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Accountants digest brexit - april 2017

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Accountants Digest of April 2017 setting out “Brexit Implications for Accountants”. This contains articles I wrote on FX implications (3.2 and 3.3).
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  • 1. About the authors This digest was compiled and edited by Julia Bowyer ACA, the Accounting and Audit Content Manager at Wolters Kluwer UK. The contributors are set out on the next page. Contents 1 Introduction and purpose of this digest 3 2 Governance: dealing with risk and uncertainty 3 3 Accounting 6 4 IFRS Financial reporting 14 5 Audit – thresholds may shift post-Brexit 22 6 Potential tax and VAT changes 24 7 Brexit: EU nationals working in the UK 26 Issue 628 April 2017 Throughout this Digest the male pronoun is used to cover references to both the male and female. The law is stated as at 31 March 2017. Brexit Implications for Accountants Accountants’ Digest
  • 2. 2 Issue 628  |    April 2017 Brexit Implications for Accountants Contributors Sara White is Editor of Accountancy and CCH Daily and Amy Austin is Editorial Assistant at CCH Daily, Wolters Kluwer UK. CCH Daily is the essential source of technical news, analysis and insight for the accountancy, tax and audit professions that can also be used to earn you CPD. Malcolm Finn FCA is global financial controller at Costa Coffee, part of the Whitbread Group. He joined Costa in 2015 from Big Four firm EY where he was an advisory director working with CFOs and the senior finance leadership of listed multinationals. His particular focus at the firm was on complex groups with global scale undergoing strategic change and renewal, finance transformation, complex transactions and readiness for new regulations. Mike Cowan is a UK executive director and responsible for developing a recent EY report on Finance in a 4.0 world, which looked at the role of the CFO and finance function in what the World Economic Forum refer to as Industry 4.0 – the 4th Industrial Revolution. He is a qualified chartered accountant and brings over 20 years partner level experience working with blue chip private and public sector organisations to improve their finance functions. Mark Wearden MSc FCCA FCIS is an experienced consultant and lecturer who has worked extensively with directors and senior managers from a wide range of different type and size of organisation. Mark is Chairman of the ACCA Global Forum for Governance, Risk and Performance; an external exam assessor for ICSA, a judge for the ICSA annual reporting awards and a Senior Lecturer in Corporate Finance and Corporate Governance at the University of Lincoln. Andrew Marshall is an audit partner at KPMG. For many years he specialised in the real estate, construction, business services and transport sectors. He is KPMG UK’s senior technical partner and has been with the firm for 30 years. He is a regular contributor to CCH Daily and Accountancy magazine. Armaghan Haq FCA is head of accounting policy for retail, consumer finance and group operations divisions of Lloyds Banking Group, responsible for ensuring technical accounting risks are identified, assessed, prioritised and managed effectively across the three divisions. The views expressed in this article are solely those of the author in his private capacity and do not constitute professional advice. David Stein is the editor of Company Reporting at Wolters Kluwer UK. Company Reporting products have been influential in monitoring the development of IFRS reporting for over two decades. This high-value, independent research service reports on the constantly changing financial reporting practice of public companies, with a focus on S&P Europe 350 and UK FTSE 350. Matthew Stallabrass FCA is corporate business and audit partner at national audit, tax and advisory firm Crowe Clark Whitehill. His experience includes international groups with turnover in excess of £3bn and listed entities with market capitalisation in excess of £500m. Matthew works with clients reporting under both UKGAAP and IFRS and has experience in advising clients on the transition process. George Bull is RSM’s senior tax partner. Described by The Times newspaper as the firm’s ’tax guru’, George is primarily involved in providing leading-edge business and taxation advice to the legal profession. He firmly believes that tax systems should ‘look as though they were designed to be that way’, being fair, clear, certain and proportionate in their impact. As most tax systems fall short of this ideal, George works closely with clients to explain complex tax issues simply, producing workable solutions to difficult problems. Pat Sweet is the online reporter at CCH Daily and Accountancy, covering news stories as they happen each day. With a background in specialist publications, Pat has written about the management consultancy and IT sectors, and is now focused on developments in the accounting and finance markets. Stuart Chamberlain is an Employment law specialist for a range of on-line and digital products at Wolters Kluwer, including Croner-i.
  • 3. 3 Brexit Implications for Accountants Issue 628  |    April 2017 1 Introduction and purpose of this digest Following the triggering of Article 50 on 29 March 2017 starting the negotiating process for the UK to leave the EU, this digest will guide you around the breadth of implications facing accountants, including corporate governance, audit, accounting, tax, VAT and employment. It pulls together articles and papers from various sources here at Wolters Kluwer with the aim of considering the following questions: • Governance: How are firms and clients dealing with risk and uncertainty so they stay ahead of the game? • Accounting: What might happen to the UK accounting framework and what accounting issues are already arising in practice? • Reporting: How have companies disclosed the risk and impact of Brexit so far? • Audit: How may audit thresholds and regulation change? • Tax and VAT: What are the key likely changes in tax and VAT to consider at this stage? • Employees: Have we considered the issues for employees including pensions, tax and the impact for EU citizens in the UK? You can continue to keep up to date with developments by following the dedicated Brexit page on CCH Daily and signing up to Wolters Kluwer services such as Company Reporting and Croner-i. 2 Governance: dealing with risk and uncertainty Organisational culture has increasingly been the business topic of recent months. Its influence on risk, and its relevance for regulators and investors, is becoming increasingly tangible. This section contains an article for CCH Daily by Malcolm Finn, financial controller at Costa Coffee and Mike Cowan, head of Finance 4.0 at EY. They consider the significance of culture in the context of the organisation’s finance function, and how culture is key to overall risk management. This is followed by an extract from The PracticalGuide forAuditCommittees by Mark Wearden. 2.1 Culture, financial controls and risk management in a Brexit world 2.1.1 The uncertainty of uncertainty Whatever your personal views, recent months have heralded a period of considerable uncertainty. Macro factors of currency, geo-political risk, fiscal policies, the economy in its widest sense and even levels of consumer confidence have demonstrated the uncertainty of uncertainty. Oscillation between hard Brexit and soft Brexit, and the recent US elections, to name two events, have resulted in heightened levels of volatility. This poses a new risk landscape, which companies will need to navigate. The finance function and corporate culture will have a key part to play. 2.1.2 CFO agenda and potential accounting implications In times of uncertainty and volatility, there can sometimes be a decline in risk appetite. Chief financial officers (CFOs) will have considered their revenue and operating models including customers, markets, supply chain, workforce, and input costs as well as investment choices. Significant and sudden shifts in foreign exchange rates, prices and indices may have certain accounting consequences including fair values, valuation of inventories, impairment analysis, pension valuation, and recoverability of assets. Organisations may need to consider the continued appropriateness of accounting policies and judgments. Close reading of contracts may yet reveal that some have Brexit scenario break clauses. 2.1.3 Impact on finance and treasury functions This changing environment makes it more important than ever that organisations have confidence in their ability to properly respond to unforeseen challenges and effectively implement strategies. This requires first-rate decision making and frontline behaviours that align with leadership’s intentions. Yet, it is easy to forget that organisations are but collectives of individuals, each of whom has anxieties and ambitions, and each of whom is affected and influenced by the environments in which they work and the stakeholders that they
  • 4. 4 Issue 628  |    April 2017 Brexit Implications for Accountants serve. Gaining confidence over the frontline individuals’ decision making and behaviours requires an understanding of the cultures that help shape those environments. The recent economic turbulence has been particularly tangible for finance and treasury functions. With heightened importance of finance and treasury decision making comes an increasing responsibility for leadership to fully understand how culture influences it. This is particularly challenging given the inherent pressures in managing and messaging to finance’s diverse range of stakeholders. One of the key risks in this situation is rationalising unfavourable decisions – where, as a result of individuals managing a range of stakeholders, they feel constrained in speaking up or encouraged to ‘play down’ difficult news. This may cause good people to rationalise misleading communication. The other element to consider is how finance’s culture interacts with the multitude of dimensions and dynamics that exist across the wider organisational culture. Cross-functional working is now commonplace in many organisations. Fear or blame cultures, or cultures that exhibit silo mentalities, can be particularly prohibitive for finance functions since they are critically dependent upon wider business information to successfully manage risk, and often house the expertise that other parts of the business require to facilitate key decision making and forecasting. A finance function that is hyper-connected across the organisation and can work more effectively within the diverse aspects of the larger organisational culture can add competitive advantage. In short, culture is key to a business’s ability to intelligently develop and implement the right strategy to weather the uncertainty in the market. Organisations that encourage open, constructive and integrative discussions and a collaborative ‘big picture’ approach, based on diverse relationships throughout the organisation, are likely to be more resilient. 2.1.4 Influencing behaviour Most of us intuitively understand that the political and social dimensions to our jobs influence the way we act. For this reason, culture has been increasingly recognised as a significant factor in the strength of an organisation’s overall control environment. That is not to diminish the importance of controls and compliance. Rather, it is a basic acknowledgment that even the best compliance frameworks have unforeseen gaps, and that individuals are more likely to make good decisions when they are acting within cultures that are aligned with the organisation’s purpose and values. Culture is the invisible hand that guides people to do the right thing even when no one is watching. Organisations that focus on rules alone are likely to find that they have not done enough to drive the behaviours they desire their people to exhibit. In a recently published study, Corporate culture and the role of boards, the Financial Reporting Council (FRC) addressed the link between culture and risk head on. It laid out leadership’s direct responsibility for embedding at all levels a culture where behaviours, purpose and values are aligned, for assessing culture and for taking immediate action to address gaps and misalignments. Equally as important, the FRC also urged that ‘codes of conduct are a baseline; a culture is created by what you do rather than what you say’. Most finance and treasury functions will invest significant time focusing on externally visible corporate behaviours and communications, but often overlook the ‘invisible norms’ that dominate interactions within treasury and with other functions, which are of equal importance. Embedding an open culture allows risks and opportunities from a wider range of sources to surface and enables appropriate consideration by all relevant stakeholders. Clearly the traditional methods for managing risk and performance will always have a high level of importance, but leadership should recognise that culture has a significant and demonstrated impact as well.
  • 5. 5 Brexit Implications for Accountants Issue 628  |    April 2017 2.1.5 Assessing culture Culture can be hard to define, observe and measure. Yet, as the FRC has urged, define, observe and measure we must. The problem is moving on from talking about culture to measuring it and understanding its influence on behaviours and ultimately performance. Recent regulatory focus will provide further impetus for major listed companies to give culture more attention. Investors and analysts are also taking culture seriously – they are already demanding more and better information on culture beyond platitudes and employee engagement scores. With the uncertainty of our times, these circumstances dictate that companies cannot afford to delay taking real, concrete steps toward tackling their cultures. As the FRC notes, ‘objective, evidence‐based tools are already available which are capable of layering and presenting information [on culture],’ helping finally make the intangible, tangible. Organisations, and finance and treasury functions in particular, need to begin utilising this technology to best arm themselves for the road ahead. 2.2 CCH Practical Guide for Audit Committees: Strategy, risk and control The CCH PracticalGuide forAuditCommittees is aimed at people from any type or size of organisation who are involved with or need to know more about how to structure and operate an audit committee, including internal and external auditors, audit committee members and company directors. In Section 6, Mark Wearden covers strategy, risk and control including setting out the theory behind a ‘triangular approach’ to effective governance, which will become even more important for organisations to consider in light of Brexit. He then sets out the following questions for audit committees to consider in relation to risk awareness in their own organisations. • Are we looking backwards or forwards? –– How much time do we spend on strategic consideration? –– How far ahead do we look? –– Is the past used to inform the future? • Who owns the organisational risks? –– Does the audit committee have a clear remit? –– Do the other directors recognise their accountability? –– Is there too much reliance on the audit committee? • How far are we prepared to go? –– Do we understand our risk appetite? –– Have we determined our risk tolerance parameters? –– When did we last test the boundaries? • Are the risks aligned to the strategy? –– Do we recognise the triangulation of strategy, risk and control? –– Who determines the strategy? –– Who identifies the risks? • How do we know when something is going wrong? –– Are the reporting lines clear? –– Is the transparency evident? –– Can we trust the key players at all levels?
  • 6. 6 Issue 628  |    April 2017 Brexit Implications for Accountants 3 Accounting 3.1 UK Accounting framework: what does Brexit mean for accounting standards? The Brexit vote could have long-term implications for the use of IFRS in the UK. Drafted in December 2016, Andrew Marshall FCA, senior technical partner at KPMG considers the pitfalls and potential options for UK accounting standards once the UK leaves the EU. As the Brexit debate rumbles on, one of the questions that we are frequently asked is what Brexit might mean for accounting standards in the UK and whether it could lead to the demise of International Financial Reporting Standards (IFRS) in the UK and the return of UK GAAP. One answer is that the UK government and European Commission have more important things to negotiate as they plot their route to a hard or soft Brexit. However, at the same time, there are vocal groups who have concerns with certain aspects of IFRS and may use the opportunity to lobby for just such a change. So first of all the facts. We are still in the EU for the time being, so there will, for certain, be no change to the requirements in the next two years or so until Brexit eventually takes place. Second, the EU-wide requirement for listed companies to use EU-adopted IFRS is now embedded into our own law in the CompaniesAct 2006; it is also worth noting that this falls into many places and unpicking the requirement will take much detailed redrafting of legislation. Third, what most people now known as old UK GAAP has passed into history and private companies (with the exception of small ones) are now applying FRS 102 Financial Reporting Standard applicable in the UK and Ireland, which is closely aligned with the IFRS for small and medium-sized entities. So any change would require a lot of unpicking. 3.1.1 Potential pitfalls Taking all this into account, it would seem that the following potential options lie open to the UK: • move to full IFRS – which would align with global requirements, but may indicate acceptance of all standards whether we like them or not, and potentially remove bargaining power with the International Accounting Standards Board (IASB); • continue with EU-adopted IFRS – which would seem unlikely to be popular, given we are likely to have no influence over the EU endorsement process;  However, it may be necessary in order to access EU capital markets and the single market more generally; for instance, Norway applies EU-adopted IFRS; • bring in our own endorsement process and have UK-adopted IFRS, which may as noted above complicate access to EU markets post-Brexit, but potentially also to other capital markets such as the US; or • revert back to UK GAAP, which could lead us to fall into all of the above pitfalls. While all of these routes have their pros and cons, it feels right now that a UK-adopted IFRS is likely to be the preferred route. This is after all a route we already follow with auditing standards. Many have voiced a desire for any endorsement process to be light touch. 3.1.2 Unexpected repercussions Aside from these possible changes, there are a number of more subtle impacts which may be felt over the longer term. For instance, the UK has been a strong advocate for IFRS within the EU. At times this has been in opposition to other countries which have sought to water down or reject some IFRS or aspects thereof in the EU. Without the UK’s voice, there is a risk that the EU could take a more antagonistic position on certain standards than it has previously done. Another issue, which has common ground with many other concerns on Brexit, is that the UK’s influence on IFRS will diminish. Whereas the EU is listened to as perhaps the major sponsor of IFRS, the UK on its own will be battling to be heard with many other global voices. A contrary view is that the UK should remain a major capital market and hence its view will still be listened to. As with much to do with Brexit, it is difficult right now to second guess where we will end up, but in and around our profession this debate is likely to increase over the next couple of years.
  • 7. 7 Brexit Implications for Accountants Issue 628  |    April 2017 3.2 Accounting example in practice – IAS 21 Accounting for currency fluctuations under IAS 21 The EffectsofChanges in Foreign Exchange Rate, is a bala
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