HMRC red flag. In addition, the value of the claim needs to be proportionate. HMRC will not expect staff members to spend 95% or more of their time on R&D. Any indication that this is the case may result in the attention of the R&D tax relief investigation team. Similarly, a robust approach is required when looking at outside costs, including subcontractors. Only time spent on the technical uncertainties of a claim is qualifying.
The best claims technology on the market will walk the advisor through this process, flagging risks with a red, amber and green rating and building confidence along the way. This presents an opportunity to assess the eligibility and quality of claims before they are submitted to HMRC for review.Author bio JenBadgerisOperations DirectorofWhisperClaims withexperiencein multinationalsoftware technology.
For those accountants that have yet to embrace R&D tax relief – or those that want to streamline the service delivery to expand the number of claims submitted – it is straightforward to put in place the correct processes using claims preparation technology designed by R&D tax relief experts. Question prompts built within the platform help accountants to tease out the relevant information. Claims can be created faster with in-built flags for any figures that look out of line, such as overstating salary costs. And, if there are additional questions, they can be resolved with quick access to online experts with years of experience in this field.
The increase in R&D tax relief compliance activity should provide accountants with a clear incentive to get involved – or extend existing services. It should deter the less honest advisors and provide genuine, trusted providers who have taken the time to understand both the R&D tax relief scheme and their clients’ businesses with a real opportunity to deliver client value and generate additional revenue.
Clients deserve the best advice available and who is better placed to deliver this advice than their accountants, who are already their trusted business advisers? ●
Navigating tax in an e-worldOliverFroehlich Europeane-commercemanager,Vertex
Managing indirect tax in an online retail environment when there are multiple selling channels, and a global supply and customer base, is incredibly complex. In the United States alone, there are over 11,000 standard sales tax jurisdictions.
Throw into the mix that online marketplaces are complicated by nature, with new sellers, products and customers being added all the time, and you’re faced with a quagmire of tax legislation that even the most switched-on tax department would struggle to keep pace with. So what are the tax implications of transacting in an ‘e’ world, and how can you ensure accuracy and compliance?
The pandemic has accelerated the shift to e-commerce, with the UK online retail market growing by over 40% in 2020, adding £25.1 billion to the market. This growth trajectory is expected to continue, with e-commerce predicted to overtake town centre shopping by 2025. And there are further changes to come. Online marketplaces, for example, are expected to grow by 15% annually and match direct e-commerce spending by 2025. And it’s only a matter of time before people shopping in the metaverse via their avatars becomes commonplace.
Change is fast-paced, bringing with it an ever evolving tax landscape that’s adding
considerable layers of complexity, particularly when online retailers begin to sell globally. And special attention must be paid when a business runs an online marketplace, which is essentially an online department store selling a range of products and brands.
Obligations on e-commerce businesses and marketplace providers to account for VAT, goods and services tax (GST) or sales tax on physical goods have increased globally since 2015. For instance, the 2018 ruling in South Dakota v Wayfair Inc dragged many non-US online retailers into the US sales tax net for the first time, as it stipulated that taxes had to be paid based on the location of the consumer rather than the physical location of the retailer. Therefore, non-American retailers selling online to US based consumers, were now subject to US taxes.
Requirements for tax to be paid based on customer location have now become standard in many countries, meaning that e-retailers need to be acutely aware of where their customers are located and the tax implications.
Furthermore, 70 countries, including the UK, have introduced a digital services tax (DST). Therefore, operating in one or more of these countries requires payment of the appropriate taxes if the retailer is providing a ‘digital service’.
The UK government, which introduced its digital service tax in April 2020, has imposed
a 2% tax on the gross revenues of large multinationals operating search engines, social media platforms and online marketplaces with revenues from UK users exceeding £25 million. But of course, when providing a digital service to overseas customers, the business or marketplace owner needs to be clear where each customer is located, as they could be liable to pay a digital services tax in the customer’s country.
Online marketplaces are intrinsically fluid and fast-moving, with new products, sellers and customers being added all the time, as well as new markets being entered into. Tax must be considered across multiple touchpoints. For instance, product classification on marketplaces creates risk, with marketplace owners often giving the sellers the freedom to choose how they categorise their products. This classification then determines the tax code.
So what happens if the seller lists their products in an incorrect category? Will this be picked up and rectified? And what about when customers cancel subscriptions and move to one-off purchases instead? If this change hasn’t
been identified and accounted for, it would be a customer status violation. In addition, for tax to be filed correctly, all necessary tax provinces must be provided on the checkout form, each country’s invoice obligations must be fulfilled, and the marketplace owner needs to ensure tax is filed in the correct currency.
It’s a minefield, and the expectation is that online sales channels will keep growing and the taxing of e-commerce businesses will get more rather than less complex. In fact, the UK is currently exploring the possibility of an online sales tax as a means to rebalance the taxation of the retail sector. This could have far-reaching consequences for both British and overseas online retailers.
As the tax landscape undergoes rapid change to reflect a fast moving e-commerce market, tax obligations are becoming harder and harder to fulfil. It’s becoming impossible for one tax team and one in-house IT team to solve all the challenges they are faced with. This makes it important for online retailers to create partnerships with e-commerce tax specialists sooner rather than later.
As part of this, businesses must source tax technology experts to create a solid base of automation. Indirect tax technologies or ‘tax engines’ are critical for electronically determining global tax liabilities and reporting obligations, and for analytics and compliance automation. Such technologies remove the guess work and errors from tax determination, making tax a precise, seamless and frictionless part of online transactions. And as tax and IT teams aren’t continually battling with understanding and addressing tax legislation within new markets and jurisdictions, this reduces administration and supports growth without the tax risk.
Tax and accounting teams based within e-commerce businesses often spend hours every month aggregating data in spreadsheets for international tax reporting, and the more countries they sell in, the more spreadsheets they need to fill in. This is not only incredibly time-consuming and prone to error, but it can’t possibly support a fast-growing online retailer or marketplace provider with ever-changing tax liabilities.
The bottom line is that manually managing tax in an ‘e’ world is completely unviable. And as e-commerce continues to grow, online retailers must invest in tax technologies to enable automated compliance, invoicing and reporting, while delivering a frictionless digital shopping experience. ●
A sustainability journey
Ganesh Ramaswamy considers the environmental, social and governance agenda and its implication on tax.GaneshRamaswamy Associate,Kreston Rangamani
In the past couple of years, the topic of environmental, social and governance (ESG) aspects of a business has been extensively discussed and covered across the global media. The focus on ESG has been particularly expedited by climate change, broken supply chains and the after effect of the Covid-19 pandemic. Businesses around the world are under severe pressure from shareholders, investors, regulators, suppliers, customers and communities, to start charting out their sustainability and wider ESG journey. Moreover, ESG considerations dominate many shareholder discussions and institutional policies.
For businesses, launching a sustainability journey often means they have to make substantial changes to how they operate. This requires a lot of long term planning, as well as changing business systems, processes, procedures and models from a set model which requires a lot of capital. To support the capital
requirements, there are substantial amounts of sustainable/ESG funding available in the financial market. Businesses are in a position to tap ‘Use of proceeds’ instruments like green and sustainability bonds and loans where the funds are used to finance specific projects and initiatives with social or environmental benefits, as well as ‘ESG linked instruments’ which are ESG and sustainability linked loans where repayments terms are pegged to certain environmental or social performance indicators.
ValuecreationfromESG Investors, regulators and other stakeholders have started to demand detailed disclosures regarding the social and environmental commitments of businesses in their periodic reports. Stakeholders are interested in the external impact of the actions of businesses, which will have an effect on both customers and suppliers. Employees want to ensure that their companies focus on
better working conditions and gender equality, as well as various other social and environmental issues. A structured ESG strategy will attract suitable talent and create long term value for the employees and the business.
Businesses have also come to realise that by incorporating ESG parameters into business operations, there are huge opportunities for value creation, as well as risk mitigation. Businesses are now reviewing their product and service mix. They are actively considering launching new sustainable products in order to capitalise on changes in consumer trends and preferences.
The net-zero goals declared by many countries have created huge business opportunities in various sustainable sectors like biofuels, electric vehicles, waste management, green hydrogen and related sectors. This opens up a number of opportunities for the SME sector to come in as disruptors in the sustainability eco system.
If SMEs and start-ups have ESG credentials, their products and services may be preferred over large businesses, which may take a considerable time to switch over from their traditional models to ESG compatible models. This will enable SMEs to enter into new markets and get premium pricing for their products and services.
Businesses need to start assessing and adapting their supply chains in order to gear themselves up from the negative impacts of climate change across the globe. If businesses see a risk of shortage in their raw material supplies due to climate change, they will have to immediately look at sustainable alternatives in order to avoid supply chain disruptions. This way the businesses would look at ESG models as a process of risk mitigation for their operating models.
Corporate business houses have to ensure that they have the right social and governance policies for increased transparency and accountability. Instances of corruption, bribery and human rights abuses are now monitored through good corporate governance tools. Most large corporations have started to focus on social aspects like health, safety, employee wellbeing and impact on communities.
Regulators around the world have also brought in tight legislations in the form of penalties and fines. Not promoting ESG models can even lead to a negative impact on brand reputation, leading to a decline in stock prices.
Tax issues have important implications for businesses as they plan their ESG roadmap. Many jurisdictions offer tax incentives to businesses that undertake spending on ESG infrastructure within their businesses. This gives businesses a lot of opportunities to optimise their effective rate of taxation by factoring in the incentive benefits.
It is very important for businesses to have a good tax policy in place, in view of the reputational consequences which come about on account of an aggressive tax structure. Tax is indeed a critical risk for any business enterprise, and has to be managed professionally due to the changes in the tax structure on account of switch over of the business to a ESG model.
Around the world, there is always a call for transparency for disclosure of tax policies by multinational enterprises (MNE). The OECD’s base erosion and profit shifting (BEPS) project and BEPS 2.0 have introduced new disclosure norms. The country-by-country reports which MNEs file in countries where they operate provides data on
Taxissueshaveimportant implicationsforbusinessesasthey plantheirESGroadmap.
BUSINESS ASPECTS OF ESG
global allocation of revenue, profit and taxes at the respective jurisdictions. In most countries, the regulatory authorities are asking MNEs to disclose their related party transactions in detail. These disclosures provide regulators with sufficient information to make tax assessments in a just and fair manner.
A number of businesses have now started focusing on their carbon footprint, committing to reducing emissions and using other resources more sustainably. This results in consideration of carbon taxes. It also results in ethical sourcing and pricing of intra group transactions which ultimately impact the business’s tax profile. The credits given by various governments for using green energy is considered to be an essential catalyst in this journey.
Governmentsaroundtheworld areimplementingplanstohavea sustainablesocietyandhaveset self-imposednetzerotargetdates.
Reporting on tax policies of businesses is also now becoming a very critical factor in ESG.
There are a lot of stakeholders – the government, stockholders, employees, creditors and customers of a business who want to know whether the business is paying the right amount of tax or not.
The ESG commitments of businesses bring them in the vicinity of tax rebates and tax concessions. There is therefore an increased social interest in whether the business chose the ESG model so as to secure a huge tax concession.
Businesses are now required to explain and make clear their tax policies, consequent to their ESG commitments. It is common knowledge that tax plays a very important decision role in framing the ESG commitments of businesses. Public and shareholders require this tax policy to be demonstrated, linking it with the ESG progress. A transparent tax policy will build in a lot of trust for the shareholders and public in the business. Although large listed companies have an obligation to consider and publish their tax strategies in their annual reports, these companies have started to report much beyond their basic compliance requirements, including how their tax strategies connects with their ESG strategies.
now look at the tax risk rate and want to quantify tax positions which deviate from the investors ESG policy on tax matters.
Furthermore, many leading MNEs have started to incorporate a number of reports on the tax issues of their businesses as part of their ESG policy. The following are some of the details incorporated in their periodic reports:
a. Details of the effective tax rate for the company as a whole and also details of jurisdiction tax rates.
b. Details of the material tax risks faced by the business and how these have been mitigated.
c. Details of the structure of the tax department of the business, the staffing pattern and the position within the organisation.
d. Details of the country specific tax developments across jurisdictions and how these will impact company.
e. Details of the mandatory disclosure requirements in each jurisdiction and the compliance level adhered to by the company.
f. Details of the comments by the board on the tax risk, which is part of the board’s oversight function.
g. Details of the tax risk policy of the company.
h. Details of the monitoring done by the company on it tax risk policy across jurisdictions.
i. Details of government incentives, grants, credits for renewable energy project investments, carbon taxes, accelerated depreciation, etc. which have been claimed by the company.
j. Details of tax benefits made available to employees through their salary structure.
Governments around the world are implementing plans to have a sustainable society and also have set self-imposed net zero target dates. Many governments are also providing incentives for businesses that set up low carbon emissions and also give skilled employment to workers.
On the other hand, the government uses taxes to lower emissions and develop an economy by encouraging reusing and recycling of existing products. Against this backdrop, businesses look at how they can develop a tax strategy to bring about transformation in production processes, operations and employment practices.
GaneshRamaswamyis anAssociateatKreston Rangamaniandisbasedin Kerala,India.
Many private equity and institutional investors have now mandated that ESG tax issues have to be incorporated into the due diligence exercise that are carried out in target companies. Investors
The momentum in the relevance of ESG is here to stay and is accelerating. Tax will play an essential role in its path. Tax teams within companies must get involved if they are to understand the interplay of tax and ESG factors. Companies need to understand the tax implications of their ESG related choices and how they will be measured and translated into reported metrics.
The impact of rising costs
High inflation has become a reality around the world, and in some countries it has escalated at the fastest pace in 40 years. Inflation may be inherent in any economy, but today, economists’ concerns around its impact are heightened because the rising trend has been so sustained. Views differ on the causes: some commentators believe that high inflation is being driven by the increased supply of money in the economy and others see it as being related to supply chain bottlenecks and hiring difficulties.
Price increases have been concentrated primarily in goods, largely due to factors including port backlogs, where container ships were waiting offshore for long periods of time before they could dock to unload, and disruptions in the supply chain due to Covid-19.
With these significant price increases, managing costs and corporate budgeting becomes problematic. Financial executives internationally are faced with decisions about whether the increase in business costs should be passed on to their customers or whether the rise in inflation is temporary and can therefore be absorbed by the business. If the
Christine McAlarney asks how organisations can cope with the impact of rising costs and inflation on corporate budgets.©Getty
former, they then have to decide whether price rises should be introduced incrementally over a period of time or all at once. Having pricing discussions with customers multiple times in quick succession may cause frustration for customers and could ultimately prompt them to send their business elsewhere.
Executives have also had to monitor competitor prices more closely and make decisions about whether they should act first or wait for their rivals to do so. Some have focused on loyalty programmes or volume-type rebate offers as a way to increase overall profitability and offset higher vendor costs and overhead expenditures.
Executives have also had to closely monitor expected changes in contract pricing, working with vendor sourcing, procurement and vendor management within their organisations to understand what contracts are renewing and whether negotiations have been favourable or unfavourable with similar contracts. Growing an entity’s network of suppliers is one way to increase bargaining power.
With continued economic uncertainty, there has also been a shift in the types of expenditures needed in response to an organisation’s strategy changes. Executives are challenged with new decisions that impact projected cash flows, including:
● whether to renew or terminate a lease arrangement;
● the amount of technological investment needed to ensure a secure remote working environment;
● compensatory costs related to employee retainment, staff turnover, skills shortages and related recruiting efforts;
● costs related to changes in the organisation’s internal control structure; and
● new digital initiatives.
With certain planned initiatives, executives are making decisions about whether the time is right to proceed or to hold off until prices go down, including considering hedging arrangements to limit the volatility in prices.
Labour shortages are one of the most significant post-pandemic struggles in many countries.
Executives may have to rethink the organisation’s approach to office space by re-assessing how and where people work and evaluating new opportunities to use technology to improve efficiency and effectiveness.
Managing this issue may require a new plan of action, such as the ‘lending’ trend of supplementing
teams through co-sourcing with other companies in the industry and outsourcing from third party providers. For certain industries, implementing new outsourcing arrangements can enable around the clock production, potentially increasing output volumes and therefore overall profitability.
Since meetings quickly shifted from face-to-face to taking place on Microsoft Teams or Zoom, people can easily communicate with co-workers, customers, vendors, board members and stockholders from anywhere in the world. With this shift in communication style, executives have felt more comfortable about the effectiveness of the remote working environment. This pandemic trend appears to continue in some form for many companies.
Monitoring working capital is another measure that executives should take to manage costs and economic uncertainty. Working capital improvements will boost levels of cash, reduce transaction and operational costs, and lower levels of bad debt and inventory obsolescence. These measures could help organisations to overcome short term liquidity challenges, avoid a potential covenant violation, or mitigate revenue disruption.
Management of working capital involves the evaluation of the collection and payment cycles of accounts receivable and accounts payable. Data visualisation tools have become a powerful way for executives to interact with timely digital insight and deploy analytical techniques to effectively evaluate and communicate progress internally and externally.
Organisations may need to consider further cost reduction measures, including the consolidation of processes within separate business units through the centralisation of certain processes (e.g. vendor management, cash management and cash receipt processing). Managing business unit processes and infrastructure separately with individual business unit leaders potentially creates unhelpful diversity across systems and results in less than optimal efficient processes. Streamlining production and reporting should therefore be a major boon to the whole organisation.
The effects of inflation in many countries cannot be ignored and the measures executives take will depend on whether they believe inflation is transitory or not. Either way, executives are faced with challenging decisions regarding price increases, employee retention measures, expenditure and overhead cost cutting initiatives, working capital management, technological improvements and potential process consolidation considerations. There’s a lot to think about – but there are plenty of solutions at hand too. ●
How accountants can save the world
Speakers: Peter Ellington, CEO, Triple Bottom Line Accounting; Fran Ellington, ESG Director, Triple Bottom Line Accounting; Andrea Finegan, Visiting Fellow, University of East Anglia
AIA is pleased to launch the Sustainability Workshop Series. The three-part series, which begins on 14 November, will examine the impacts on the accountancy sector, climate change and ESG, whilst providing guidance on transforming accounting for a sustainable future.
14 November 2022: | Time: 12.30 – 13.30
What does sustainability mean for accountants?
5 December 2022: | Time: 12.30 – 13.30
Climate change – Net zero and carbon accounting
9 January 2022: | Time: 12.30 – 13.30
Why ESG values are integral to future sustainability
How digitalisation can enhance skills in your accounting firm and team
2 November 2022
Time: 10:30 - 11:30
Speaker: Gavin Spencer, Managing Director, Beach Accountants Limited
Learn how digitalisation can help develop your team and get them more prepared for the new change in the accountancy world, following the introduction of MTD.
AML update: client verification, suspicious activity and discrepancy reporting 8 November 2022
Time: 12.30am – 13.30pm
Speaker: David Potts, AIA
The Money Laundering Regulations require accountancy firms to take appropriate steps to identify and verify their clients and the ultimate beneficial
owners of entities. This process helps to assess the risk that the firm could be used for money laundering, including terrorist financing, and supports a robust risk-based approach.
This webinar explores practical approaches that firms can take to efficiently identify and verify their clients, spot and report suspicious activity and ensure compliance with key regulatory requirements, such as reporting discrepancies to the register or providing verification services related to the recently launched Register of Overseas Entities. It will help supervised firms to ensure that they maintain policies and procedures which meet regulatory requirements and best practice, appropriate and proportionate for their size and activities.
FRS update: key current issues for SMEs 23 November 2022
Time: 10.30 – 11.30
Speaker: David Potts, Potts Financial Training
David will outline the current state of play with IFRS – IFRS and IFRIC currently in force and most recent changes and new Standards issued. He will also update on key IFRS projects and changes required for 2022 year ends and beyond, and discuss common problems and issues as identified by regulatory bodies.
A review of beneficial ownership of companies and IPS & the RBO | Ireland 29 November 2022
Time: 10:30 - 12:00
Speaker: Sinead Gortland, Corporate Consultant, Omnipro
An informative webinar which will ensure information on the Register of Beneficial Owners (RBO) is up to date and accurate before a Company is in breach of their statutory duty to file.
Digital transformation: digital tools to accelerate productivity
2 December 2022
Time: 10.30 – 11.30
Speaker: Samuel Ellis, Head of Finance, InterWorks
Using technology to accelerate productivity and drive value is becoming ubiquitous with the accountant’s role right through from the ground level to management and the executive team.
You can find further information and register for these events at www.aiaworldwide.com/events
Companies, investors and professional accountants add their voices to the call for global alignment between sustainability reporting standard setters and frameworks
Sixty-fivecompanies,investorsand professionalaccountingfirmsfrom acrosstheworldaddtheirvoicesto thecallformajorstandard-setting effortstomorecloselyalignwithand supportaglobalbaselineforreporting sustainability-relatedinformation.
Theendorsedstatementwas developedjointlybytheWorld BusinessCouncilforSustainable Development(WBCSD),the PrinciplesforResponsibleInvestment (PRI),andtheInternational FederationofAccountants(IFAC). Inadditiontoformalconsultation responses,thispublicstatement makesclearthemomentumand encouragementbehindstronger alignmentbetweensustainability standard-settingefforts.
Significanteffortsbythe InternationalSustainabilityStandards Board(ISSB),theUSSecuritiesand ExchangeCommission(SEC),andthe EuropeanCommissiontogetherwith theEuropeanFinancialReporting
Taxpayers’ attitudes about paying taxes correlate closely with perceived levels of corruption, according to a major new study, ‘Public Trust in Tax’, by the International Federation of Accountants (IFAC) and Association of Chartered Certified Accountants (ACCA).
A survey of 5,900 people across 14 countries – many in developing economies – found that trust in tax systems is lower when taxpayers perceive higher levels of corruption and diversion of public funds.
‘Fighting corruption is such a central priority for the global accountancy profession because corruption has such negative implications for trust, tax
AdvisoryGroup(EFRAG),allaim toaddresstheneedtoenhance andevolvecorporatereportingto includeandconsidersustainability information.However,currentdraft standardsandinitiativesarenot technicallycompatibleintermsof concepts,terminologies,andmetrics.
Astheseproposedsustainabilityrelateddisclosurerequirements arerefinedandfinalised,leading financialmarketparticipantsare askingfinancialmarketregulators toavoidregulatoryandstandard settingfragmentationbyaligning onkeyconcepts,terminologies andmetricsonwhichdisclosure requirementsarebuilt.
Acomprehensiveglobalbaseline ofsustainabilitydisclosuresis requiredforreportingentities toavoidundueburdenandfor investorstomakeinvestment decisionsthattrulycontributeto sustainableoutcomes.Aglobally consistent,comparable,reliable
morale and sustainable development more broadly. We know from research by the IMF that economic growth goes hand in hand with a consistent stream of tax revenues.’
This year’s survey builds on previous research, and for the first time includes data from developing countries outside of the G20. With the UN predicting that the highest population growth up to 2050 is set to happen in non-G20 countries, this edition of ‘Public Trust in Tax’ looks at issues impacting an increasing share of the global population. The survey was backed up by a series of roundtables to explore attitudes further.
Kevin Dancey, chief executive IFAC, says: ‘The relationship between taxpayers and governments, and between businesses, society and tax systems is fundamental to the sustainability – and survival – of the
andassurablecorporatereporting systemisindispensableinproviding allstakeholderswithaclearand accuratepictureofanorganisation’s abilitytocreatesustainablevalue overtime.
ThePrinciplesforResponsible Investment(PRI)istheworld’sleading proponentofresponsibleinvestment. SupportedbytheUnitedNations,it workstounderstandtheinvestment implicationsofenvironmental,social andgovernance(ESG)factorsandto supportitsinternationalnetworkof investorsignatoriesinincorporating thesefactorsintotheirinvestment andownershipdecisions.ThePRI actsinthelong-terminterestsofits signatories,ofthefinancialmarkets andeconomiesinwhichtheyoperate andultimatelyoftheenvironment andsocietyasawhole.Launchedin NewYorkin2006,thePRIhasgrown tomorethan5,000signatories, managingoverUS$121trillion.For moreinformationvisitwww.unpri.org
economies that support us all, in both the short and long term. Our Trust in Tax surveys provide crucial insight into these relationships and can help global policymakers as they consider the best way forward.’
IFAC recently released its ‘Action Plan for Fighting Corruption and Economic Crime’, with broad support from the global accountancy profession. The plan outlines specific actions that members of the profession can take, individually and in concert, to engage in a meaningful way in the fight against corruption. ‘Given the correlation between perceived levels of corruption and citizens’ willingness to pay taxes, this plan is an important effort to help ensure that citizens see the benefits of their tax dollars,’ said Mr. Dancey.
The survey key findings are set out below:
Politicians are widely distrusted with a net trust deficit of -25%. In contrast, professional tax accountants and lawyers are trusted (67.1% and 64.6% respectively). Attitudes to tax authorities are split with a significant minority – 27.9% – distrusting or highly distrusting them.
Roundtable participants saw lack of trust in politicians as a major barrier to tax engagement with the systems. Citizens don’t object to paying tax –they object to misappropriation.
In the survey, 46.4% agreed that multinationals were paying a reasonable amount of tax. This contrasts with Public Trust in Tax surveys in G20 countries showing only 22.4% agreed.
Attitudes towards tax minimisation are more relaxed in developing countries with respondents more likely to agree that specific taxpayer groups were paying a reasonable amount of tax.
People strongly support the use of tax incentives to target megatrends such as climate change (73.8%) and ageing population (72.8%).
Tax incentives were seen as way of attracting multinational businesses to invest (73.9%) and build a more coherent international tax system through co operation between countries (69.3%).
IFACLaunchesnewresource centretoelevateprofessional accountants’contributions asbusinessleadersandvalue partners
A new webpage by the International Federation of Accountants (IFAC) collates useful IFAC resources on how professional accountants can be futureready for a rewarding career in business or the public sector.
As key enablers of successful organisations, the career paths open to professional accountants span business and the public sector in a variety of finance and commercialfacing roles. As digital and sustainability transformations progress internationally, professional accountants have an
opportunity to elevate their strategic contributions as leaders and value partners.
IFAC’s new collection of resources, ‘Professional accountants as business leaders and value partners’, explores how professional accountants can be future ready, data-savvy leaders who drive sustainability. These materials aim to help in understanding and navigating challenges and opportunities across various roles as finance and business leaders, risk managers and analysts, and in broader commercial roles including in procurement and supply chain management.
Components of the new resource center include:
● mainstreaming sustainability in business;
● future-ready CFO and finance function;
● data and digitalization;
● case studies from a variety of entities around the world. including Olam Agri, Reliance Industries, Standard Chartered Bank, Sime Darby Berhad, OMRON, Prudential Financial, Pakistan International Airlines, and more.
IESBAandIAASBwelcome IOSCOStatementofSupportfor developingstandardsrelatingto assuranceofsustainability-related information
The International Ethics Standards Board for Accountants (IESBA) and International Auditing and Assurance Standards Board (IAASB) welcome the announcement from the International Organisation of Securities Commissions (IOSCO) of its support and encouragement for the IAASB’s and IESBA’s work on developing standards relating to assurance of sustainabilityrelated information.
The IAASB and IESBA acknowledge that stakeholders are increasingly seeking assurance of sustainabilityrelated information and that it is important to respond to market demands with robust standards applicable to all sustainability assurance providers.
IAASB Chair Tom Seidenstein said: ‘There is a clear need for ongoing
dialogue and collaboration to ensure sustainability reporting, assurance and regulation develop in a cohesive manner to provide decision-useful information to stakeholders. We are pleased to have IOSCO’s support for our ongoing work to enhance sustainability assurance standards and look forward to continuing our strong, fruitful relationship with IOSCO and others.’
IESBA Chair Gabriela Figueiredo Dias said: ‘Ethics standards, including independence requirements, are foundational to public trust in the assurance of sustainability-related information. It is crucial and in the public interest that all assurance providers, whether or not they are from the accountancy profession, adhere to the same high bar of ethical behaviour and independence when engaged in such assurance work. We have given high priority to bringing to market fit-forpurpose ethics and independence standards in this area and look forward to close coordination with IOSCO and IAASB on this journey.’
The IESBA will meet to consider possible approaches to standard setting in relation to sustainability assurance and sustainability reporting, recognising that professional accountants in business play a ‘first line of defence’ role in preparing and presenting trustworthy sustainability information. The IESBA will also consider the applicability of its standards to assurance providers outside of the accountancy profession. The IESBA anticipates approving a project plan by December 2022.
The IAASB and IESBA will continue to closely collaborate with IOSCO and other regulatory and standard-setting bodies to inform the development of robust standards that foster independent, high-quality engagements and globally consistent practices.
FRCreportonlessonslearnt fromthefirstyearofmandatory structureddigitalreporting
The Financial Reporting Council (FRC) Lab has published a report that identifies lessons learnt from the first
year of mandatory structured digital reporting under the Transparency Directive on European Single Electronic Format (ESEF) regulation.
The Lab’s review found that many companies have risen to the challenge of producing an annual financial report in the new digital format. However, there is still much to be done as data quality and usability remain below the level expected for companies in a leading capital market.
The report sets out some actions to improve companies’ processes, the usability and design of the reports and XBRL tagging.
Mark Babington, Executive Director of Regulatory Standards at the FRC, said: ‘It’s really encouraging that so many seem to have taken on board the tips from last year’s early implementation review. There is, of course, room for improvement and the actions in this report will help companies to make their reporting fit for increasing digital consumption. A focus on data quality and usability will be key to achieve this.’
Clare Cole, Director of Market Oversight at the Financial Conduct Authority, said: ‘We welcome the FRC Lab’s valuable work to help companies produce high-quality structured reports. This report is an important step to help unlock the full benefits of structured digital reporting for all participants in the UK’s capital markets.’
TaskforceonDisclosuresabout ExpectedCreditLosses(DECL) hasupdateditsguidance
The Taskforce on Disclosures about Expected Credit Losses (‘the DECL Taskforce’) has published updated guidance on a complete set of high quality IFRS 9 Expected Credit Loss accounting (ECL) disclosures.
The guidance is aimed primarily at the biggest UK-headquartered banks and building societies, but is also likely to be relevant to a much wider group of preparers.
Since the beginning of 2018, banks and building societies preparing IFRS accounts have been required to provide for credit losses using ECL. The complexity and judgement involved
in estimating ECL means that high quality, comparable disclosures are essential in enabling users of financial reports to understand, analyse and compare the ECL numbers.
In order to help guide the ECL disclosure practice, the FCA, FRC and the PRA set up a Taskforce of preparers and users and asked it to work together – under the leadership of Simon Samuels of Veritum Partners and David Joyce of Lloyds Banking Group – to determine and describe what a complete set of high quality ECL disclosures might look like. That work formed the basis of the Taskforce’s first and second reports, issued in November 2018 and December 2019, respectively.
This third report from the Taskforce includes the results of assessments made by Taskforce members of the progress made by preparers in the adoption of certain of the disclosure recommendations, which demonstrated very high levels of adoption. It also includes good practice examples drawn from banks’ and building societies’ financial statements, and other amendments to address gaps, deficiencies or to otherwise improve existing material.
Almost all the original recommendations and guidance remain, but this third report introduces updates to encourage consistency and comparability, and further guidance on the ‘judgemental adjustments’ (such as post-model adjustments and overlays) that banks and building societies make to modelled numbers in estimating ECL.
ESMAremindsfirmsofthe impactofinflationinthecontext ofinvestmentservicestoretail clients
The European Securities and Markets Authority (ESMA), the EU’s securities markets regulator, has published a statement reminding firms to consider inflation and inflation risk when applying relevant MiFID II requirements in the interest of investor protection.
Over the past months, inflation rates have risen in the EU, as in the rest of
the world, and this growth in inflation has impacted households both in their daily lives and in their investments and investment decisions.
ESMA notes that from an investor protection perspective, this trend poses a risk for retail investors, as some of them will not fully appreciate the link between inflation and financial markets and may not fully understand how considerations on inflation should be factored in when they make saving and investment decisions.
ESMA has therefore issued its Statement to remind firms of relevant MiFID II requirements, as it believes that investment firms may play a role in considering inflation and inflation risk, both when manufacturing and distributing investment products and when providing investment services to retail clients. Investment firms can also help in raising clients’ awareness of inflation risk.
ESMApublishesfinalguidelines onMiFIDIIsuitability requirements
The European Securities and Markets Authority (ESMA) has published its Final Report on Guidelines on certain aspects of the Markets in Financial Instruments (MiFID) II suitability requirements.
The assessment of suitability is one of the most important requirements for investor protection in the MiFID framework. It applies to the provision of any type of investment advice, whether independent or not, and to portfolio management.
The main amendments introduced to the MiFID II Delegated Regulation and reflected in the guidelines on the topic of sustainability are:
● Information to clients on the sustainability preferences: Firms will need to help clients understand the concept of sustainability preferences and explain the difference between products with and without sustainability features in a clear manner and avoiding technical language.
● Collection of information from clients on sustainability preferences: Firms will need to
collect information from clients on their preferences in relation to the different types of sustainable investment products and to what extent they want to invest in these products.
● Assessment of sustainability preferences: Once the firm has identified a range of suitable products for their client, in accordance with the criteria of knowledge and experience, financial situation and other investment objectives, the firm shall identify the product(s) that fulfil the client’s sustainability preferences.
● Organisational requirements: Firms will need to give staff appropriate training on sustainability topics and keep appropriate records of the sustainability preferences of the client (if any) and of any updates of these preferences.
By pursuing the objective of ensuring a consistent and harmonised application of the requirements in the area of suitability, including on the topic of sustainability, the guidelines will contribute to the achievement of the objectives of MiFID II.
FASBseeksinputonproposal toimproveaccountingfor investmentsintaxcredit structures
The Financial Accounting Standards Board (FASB) has issued a proposed Accounting Standards Update (ASU) intended to improve the accounting and disclosures for investments in tax credit structures. Stakeholders are encouraged to review and provide comments on the proposed ASU by 6 October 2022. The proposed ASU is a consensus-for-exposure of the FASB’s Emerging Issues Task Force (EITF)
In 2014, the FASB issued a standard that introduced an option allowing reporting entities to elect to apply the proportional amortisation method to account for investments made primarily for the purpose of receiving income tax
credits and other income tax benefits. The guidance limited the proportional amortisation method to investments in low-income housing tax credit (LIHTC) structures.
Under the mothod of proportional amortisation, an entity amortises the initial cost of the investment in proportion to the income tax credits and other income tax benefits received and recognises the net amortisation and income tax credits and other income tax benefits in the income statement as a component of income tax expense (benefit).
Investments in other tax credit structures are typically accounted for using the equity or cost method, which results in investment gains and losses and tax credits being presented gross on the income statement in their respective line items.
In recent years, stakeholders have asked the FASB to allow reporting entities to elect to apply the proportional amortisation method to tax equity investments that generate tax credits through other programmes, such as the New Markets Tax Credit (NMTC) programme, the Historic Rehabilitation Tax Credit (HTC) programme, and the Renewable Energy Tax Credit (RETC) programme.
These stakeholders noted that the proportional amortisation method provides financial statement users with a better understanding of the returns from investments that are made primarily for the purpose of receiving income tax credits and other income tax benefits than the equity or cost methods.
The amendments in this proposed ASU would allow reporting entities to elect to account for their tax equity investments using the proportional amortisation method if certain conditions are met, regardless of the programme from which the income tax credits are received.
The election would be on a programme-by-programme basis. The proposed amendments would also require disclosures to enable financial statement users to better understand the nature and effects of the entity’s investments that generate income tax credits and other income tax benefits.
The Monetary Authority of Singapore (MAS) and the International Financial Services Centres Authority (IFSCA) have signed a FinTech Co-operation Agreement to facilitate regulatory collaboration and partnership in FinTech.
MAS and IFSCA will leverage existing regulatory sandboxes in their respective jurisdictions to support experimentation of technology innovations. This includes referral of companies to each other’s regulatory sandboxes and enable innovative cross-border experiments in both jurisdictions. The Co-operation Agreement will also allow MAS and IFSCA to evaluate the suitability of use cases which could benefit from collaboration across multiple jurisdictions, and invite relevant jurisdictions to participate in a Global Regulatory Sandbox.
MAS and IFSCA will also share non-supervisory related information and developments on innovation in financial products and services, facilitate discussions on emerging FinTech issues and participate in joint innovation projects.
Sopnendu Mohanty, the Chief Technology Officer of IFSCA, said: ‘This Co-operation Agreement builds on the Memorandum of Understanding on Supervisory Co-operation signed between MAS and IFSCA in July 2022. The cross-border testing of use cases between Singapore and India will pave the way for operationalising a broader collaboration framework for FinTech use cases involving multiple jurisdictions.’
IFSCA Chief Technology Officer
Joseph Joshy said: ‘This agreement is a watershed moment that ushers in a FinTech Bridge to serve as a launch pad for Indian FinTechs to Singapore and landing pad for Singapore FinTechs to India, leveraging the Regulatory Sandboxes. The possibility of global collaboration on suitable use cases through a Global Regulatory Sandbox is an exciting opportunity for the FinTech ecosystem.’