NQ magazine August 2017
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STANDARDS IFRS 9 to IFRS 12 in the spotlight
ALL THE NEWS YOU NEED
and a whole lot more Pages 4 and 7
HMRC Why it’s time to get personal Page 8
MANAGEMENT ACCOUNTANTS HAVE A ROLE TO PLAY P20
PRESENT YOURSELF Some top advice from CIMA on giving financial presentations
ETHICAL DILEMMA Money is missing from a charity you are involved with. What should you do? Page 18
Don’t be taken in by plush offices - look for the telltale signs of fradulent trading
NQ magazine EDITOR’S COMMENTS
A million and counting Hope those of you in the UK are enjoying the summer – remember, there is a reason we live in a ‘green and pleasant land’! Our lead news story this month highlights how the number of accountants and those wishing to be one continues unabated on its upward trajectory. The seven UK and Irish-based bodies now have half-a-million members and half-a-million students worldwide. The profession was ‘joined’ by 25,242 new members in 2016 alone. It’s good to see the number of female members is also on the rise, thanks mainly to the ACCA. Some 46% of its members are female. Come on ICAEW, why only 28%? The ACCA has been the star here. It really has ‘strengthened its global reach’. You can expect it to break the 200,000 members any day now. What an achievement, and much praise must go down to two women, Anthea Rose and Helen Brand. Rose was the CEO of ACCA from 1993 until 2003. She was the first female head of a major accountancy body and had worked for the ACCA since 1977. Brand became CEO in 2008 and is still there today. Together they have grown a body that felt the poor relation to the posh boys at the ICAEW in the 1980s into a proper global accountancy body – a match for anyone! It now leads the way on many things, especially on thought leadership, with its truly international focus. We are continuing with our IFRS ‘pocket guide’ and this month we cover IFRS 9 to 12. We will give you 13 to 17 next time. Bet you can’t wait! If you read one thing in this issue read Josie Gowler’s piece on page 12. She works for the Medical Research Council and is one of you! It is a really clever, thoughtful piece about how to start a new job. Just drop me an email if you want us to cover a particular topic in NQ. Graham Hambly, Editor (email@example.com)
number of members studying with UK and Irish accountancy bodies P4
global intangible value not reflected in 2016 balance sheets P4
amount raised by HMRC through new tax collecting initiative P7
number of UK taxpayers with an online Personal Tax Account P8
rules to delivering a powerful financial presentation P10 top tips from ACCA for newly qualified accountants P14
Time to end illogical intangible rules
A million members and students UK and Irish professional accountancy bodies now have more than half-a-million members and half-a-million students worldwide under their wings. The seven bodies in the latest FRC report ‘Key Facts & Trends in the Accountancy Profession’ report they have over 350,000 members in the UK and Republic of Ireland and 515,000 members globally. In all, 25,242 students became members during 2016, and just under 15,000 of these became ACCA members. The next highest total was CIMA with 4,958 new members. The FRC also revealed that the total percentage of female members has increased from 33% in 2012 to 35% in 2016. ACCA has the largest proportion of female members (46%). The ICAEW has the lowest percentage at just 28%.
Five signs of stress CIPFA is calling on councils to watch for five warning signs of financial stress and to build resilience on all aspects of planning and operations. Local government financial pressure is mounting, and CIPFA’s snapshot of local authority CFO’s confidence in delivering public services has revealed serious spending pressures – especially in children’s education and social care. CIPFA’s five key symptoms of financial stress are: 1 A rapid decline in reserves – using reserves to avoid cuts will only provide temporary relief. 2 A failure to plan and deliver savings in service provision – so that councils are not living within their resources. 3 Shortening of medium-term financial planning – a failure to plan ahead could indicate a lack of strategic thinking and an unwillingness to confront tough decisions. 4 Firm objectives missing from savings plan – such as a saving plan with ‘still to be found’ gaps or consisting of targets rather than robust plans; this may also include a tendency for over optimism in timing and scale of savings. 5 Tendency for unplanned overspends – carrying forward undelivered savings into the following year only creates the need for greater cuts in subsequent years. 4
The disclosure of intangible assets remains disappointingly low, with $35trn (or almost three-quarters) of global intangible value not reflected in 2016 balance sheets, says Brand Finance. It explained that insufficient reporting of intangible assets leads to a host of problems for analysts, investors, boards and shareholders. With little information on particular assets, analysts’ assessments are not as accurate as they could be, forcing investors, in effect, to act with one eye closed. Brand Finance said this has negative effects on share price volatility, affecting the stability and sustainability of finance. Finally, the lack of real information about the true value of assets leaves boards and shareholders prone to agree to hostile takeovers or to sell individual assets at less than competitive prices.
Landlords don’t like young tenants
The housing crisis for young people is set to worsen as more and more landlords refuse to rent to people under 35, says a study by Sheffield Hallam University. The research found one third of landlords were ‘cutting back’ on renting to under-35s. It appears concern over young people’s ability to pay the rent is encouraging landlords to look for older and what they believe are more secure tenants. Students could be in an even worse position with almost half of Landlords saying they do not let to students. The number of 16 to 24 year olds privately renting has increased by 50% since 1996, rising from 42% then to 64% in 2016.
UK accounting jobs up 21% A new UK Jobs Index has found that the number of advertised job vacancies for accounting and finance professionals in the UK rose by 21% in the second quarter of 2017, compared to the same time last year. This is almost double the average growth across all sectors (11%). As always accountants with good technical skills and commercial awareness are highly sort after. SMEs and startup firms across tech and related fields have played a key role in driving demand. And with Brexit around the corner, senior financial professionals are in high demand to provide strategic input to ensure long-term financial sustainability. NQ Magazine August 2017
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Behavioural science key to tax revenue
So how do you simplify UK corporation tax? The Office of Tax Simplification has made some bold recommendations to improve the ‘experience’ of small and large businesses when it comes to corporation tax. The independent adviser says in its new set of recommendations that when it comes to the smallest companies they should use the accounting profit prepared under accounting standard IFRS 105 as the taxable profit without any adjustments. For slightly larger companies the proposal is that companies should only need to consider a set list of five or six potential adjustments. OTS says that in the future optional cash accounting could be introduced for companies with a turnover under £150,000, to mirror the successful system for 1.1m unincorporated businesses. When it comes to aligning corporation tax more closely with accounts, OTS said three ideas stood out: • Using the accounting definition of capital expenditure (essentially creating an asset) for tax purposes. • Bringing the definitions of trading and property deductions and management expenses together to remove the complication of having two sets of very similar rules. • For companies with different sources of income, brining these together into one business profit or loss for tax purposes, with losses fully pooled.
Audit firm numbers fall again The number of registered audit firms continues to slide. At the end of 2016 there were just 6,010 registered audit firms in the UK and Ireland. The number of members holding audit qualifications also dropped (129,509 in 2016, compared with 140,135 in 2014). However, the latest figures show that there was an increase in the number of approved training offices in the UK and Ireland, with an upward trend in the number of students choosing audit as a route to qualification. The total fee income of the firms, which audit Public Interest Entities (PIEs), has grown. There has been a decrease in the growth rate of audit fee income for the Big 4 firms. Those outside this group, however, experienced an increase in the growth rate. Fee income from non-audit work to audit clients continued to see the greatest percentage increases for audit firms outside the Big 4 (19.5%) in 2015/16, compared with 13.2% in 2014/15. The Big 4 experienced a slower growth rate in this area of 2.6%. NQ Magazine August 2017
HMRC currently estimates that illegal tax evasion and legal tax avoidance together cost the UK government around £34bn a year. However, a new study has found that using ‘nudges’ informed by behavioural science research can help reduce this. A Warwick Business School study found using descriptive norms – i.e. describing what other people do, such as “nine out of 10 people in the UK pay their tax on time” taps into our social norm bias and significantly increases tax payment rates. Researchers estimate that £4.9m of tax repayment was accelerated during a 23-day sample period where this sort of message was trialled with 200,000 UK taxpayers.
ACCA grows by 5.5% The ACCA has ‘strengthened its global reach’ with a 5.5% increase in membership. It now has nearly 200,000 members (current figure is just over 198,000) and 486,000 students worldwide. ACCA CEO Helen Brand (pictured) said: “During 2016/17 we have seen a number of major initiatives come to fruition – from our strategic alliance with CA ANZ to the launch of our groundbreaking ‘Professional accountants – the future’ research, which examined the prospects of the accounting profession.” She went on to explain the ACCA has announced major future-proofing changes to the ACCA Qualification based on these findings.
Dealing with the data deluge CIMA has joined forces with ITN Productions to produce a news and current affairs-style programme. ‘Data – Deluge & Decisions’ will premier on 26 September and will form part of an extensive communications campaign, featuring CIMA members, thought leaders and government decision makers. The programme will focus on the importance of making good decisions in business to create long-term success.
New help for SMEs HMRC has launched a new online tax forum and dedicated webchat service for small businesses and the self-employed. The Small Business Online Forum is supposed to be a quick and easy way for small businesses to get answers to their tax questions. HMRC originally launched a pilot forum in March 2017 and since then it has grown to have more than 1,000 registered users. The forum, however, does not deal with questions about taxpayers’ individual circumstances. You can access the forum at: https://online.hmrc.gov. uk/webchatprod/community/forums/list.page 7
MAKING TAX DIGITAL
Time to get personal Some aspects of the MTD initiative have been deferred, but some are already in place, writes Tony Margaritelli
NQ Magazine August 2017
MAKING TAX DIGITAL
he accountancy profession as a whole has been fixating with some justification on the Making Tax Digital regime proposed by HMRC back in December 2015, which some of you may remember led to the lurid headline ‘The death of the tax return’. Now we have been advised that, apart from VAT reporting, the bulk of the MTD provisions have been pushed back to April 2020, and decisions on the level of exemptions and consultations regarding corporate bodies will be delivered much nearer 2020 than 2017. So, many practising accountants have breathed a sigh of relief while at the same time there has been much wailing and gnashing of teeth from the software developers, coupled with feverish sales and profit forecast re-modelling. But one aspect of the digital agenda that is firmly under way and which is relevant to every individual rather than to every business, and which has received very little publicity, is that EVERY taxpayer already has a Personal Tax Account set up for them by HMRC. Yes, every taxpayer has a Personal Tax Account ready and waiting to be used; all that is required is for the taxpayer to register to use their tax account. This can be achieved by going to www.gov.uk/personal-tax-account (a simple Google search will get you there). The registering process is very simple and you should be up and running in no time, and there are even HMRC videos to help you available on YouTube. In December 2016, seven million users had registered and as at today registered users are in the order of nine million – still a long way to go but not a bad number when you consider how little publicity has been given to the subject. You can access your Personal Tax Account from your desktop or laptop computer, your tablet or your smartphone so you can as they say make changes ‘on the go’. So what can you do with your Personal Tax Account? Well quite a lot actually, not least of which is that it is digital and so there is no need for phone calls – which we all know are not HMRC’s strongest point –and certainly no need for
NQ Magazine August 2017
something as archaic as a letter. From within your account you can liaise with HMRC, check the address they hold for you and amend as necessary; you’ll be able to see the tax code that is being provided to your employer or if you have multiple employments to each one. You will be able to see an estimate of the tax you are likely to pay for current year AND the next year, and see how your tax has been worked out. You can use the account to claim a tax refund that is due you and have it paid directly into your bank account – this happens in about five days, as opposed to waiting upwards of six weeks for a cheque for the same refund. You can get estimates for your state pension and you can track your National Insurance records to ensure that there are no incorrect gaps. Your Personal Tax Account is where you can apply for the Marriage Allowance and it will help you keep on top of any Child Benefit entitlement you may have. And if you or your partner are high earners, here is where you can opt out so as not to incur the High Income Child Benefit Charge. The self-employed get a whole raft of options made available including filing returns, checking tax calculations, appealing penalties and telling HMRC that you have ceased to be self-employed. So you see MTD is not all about business, and the part that relates to the individual is far less contentious than the proposals for companies. So if you haven’t already joined HMRC’s digital revolution, sign up for your Personal Tax Account now. NQ
l Tony Margaritelli is Chair of the ICPA, an independent organisation representing accountants in practice. See www.icpa.org.uk for more
HOW TO GIVE GREAT
FINANCIAL PRESENTATIONS Peter Simons has some advice on an activity that scares many of you witless – giving a presentation to your firm’s top brass
NQ Magazine August 2017
ou’ve analysed the data. You’ve derived the insights and understood the implications to the business. Job done? If only business was that simple. Understanding the numbers and their meaning is only one piece of the puzzle. Effectively communicating the data and telling the story behind the numbers is the other piece. To do this you might need to give a presentation – and this is where many start to worry. To help accountants ease their fears the AICPA partnered with communications experts Peter A. Margaritis and Jennifer Elder to create a new CGMA guide: ‘Six rules to delivering a powerful financial presentation’. This brief helps finance professionals prepare and deliver powerful presentations. Here are the six rules to guide you on your next financial presentation.
1It’s all about the audience
Before you start preparing your presentation think about your audience. Accounting and finance types mainly use the left part of their brain, the side responsible for language, logic and analytical thinking. Sales and marketing people make more use of the right part of the brain, responsible for intuition and creativity. For them less is more, and many try to avoid getting into too much detail and information, especially when it is about numbers. So the big question is, how can you deliver the financial information that is needed without confusing your listeners? The answer is, you need to tell them what they want to hear first and then continue with what they need to know. This way you’ll have their attention right from the start.
go of the need for 2Let perfection
Nobody likes making mistakes. That’s one of the reasons why so many people hate giving presentations – when you are thinking on your feet, mistakes simply will happen. If you make a mistake, the most important thing to remember is: do not panic. Panicking will cause you to forget to breathe, NQ Magazine August 2017
knowledge about what actions your audience needs to take. The numbers and figures alone won’t be useful to your colleagues. It’s not just about how much your revenue increased, for example, it’s about why it increased and who played an important role in this. That’s your story behind the numbers.
pictures to enhance 5Use the data
meaning that your brain won’t get enough oxygen, and your performance will not be as cogent as it could be. If you make a mistake, pause to regain your composure and continue. It’s natural to do this while speaking so your audience won’t notice that you are trying to calm down. A good training tool is to take a video of yourself while practising and watch it. This will help you learn from your mistakes and give you more confidence.
the audience’s 3Grab attention
While much communication tends to be short and quick these days, telling a good story will always grab the attention of your audience. And a human angle will make it even more interesting. One of Steve Jobs’ most famous speeches is his Stanford Commencement Address from 2005, which has been watched more than 26 million times on YouTube. In this speech he tells three stories about crucial moments in his life – and it is these personal stories that have made his speech so compelling. Adding a human angle and relatable context, even in a financial presentation, will help you communicate information effectively.
the story behind the 4Tell numbers When explaining highly technical accounting details do it in a way that doesn’t use slides packed with raw data. It’s important to translate the data you have into information and
Using visuals will help with your storytelling as it gives context to the information and illustrates the point you are trying to make. If you pack your slides with too much data your audience will focus on reading it instead of on you. When you present information like sales, gross profit or net income you can also illustrate your point by putting data into charts instead of using only numbers.
Avoid jargon. If you are speaking to people from elsewhere in the business, most of your audience will probably not understand the technical language of accountancy. So you need to make your financial presentation as simple as possible and understandable to everyone. Take a tip from Warren Buffett: pretend you are addressing a member of your family. So to summarise, giving a convincing financial presentation is about grabbing the attention of the audience by telling the story behind the numbers; using pictures or graphics; and using language everybody understands. By following the above six rules and practising, practising, practising, everyone can become a better financial storyteller. To download ‘Six rules to delivering a powerful financial presentation’ go to www.cgma. NQ org/resources/reports.
l Peter Simons is Associate Director of Research and Development – Management Accounting, Association of International Certified Professional Accountants 11
KNOW YOUR BUSINESS
Know your business 12
NQ Magazine August 2017
KNOW YOUR BUSINESS
Josie Gowler offers some top tips on how you can hit the ground running when you start a new job
landed the role. Since joining the Medical Research Council’s (MRC) Laboratory of Molecular Biology as Head of Finance and Research Contracts in early 2017, I’ve made sure that I’ve really got under the skin of this fascinating organisation, and this has enhanced the day job and enabled me to add significant value to the role already. It’s an approach that’s done me well in every role I’ve had since qualifying as a chartered accountant back in 1998. Hopefully, following these steps will help you to get off to as fine a start with any new sector or employer as I have. l Keep up with the homework Landing the job is just the beginning. While working out my notice period at my previous employer, I made sure I kept revisiting the MRC website in the evenings, reading more about the industry and flicking through trade publications such as New Scientist. I also downloaded the sector’s Financial Reporting Manual (FReM) and started to absorb the subtle differences in reporting requirements in this new area. Naturally, I’ve kept up this continuous learning after joining. l Informal meetings Before my start date, I followed up with a couple of informal meetings with my new boss and colleagues – outside of the interview setting it was helpful to have a more casual discussion to understand issues, challenges and expectations and begin to think about how I’d go about tackling them.
etting ready for job interviews, we’ve all done the same things: reading the accounts, mugging up on the industry, reviewing the website, scouring the internet for news and views on what it’s hoped will soon become a new employer. But I’m a great advocate of continuing this process after landing that new position, and I’ve always been surprised that keen candidates who study the business intently don’t consistently apply the same rigour once they’ve NQ Magazine August 2017
l Arrange the first fortnight Sorting this out before actually joining enabled me to figure out the colleagues I really needed to meet in my first couple of weeks and get time in their diaries – always useful to set this up early if possible in today’s busy workplace, especially with senior management. l Get the ‘grand tour’ I found it useful to get an overview of the organisation via a proper lookround, especially important for an organisation such as the MRC which is spread over several sites. This will also help you to get to know the capital and real estate, vital for planning. Once in role, I’ve kept up my interactions with departments. Both at the MRC and at PA Consulting earlier in my
career, I found there was nothing like a laboratory visit for really appreciating key projects and new developments. l Get to know other departments Get behind the numbers, meet with the department heads and find out what they really need and want. What are their main concerns? Their big projects? By really going out into the divisions I’ve been able to see the numbers in context and add more value as a result. l Talk to people Not just the department heads, but end-users, in my case scientists and students. They’ve brought me a helpful coal-face perspective. l It’s not just Continuous
Professional Development (CPD) Going on the right courses doesn’t simply mean the accountancy and management CPD – I’ve made sure I’ve gone to relevant lectures and seminars too. The MRC runs excellent ‘science for non-scientists’ briefings and I have attended every one. l Consider the wider world In my case this means getting a grasp of external factors and funders, such as universities and charities, and wider initiatives such as the forthcoming creation of UK Research & Innovation, which will be bringing together the seven research councils into one combined body. l Understand the IT side This could be a whole article in itself, but finding out before I joined which accounting and software packages the MRC uses enabled me to brush up on any slightly jaded skills and get off to a much swifter, easier start. Hopefully sharing my experiences will help anyone thinking of making the move to a new sector or new role to take the leap with extra NQ confidence.
l Josie Gowler is Head of Finance and Research Contracts at the Medical Research Council’s Laboratory of Molecular Biology (LMB) and formerly Chief Finance Officer at the Office of the Police and Crime Commissioner for Cambridgeshire 13
Top tips for newly qualified accountants ACCA offers some timely advice for those making the transition to member status
ollowing on from the recent introduction to the ACCA Case Presentation Team blog on best practice in the last edition of NQ magazine, we are pleased to bring you the next instalment: our top five tips for newly qualified accountants. First of all, if you have recently completed your ACCA qualification, well done! Attaining membership to ACCA is a fantastic achievement and we hope this article will help you successfully embark on the next steps in your career.
various member networks [http://www.accaglobal.com/gb/ en/member/member-networks.html], social media outlets, events and more! Here in the Case Presentation Team we cannot encourage you more to make use of such resources! They are a great source of information and support and can help you through pretty much any query you have throughout your career to prevent you struggling with an issue alone and potentially making errors.
Step 1: Consider your career options carefully
Step 3: Keep up-to-date
As you will no doubt be aware, your ACCA qualification can open the door to a variety of career options; whether you wish to work in industry or private practice. ACCA provides access to sage careers advice and employment opportunities [http://careers.accaglobal.com/] for its members, so make sure you have considered the route that suits and appeals to you best. Once you have decided, make sure you consider carefully whether you require any additional certificates or licenses to practice in your chosen arena [http:// www.accaglobal.com/content/dam/acca/global/PDFmembers/2012/2012p/PC_factsheet.pdf]. Many complaints are referred for adjudication before ACCA’s disciplinary committee on the back of member’s practising outside of their remit, and are understandably regarded as very serious matters. Do not let this happen to you and risk damaging the career you have worked so hard to achieve by a misunderstanding of, and/or failure to have regard to, the applicable practising regulations [http://www.accaglobal. com/content/dam/ACCA_Global/Members/Doc/rule/ ACCA%20Rulebook%202017.pdf].
This top tip covers a number of bases: 1. Always make sure you keep your contact details up to date with ACCA via MyACCA [https://login.iam.accaglobal. com/] to ensure you receive all communications and can be contacted if needed. It is your responsibility in accordance with ACCA regulations to keep this information up-to-date. You do not want to miss out on opportunities or important communications that could impact upon your career; 2. Ensure that you complete and pay your annual subscriptions each year – do not allow your certificates, licences and/or membership to inadvertently lapse thereby potentially exposing yourself to disciplinary or regulatory action; 3. Always keep on top of your CPD requirements and records to ensure you remain on top form and compliant with your professional obligations.
Step 2: The importance of networking ACCA is extremely proud of its global reach and the support that it offers its members throughout their career through 14
Step 4: Get to know the ACCA rulebook Make sure you familiarise yourself with the ACCA rulebook [http://www.accaglobal.com/content/dam/ACCA_Global/ Members/Doc/rule/ACCA%20Rulebook%202017.pdf], and are mindful of any changes or updates to the same. The rulebook sets out the bye-laws, regulations, and ethical requirements you need to comply with and you should always keep it to hand to ensure you are aware of your rights and responsibilities. NQ Magazine August 2017
Step 5: Continuous improvement ACCA can help to provide access to a vast array of opportunities and resources for you to complete further training and qualifications to advance your career; including providing preferential terms for members on a wide range of courses, membership fees and tuition material offered by partner organisations [http://www. accaglobal.com/hk/en/member/membership/partner-quals. html] Keep an eye on what is available so you can make the most of the opportunities available to you through ACCA membership! If there are any specific topics or issues that you would like to see discussed by our team on this blog in the future, please do not hesitate to contact us with suggestions at firstname.lastname@example.org NQ â—? Thanks to ACCA for this article NQ Magazine August 2017
Standard briefing Here is the second in our series of NQ’s pocket guide to the IFRS – brought to you in association with the IFRS Foundation IFRS 9 FINANCIAL INSTRUMENTS
IFRS 9 is effective for annual periods beginning on or after 1 January 2018, with early application permitted. IFRS 9 specifies how an entity should classify and measure financial assets, financial liabilities, and some contracts to buy or sell non-financial items. IFRS 9 requires an entity to recognise a financial asset or a financial liability in its statement of financial position when it becomes party to the contractual provisions of the instrument. At initial recognition, an entity measures a financial asset or a financial liability at its fair value plus or minus, in the case of a financial asset or a financial liability not at fair value through profit or loss, transaction costs that are directly attributable to the acquisition or issue of the financial asset or the financial liability. Financial assets: When it first recognises a financial asset, the entity classifies it on the basis of the entity’s business model for managing the asset and the asset’s contractual cash flow characteristics, as follows: l Amortised cost – a financial asset is measured at amortised cost if both of the following conditions are met: – the asset is held within a business model whose objective is to hold assets in order to collect contractual cash flows; and – the contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding. l Fair value through other comprehensive income – financial assets are classified and measured at fair value through other comprehensive income if they are held in a business model whose objective is achieved by both collecting contractual cash flows and selling financial assets. l Fair value through profit or loss – any financial assets that are not held in one of the two business models mentioned are measured at fair value through profit or loss. When, and only when, an entity changes its business model for managing financial assets it must reclassify all affected financial assets. Financial liabilities: All financial liabilities are measured at amortised cost, except for financial liabilities at fair value through profit or loss. Such liabilities include derivatives (other than derivatives that are financial 16
2017 IFRS® Foundation
Pocket Guide to IFRS® Standards: the global financial reporting language Paul Pacter
guarantee contracts or are designated and effective hedging instruments), other liabilities held for trading and liabilities that an entity designates to be measured at fair value through profit or loss (see ‘fair value option’ below). After initial recognition, an entity cannot reclassify any financial liability. Fair value option: An entity may, at initial recognition, irrevocably designate a financial asset or liability that would otherwise have to be measured at amortised cost or fair value through other comprehensive income to be measured at fair value through profit or loss if doing so would eliminate or significantly reduce a measurement or recognition inconsistency (sometimes referred to as an ‘accounting mismatch’) or otherwise result in more relevant information. Impairment: Impairment of financial assets is recognised in stages: Stage 1 – as soon as a financial instrument is originated or purchased, 12-month expected credit losses are recognised in profit or loss and a loss allowance is established. This serves as a proxy for the initial expectations of credit losses. For financial assets, interest revenue is calculated on the gross carrying amount (ie without deduction for expected credit losses). Stage 2 – if the credit risk increases significantly and is not considered low, full lifetime expected credit losses are recognised in profit or loss. The calculation of interest revenue is the same as for Stage 1. Stage 3 – if the credit risk of a financial asset increases to the point that it is considered credit-impaired, interest revenue is calculated based on the amortised cost (ie the gross carrying amount less the loss allowance). Financial assets in this stage will generally be assessed individually. Lifetime expected credit losses are recognised on these financial assets. Hedge accounting: The objective of hedge accounting is to represent, in the financial statements, the effect of an entity’s risk management activities that use financial instruments to manage exposures arising from particular NQ Magazine August 2017
risks that could affect profit or loss or other comprehensive income. Hedge accounting is optional. An entity applying hedge accounting designates a hedging relationship between a hedging instrument and a hedged item. For hedging relationships that meet the qualifying criteria in IFRS 9, an entity accounts for the gain or loss on the hedging instrument and the hedged item in accordance with the special hedge accounting provisions of IFRS 9. IFRS 9 identifies three types of hedging relationships and prescribes special accounting provisions for each: l fair value hedge: a hedge of the exposure to changes in fair value of a recognised asset or liability or an unrecognised firm commitment, or a component of any such item, that is attributable to a particular risk and could affect profit or loss. l cash flow hedge: a hedge of the exposure to variability in cash flows that is attributable to a particular risk associated with all, or a component of, a recognised asset or liability (such as all or some future interest payments on variable-rate debt) or a highly probable forecast transaction, and could affect profit or loss. l hedge of a net investment in a foreign operation as defined in IAS 21. When an entity first applies IFRS 9, it may choose to continue to apply the hedge accounting requirements of IAS 39, instead of the requirements in IFRS 9, to all of its hedging relationships.
IFRS 10 CONSOLIDATED FINANCIAL STATEMENTS IFRS 10 establishes principles for presenting and preparing consolidated financial statements when an entity controls one or more other entities. IFRS 10: l requires an entity (the parent) that controls one or more other entities (subsidiaries) to present consolidated financial statements; l defines the principle of control, and establishes control as the basis for consolidation; l sets out how to apply the principle of control to identify whether an investor controls an investee and therefore must consolidate the investee; l sets out the accounting requirements for the preparation of consolidated financial statements; and l defines an investment entity and sets out an exception to consolidating particular subsidiaries of an investment entity. Consolidated financial statements are financial statements that present the assets, liabilities, equity, income, expenses NQ Magazine August 2017
and cash flows of a parent and its subsidiaries as those of a single economic entity.
IFRS 11 JOINT ARRANGEMENTS IFRS 11 establishes principles for financial reporting by entities that have an interest in arrangements that are controlled jointly (joint arrangements). A joint arrangement is an arrangement of which two or more parties have joint control. Joint control is the contractually agreed sharing of control of an arrangement, which exists only when decisions about the relevant activities (ie activities that significantly affect the returns of the arrangement) require the unanimous consent of the parties sharing control. IFRS 11 classifies joint arrangements into two types â€“ joint operations and joint ventures: l in a joint operation, the parties that have joint control of the arrangement (joint operators) have rights to particular assets, and obligations for particular liabilities, relating to the arrangement; and l in a joint venture, the parties that have joint control of the arrangement (joint venturers) have rights to the net assets of the arrangement. IFRS 11 requires a joint operator to recognise and measure its share of the assets and liabilities (and recognise the related revenues and expenses) in accordance with IFRS Standards applicable to the particular assets, liabilities, revenues and expenses. A joint venturer accounts for its interest in the joint venture using the equity method (see IAS 28).
IFRS 12 DISCLOSURE OF INTERESTS IN OTHER ENTITIES IFRS 12 requires an entity to disclose information that enables users of its financial statements to evaluate: l the nature of, and risks associated with, its interests in a subsidiary, a joint arrangement, an associate or an unconsolidated structured entity; and l the effects of those interests on its financial position, NQ financial performance and cash flows. 17
The truth will out
NQ Magazine August 2017
A charity is missing some of its funds and you know exactly where the money went. So what should you do about it? OUTLINE OF THE CASE You are a trustee of a charity, which has total incoming resources of approximately £500,000 and total assets of about £200,000. You recently discovered that, almost a year ago, the respected, long-standing treasurer of the charity ‘borrowed’ £40,000 from the charity’s funds. At the time, the charity’s bank accounts held £100,000, of which £30,000 belonged to the general fund and £70,000 to the restricted fund. The treasurer had been experiencing personal financial difficulties arising from the partition of his business following an acrimonious divorce. He has explained to you that he borrowed the money because his company was up to its bank overdraft limit, and he had to pay the employees’ wages. He had used one of the blank cheques signed by another trustee that the treasurer traditionally held to cover emergencies while the other trustees were on holiday. His intention had been for this only to be for a few days, as he was expecting a large trade debt to be settled imminently, relieving the pressure on the overdraft. To compound his misfortune, the debtor then went into liquidation, and the treasurer could not pay back the ‘loan’ from the charity immediately. Nevertheless, he had hoped to trade his business out of financial difficulty. All this occurred a month before the charity’s financial year end. The treasurer successfully delayed the audit for a few months while he tried to pay back the money to the charity. He has managed to pay back £15,000 since the year end. The charity’s audit will begin next week. The other two trustees had known about the treasurer’s divorce and the financial pressures facing him and his business, and they are sympathetic towards him. The treasurer is trying to persuade you and the other two trustees that £40,000 can be included in the charity’s trade debtors at the year end, as a debt due from his company, and he will return the remaining £25,000 as soon as he can.
KEY FUNDAMENTAL PRINCIPLES
Integrity: The treasurer’s conduct was dishonest, and he is proposing to conceal it within the charity’s accounts. If you agree to assist him in his deception, you will not be acting in a straightforward and honest manner. Professional competence and due care: You need to ensure that you understand the necessary disclosures in the accounts and any whistleblowing requirements in respect of the treasurer’s dishonesty. Professional behaviour: How should you proceed so as to comply with relevant law and regulations, and not discredit yourself or your profession?
Identify relevant facts: The treasurer misappropriated a significant amount of money from an organisation whose NQ Magazine August 2017
interests you have been entrusted to protect. He appears to have been open with you and the other trustees recently, but you must now be sure of your obligations towards the charity, its auditors and users of the charity’s accounts. Identify affected parties: Key affected parties are you, your fellow trustees, the treasurer and the auditors. Also affected are the charity, its beneficiaries and users of the charity’s accounts. Who should be involved in the resolution: You should consider to what extent the treasurer and the other trustees should be involved. However, the auditors will certainly need to be advised of the situation.
POSSIBLE COURSE OF ACTION You should discuss the matter with the other trustees to ensure that they do not seek to cover up the treasurer’s fraudulent behaviour. You should advise them that the accounts should reflect what actually occurred, and it should be explained to the auditors. You need to consider whether the treasurer should be immediately removed as a trustee. Alternatively, if you and the other trustees consider that the treasurer, as a well-respected trustee in the past, has, for the vast majority of the time, served the charity well, you may determine that the charity would be best served if he were to remain. You and the other trustees may need to take advice on this. Not only were the treasurer’s actions dishonest, but there is no guarantee that the remaining £25,000 debt to the charity will ever be repaid. As a professional accountant, and also specifically as a trustee, you must be aware of your whistleblowing obligations under the law, as well as your responsibilities to safeguard the charity’s assets. There are also likely to be other blank signed cheques in existence, and this undermines the charity’s internal control system. You have a duty to co-operate with the auditors, and the auditors may have a statutory duty to report the fraud and whether or not the trustees have reported it. However, your own interest in the fact that the auditors may report you should not be relevant to your ethical decision. Fraud has taken place and so you may also need to consider whether you have any other whistleblowing obligations. Failure to whistleblow might be construed as negligence, and the trustees might be opening themselves up to a personal liability. You could consult a lawyer or your professional body for advice at any time. You should document, in detail, the steps that you take in resolving your dilemma, and any discussions held. This may serve to protect you if your ethical judgement is challenged in the future. NQ
l Thanks to the CCAB for this article 19
YOU’VE BEEN HACKED! CIMA’s ’s Ken Witt explains the growing role of the management accountant when it comes to protecting against cyber attacks
NQ Magazine August 2017
he recent global WannaCry and Petya cyber attacks were a wake-up call for many organisations. The extent of Petya is not known yet, but according to reports there were around 2,000 attacks on a single day, crippling businesses and government agencies around the world. WannaCry is estimated to have affected more than 200,000 computers and, with the NHS being one of the victims in the UK, it meant that even operations had to be cancelled. Cyber threats can have severe consequences: lost business, fines, lawsuit costs and settlements, and reputational damage, among other things. There are predictions that the financial loss from WannaCry could be hundreds of millions of pounds.
Who’s in control? According to a 2017 Deloitte report, only 5% of FTSE 100 boards appear to have a director with specific cybersecurity expertise – a clear cybersecurity weak spot. Management accountants and finance professionals can play a big role in helping organisations identify and mitigate cyber security risks. Chief financial officers work at the heart of an organisation, and usually have ownership of risk management, asset protection and control, and business continuity. All of this is affected by cybersecurity, so it’s only logical that finance professionals take care of this area as well. Risk management is also a core competency of management accountants, making them the ideal partner to help organisations develop their cybersecurity strategies. However, you cannot protect your company without knowing what threats are. To help management accountants understand security risks, approaches and responses to cyber threats, the AICPA has introduced the CGMA cybersecurity tool. This new resource provides a practical guide to combatting cybersecurity intrusions to help ensure the success of organisations.
Understanding cybersecurity To win the war you need to know who your enemy is – and what weapons they use. While you’ve got your ‘basic’ cyber criminals, cyber attacks can also be carried out by business competitors, insiders such as former employees or even other countries. Cyber criminals often use malicious software –malware – to steal data and money or cause denial of service. The most common malware types are: l Ransomware used for denial-of-access attacks, which lock computer systems until a ransom is paid. l Botnets, a network of infected computers controlled by the attacker. l Malvertising, where online advertisements are used to spread malware. l Phishing, usually in the form of an e-mail made to look like it comes from a trustworthy or legitimate source. By clicking on a link in the mail or by opening an attachment, the user installs malware on their computer. Another threat is application attacks via phone apps or home devices connected to the internet.
vulnerabilities can be caused by system configuration mistakes or if staff ignore software security updates. Nevertheless, many problems and vulnerabilities are caused by users themselves, for example, by using weak passwords or clicking on links or attachments from unknown parties.
Cybersecurity objectives Organisations should define their key cybersecurity objectives. Key objectives include: l Enabling continuous access to and use of information and systems. l Protecting information from unauthorised access and disclosure. l Guiding against data modification or destruction. l Guarding against the improper use, modification or destruction of systems. To achieve these objectives, businesses need to implement security mechanisms to protect information assets, detect malicious activity and be able to respond effectively when these attacks happen. These measures could include: l Requiring identification, such as usernames, to make sure that there is accountability. l Authenticating this identification via passwords, fingerprints, etc. l Only allowing particular types of access or transaction for users with verified level of authority. l Protecting sensitive data such as credit card information, for example, through encryption.
Responding to cyber breaches Centralisation is an important element of cybersecurity, especially for big firms with large numbers of computers, laptops and mobile devices. The ability to manage software updates or security protocols through a centralised management ensures better control. Centralised management is also an option for mobile devices as third-party mobile device management (MDM) products are now available. For laptops, whole disk encryption is vital as it prevents unauthorised access in case laptops are stolen or lost. Further security features are network configuration and firewalls; application firewalls; and antivirus and endpoint products.
What can you do? Finance professionals have a responsibility to understand and mitigate the business risks associated with a cybersecurity attack. Our CGMA cybersecurity tool will help you guide your organisation to develop an organisation-wide approach to protecting against cyber attacks, ensuring the continued success of organisations.
The CGMA cybersecurity tool can be downloaded – go to www.cgma.org/resources/ tools/cgma-cybersecurity-tool.html
What makes your systems vulnerable? Weaknesses can be traced back to technical, procedural or human flaws. Among technical problems are software defects or not using adequate security protections. Procedural NQ Magazine August 2017
Too good to be true? Don’t be taken in by plush offices and a whizzy website – look for the telltale signs of dodgy dealing
firm that claims to offer ‘investment management services’ approaches you to help prepare its books. It has an online presence and a very well-designed website. Among the many stock pictures of professionals looking ‘professional’ is a photo of its premises in the shadow of an iconic City landmark. You are aware that the firm rents these offices. The firm trades in gold, palladium and other precious metals. It has numerous skilled advisors on the payroll such that a large part of revenues is paid as salaries. The managing director is professionally qualified but his previous business (which had a strikingly similar name) failed recently when the commodity markets collapsed. The first filing deadline for that business was missed and the company collapsed shortly after. Unfortunately,
previous accountants are unavailable to tell you any more about what happened.
How can your risk assessment procedures protect you? For the purposes of this exercise put yourself in the position not of an objective assessor with the benefit of hindsight, but a sole practitioner who has just been approached to do some work. You will need to consider the effectiveness of your risk assessment systems carefully and honestly. This scenario describes a fairly typical London investment fraud. These organisations often have no permanent office space, preferring rented physical or ‘virtual’ offices instead. Their business name may refer
NQ Magazine August 2017
to accountancy or finance services in order to conjure up in the investor’s mind something of the prestige of the professions. They favour images and references to iconic buildings or street names for similar reasons, and the website is likely to reflect this. Another common ruse is to purport to trade in precious commodities. High salary costs as a proportion of turnover is yet another sign of an investment scam. Escrow services may also be offered – to facilitate money laundering. The individuals involved in this fraud may be professionally qualified in some way, though not necessarily as accountants. They are likely to have had previous involvement in similar scams with similar names. Year-end accounts may not exist – the businesses were probably wound up before they were required – but the
explanations for previous closures will doubtless sound perfectly plausible. Our initial risk assessment and ongoing client due diligence will clearly need to be well up-to-scratch here. A number of indications are mentioned which we can feed into an overall risk-based approach. It will also be important to maintain our professional scepticism and questioning mind at all times: just how likely is it that we have been given legitimate explanations? An organisation with lots of money to pay staff might also have lots of money for professional fees – especially to pay an accountant whose work will lend legitimacy to dubious activities. We will need to make sure that offers of generous remuneration do not impair our objectivity, due care or diligence. NQ
l Thanks to the CCAB for this article
NQ Magazine August 2017
Published on Aug 11, 2017
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