Technical and Insight
New UK GAAP – an overview
This issue of In Practice focuses on the introduction of UK GAAP, with a number of articles dedicated to it. We begin with a broad overview.

This issue of In Practice focuses on the introduction of UK GAAP, with a number of articles dedicated to it. We begin with a broad overview. 

2015 is the year that the old financial standards and guidance from the Financial Reporting Council are replaced by new UK GAAP. Accounts for periods beginning on or after 1 January 2015 must be prepared using the new Standards and the current FRSs, SSAPs, UITF Abstracts and Statements of Principles for Financial Reporting, together with FRSSE 2008, will cease to be valid. 

Entities are permitted to use whichever of the new standards is most appropriate to them, subject to their eligibility to adopt them. FRSSE 2008 is replaced by FRSSE 2015 or later in the year a small company version of FRS102. 

  • FRS 100 Application of Financial Reporting Requirements introduces the relevant financial reporting standards. It also establishes that if an entity is not required by legislation or regulation to prepare its accounts under EU IFRS, then the financial statements:
    • may be prepared using FRSSE 2015, if eligible to apply it
    • if not eligible to apply the FRSSE, or chooses not to, FRS102, EU IFRS or FRS101 must be adopted, provided they are individual financial statements of a qualifying entity.
    • FRS 101 Reduced Disclosures Framework allows qualifying group entities to benefit from some disclosure exemptions when preparing individual accounts under EU IFRS
    • FRS102 The Financial Reporting Standard Applicable in the UK and the Republic of Ireland replaces most of the former standards and abstracts
    • FRS 103 Insurance Contracts is relevant for entities applying FRS 102 that have insurance contracts
    • FRSSE 2015 replaces FRSSE 2008, as well as including requirements for micro-entities
    • FRS 102 - small entity provisions (yet to be issued) replacing FRSSE.


The UK Financial Reporting Framework offers the following options: 

  • micro-entities are able to prepare and file simplified accounts using the micro-entities provisions in FRSSE 2015, FRS 105, FRS 102 - small entity provisions, FRS 102 or EU IFRS
  • small entities can apply FRSSE 2015, FRS 102 - small entity provisions, FRS 102 or EU IFRS
  • medium-sized and large companies, public companies and other entities that are not small, may apply FRS 102 or EU IFRS.


A qualifying group entity will also be able to prepare its individual financial statements in accordance with FRS 101 (EU IFRS with reduced disclosures). 

Entities required by legislation or by the IAS or other Regulation to prepare their financial statements in accordance with EU IFRS, for instance group accounts of entities whose securities are listed on an EU stock exchange, will continue to do so. 

The Companies, Partnerships and Groups (Accounts and Reports) Regulations 2015 has an impact on the choice. The most significant provisions of the draft regulations will: 

  • adopt the maximum thresholds available in the accounting directive to determine the size of small companies and enable the highest number of medium-sized companies to be re-categorised and access the less burdensome small companies regime. Mandatory increases in the thresholds for medium-sized companies will also be applied
  • reduce the number of mandatory notes required of small companies to 13 notes, where these are appropriate
  • permit small companies to prepare an abridged sheet and abridged profit and loss account if approved by all of the company’s shareholders
  • give companies in the same group as a public company which is not a listed company access to the small or medium-sized companies regimes
  • provide companies with the opportunity to use alternative layouts when preparing their profit and loss account and the balance sheet provided that the information given is at least equivalent to the information otherwise required by the standard formats (This option is intended to reduce the burden of consolidation for those in a group using international accounting standards.)
  • remove the requirement for micro-entity companies to prepare a directors’ report.


It allows directors to take advantage of the small company provisions by allowing adoption of the increased small company thresholds (turnover £10.2m, balance sheet total £5.1m and number of employees 50) and accounting requirements from January 2015 rather than waiting for the thresholds to apply for financial years beginning on or after 1 January 2016. 

Micro-entities
LLPs, partnerships and charities cannot be micro-entities. The Companies Act 2006 defines micro-entities as companies which do not exceed two or more of the following criteria: 

Balance sheet total: £632,000
Turnover:                £316,000
Average no. of employees:  10 

in any year.


Micro-entities may prepare accounts that include only an abridged balance sheet, prepared according to one of two formats in FRSSE 2015, an abridged profit and loss account, for which there is only one format and a director’s report. It is not necessary to prepare a separate set of notes for micro-entities and the only additional information required, ie advances and guarantees to directors and other financial commitments and guarantees, must be included at the foot of the abridged balance sheet. Micro-entities can file just the abridged balance sheet and footnotes with Companies House. 

The recognition and measurement criteria for micro-entity accounts are the same as those for FRSSE 2015, except for those applying to fixed assets and some current assets. The revaluation of tangible assets and the choice to measure fixed asset investments at market value are not available. Investment properties are accounted for at impaired historic cost rather than at market value at the balance sheet date and current asset investments cannot be measured at current cost. 

More detailed guidance on micro-entities is available. 

An entity eligible to apply the micro-entities provisions should consider whether micro-entity accounts would provide sufficient information to users of its accounts.  This may be relevant where finance providers require more detailed accounts, or the option of revaluing fixed assets may be important. The FRC is proposing to make the accounting standards for micro and small entities consistent with FRS 102. 

In this case, FRSSE 2015 would be withdrawn for accounting periods beginning on or after 1 January 2016 and the current provisions for micro-entities replaced by a new standard, the Financial Reporting Standard for Micro-entities (FRSME) based on simplified recognition and measurement requirements of FRS 102. 

Under the proposed FRSME the presentation and disclosure requirements for micro-entities may not change, the recognition and measurement will change from those of FRSSE 2015 to those of FRS102.  The FRS 102 requirements for micro-entities will be simplified under FRSME; accounting for individual transactions will be broadly consistent with larger entities, which should help users to understand the financial statements. 

Small entities
Small entities are able to apply FRSSE 2015 and those choosing to do so, need to be aware of the differences from FRSSE 2008

ACCA has published individual model accounts for a company using FRSSE 2015 which can be requested by e-mailing advisory@uk.accaglobal.com and quoting your membership number. 

Large and medium-sized entities 
Many medium-sized entities may take advantage of The Companies, Partnerships and Groups (Accounts and Reports) Regulations 2015and use the small company regime ahead of 1 January 2016 and use FRSSE or yet to be issued small entity provisions in FRS 102. 

Entities that are not small can adopt FRS 102, EU IFRS or FRS 101, if eligible. The transition from old UK GAAP to FRS 102 is complicated and guidance on FRS 102 can be obtained from ACCA’s website 

ACCA has also published Technical Factsheet 181 FRS 102 – Making the transition to new UK GAAP, which includes an analysis of the changes to terminology amd formats from old UK GAAP, a detailed comparison of topical areas and the potential tax impact.  

ACCA has produced model accounts for a small company applying FRS 102. Members can request a copy by emailing advisory@uk.accaglobal.com and quoting their membership number.

FRC issues new FREDs streamlining UK GAAP
The new standards apply if your turnover is under £10.2m.

The new standards apply if your turnover is under £10.2m. 

Yesterday (19 February) the FRC launched a consultation on three financial reporting exposure drafts (FREDs) that make amendments to UK GAAP and base them on the FRS 102 framework: 

  • FRED 58 Draft FRS 105 The Financial Reporting Standard applicable to the Micro-entities Regime
  • FRED 59 Draft amendments to FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland – Small entities and other minor amendments
  • FRED 60 Draft amendments to FRS 100 Application of Financial Reporting Requirements and FRS 101 Reduced Disclosure Framework. 


The key changes proposed in the three FREDs include: 

  • the withdrawal of the FRSSE for accounting periods beginning on or after 1 January 2016
  • a new accounting standard for micro-entities (FRS 105) based on FRS 102
  • new recognition and measurement requirements for other small entities outlined in a new section of FRS 102 but with reduced presentation and disclosure requirements compared to the full standard
  • greater flexibility in relation to the format of the profit and loss account and balance sheet in FRS 101, allowing the use of IFRS-based presentation requirements similar to those used for group accounts.


The proposals are intended to be effective for accounting periods beginning on or after 1 January 2016, with early application permitted for accounting periods beginning on or after 1 January 2015. 

Companies qualifying as small under the increased Companies Act thresholds (Turnover £10.2m, Balance Sheet total £5.1m, employees 50) will therefore be able to apply FRS 102 for small entities from 1 January 2015 rather than apply full FRS 102. 

Each FRED includes a number of consultation questions relating to specific issues on which the FRC is particularly interested in receiving comments from stakeholders. 

Some of the most significant questions are: 

  • should the small entities section of FRS 102 include different recognition and measurement criteria from those applicable to larger entities?
  • should FRS 105 for micro-entities use the same language and terminology of FRS 102?
  • is the level of simplification in FRS 105 compared to FRS 102 appropriate?
  • is it appropriate mandate the expensing of borrowing and development costs in FRS 105?


The consultation on the three FREDs runs up to 30 April 2015 and we invite you to send your comments to ACCA via email at supportingpractitioners@accaglobal.com by 31 March. We will consider these and incorporate our members’ views into our own reply.

 

 

 

GAAP: Measurement of basic financial instruments: old GAAP v FRS 102
A comparison of the measurement treatment of basic financial instruments between old UK GAAP and FRS 102, including the potential tax impact of the new standard.

A comparison of the measurement treatment of basic financial instruments between old UK GAAP and FRS 102, including the potential tax impact of the new standard.
 

Old UK GAAP

FRS 102

 

For entities not required or opting to apply FRS 26, old UK GAAP included limited requirements in respect of recognition and measurement of financial instruments.

 

FRS 4 dealt with recognition and measurement of financial instruments presented as debt/liabilities under FRS 25 (for example loans received, bonds issued, certain types of preference shares etc.). The FRSSE had equivalent provisions to FRS 4. 

 

FRS 25 dealt with the presentation of financial instruments, notably with the classification of financial instruments as financial assets, financial liabilities or equity instruments. The FRSSE included similar provisions to FRS 4.

 

No standard under old UK GAAP dealt with financial assets such as current or fixed asset investments in shares or bonds, loans made and receivables.

 

The Accounting Regulations (S.I. 2008/410 and S.I. 2008/409) include measurement provisions in respect of fixed and current asset investments (such as listed and unlisted securities and long-term loans) but do not include specific provisions for other financial assets not classified as investments (like receivables).

 

Under old UK GAAP the accounting treatment of financial instruments not covered by standards or statute was therefore determined by prevailing practice.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

FRS 4 and the FRSSE required debt (liabilities) to be initially recognised at the value of the proceeds received less the costs directly incurred to raise the debt. The finance costs of the debt, ie total payments to be made less net proceeds, was then allocated over the term of the debt at a constant rate over the carrying amount. In turn the carrying amount was increased by the finance costs for each reporting period and reduced by payments made in that period.

 

 

 

 

 

 

 

 

 

 

   

 Under the Accounting Regulations, investments should be carried at historic cost less diminution in value.

 Investments may also be measured in accordance with the alternative accounting rules, which involve taking revaluation surpluses to a revaluation reserve and not through the profit and loss.   

 The Accounting Regulations also allows investments, and other financial instruments including derivatives, to be carried at fair value with changes in value going through the profit and loss account. However, entities taking this option were required to apply FRS 26.

 Some complex financial instruments, like derivatives, were not recognised under old UK GAAP if an entity was not applying FRS 26 but were only required to be disclosed in certain circumstances.

 

 

FRS 102 includes separate accounting requirements, outlined in two different sections of the standard, for ‘basic’ and ‘other’, more complex, financial instruments and transactions. The requirements for basic financial assets and liabilities are relevant to all entities. If an entity only enters into basic financial instrument transactions it will not need to apply the section of the standard that deals with more complex financial instruments.

 

FRS 102 also allows an entity to apply the recognition and measurement provisions of IAS 39 or IFRS 9 to all its financial instruments rather than the corresponding provisions in the standard.

 Basic financial instruments normally include:

a)    cash and bank accounts

b)    trade and other accounts receivables and payables

c)    loans from banks or other third parties

d)    loans to and from subsidiaries and associates or to other third parties

e)    bonds and similar debt instruments

f)     investments in non-convertible preference shares and in non-puttable ordinary and preference shares

g)    commitments to receive or make a loan to another entity that cannot be settled net in cash.

 

Examples of more complex financial instruments include:

a)    options and forward contracts
b)    interest rate swaps
c)    investments in convertible debt and convertible preference shares
d)    investments in another’s entity equity instruments other than non-convertible preference shares and non-puttable ordinary and preference shares
e)    rights, warrants and futures contracts.

 

Basic financial instruments are required to be measured in different ways depending on the type and characteristics of the instruments:

 a)    Debt instruments such as bonds, loans etc. will be measured initially at present value of future payments and subsequently at amortised cost using the effective interest method.

b)    Debt instruments that are payable or receivable within one year, typically trade payables or receivables, will be measured, initially and subsequently, at the undiscounted amount of the cash or other consideration expected to be paid or received. However, if the arrangement constitutes a financing transaction, ie the payment of a trade debt deferred beyond normal business terms or financed at a rate of interest that is not a market rate or in case of an outright short-term loan not at market rate, the financial asset or liability will be measured, initially and subsequently, at the present value of the future payments discounted at a market rate of interest for a similar debt instrument.

c)    Debt instruments may also be designated by entity to be measured at fair value through profit or loss in certain specific circumstances.

d)    Investments in non-convertible preference shares and in non-puttable ordinary and preference shares should be measured:

  1. at fair value with changes recognised in profit or loss if the shares are publicly traded or their fair value can otherwise be measured reliably
  2. at cost less impairment for all other investments.

 Financial assets that are measured at cost or amortised cost shall be assessed for impairment at the end of each reporting period.

 Other complex financial instruments are required to be measured at fair value with changes in fair value recognised in profit or loss except for:

a)    investments in equity instruments that are not publicly traded and whose fair value may not be reliably estimated which shall be measured at cost less impairment and

b)    hedging instruments for which the entity is applying the hedge accounting provisions in FRS 102.

 


The changes introduced by FRS 102 have a major impact on the accounting treatment of financial assets. In particular some debt instruments, like bonds and loans, could have been carried at historic cost or valuation under old UK GAAP, while FRS 102 includes a specific requirement to measure them at amortised cost using the effective interest method, which represents the present value of the future cash flows of the financial asset discounted to the carrying amount of the financial asset using the interest rate that exactly produces such result, ie the effective interest rate. The effective interest rate is determined by discounting expected cash flows, like interest payments, repayments of principal, fees, finance charges, premiums, discounts etc., to the carrying amount of the financial asset initially recognised, ie the transaction price of the asset. 

FRS 102 also specifies the accounting treatment of debt instruments, both assets and liabilities, required to be settled within one year, which should be measured at the undiscounted amount of the cash or other consideration expected to be paid or received, unless they constitute a financing transaction. A financing transaction is typically one that does not include a stated interest rate or includes one that is not a market rate, such an interest-free loan or a trade debt payable beyond normal business terms. 

Debt instruments in respect of such transactions are required to be measured, if materially different from undiscounted amounts, at the present value of the future payments discounted at a market rate of interest for a similar debt instrument. Old UK GAAP did not include such precise provisions for short-term financial assets and liabilities and the measurement requirements for financing transactions are likely to have a significant financial reporting impact. 

Another significant difference introduced by FRS 102 is in respect of investments in shares. Under old UK GAAP such investments were normally carried at historic cost less impairment or at valuation with revaluation surpluses going to a revaluation reserve via the STRGL. Under FRS 102, investments in shares whose fair value cannot be reliably measured are carried at cost less impairment while those in publicly traded shares or shares whose fair value can be reliably measured are carried at fair value with changes via the profit or loss. 

Effectively FRS 102 restricts the possibility of revaluing share investments to those that are reliably measurable in terms of fair value, possibly by reference to an active market, while under old UK GAAP revaluation was allowed under the more subjective judgement of the directors that can determine a value that appears to be appropriate to them in view of the company’s circumstances. Additionally under FRS 102 changes in the fair value of share investments are recognised in profit or loss and not via other comprehensive income as in the old UK GAAP. 

The considerations outlined above will also apply for a small entity considering whether to adopt the FRSSE 2015 or the small entity provisions in FRS 102, as soon as they are available rather than wait for the period beginning on or after January 2016. That is the case because the FRSSE 2015 includes the same requirements in respect of measurement of basic financial instruments as the old UK GAAP. 

Transition 
The general transitional procedures in FRS 102 will apply to financial instruments on first-time adoption, ie assets and liabilities will be recognised, reclassified and measured as at the transition date in accordance with FRS 102. For instance derivatives will be recognised if they were not recognised under previous GAAP and investments in traded shares will be re-measured at fair value if they were previously carried at cost.   

An exception to the general transition rule is in respect of the derecognition provisions. Financial assets and liabilities derecognised under an entity’s previous accounting framework before the date of transition will not be recognised upon adoption of FRS 102. Conversely, for financial assets and liabilities that would have been derecognised under FRS 102 in a transaction that took place before the date of transition, but that were not derecognised under an entity’s previous accounting framework, an entity may choose: 

  • to derecognise them on adoption of FRS 102; or
  • to continue to recognise them until disposed of or settled.


Tax
impact
As noted, FRS 102 introduces major changes to the rules for the reporting of financial instruments. The taxation of financial instruments is, to a large extent, covered by the loan relationship rules. 

The computational rules for loan relationships are set out in CTA09/PT5/CH3. The key principles outlined in section 307 and 308 of CTA09 are that the amounts to be brought into the corporation tax computation are the 'credits and debits' which: 

  • taken together, ‘fairly represent’ the company’s profits and losses from its loan relationships, and
  • are computed in accordance with generally accepted accounting practice (GAAP). 


The loan relationship regime relies heavily on companies’ accounts, with the accounting treatment determining, to a large degree, both the amounts taken into account for tax purposes, and the timing. 

The derivative contract rules introduced in 2002 (now to be found in CTA 2009 Pt. 7) govern the tax treatment of companies which are party to certain options, futures and contracts for difference. Again, the credits and debits to be brought into account are, very broadly, those that are recognised in accordance with generally accepted accounting practice. 

The changes introduced by FRS 102 have a major impact on the accounting treatment of financial instruments and, since the taxation treatment broadly follows the accounting treatment under GAAP, this will have a direct impact on the taxation treatment.  

FRS 102 makes widespread use of fair value accounting, particularly for derivatives.  This creates potential corporation tax volatility on restatement and on an on-going basis. 

Some companies might not be aware that they are carrying financial instruments in the shape of interest-rate swaps, foreign exchange contracts, or options and hedges the banks may have added to their loan agreements. Loan contracts should therefore be scrutinised to establish if they involve any derivatives or other financial instruments, as this will complicate matters and trigger the need to apply the section of the standard that deals with more complex financial instruments.

  

GAAP: Recognition of intangibles and goodwill: old GAAP v FRS 102
A comparison of the recognition treatment of intangibles and goodwill between old UK GAAP and FRS 102, including the potential tax impact of the new standard.

A comparison of the recognition treatment of intangibles and goodwill between old UK GAAP and FRS 102, including the potential tax impact of the new standard.
 

Old UK GAAP

FRS 102

 

FRS 10 deals with both goodwill and intangible assets. The FRSSE deals with them in the same section.

 

 Purchased goodwill is defined as the difference between the cost of an acquired entity and the aggregate of the fair values of that entity’s identifiable assets and liabilities.

 

 

 

 FRS 10 and the FRSSE define intangible assets as non-financial fixed assets that do not have a physical substance but are identifiable and are controlled by the entity through custody or legal rights.

 Identifiable assets, in line with companies legislation, are those that can be disposed of separately without disposing of a business of the entity. If an asset can only be disposed as part of a business, it is considered indistinguishable from that business’s goodwill and accounted as such.

 FRS 10 and the FRSSE prohibit recognising an intangible asset if future benefits are expected to flow to the entity but the entity does not control the asset via legal rights or custody. That is the case, for example, for a portfolio of clients or a team of skilled staff, where it is expected that they will continue to request the firm’s services or offer their services, but the entity has insufficient control over the expected future benefits to recognise an asset.

 An intangible asset acquired as part of a business acquisition should be capitalised separately from goodwill if its value can be reliably measured on initial recognition. Otherwise the intangible asset should be subsumed within goodwill.

 

 

FRS 102 deals with goodwill and other intangible assets in separate sections of the standard. Goodwill is included in the section that deals with business combinations.

 Goodwill is defined as future economic benefits arising from assets that are not capable of being individually identified and separately recognised. In particular goodwill is the excess of the cost of a business combination over the acquirer’s interest in the net amount of the identifiable assets, liabilities and contingent liabilities recognised.

 An intangible asset is defined as an identifiable non-monetary asset without physical substance. Such an asset is identifiable when:

 a)      it is separable, ie it can be separated or divided from the entity and sold, transferred, licensed etc. either individually or together with a related contract or asset or liability; or

b)      it arises from contractual or other legal rights, regardless of whether those rights are transferable or separable from the entity or from other rights and obligations.

 FRS 102 requires an intangible to be recognised only if:

 a)      it is probable that the expected future economic benefits attributable to the asset will flow to the entity: and

b)      the cost or value of the asset can be measured reliably.

  

An intangible asset acquired in a business combination is normally recognised as an asset because its fair value can be measured with sufficient reliability.


As a result of the definition of an intangible asset included in FRS 102, the recognition of intangibles separately from goodwill is more likely as that may happen even if they cannot be disposed of separately, which was a requirement under the old UK GAAP. In fact FRS 102 allows recognition if the asset arises from contractual or other legal rights. On the other hand, even if the entity does not have control of the asset via contractual or legal rights, an intangible may still be recognised under FRS 102 if it can be separately sold or transferred.

FRS 102 also implies that the fair value of an intangible asset acquired in a business combination can normally be reliably measured, therefore resulting in more intangibles being recognised separately from goodwill in case of a business acquisition than under old UK GAAP, where they were rarely separately recognised. The main impact on financial reporting may result in assets like customer relationships or order books acquired in a business combination to be recognised as identifiable intangibles under FRS 102, separate from goodwill and possibly amortised over different useful lives.

For example a company may acquire the business of another entity that specialises in developing and producing automated industrial machinery for quality control purposes and the purchase agreement may refer to a number of items being transferred like plant and machinery, fixtures, stock, registered intellectual property, know how, customers’ and suppliers’ lists, specifically skilled workforce, such as researchers and designers, and unregistered intellectual property. Under old UK GAAP a number of intangibles, such as customers’ and suppliers’ lists, skilled workforce and unregistered intellectual property, would not normally be recognised. Under FRS 102 they are likely to be recognised as separate intangibles as a result of the business combination. That is because FRS 102 implies that in a business combination the fair value of an intangible can normally be reliably measured and that it is not necessary, as under old UK GAAP, for intangibles to be both separable and controlled via custody or legal rights at the same time to be recognised.

The considerations outlined above will also apply for a small entity considering whether to adopt the FRSSE 2015 or the small entity provisions in FRS 102, as soon as they are available rather than wait for the period beginning on or after January 2016. That is the case because the FRSSE 2015 includes the same requirements in respect of recognition of intangibles and goodwill as the old UK GAAP.

Recognising more intangible assets of different types, with different amortisation periods, could produce more precise results but also require increased and more complex financial reporting work. Additionally material differences in amortisation will impact the results of the reporting entity and its distributable profits. An entity should obtain a detailed understanding, under FRS 102, of the intangibles being acquired as part of a business combination to plan the impact of the proposed transaction on the entity’s financial reporting.

Transition
A first-time adopter of FRS 102 may elect not to apply the business combinations provisions to combinations effected before the date of transition. In such a case the entity shall recognise, reclassify and measure, as at the date of transition, all its assets and liabilities acquired or assumed in a past business combination in accordance with the various relevant provisions in FRS 102, apart from a few exceptions including: 

  • intangible assets other than goodwill, as intangible assets subsumed within goodwill shall not be separately recognised
  • goodwill, as no adjustment shall be made to the carrying value of goodwill. 


Tax impact
As mentioned, more intangible assets are likely to be recognised separately from goodwill in a business combination under FRS102 than under old UK GAAP. 

The relevant legislation for corporate intangible assets, including goodwill, is found in Part 8 of the Corporation Taxes Act 2009. 

For tax purposes goodwill is defined by referring to the definition for accounting purposes. HM Revenue & Customs describe goodwill as:

'"Goodwill", in accounting terms, is simply the difference between the price a business fetches when it changes hands, and the value of its identifiable (including intangible) assets. But goodwill that only appears in the consolidated accounts of a group of companies, and not in company-level accounts, is outside the scope of the CTA09 rules.’ 

Therefore a goodwill asset recognised under an accounting standard in the individual accounts of a company will be automatically recognised under the UK corporation tax regime provided it was created or acquired on or after 1 April 2002. 

HMRC describes intangible fixed assets including goodwill as:

‘The term “intangible asset” covers not only intellectual property, such as patents, copyrights, trademarks and know-how, but also a variety of other assets with commercial value such as agricultural quota, payment entitlements under the single payment scheme for farmers, franchises and telecommunication rights.’ 

For tax purposes Intangible assets including goodwill must satisfy two conditions: 

  • the asset conditions; and
  • the FA02 rule. 


To satisfy the asset conditions, the goodwill or an intangible fixed asset must be recognised as such in the company accounts, unless it falls under specific exclusions in legislation. To satisfy the FA02 rule, the company must have either created or acquired the asset directly or indirectly from an unrelated party on or after 1 April 2002.

The effect of changes to the business combination requirements in FRS 102 will increase the recognition of non-goodwill intangible assets. These assets will fall within the intangible assets regime under CTA 2009. The main feature of the intangible assets regime is that the tax treatment follows the accounting treatment. As there may be more assets classified as separate intangible assets, with different amortisation periods, the tax deductions will follow the accounting treatment and the possible variations in profits that may arise.

GAAP: Small company limit increases in 2015 or 2016?
Should a company transition to FRS 102 this year, or wait until 2016?

Should a company transition to FRS 102 this year, or wait until 2016? 

Entities qualifying as large or medium-sized under Companies Act 2006 will need to transition to FRS 102 The Financial Reporting Standard Applicable in the UK and the Republic of Ireland for periods beginning on or after 1 January 2015, unless they opt for application of EU-adopted IFRS. 

However, the Department for Business, Innovation and Skills (BIS) has confirmed in January 2015 that the small company thresholds will be increased to: 

Turnover

 £

Balance sheet total

£

Number of employees

10.2 million

5.1 million

50


The new thresholds will apply for financial years beginning on or after 1 January 2016 but BIS has also confirmed that companies meeting the thresholds have the option of accessing the small company accounting regime ahead of that date – from 1 January 2015. 

In conjunction with the above the Financial Reporting Council (FRC) is proposing to bring small companies within the scope of FRS 102 by adding a new section to the standard (Section 1A Small Entities), which will mandate the same recognition and measurement requirements but also much reduced presentation and disclosure requirements for small entities. 

The small company provisions within FRS 102 will replace the FRSSE 2015 for periods beginning on or after 1 January 2016; however, early adoption will be allowed as it will be permitted by company law. The FRC has stated that the final version of FRS 102 including small entity provisions will be published in summer 2015. 

Medium-sized entities qualifying as small under the increased thresholds, estimated to be 11,000 by BIS, are therefore able to avoid transition to the full FRS 102 from 1 January 2015 as they are able to apply the small entity provisions in FRS 102 when these are available, effectively avoiding the need to produce a cash flow statement, a statement of changes in equity, a statement of total comprehensive income and consolidated accounts, as well as producing a total of only 13 disclosures. Such entities may alternatively apply full FRS 102 from 1 January 2015 and then have the option of using the small entity provisions in FRS 102 for periods from 1 January 2016. 

Small companies need to transition to FRSSE 2015 for periods beginning on or after 1 January 2015 if they do not choose to adopt FRS 102 or EU-adopted IFRS. The FRSSE 2015 is still almost totally based on old UK GAAP and features a limited number of differences with the FRSSE 2008. 

The FRSSE 2015 will be replaced by the small entity provisions within FRS 102 for periods beginning on or after 1 January 2016. However, small entities may avoid adopting the FRSSE 2015 from 1 January 2015 as they will be able to apply the small entity provisions in FRS 102 when these are available in summer 2015. 

The main differences between the FRSSE 2015 and the small entity provisions in FRS 102 will be in respect of the recognition and measurement of various items in the financial statements, while presentation and disclosures will be broadly consistent. Small entities should consider whether adopting the small entity provisions in FRS 102 as soon as they are available, rather than transitioning to the FRSSE 2015 first, would be a better option in terms of costs and consistency of financial information produced. 

In this longer article we provide a comparison of the recognition and measurement treatment of intangibles and goodwill between old UK GAAP and FRS 102, including the potential tax impact of the new standard.

GAAP: Accounting for investment properties
Analysis of how to treat investment properties under FRS 102.

Analysis of how to treat investment properties under FRS 102. 

Current accounting treatment 
Under SSAP 19, investment properties are required to be included on the balance sheet at open market value and are not subject to depreciation. The changes in value should not be taken to profit and loss account but to the statement of recognised gains and losses (and credited to a revaluation reserve) unless a deficit is expected to be permanent in which case it does go to the profit and loss account. 

Valuation does not need to be by a qualified or independent valuer, but disclosure is required of the names or qualifications of the valuers, the bases used and whether the valuer is an employee or officer of the company. 

Investment properties are defined as ‘held not for consumption in the business operations but as investments, the disposal of which would not materially affect any manufacturing or trading operations of the enterprise’. 

Accounting treatment under FRS 102 
FRS 102 requires valuation at fair value only if the property can be measured reliably without undue cost or effort. If that is not possible, the property should be accounted for as ‘property, plant and equipment’, and not as investment property. If the investment property fair value can be measured reliably, it shall be measured at fair value at each reporting date with changes in fair value recognised in profit or loss. 

Disclosure is required of the extent to which the fair value of investment property is based on a valuation by an independent valuer who holds a recognised and relevant professional qualification and has recent experience in the location and class of the investment property being valued. If there has been no such valuation, that fact shall be disclosed. 

Investment properties are defined as those ‘held to earn rentals or for capital appreciation or both, rather than for use in the production or supply of goods or services or for administrative purposes; or sale in the ordinary course of business’. 

Transition 
On first adopting FRS 102 the entity may elect to measure an investment property at its fair value at transition date, using that value as its deemed cost, or it can elect to use a previous GAAP revaluation as its deemed cost at the revaluation date. 

Reporting and commercial impact of the changes 
The main impact on financial reporting will be any upward revaluation going through the profit and loss account. If material amounts hit the profit or loss (statement of income), there will be an effect on the results of the entity, increasing its retained earnings. Gains on revaluation of investment properties, although included in retained earnings, would not be considered as distributable profits, as they are not realised, and therefore entities should keep track of such gains and consider them separately when making a distribution. 

Additionally, where the properties are not revalued and the property is categorised as property, plant and equipment, an additional amount of depreciation will go through profit and loss account and could impact on the operating profit margin and reserves of an entity and therefore may result in the breach of debt covenants, like PBIT-based interest cover, gearing and dividend cover. 

Taxation impact of the changes 
Under FRS 102, investment property whose fair value can be reliably measured without undue cost or effort must be measured at that fair value at each balance sheet date with gains and losses recognised in profit and loss. 

These gains or losses will be capital in nature and hence no tax effect until the property is actually sold. HMRC has yet to change their policy to include specific guidance with regard of gains and losses on investment properties. As a general rule, capital expenditure is not allowable as a deduction from business profits unless there is a specific statutory allowance. Instead capital expenditure is added to the cost of the property and will reduce the capital gain on eventual sale of the property. 

Further information is available

 

 

GAAP: Consolidated financial statements and business combinations, current GAAP v FRS 102
How to address business combinations under FSR 102.

How to address business combinations under FSR 102. 

Current accounting treatment 
FRS 2 requires a parent undertaking to prepare consolidated financial statements unless it is exempted from doing so under the provisions of Companies Act 2006. 

Under FRS 6 acquisition accounting should be used for business combinations not accounted for by merger accounting. 

FRS 6 requires a business combination to be accounted for by using merger accounting if the combination meets the specific criteria to qualify as a merger and also meets the conditions for the use of merger accounting in company legislation. 

A group reconstruction may be accounted for by using merger accounting even if the definition of merger in FRS 6 is not met. 

Accounting treatment under FRS 102
FRS 102 mirrors FRS 2 as a parent is required to prepare consolidated financial statements unless it is exempt under the provisions of Companies Act 2006. The impact of the changes in small company limits for accounting which - if the directors of the company so decide - could apply from 1 January 2015, will impact on consolidation. 

Under FRS 102 all business combinations should be accounted for by applying the purchase method except for some involving public benefit entities. 

Group reconstructions may be accounted for by using the merger accounting method. 

Transition
A first-time adopter of FRS 102 may elect not to apply the business combinations provisions to combinations effected before the date of transition. In such a case the entity shall recognise, reclassify and measure, as at the date of transition, all its assets and liabilities acquired or assumed in a past business combination in accordance with the various relevant provisions in FRS 102, apart from a few exceptions including: 

  • intangible assets other than goodwill, as intangible assets subsumed within goodwill shall not be separately recognised
  • goodwill, as no adjustment shall be made to the carrying value of goodwill
  • accounting estimates, such as amortisation, depreciation and provisions
  • financial assets and liabilities derecognised under previous accounting standards.


If a first-time adopter restates any business combination to comply with FRS 102, it shall restate all later business combinations. 

Reporting and commercial impact of the changes
The requirements for the preparation of consolidated accounts are unchanged under FRS 102 compared with current UK GAAP. In particular exemptions from preparing group accounts are based on the provisions of Companies Act 2006. FRS 102 also maintains that a parent is not required to prepare group accounts if all its subsidiaries are excluded from consolidation. 

In particular a subsidiary has to be excluded from consolidation where severe long-term restrictions over its management or assets exist or if the interest in it is held exclusively with a view to subsequent resale. Additionally a subsidiary may be excluded if its inclusion is not material, individually or collectively for more than a subsidiary, for the purposes of giving a true and fair view in the context of the group. 

Business combinations are defined in FRS 102 as the bringing together of separate entities or businesses into one reporting entity, ie the acquisition of the equity of another entity or the purchase of all or some of the net assets of another entity that together form a business. Under FRS 102 all business combinations should be accounted for by using the purchase method (acquisition accounting), except for group reconstructions meeting certain conditions which may be accounted for by merger accounting. 

Under current UK GAAP, ie FRS 6 Acquisitions and Mergers, if a business combination meets the specific criteria to be classified as a merger then it should be accounted for using merger accounting, unless prohibited by companies legislation; while merger accounting is allowed for group reconstructions in certain circumstances. In contrast FRS 102 does not allow or require the use of merger accounting even for ‘genuine’ mergers and therefore the main impact of such a change is that an acquirer will always need to be identified for accounting purposes. 

However, FRS 102 maintains the use of merger accounting for group reconstructions, including for example the addition of a new parent to a group or the transfer of the shares in a subsidiary from a group entity to another, when the use of merger accounting is not prohibited by company law, the ultimate equity holders remain the same with the same rights in respect of each other and no non-controlling interest (minority interest) is altered by the transfer. 

In commercial terms the fact that an acquirer will always need to be identified for financial reporting purposes, even in the circumstances of a genuine merger, may create problems, as the parties involved and purported to be acquirers or acquisition targets may not accept a financial reporting representation of the business combination that does not reflect its commercial reality. 

The potential impact of the required accounting treatment for mergers will need to be carefully assessed in respect of the various stakeholders of the entities involved, such as shareholders, finance providers, employees and suppliers, to verify whether it would be acceptable to the parties involved or whether it would imply renegotiations/adjustments of financing/shareholders agreements or employees/suppliers contracts. It may be possible to see that the successful completion of a merger may depend on the fact that the acquisition of one entity by another, as depicted in the financial statements, is acceptable to the stakeholders involved. 

Taxation impact of the changes 
No taxation implications.

GAAP: Deferred tax
How will deferred tax change under FRS 102?

How will deferred tax change under FRS 102? 

Current accounting treatment 
FRS 19 requires that deferred tax should be recognised in respect of all timing differences that have originated but not reversed by the balance sheet date; and should not be recognised on permanent differences. Deferred tax should not be recognised on timing differences arising when non-monetary assets are revalued, unless, by the balance sheet dates, the reporting entity has entered into a binding agreement to sell the revalued asset and recognised the gains and losses expected to arise on sale. 

Tax that could be payable on any future remittance of the past earnings of a subsidiary, associate or joint venture should be provided for only to the extent that, at the balance sheet date, dividends have been accrued as receivable or a binding agreement to distribute the past earnings in the future has been entered into. 

Accounting treatment under FRS 102 
Deferred tax shall be recognised in respect of all timing differences at the reporting date. Timing differences are differences between taxable profits and total comprehensive income, arising from the inclusion of income and expenses in tax assessments in periods different from those in which they are recognised in the accounts. Deferred tax relating to a non-depreciable asset that is measured using the revaluation model, or to investment properties measured at fair value, shall be measured using the tax rates and allowances that apply to the sale of the asset. 

Deferred tax shall be recognised when income or expenses from a subsidiary, associate, branch or interest in a joint venture have been recognised in the financial statements and will be assessed to or allowed for tax in a future period, except where the reporting entity is able to control the reversal of the timing difference and it is probable that the timing difference will not reverse in the near future. 

When the amount that can be deducted for tax for an asset (other than goodwill) that is recognised in a business combination is less (more) than the value at which it is recognised, a deferred tax liability (asset) shall be recognised for the additional tax that will be paid (avoided) in respect of that difference. Similarly, a deferred tax asset (liability) shall be recognised for the additional tax that will be avoided (paid) because of a difference between the value at which a liability is recognised and the amount that will be assessed for tax. 

Reporting and commercial impact of the changes
The main impact on financial reporting is likely to be additional deferred tax provisions relating to revaluations which may affect the results of the entity by reducing its distributable profits; however, a deferred tax provision in respect of a gain on an investment property measured at fair value is not treated as a realised loss, ie as a reduction in distributable profits, as such gain is regarded as unrealised. Additionally there will be an increase in provisions on the balance sheet. 

Transition
The transition section of the standard is silent on the treatment of deferred tax and accordingly the general transitional procedures in FRS 102 will apply to deferred tax on first-time adoption, ie assets and liabilities will be recognised, reclassified and measured as at the transition date in accordance with FRS 102. For instance a deferred tax liability may need to be recognised at transition date in respect of a gain on an investment property re-measured at fair value on first-time adoption.

GAAP: Foreign currency translation
Understanding the treatment of foreign currency under FSR 102.

Understanding the treatment of foreign currency under FSR 102. 

Current accounting treatment 
SSAP 20 (applicable to entities not required or opting to apply FRS 23) requires foreign currency transactions to be translated in the entity’s local currency using the spot exchange rate, or an average rate for a period that is a close approximation. Foreign currency monetary items are retranslated at balance sheet date exchange rate. 

Non-monetary items are carried at historic exchange rate. An entity’s local currency is the currency of the primary economic environment in which the entity operates and generates cash flows. Exchange gains and losses are recognised in profit or loss. SSAP 20 permits transactions covered by a forward contract to be translated at the contract rate.

Accounting treatment under FRS 102
FRS 102 requires entities to initially translate foreign currency transactions in an entity’s functional currency using the spot exchange rate, although an average rate for a week or month may be used if the exchange rate does not fluctuate significantly. Foreign currency monetary items are subsequently translated in the functional currency at the exchange rate applicable at the end of the reporting period. Non-monetary items are carried at the historic rate and non-monetary items measured at fair value are translated at the rate of the date when the fair value is re-measured. 

An entity’s functional currency is the currency of the primary economic environment in which the entity operates, normally the one in which it primarily generates and expends cash. Exchange differences on monetary items are recognised in profit or loss. Exchange gains or losses on non-monetary items measured at fair value are recognised as part of the change in fair value posted in other comprehensive income or profit or loss. 

FRS 102 does not include provisions about using a contracted exchange rate to match a trading transaction. Therefore balances covered by a forward contract will be retranslated at the year-end rate. In turn under FRS 102 a foreign exchange forward contract will be recognised in the balance sheet as a financial instrument at fair value through profit or loss. 

However, FRS 102 allows designating a foreign exchange forward contract as a hedging instrument in a designated relationship to hedge the foreign exchange risk of a trading transaction. In such a case the change in the fair value of the forward contract will be recognised in other comprehensive income to the extent that it effectively offsets the retranslation gain or loss on the expected cash flows from the trading transaction. 

The option of adopting hedge accounting is, however, onerous in terms of documentation, complexity of the rules and disclosures and it is unlikely to be attractive for many entities. FRS 102 allows an entity to present its financial statements in any currency, a ‘presentation currency’. To do so all the items expressed in its functional currency should be translated in the presentation currency of choice. Assets and liabilities should be translated at the closing rate at the end of the reporting period while income and expenses shall be translated at the exchange rates at the day of transactions. Exchange differences resulting from the translation of financial statements in functional currency to presentation currency are recognised in other comprehensive income. 

Transition
The transition section of the standard is silent on the treatment of foreign currency translations and accordingly the general transitional procedures in FRS 102 will apply on first-time adoption, ie assets and liabilities will be recognised, reclassified and measured as at the transition date in accordance with FRS 102. 

Financial impact of the changes
While the translation into a presentation currency different from an entity’s functional currency follows a set of separate rules whose effect on the financial statements are difficult to gauge, the use of a presentation currency may be important to a number of entities which, for example, need to provide comparable financial information to overseas shareholders or, as it is often the case for UK subsidiaries of a foreign group that may have Sterling as functional currency while their group prepares accounts in US Dollars or Euros, need to present their financial statements in the functional currency of their parent to facilitate consolidation procedures and comparability of results and financial position. 

In particular switching to financial statements presented in a currency other than Sterling may need to be agreed with lenders and would need to be verified against any restrictive covenants. Additionally choosing a foreign presentation currency may result in alterations to results reported into an entity’s functional currency generated by the variations in exchange rates between the two currencies. 

Such variations may affect not only debt covenants but also remuneration and share based schemes that may have been originally stipulated by reference to local currency and that would need to be revisited to take into account any foreign exchange distortion. For entities using forward foreign exchange contracts to match their commercial transactions, the changes in FRS 102 result in a more exacting financial reporting treatment. Such entities would have, under SSAP 20, reduced their exposure to volatility in the profit and loss account by using the exchange rates specified in the forward contracts. 

Under FRS 102, in order to achieve an element of matching foreign exchange gains and losses on their commercial transactions, entities may choose to apply hedge accounting to such arrangements in accordance with Section 12 of the standard. However, it is likely that entities may decide not to adopt hedge accounting because the administrative burden of maintaining the relevant documentation and the intrinsic complexities of hedge accounting may outweigh the benefits of the accounting treatment permitted. 

Entities not opting to apply hedge accounting will, however, need to recognise forward foreign exchange contracts at fair value when they are taken out and will recognise fair value gains and losses in profit or loss on an on-going basis at each reporting date rather than just at the time of settlement. On the other hand, transactions and monetary items covered by forward contracts will be translated at the exchange rate of the transaction date and of the year end respectively with exchange differences recognised in profit or loss. Effectively this treatment will produce two sets of entries in profit or loss, while under SSAP 20 there would have been none. 

Taxation impact of the changes
Profits and losses arising to the company from its derivative and related contracts include exchange gains and losses. The exception to this is a gain or loss on a derivative that consists wholly or mainly of currency. Where a company prepares its accounts in accordance with UK GAAP (excluding FRS23 and 26) and uses a forward currency contract to match its exchange exposure, the exchange movements arising in respect of the forward currency contract that are eligible for matching are determined by reference to the spot rate prevailing at the end of the accounting period. It is no longer possible for profits and losses on forward currency contracts to be left out of account. 

GAAP v FRS 102: cash flow statement
A look at the cash flow statement when transitioning to FRS 102.

A look at the cash flow statement when transitioning to FRS 102. 

Current accounting treatment 
FRS 1 applies to financial statements intended to give a true and fair view, but there are exemptions such as small companies (based on the small companies exemption in companies’ legislation) and some subsidiaries which are not required to prepare cash flow statements. 

FRS 1 requires an entity to prepare a cash flow statement including all the increases and decreases in the amounts of cash classified under nine standard headings: 

a)    operating activities
b)    dividends from joint ventures and associates
c)    returns on investments and servicing of finance
d)    taxation
e)    capital expenditure and financial investments
f)     acquisitions and disposals
g)    equity dividends paid
h)    management of liquid resources
i)     financing.


Cash comprises cash in hand and deposits repayable on demand, ie with a period of notice of not more than one working day, less overdrafts repayable on demand. 

FRS 1 requires a separate reconciliation between operating profit and net cash flow from operating activities and a separate reconciliation of net cash flow to movement in net debt. 

Accounting treatment under FRS 102
The same exemptions apply under FRS 102 as under FRS 1. 

FRS 102 requires an entity to present a statement of cash flows providing information about the changes in cash and cash equivalents for a reporting period classified under three headings: 

a)    operating activities
b)    investing activities and
c)    financing activities. 


Cash is defined as cash on hand and demand deposits. 

Cash equivalents are defined as short-term, highly liquid investments that are readily convertible to known amounts of cash and that are subject to an insignificant risk of changes in value. An investment with a maturity of three months or less may qualify as a cash equivalent. Bank overdrafts repayable on demand and that are an integral part of cash management are a component of cash and cash equivalents. 

FRS 102 requires a reconciliation of the amounts of cash and cash equivalents presented in the statement of cash flows to the equivalent items in the statement of financial position. 

Transition
There are no specific transitional provisions in FRS 102 in respect of the statement of cash flows; however, comparatives consistent with the presentation under FRS 102 will need to be presented on first time adoption. 

Reporting and commercial impact of the changes
Compared to current UK GAAP (FRS 1), FRS 102 extends the scope of the statement of cash flows by requiring the inclusion not only of inflows and outflows of cash, defined as cash in hand and demand deposits, and of bank overdrafts repayable on demand, but also of cash equivalents. Cash equivalents include investments with a maturity of three months or less that under FRS 1 are normally classified within management of liquid resources. 

The three headings for classification of cash flows also represent a significant reduction on the nine required by FRS 1 and will require careful re-thinking for the reclassification of items on first adoption of FRS 102. 

Under FRS 102 operating activities are indicated as the main revenue-producing activities of the entity and therefore cash flows from such activities normally result from transactions that determine the profit or loss of the entity. Examples are:
 

a)    cash receipts and payments for sale or purchase of goods and services
b)    cash payments and refunds of tax, unless they relate specifically to investment of financing activities
c)    cash receipts and payments from investments, loans and other contracts held for dealing or trading purposes, ie those similar to inventory acquired specifically for resale. 


However, the cash flows for some transactions that result in a gain or loss, such as the sale of plant by a manufacturing entity, are classified as from investing activities. Investing activities are the acquisition and disposal of long-term assets and other investments not included in cash equivalents. Examples of investing activities cash flows are:
 

a)    cash payments and receipts to acquire or to sell property, plant and equipment, intangible assets and other long-term assets
b)    cash payments and receipts to acquire or sell equity or debt instruments of other entities and interests in joint ventures
c)    cash advances and loans made to other parties and connected repayments.
 

Financing activities are activities resulting in changes in the size and composition of contributed equity and borrowings of an entity. Examples of cash flows from such activities are: 

a)    cash proceeds from issuing shares and other equity instruments
b)    cash payments to owners to acquire or redeem the entity’s shares
c)    cash proceeds from issuing debentures, loans, notes, bonds, mortgages and other long-term or short-term borrowings
d)    repayments of amounts borrowed
e)    lessee’s payments to reduce a liability on a finance lease. 


In respect of interest and dividends, FRS 102 requires that cash flows from interest and dividends paid and received should be presented separately. An entity may classify interest paid and interest and dividends received as operating cash flows. Alternatively interest paid may be classified as financing cash flows and interest and dividends received as investing cash flows. Dividends paid may be classified as financing cash flows because they are a cost of obtaining financial resources. Alternatively they may be classified as a component of cash flows from operating activities because they are paid out of operating cash flows. 

Taxation impact of the changes
No taxation implications.

GAAP: Employee benefits
How to account for employee benefits under the new standard.

How to account for employee benefits under the new standard. 

Current accounting treatment 
Disclosure of ‘employee benefits’ is not covered by a current UK standard. Companies Act 2006, section 411 requires certain information regarding staff numbers and costs, though this disclosure is NOT required of entities within the small companies’ regime.

The costs to be disclosed are wages and salaries paid or payable, social security costs incurred and other pension costs incurred. There is no explicit guidance in UK GAAP relating to other employee benefits, such as paid annual leave or paid sick leave. (Though it is mentioned obliquely in paragraph 11(b) of FRS 12.)

Accounting treatment under FRS 102
Section 28 of the standard deals with employee benefits, defined as ‘all forms of consideration given by an entity in exchange for service rendered by employees, including directors and management’. The cost of accumulating compensated absences is required to be measured and recognised in the financial statements. Therefore an entity that has employees that have untaken holidays at the balance sheet date that will be paid for in the next financial year will need to make an accrual for such entitlements. 

Reporting and commercial impact of the changes
The main impact on financial reporting, which will only impact on those entities that did not previously include an accrual for holiday pay, will be increased employee costs hitting the profit or loss (statement of income) and therefore affecting the results of the entity and reducing its distributable profits. It is difficult to gauge how material the effect could be, and will of course vary depending on the number of employees, the size of their holiday entitlement and the timing of the entity’s year end in relation to the holiday season. Additionally there will be an increase in creditors due within one year; this is where the standard stipulates that the entity shall present the amount accumulated at the year end. 

The calculation of accumulating compensated absences represents additional work for the entity, as there was no previous requirement to disclose this information, so most entities would not formerly have collated the information. However, an advantage to this is that there will be a more uniform approach to this issue going forward, meaning that accounts will be more comparable in future. ‘Old’ GAAP was fairly unclear, so previously some entities did provide for accrued holiday pay and some didn’t; and for those that did, many differing methods may have been used. 

Transition
The transition section of the standard is silent on the treatment of employee benefits and accordingly the general transitional procedures in FRS 102 will apply on first-time adoption, ie assets and liabilities will be recognised, reclassified and measured as at the transition date in accordance with FRS 102 (resulting in an accrual for untaken holiday pay to be included as at that date). 

Taxation impact of the changes
The changes will have a minimal effect for corporation tax purposes. A likely scenario for those companies who have not previously accrued for holiday entitlement at the year-end is that their staff costs will increase in the year of transition, leading to a reduction in its corporation tax liability for the transitional year. 

Corporation Tax 2009, s1288 requires that any employee’s remuneration, including directors’ bonuses, accrued for in the accounts will be disallowed for corporation tax purposes unless paid within nine months of the year-end. Similar provisions exist for unincorporated businesses at Income Tax (Trading and Other Income) Act 2005, s36.

GAAP: Software and website development costs
What impact will new UK GAAP have on certain technologies?

What impact will new UK GAAP have on certain technologies? 

Current UK GAAP
Under FRS 10 software development costs directly attributable to bringing a computer system or other computer-operated machinery into working condition for use within the business are classified as tangible fixed assets, like part of the hardware. 

UITF 29 applies the above principles in FRS 10 to website development costs (not website planning costs that cannot be capitalised) requiring that all such costs should be classified as tangible fixed assets.

Accounting treatment under FRS 102
FRS 102 does not address the classification of software and website costs and therefore each entity should develop and apply a suitable accounting policy to classify such costs as tangible fixed assets or as intangible assets.

In developing a suitable accounting policy management makes reference to, in descending order, other FRS dealing with similar issues, any SORP applicable to the entity, general recognition criteria and measurement concepts in section 2 of FRS 102 and IFRSs. Software and website development costs (not research costs) may be recognised as internally generated intangibles only if the entity can demonstrate:
 

a)    the technical feasibility of completing the intangible asset so that it will be available for use or sale
b)    its intention to complete the intangible asset and use or sell it
c)    its ability to use or sell the intangible asset
d)    how the intangible asset will generate probable future economic benefits
e)    the availability of adequate technical, financial and other resources to complete the development and to use or sell the intangible asset
f)     its ability to measure reliably the expenditure attributable to the intangible asset during its development. 


Reporting and commercial impact of the changes
In view of the lack of direction in FRS 102 it is conceivable that some entities will classify software and website development costs as intangible assets while under current UK GAAP they would have been classified as tangible assets.

It is unlikely that choosing to classify assets under one or the other of the two categories will result in material differences in terms of initially recognised amount and subsequent amortisation/depreciation or impairment, especially in view of the fact that the estimated useful economic life of such assets is likely to be short. 

Transition
Whether software and website development costs are treated as intangible or tangible assets, the deemed cost can be either the fair value on transition date, or a previous GAAP revaluation at the revaluation date. Additionally the general transitional procedures in FRS 102 require the reclassification at the date of transition of items that were recognised under previous GAAP as one type of asset (ie tangible or intangible) or liability but are a different type of asset or liability under FRS 102. 

Taxation impact of the changes
We have already seen what FRS 10 has to say about software. Under the current rules of FRS 10, internally generated assets cannot be capitalised, unless there is a readily ascertainable market value, which in practice would be rarely, if ever. But internally generated software is excluded from this general rule, which makes it clear that such costs, if appropriate, should be capitalised and treated as a tangible fixed asset.

Under FRS 102, there will be greater scrutiny of Intangible assets, certain software costs will be reclassified from tangible fixed assets to intangible fixed assets, leading to possible acceleration of tax relief through accounting amortisation of these software that will fall within the intangibles assets regime instead of the capital allowances regime.

The tax treatment mirrors the tax position for website costs. The main feature of the intangible assets regime is that the tax treatment follows the accounting treatment. As there may be more assets classed as intangible fixed assets the tax treatment will be easier to follow on from the accounts. 

As the choice may be down to the individual entity, the tax difference will be down to how far the policy of the entity differs from its current accounting policy. In addition, there is also the possibility of recognising software and website development as an internally generated intangible fixed asset, subject to various conditions.

Due to the lack of guidance, the change in tax treatment could be significant as the difference between the current fixed asset treatment and the possible intangible asset treatment under FRS 102.

GAAP: Leases
Looking at leases under FRS 102.

Looking at leases under FRS 102. 

Current accounting treatment
SSAP 21 classifies leases as finance leases and operating leases. A finance lease is a lease that transfers substantially all the risks and rewards of ownership of an asset to the lessee. SSAP 21 includes a presumption that if the present value of the minimum lease payments amounts to 90% or more of the fair value of the leased assets, the lease is a finance lease. An operating lease is a lease other than a finance lease.

Accounting treatment under FRS 102
Under FRS 102 a lease is classified as a finance lease if it transfers substantially all the risks and rewards incidental to ownership. A lease is classified as an operating lease if it does not transfer substantially all the risks and rewards incidental to ownership. FRS 102 does not include a presumption for the classification of a finance lease based on the present value of the minimum lease payments but indicates that the classification of a lease depends on the substance of the transaction rather than the form of the contract. 

FRS 102 also includes examples of situations in which a lease would be normally classified as a finance lease; such as: 

a)    the lease transfers ownership of the asset to the lessee by the end of the lease term
b)    the lessee has an option to purchase the asset at a price sufficiently lower than fair value at the date the option becomes exercisable that it will be reasonably certain at the inception of the lease that the option will be exercised
c)    the lease is for the major part of the asset’s economic life even if the title is not transferred
d)    at the inception of the lease, the present value of the minimum lease payments amounts to at least substantially all of the fair value of the leased asset (in this example there is no mention of the 90% threshold)
e)    the leased assets are of such a specialised nature that only the lessee can use them without major modifications. 


Further indicators of situations that could result in a lease being classified as a finance lease are: 

a)    lessor’s losses associated with the cancellation of the lease are borne by the lessee
b)    gains or losses from the fluctuation of the residual value of the leased asset accrue to the lessee
c)    the lessee has the ability to continue to lease the asset for a secondary period for a rent substantially lower than market rent. 


Transition period
Under FRS 102, there is no 90% guideline this is likely to result in a different classification of some leases. For example, leases exceeding 90% of the asset’s fair value may be more easily classified as operating leases if they effectively do not transfer all the risks and rewards of ownership. Conversely, leases whose present value of payments does not approach 90% of fair value may be classified as finance leases by looking at the substance of the contract. 

Financial impact
The financial reporting impact of recognising a lease as an operating lease rather than as a finance lease is well known. For a lessee an operating lease results in a constant expense in the profit or loss over the term of the lease with little or no effect on the financial position of the entity, while a finance lease results in the immediate recognition of the fair value of the leased asset and a corresponding liability that may have a material effect on the financial position of the entity. 

In terms of financial results the difference between classifying a lease as an operating lease or a finance lease is unlikely to be very material; the rental expenses in the profit or loss for an operating lease will be constant while a finance lease will result in a depreciation charge of the capitalised leased asset and a finance charge which will be higher at the beginning of the lease term. However, the impact on the financial position of a lessee in classifying a lease as a financial lease is mainly derived by the liability, equal to the fair value of the leased asset, recognised at the commencement of the lease term. 

In respect of a substantial asset capitalised under a finance lease the corresponding liability recognised is likely to increase the entity’s gearing ratio and therefore may result in the breach of debt covenants. A capitalised leased asset may also result in the potential breach of non-financial debt covenants that may restrict capital expenditure beyond certain limits without approval. 

Taxation impact of the changes
HMRC guidance in respect of finance leases is still applicable for companies using FRS 102. For a finance lease, if the proper accounting treatment has been applied in a lessee's accounts, no adjustments will normally be necessary in the tax computation as correctly prepared accounts normally give the right treatment for tax purposes without further adjustments in the tax computation. The charge for depreciation of the leased asset must not be added back in the lessee's tax computation (it does not relate to capital expenditure by the lessee) nor must the lessee's profit or loss on sale of the leased asset be adjusted in the tax computation. 

The total of the depreciation charged in respect of the leased asset, adjusted for any profit or loss on sale, is equal to the total rentals paid less the finance charge element (charged against profits separately) and adjusted for rebates (or sometimes additional rental payments) on termination of the lease.

Understanding the Finance Bill 2015
A summary of the key provisions included in the Finance Bill 2015 and measures that have an immediate effect. 

A summary of the key provisions included in the Finance Bill 2015 and measures that have an immediate effect.  

Tax rates and allowances
Personal tax 2015/16: 

  • personal allowance increased to £10,600
  • basic rate threshold increased to £31,785
  • capital gains tax annual exemption increased to £11,100
  • inheritance tax nil-rate band remains at £325,000. 


Corporation Tax - FY 2015:

  • The main rate of corporation tax is to be aligned with the small companies’ rate at 20%, with effect from 1 April 2015.

Corporation tax

Research & development (R&D) tax relief

  • The rate of relief for qualifying R&D expenditure incurred by small and medium sized entities is increased from 225% to 230% with effect from 1 April 2015;
  • The rate of tax credit relief is increased from 10% to 11% for large companies.


ACCA has produced a Guide to research and development tax relief for SMEs which reflects the most recent changes.

Restriction of corporation tax allowance on intangible fixed assets in certain circumstances
Finance Bill 2015 introduces measures to restrict corporation tax deductions under the corporate intangible fixed asset regime where goodwill and other intangible assets are acquired from related party individuals. This will only apply to close companies making acquisitions from their individual participators. 

Prior to this, a deduction was allowed on the acquisition of goodwill, etc. on incorporation. 

The new legislation also imposes a restriction on entrepreneurs’ relief where an individual, trust or member of a partnership transfer goodwill or other intangible assets to a related company (see personal tax section).

Diverted profits tax
The diverted profits tax represents a major development in the crackdown against tax avoidance on multi-national groups. The proposal is to charge a diverted profits tax of 25% in the following two situations: 

  • where a non-UK resident company makes taxable supplies to UK customers of more than £10,000,000 (including sales from connected companies) and the related UK activities are designed to avoid creating a permanent UK establishment
  • where a UK resident company makes payments to related parties under arrangements that are designed to secure a reduction in tax, without any underlying economic substance.

 

Targeted anti-avoidance rules for loan relationships and derivative contracts
A new targeted anti-avoidance rule is to be introduced to counteract the effects of companies attempting to obtain a tax advantage by miss-using the loan relationship rules. 

Changes to social investment tax relief
The amount that can be invested under Social Investment Tax Relief (SITR), a relief that was introduced from 6 April 2014, is to be increased. 

The government is to request EU approval to increase the amounts that can be invested in an individual organisation from the current limit of £275,000 over a three year period, to: 

  • an annual limit of £5m; and
  • an overall limit on the amount that can be invested in an individual organisation of £15m.


Additionally, the government plans to extend the scope of SITR to ‘community energy generation undertaken by qualifying organisations’. The changes will come into effect on or after 6 April 2015, subject to State aid clearance. 

Personal Tax 

Capital gains tax: Restriction of entrepreneurs’ relief on disposal of goodwill to a connected person
This new measure represents one of the most significant measures announced in the Autumn Statement 2014. 

Entrepreneurs’ relief in respect of goodwill has been withdrawn where an individual, trustee, or member of a partnership transfers their business to a close limited company to which they are a ‘related party’.

Any chargeable gain arising on such transfers will now be subject to tax at 18%/28% rather than 10%. The new legislation also imposes a restriction on corporation tax relief where a company acquires goodwill or other intangible assets from related parties (see corporation tax section).

The new legislation applies from the date of the Autumn Statement, i.e on or after 3 December 2014.

Changes to CGT private residence relief
The private residence nomination rules enable an individual who owns two or more properties to nominate a property as their main residence, provided that they do actually occupy the property at some point. 

With effect from 6 April 2015, there will be some new conditions that will apply in order for such an election to be effective. These will mainly affect non-resident individuals who own homes in the UK, and UK residents who own homes in other countries. 

From 6 April 2015, a home can only be nominated as the taxpayer’s main residence for CGT purposes if: 

  • it is located in the same country in which the taxpayer is resident for tax purposes
  • the taxpayer spends at least 90 midnights in the property in the tax year (or 90 days spread across all the properties the person owns in the country where the property is located). 


Days spent in the property by the taxpayer’s spouse or civil-partner count as being occupied by the taxpayer, but days can’t be double counted.

The 90 days of occupation doesn’t have to be a continuous period. Where the property is owned for part of the tax year, the 90-day requirement is reduced proportionately to the part of the year for which the property was owned.     

Individuals who are not resident for tax purposes in the UK will have to meet this 90-day condition in order to nominate a UK home as their main residence. 

UK residential property – capital gains tax for non-UK residents
Capital gains tax is a residence based tax. Under existing legislation, only individuals who were resident (or previously ordinarily resident) in the UK were subject to UK capital gains tax. Finance Bill 2015 introduces a new charge to capital gains tax for non-UK residents where they dispose of a UK residential property. 

The charge will apply to: 

  • non-UK resident individuals  (and personal representatives);
  • non-UK resident trustees
  • non-UK resident companies
  • interests held in a partnership by a non-resident.


The rate applicable to individuals will be 18%/28% depending on marginal tax rates; 28% for trustees; 28% for companies which are subject to the annual tax on enveloped dwellings and 20% for those which are not. 

Any chargeable gain will be calculated using 6 April 2015 as the base cost where the property was owned before that date, or the actual purchase price if acquired later. 

Entrepreneurs’ relief – Gains deferred against Enterprise Investment scheme or Social Investment Tax Relief investments
Capital gains which are eligible for Entrepreneurs’ Relief (ER), but which are instead deferred into investments which qualify for the Enterprise Investment Scheme (EIS) or Social Investment Tax Relief (SITR), will remain eligible for ER when the deferred gain is realised.

This measure applies with effect of disposals eligible for entrepreneurs’ relief made on or after 3 December 2014.

You can access ACCA’s Technical Factsheet 164: Entrepreneurs’ relief here. 

Increase to remittance basis charge
Finance Bill 2015 increases the annual RBC for UK resident non-domiciliaries who elect to use the remittance basis, as follows: 

  • for those who have been UK resident for at least 12 of the last 14 tax years, the remittance basis charge increases from £50,000 to £60,000
  • a new charge will apply for non-domicilliaries who have been UK resident for at least 17 of the last 20 tax years.


The charge for those who have been resident for at least seven out of the last nine tax years is unchanged at £30,000. 

ACCA has a produced a Guide to the Non-Domicile Levy, with a flowchart highlighting the options available which can be accessed here.  

Bad debt tax relief for peer to peer (P2P) lending and crowd funding
From April 2016, a new tax relief will be introduced for individuals who have incurred losses from lending through P2P platforms. The relief will enable individuals to offset losses from irrecoverable debts against interest income arising through P2P lending when calculating their taxable income. 

It is intended that the changes will have effect for loans made from 6 April 2015. Draft legislation concerning the operation of the relief will be published in 2015, with a view to being included in the Finance Bill 2016. 

Arrangements offering a choice of an income or capital return to shareholders
From 6 April 2015, where a UK resident company offers a choice of return as either capital or income will be treated as an income distribution where: 

  • shareholders are given the choice of receiving a dividend or some other form of receipt from the company or a third party
  • the ‘alternative receipt’ is substantially of the same value as the dividend option
  • they have opted for the ‘alternative’ receipt which would not otherwise have been subject to income tax.


Employment taxes
As part of their review of the benefits and expenses code, the Office of Tax Simplification (OTS) recommended a number of changes. Their main recommendations are introduced by Finance Bill 2015, as follows: 

Simplifying the administration of employee benefits and expenses
Finance Bill 2015 introduces new legislation to simplify the administration of employee benefits and expenses.

Under the existing regime, employers must report all benefits and expenses payments made to an employee or director on a form P11D, unless the expenses are covered by a dispensation. The employee then has to make an election under ITEPA 2003, s.336 for exemption in respect of any of those expenses that were incurred wholly, exclusively and necessarily in the course of carrying out the duties of their employment.

Under the new regime, there will be automatic exemption from reporting expenses payments that should not be taxable in the hands of the employee/director.

The draft legislation also provides for a similar exemption regime for payment of flat rate expenses. The government has stated that payments of qualifying expenses and benefits made as part of a salary sacrifice arrangement will not meet the requirements for exemption.

The new arrangements will come into effect from 6 April 2016.

Voluntary ‘payrolling’ of benefits in kind
New legislation will be introduced to enable employers to report and account for PAYE on benefits in kind through the RTI payroll system. The consultation process is still ongoing and is examining of introducing the ability for employers to voluntarily payroll the following types of benefit: 

  • company cars
  • car fuel benefit
  • medical insurance
  • subscriptions such as gym membership.


The new arrangements will come into force from 6 April 2016. 

Statutory exemption for trivial benefits-in-kind
The Finance Bill introduces a statutory exemption for trivial benefits in kind, i.e., those costing less than £50.00. The exemption will not apply to the following: 

  • cash or a cash vouchers
  • benefits provided as part of a salary sacrifice arrangement
  • benefits provided in recognition or anticipation of particular services or duties performed in the course of employment.


This measure will come into effect from 6 April 2015. 

Abolition of the £8,500 threshold for benefits-in-kind
Under existing legislation, there is a difference in the treatment of benefits in kind for employees earning more than £8,500 per annum/directors and lower paid employees earning less than £8,500 per annum. 

Under the current regime, lower paid employees are exempt from tax on certain benefits in kind and employers use for P9D rather than form P11D to report benefits for such employees. 

With the abolition of the £8,500 income threshold all benefits-in-kind will be brought into charge for tax and NIC and all employees will pay tax and NIC in the same way. The legislation will include provisions to ensure that Ministers of Religion and live-in carers are not adversely affected. 

The changes will be introduced from 6 April 2016. 

Other changes to employment taxes include: 

Changes to company car and car fuel benefit
There are changes to the car and fuel benefit percentages which will take effect from 6 April 2015, as follows: 

  • the appropriate percentage of list price subject to tax will increase by two percentage points for cars emitting more than 75 grams/kilometre of carbon dioxide, to a maximum of 37% in both 2015–16 and 2016–17
  • the appropriate percentage of the list price subject to tax for the 0-50 g/km CO2 band will be 5%
  • the appropriate percentage of the list price subject to tax for the 51-75 g/km CO2 band will be 9%. 


Abolition of employer national insurance contributions for apprentices under 25
From 6 April 2016, Employer NIC will not be charged on earnings from apprenticeships for the under 25s. The exemption is restricted to earnings up to the Upper Earnings Limit (UEL) which is currently £805 per week. Earnings in excess of the UEL will be subject to employer NIC at the normal rate of 13.8%. 

NIC employment allowance extended to personal carers and support workers
The employment allowance introduced an allowance of £2,000 which employers could claim against their employers’ class 1 national insurance contributions. Previously, this was not available for employers in respect of employees engaged in the running of their domestic or household affairs. This restriction is to be removed with effect from 6 April 2015. 

Other taxes

Annual tax on enveloped dwellings (ATED):  Increase in charge
From 1 April 2015, the ATED rates will increase significantly as follows. ATED levies an annual charge where a residential property is owned by a ‘non-natural person’ (companies, partnerships with one or more corporate members and collective investment schemes). 

Property value

ATED charge 2014/15

ATED charge 2015/16

£1,000,001 - £2,000,000

Nil

£7,000

£2,000,001 - £5,000,000

£15,400

£23,350

£5,000,001 - £10,000,000

£35,900

£54,450

£10,000,001 - £20,000,000

£71,850

£109,050

Over £20,000,000

£143,750

£218,200


There are also changes to be made in connection with the administration of the scheme, the most important of which is that from 1 April 2015 the relevant company, partnership or scheme will be required to file a single annual return claiming any reliefs due in respect of the following: 

  • property rental
  • property trading
  • property development
  • businesses involving dwellings open to the public
  • dwellings used for trade purposes (occupation by certain employees or partners)
  • farmhouses used in a farming business
  • dwellings held by financial institutions in the course of a business of lending money
  • dwellings held by providers of social housing.
Tax penalty regime, mitigation, suspension and current developments
HMRC is examining its tax penalty regime. Learn how and have your say.

HMRC is examining its tax penalty regime. Learn how and have your say. 

HMRC has always stated that it uses penalties to stop people who don't take care from gaining an unfair advantage. 

The current penalties regime is supposed to reflect the behaviour of the taxpayer and their willingness to set things right once the error has been noticed. A penalty is due if the return or other tax document was inaccurate and tax has been unpaid, understated, over-claimed or under-assessed as a result. 

HMRC has indicated that it will not charge a penalty for an inaccuracy if the taxpayer can demonstrate that he took reasonable care to get things right but the return or document was still wrong. Example indicators of reasonable care by a taxpayer are keeping accurate records and checking with a tax adviser or HMRC regarding contentious matters. 

The statute contemplates three categories of behaviour that attract penalties: 

  • Carelessness – this is where the taxpayer failed to take reasonable care to get things right
  • Deliberate but unconcealed – this is where the taxpayer knew that a return or document was inaccurate but made no attempt to conceal the inaccuracy. Examples of deliberate inaccuracies include knowingly overstating business expenses, understating income or paying wages without accounting for Pay As You Earn and National Insurance contributions
  • Deliberate and concealed – this is where the taxpayer knew that a return or document was inaccurate and took active steps to hide the inaccuracy. An example of taking active steps to conceal an inaccuracy is creating false invoices as evidence of a non-existent stock purchase.


Inaccuracies that are neither careless nor deliberate are deemed to be so if discovered by the taxpayer and steps are not taken to inform HMRC. 

Mitigation
The maximum mitigations are: 

•  Carelessness: 0%, mitigable to nil for unprompted disclosure and 15% for prompted disclosure SHOULD THIS BE 10%
•  Deliberate but unconcealed: 70%, mitigable to 20% for unprompted disclosure and 35% for prompted disclosure
•  Deliberate and concealed: 100%, mitigable to 30% for unprompted disclosure and 50% for prompted disclosure.


The reduction will depend on quality of disclosure and level of assistance which the taxpayer provides to HMRC, also referred to as 'telling, helping and giving'

  • Telling gives a possible reduction of up to 30%
  • Helping gives a possible reduction of up to 40%
  • Giving access to records gives a possible reduction of up to 30%.


Suspension
Finance Act 2007 Schedule 24 paragraph 14 allows HMRC to suspend all or part of a penalty for a careless inaccuracy by notice in writing. 

The penalty provisions in Finance Act 2007 seek to influence behaviour by encouraging and supporting those who try to meet their obligations and penalising those who do not. 

HMRC may suspend all or part of a penalty only if compliance with a condition of suspension would help the taxpayer to avoid becoming liable to further penalties for careless inaccuracy. 

A condition of suspension may specify action to be taken, and a period within which it must be taken. On the expiry of the period of suspension, if the taxpayer satisfies HMRC that the conditions of suspension have been complied with, the suspended penalty or part is cancelled. If the person fails to satisfy HMRC that the suspension conditions have been met, the taxpayer must pay the suspended penalty all or in part.

If, during the period of suspension, the taxpayer becomes liable for another penalty, the suspended penalty becomes payable. A person may appeal against an HMRC decision not to suspend a penalty or against any of the suspension conditions set.

HMRC has provided toolkits, which list common errors in returns and suggest how to avoid them. If an error appearing in the toolkits is still made in a return submitted to HMRC, this is likely to attract heavier penalties.

Current developments
HMRC is considering now moving away from the current penalty system with one option being a progressive system similar to penalty points for motoring offences. So initial financial penalties can be avoided, but for persistent non-compliance or serious failures, the penalties are more substantial. There may be advantages in not initially applying penalties, but the downside is the risk that customers will fail to realise the importance of non-compliant behaviour. 

HMRC has released the consultation ‘Penalties: a Discussion Document’ that is open for comment until 11 May. It states that HMRC wants to differentiate between taxpayers who deliberately fail to comply and those who make occasional errors. All responses should be sent via email to TAP@hmrc.gsi.gov.uk before 11 May 2015.

New guidance for trustees of charities
The Charity Commission has issued guidance for trustees considering tax arrangements.

The Charity Commission has issued guidance for trustees considering tax arrangements. 

It has stated in the guidance that ‘Trustees will .... risk scrutiny and potential investigation by the commission if they engage in tax arrangements which exploit tax legislation artificially'. 

It also says that the ‘use of such arrangements is likely to be in breach of trustees’ duties and responsibilities to act prudently and in the best interest of the charity'.

The guidance also contains examples of previous arrangements that have been considered to be tax avoidance and in breach of trustees’ duties and responsibilities. 

Hack to the future
Eleven cyber risk developments to watch in 2015.

Eleven cyber risk developments to watch in 2015. 

Cyber breaches, cyber attacks, and related developments frequently dominated the news in 2014. Looking back can help us anticipate and prepare for what may happen in 2015. Here are the most important developments of 2014 and the trends we are likely to see in 2015 related to cyber risk and insurance. 

Big date breaches 
Any look back at what happened in 2014 would have to begin with the large number of significant payment card data breaches that hit retailers including Target, Home Depot, and Staples. Apart from the effects these breaches have had on the companies involved (such as lost income, executives losing their jobs, and shareholder lawsuits) these large breaches may be most noteworthy for their effect of raising the level of attention given to cyber risks within companies, and for spurring changes to payment card systems in the US and beyond. These breaches have also had important ramifications in the cyber insurance market. 

While payment card data breaches grabbed most of the headlines, it is important to note that other significant breaches took place involving other types of data. 

  • in May 2014, eBay announced that employee login credentials had been breached which could allow criminals to access personally identifiable information (PII) of eBay users
  • JPMorgan Chase disclosed that information for 83m accounts had been breached
  • on the healthcare front, roughly 4.5m patient records were breached at Community Health Systems. That could be the largest reported breach of protected health information (PHI) ever. The breach reportedly was the result of a cyber attack originating from a country more often associated with industrial espionage than the compromise of individuals’ personal information.


Aggressive regulators 
2014 saw US regulators become even more aggressive with respect to data privacy and security issues. The FTC at least temporarily1weathered a challenge by Wyndham Hotels to its ability to regulate cyber security matters, and has continued to be very active in this space.

Notable FTC actions last year include:

  • the first enforcement action2 involving the Internet of Things3
  • increasing focus on enforcing companies’ compliance with their information privacy policies
  • bringing an action4 against a company and its former CEO in connection with the collection of health information (unusual because the claim is brought against a corporate officer and because the Office of Civil Rights (OCR) in the federal Department of Health and Human Services typically gets involved with PHI risks, not the FTC)
  • actions against Apple5 and Google6 in connection with in-app purchases by children without parental consent.


The fines stem from companies’ failure to implement appropriate protections for consumer information, use of consumer information for marketing purposes, and 'do not call' list violations. The Federal Communications Commission (FCC) showed up at the cyber security regulators party last year, and has issued millions of dollars in fines. The FCC could be a significant regulator going forward. 

The Office of Civil Rights (OCR) in the Department of Health and Human Services has stated that they are bringing more data privacy and security enforcement actions than ever.7 They aren’t focused only on big breaches either. For example, the OCR reached a settlement8with QCA Health Plan, Inc., involving a stolen laptop with unencrypted PHI of only 148 people. This resulted in a $250,000 fine and a number of corrective measures. 

The SEC has also joined the party. In 2011 the SEC issued guidance9on cyber security issues for companies. In 2014, they took action. In April, the SEC Office of Compliance Inspections and Examinations (OCIE) announced10 that it would be auditing 50 broker-dealers and investment advisors to assess their cyber risks and preparedness. The SEC has made clear11 what it expects companies to do to prepare for cyber risk; well-informed commentators say that this is a prelude to enforcement actions in 2015. 

Regulators outside the US are also gearing up to become more aggressive. A few examples:  

  • the European Parliament has updated its laws to provide for fines of up to €100 million for violation of data protection laws
  • in Germany, the Commissioner for Data Protection and Freedom of Information for the state of Rheinland-Pfalz imposed a fine of €1.3m12 on Debeka Health Insurance AG (Debeka) to resolve issues regarding misuse of protected consumer data. Debeka also agreed to pay €600,000 to endow a university chair to study data protection
  • the Australian government has amended the Privacy Act of 198813 to include the Australian Privacy Principles.14 The Office of the Australian Information Commissioner (OAIC) has published guidance15 for data breach notifications that stress the ability of the OAIC to bring enforcement actions and assess fines where appropriate
  • in the UK, the Information Commissioner’s Office has continued to be active16 in enforcing data privacy rights and obligations.


Sony Pictures cyber attack 
Any discussion of 2014 must include the cyber assault on Sony Pictures Entertainment. The Sony breach is noteworthy for who did it and what it portends. The attack appears to have been launched by people in North Korea.17 It is an unusually large and public attack by agents or allies of a foreign government against a company in order to further political aims. Calling this an act of cyber warfare may be an overstatement inasmuch as war is typically thought of as an event between two or more political groups or entities; however, this attack may give us an idea of what aspects of cyber warfare might look like in the future. 

This will be a story to watch in 2015. Now that Sony Pictures has been attacked other companies will worry that they too could become victims. Unfortunately, that is a real possibility. The ultimate legacy of the attack may be that companies increase their focus on preparing for potential similar events. 

The right to be forgotten 
2014 was a year when the ‘right to be forgotten18 took important steps forward. In May, the European Court of Justice ruled19 that Google must remove information about an EU citizen that was no longer relevant and that could reflect badly on him. Since then, Google and others have received hundreds of thousands of requests to remove information that was once public. While the EU has issued guidelines20 to assist companies in deciding what to remove, the difficulties the requests present for companies receiving them are nevertheless significant. 

Lest anyone think the right to be forgotten is a non-US issue, it is worth noting that aspects of it are creeping into US laws. As of 1 January 2015, California law21 requires websites to include an ‘eraser button’ that allows children under the age of 18 to delete information they have created on web sites where they are registered users. 

NIST cyber security framework 
In February 2014, the US National Institute of Standards and Technology (NIST) published its Framework for Improving Critical Infrastructure Cybersecurity.22 The Framework is intended to provide companies with a description of what a comprehensive cyber security program should contain. Further development of the Framework by NIST is encouraged in the recently passed Cybersecurity Enhancement Act of 2014.23 Given that the NIST Framework is quickly becoming a baseline for companies to follow, the Framework will be important to watch in 2015. 

Cyber extortion on the rise 
As Brian Krebs of KrebsOnSecurity.com24 put it, 2014 was the year cyber extortion went mainstream. 2014 saw significant growth in extortion scams by criminals that infected a victim’s computer system with ransomware25 that will corrupt or delete data unless the ransom is paid. 

A typical scam would be one where the victim’s files are encrypted and cannot be restored without the encryption key. The criminals provide the key in return for the ransom payment. Unfortunately, the ransom demanded is often small enough that companies elect to pay it (often by Bitcoin26) rather than take on the expense and headache of recovering data by other means. 

While there were notable successes in combatting cyber extortion scams in 2014, such as the takedown of the botnet27 that made distribution of the Cryptolocker28 ransomware possible, as long as extortion scams continue to succeed, their prevalence in 2015 seems assured. 

The moral of the story is:  

  • back up your data
  • carry cyber policies that will respond to an extortion event.


Mobile payments and digital wallets 
In 2014, Apple introduced Apple Pay.29 For those unfamiliar with it, Apple Pay involves giving your credit card information to Apple which will then place a token30 associated with that number in an encrypted chip on an iPhone 6. The phone can then be used to pay for purchases without the credit card or credit card number ever being disclosed to the merchant or to criminals that have compromised the merchant’s systems. Apple Pay, and other existing or upcoming systems designed for the same purpose, appear likely to reduce or eliminate the risks inherent in using payment cards today. These systems seem certain to become more widely adopted in 2015, with the result being that payment card data breaches should eventually become smaller and less severe. 

EMV payment card migration 
One of the most important events that will take place in 2015 is the migration of payment cards in the US from magnetic stripes to chip-and-pin EMV cards. EMV cards are considered more secure because they require thieves to have more than the card number to make fraudulent charges. To make a charge with an EMV card the user must also input a PIN associated with the card. 

The migration to EMV cards will take place this year because the card brands are imposing a liability shift on 1 October 2015. If a merchant has not installed equipment to handle EMV card payments, and a customer has an EMV card, the merchant will be liable for any resulting fraud on the customer’s account. If the merchant has installed the necessary equipment to handle EMV card transactions, but the customer’s bank hasn’t issued him or her an EMV card, the bank is liable. If the merchant is set up to handle EMV cards, if a customer uses an EMV card, and if fraud nevertheless takes place, the card brands will be liable. 

International conflicts over privacy rights
In 2014 the US and EU collided over the disclosure obligations of Microsoft concerning data pertaining to EU citizens that Microsoft stores in the EU. 

A US Government agency (we don’t know which one) served Microsoft with a search warrant31 for the content of an individual’s email account. The contents are stored on a server in Dublin, Ireland. 

Microsoft has resisted the warrant on the grounds that US search warrants don’t apply to locations outside the United States. As Microsoft’s Deputy General Counsel32 put it, the ‘US government doesn’t have the power to search a home in another country, nor should it have the power to search the content of email stored overseas’. 

Predictably, the European Commission agrees. The EC takes the view that the information can only be obtained via established legal frameworks that provide access to it. 

The US government has argued (successfully so far) that the warrant applies to any location under Microsoft’s control. 

Microsoft (with the active support of Ireland33 and the EU34) is continuing to resist efforts to obtain the data because providing it would violate EU law. This battle will continue in 2015 and will be interesting to watch, given the ramifications the case is likely to have on the legal frameworks governing the cross-border transmission of information subject to privacy protections. 

Physical damage from cyber events 
Many people will recall the Stuxnet35 worm that infected computers in Iran that controlled nuclear centrifuges and physically destroyed a large number of them. In 2014 it was reported36 that an attack on a steel mill37 in Germany resulted in serious damage to blast furnaces there. The possibility of similar future attacks on industrial control systems is real and must be taken seriously. This will be an issue to watch in 2015. 

Changes in the cyber insurance market 
As a consequence of the large and expensive retail breaches over the past year, the cyber insurance marketplace changed dramatically in late 2014. 

Cyber coverage for companies with payment card data is becoming more expensive and harder to get. Underwriters are asking deeper questions and are asking for more information than they have in the past. Some insurers are no longer willing to cover such companies; others are reducing the policy limits they are willing to provide. In addition to underwriting becoming more stringent, pricing is going up (even on, and sometimes especially on, excess layers). All of this comes at a time when there is unprecedented demand for cyber insurance. 

Companies that don’t have payment card data exposures are not facing the same problems. For them the availability and cost of cyber insurance has changed little in the past year. 

Cyber underwriters continue to innovate. In 2014, AIG introduced its CyberEdge PC38 policy that, for the first time in a form for general use, can cover property damage and bodily injury resulting from a cyber event. It does this by providing excess DIC coverage over a company’s existing insurance programs. We also continue to see a willingness on the part of some underwriters to push the envelope on cyber policy terms and conditions in order to provide solutions, not just policies, to clients. That is essential at a time when the cyber risks companies face are so dynamic. 

William Boeck – senior vice president, Insurance & Claims Counsel, Global Technology & Privacy Practice, Lockton 
 

Sources

1       http://www.bna.com/3rd-circuit-wade-n17179893179/

2       http://www.ftc.gov/news-events/press-releases/2013/09/marketer- internet-connected-home-security-video-cameras-settles

3       http://en.wikipedia.org/wiki/Internet_of_Things

4       http://www.ftc.gov/news-events/press-releases/2014/12/medical- billing-provider-its-former-ceo-settle-ftc-charges-they

5       http://www.ftc.gov/news-events/press-releases/2014/01/apple-inc-will- provide-full-consumer-refunds-least-325-million

6       http://www.ftc.gov/news-events/press-releases/2014/09/google- refund-consumers-least-19-million-settle-ftc-complaint-it

7       http://www.dataprivacymonitor.com/enforcement/hhs-attorney-major-hipaa-fines-and-enforcement-coming/

8       http://www.hhs.gov/ocr/privacy/hipaa/enforcement/examples/qca_agreement.pdf

9       http://www.sec.gov/divisions/corpfin/guidance/cfguidance-topic2.htm

10     http://goo.gl/WCS39M

11     http://www.sec.gov/News/Speech/Detail/Speech/1370542057946

12     http://goo.gl/iIkiRQ

13     http://www.comlaw.gov.au/Details/C2014C00757

14     http://www.oaic.gov.au/privacy/privacy-act/australian-privacy-principles

15     http://www.oaic.gov.au/images/documents/privacy/privacy-resources/privacy-guides/data-breach-notification-guide-august-2014.pdf

16     https://ico.org.uk/action-weve-taken/enforcement/

17     http://krebsonsecurity.com/2014/12/the-case-for-n-koreas-role-in-sony- hack/

18     http://en.wikipedia.org/wiki/Right_to_be_forgotten

19     http://curia.europa.eu/jcms/upload/docs/application/pdf/2014-05/cp140070en.pdf

20     http://ec.europa.eu/justice/data-protection/article-29/documentation/opinion-recommendation/files/2014/wp225_en.pdf

21     http://leginfo.legislature.ca.gov/faces/billNavClient.xhtml?bill_id=201320140SB568

22     http://www.nist.gov/cyberframework/upload/cybersecurity- framework-021214.pdf

23     https://www.congress.gov/bill/113th-congress/senate-bill/1353/text

24     http://krebsonsecurity.com/2014/06/2014-the-year-extortion-went- mainstream/

25     http://en.wikipedia.org/wiki/Ransomware

26     http://en.wikipedia.org/wiki/Bitcoin

27     http://en.wikipedia.org/wiki/Botnet

28     http://en.wikipedia.org/wiki/CryptoLocker

29     http://www.apple.com/apple-pay/

30     http://en.wikipedia.org/wiki/Tokenization_%28data_security%29

31     https://www.eff.org/document/search-warrant-email-stored-microsoft

32     http://blogs.microsoft.com/on-the-issues/2014/04/25/one-step-on-the- path-to-challenging-search-warrant-jurisdiction/

33     http://digitalconstitution.com/wp-content/uploads/2014/12/Ireland- Amicus-Brief.pdf

34     http://digitalconstitution.com/wp-content/uploads/2014/12/albrecht- microsoft-ireland-amicus-brief1.pdf

35     http://en.wikipedia.org/wiki/Stuxnet

36     https://www.bsi.bund.de/SharedDocs/Downloads/DE/ BSI/Publikationen/Lageberichte/Lagebericht2014.pdf?     blob=publicationFile

37     http://www.securityweek.com/cyberattack-german-steel-plant-causes-significant-damage-report

38     http://www.aig.com/cyberedge-pc_1247_593419.html

 

Lockton Companies LLP is ACCA’s recommended broker for Professional Indemnity insurance. For information, please contact Lockton on 0117 906 5057.

Late payment costs jobs and can jeopardise access to trade credit
A nuanced approach is key to tackling the practice of late payment among the UK’s smallest businesses, a new global study from ACCA shows.

A nuanced approach is key to tackling the practice of late payment among the UK’s smallest businesses, a new global study from ACCA shows. 

A new report from ACCA has found that the culture of late payment among businesses inhibits the ability of the UK’s smallest organisations to take on more employees. 

Charlotte Chung, ACCA’s senior policy adviser on SME issues, says: ‘Microbusinesses and other small enterprises are less likely to increase headcount when faced with late payment. Compared to large corporates, we found that the effect of late payment on small businesses who want to expand was significantly greater, by 54% and 47% respectively.’ 

The report found that businesses with fewer than 50 employees are typically twice as likely as large corporates to report problems with late payment. 

According to Charlotte Chung, the cumulative impact of persistent late payment on small business activity is significant. 

‘Late payment hurts individual businesses and the wider economy in a number of ways, from increased costs to reduced capital spending or suppliers going out of business. What’s more, its impact is exacerbated among credit-constrained businesses. 

‘Unsurprisingly, it is the headcount and investment decisions of smaller businesses that are most sensitive to late payment. Late payment and customer defaults can cascade down the supply chain, crossing industries and borders until they reach the most financially secure financial institutions, which in many cases involves the government.’ 

While these findings may point to late payment being a wholly harmful business practice that requires hard action to remedy, ACCA advises care be taken by policymakers. The report identifies a very large share of business to business trade that makes use of trade credit – where payment is not made at the time when goods or services are delivered, but rather at a later date, usually agreed in advance by the two parties. 

ACCA has identified thirteen types of deviations from prompt payment, each of which calls for a different approach from businesses and policymakers. Failing to distinguish between them will lead to poor policies that run the risk of doing more harm than good. 

Along with outlining the thirteen varieties of late payment, the report includes a set of objectives for government intervention in the trade credit market designed to deal with the negative aspects of late payment without compromising economic growth. 

  1. To dampen the systemic impact of late payment on the economy, by encouraging ‘deep pockets’ (eg financial services firms or tax authorities) with a stake in the entire supply chain.
  2. To ensure that the legal and policy frameworks around incorporation, financing, contracts and insolvency are aligned in order to deal with different aspects of late payment promptly and in a consistent manner.
  3. To encourage trade credit by giving suppliers a minimum level of protection against supplier dilution – ie the reassurance that even when customers fail they can still look forward to a minimum level of recoveries.
  4. To ensure that businesses can look forward to a similar level of discretion in negotiating credit terms with their customers regardless of whether they are new or repeat suppliers.
  5. To encourage the development of financial markets so that businesses have quick access to alternative financing options in response to changing terms of credit or unexpected late payment.


The full report can be downloaded here. This report is the first of a trilogy to be published by ACCA on the issue of late payment.

The latest developments in UK VAT
Updates on VAT MOSS and businesses which are alcohol wholesalers.

Updates on VAT MOSS and businesses which are alcohol wholesalers. 

VAT Mini One Stop Shop (VAT MOSS)
The place of supply of digital services – otherwise known as broadcasting, telecommunications and electronic services (BTE) – has moved to where the customer is based from 1 January 2015. This has been a well publicised change and due to the administrative burden of potential of requiring multiple VAT registrations in up to a potential 28 European Union member states, the VAT Mini One Stop Shop (VAT MOSS) was introduced. 

The VAT MOSS is a system available to registration for all businesses that fall within this regime, without which businesses supplying digital services may be obliged to register in the most extreme circumstances in all 28 EU member states. 

The first VAT MOSS return for those registered will be for the period 1 January to 31 March 2015; the return will be able to be completed from 1 April 2015. The VAT MOSS return will need to be filed and paid by 20 April 2015. 

Until 30 June 2015 HMRC is offering help to microbusinesses (those trading below the VAT registration threshold, currently £81,000) that are registering for VAT MOSS. It is allowing microbusinesses to base their customer location, VAT taxation and accounting decisions on information provided to them by their payment service provider. This means the business need not require further information to be supplied by the customer for this transitional period and will give microbusinesses time to adapt their websites to meet the new data collection requirements. 

For further details please view ACCA’s Guide to VAT MOSS 


Alcohol Wholesaler Registration Scheme (AWRS) 
In order to combat alcohol fraud HMRC has proposed the introduction of the Alcohol Wholesaler Registration Scheme (AWRS). Businesses that wholesale alcoholic drinks will need to apply to register under the AWRS from 1 October and 31 December 2015.  The objective is to combat fraud and protect legitimate wholesale alcohol traders against unfair competition from illicit traders. 

There are 20,000 wholesale alcohol traders in the UK and between 6 April 2013 and 5 April 2014 HMRC through its ‘tackling alcohol fraud’ initiative protected revenues of over £680m, therefore this is a significant issue. 

Any wholesale alcohol businesses not registered in this period run the risk of trading illegally. During this registration period HMRC will assess whether businesses should be registered by looking for businesses that demonstrate their business is sufficiently protected from illicit alcohol trade, in other words that they are ‘fit and proper’. If HMRC discovers evidence of fraud it may lead to the right to trade alcohol to be removed. 

It is also proposed from April 2017 it will become an offence for a retailer to purchase alcohol from an unregistered alcohol wholesaler. 

Further details are available in VAT Notes 2014 Issue 4

GAAP: Model accounts
Model accounts based on both the FRSSE 2015 and FRS 102 available to ACCA members.

ACCA has produced model accounts based on both the FRSSE 2015 and FRS 102. Find out how to obtain your set via our website

HMRC sets out payroll penalties approach
Employers that have received an in-year late filing penalty for the period 6 October 2014 to 5 January 2015 and were three days late or less should appeal online.

Employers that have received an in-year late filing penalty for the period 6 October 2014 to 5 January 2015 and were three days late or less should appeal online. 

HMRC has published an announcement about in-year PAYE filing and payment penalties on GOV.UK. 

It explains that:  

  • employers will not incur filing penalties for short delays of up to three days
  • late payment penalties will not be issued automatically, but will continue to be reviewed on a risk-assessed basis
  • HMRC will be closing around 15,000 schemes that have not made a PAYE report since April 2013 and which appear to have ceased
  • there is no change to the filing deadlines. This means filing on or before each payment date unless the circumstances set out in the Sending an FPS after payday guidance apply
  • HMRC has published a discussion document seeking views about potential improvements to the way in which penalties apply for failing to pay what is owed or to meet deadlines for returns or registration. Following the consultation, HMRC will review the operation of the changes to the PAYE penalties by 5 April 2016
  • employers that have received an in-year late filing penalty for the period 6 October 2014 to 5 January 2015 and were three days late or less should appeal online.
Property in Wales – consultation paper
Consultation on proposed land transaction tax opens.

Consultation on proposed land transaction tax opens. 

The Minister for Finance and Government Business has issued a consultation paper on proposals for a Land Transaction Tax to replace Stamp Duty Land Tax in Wales in 2018. 

The consultation seeks views on 28 specific questions in relation to: 

  • tax structure, bands and rates for residential and non-residential transactions
  • partnerships, trusts and companies
  • leases
  • reliefs and exemptions
  • compliance and avoidance. 


The consultation, including details of how to respond, can be found on the Welsh Government website and is open until 6 May 2015.

NEWS
How I survived self assessment
The Secret Accountant returns with their take on how they once again survived January.

The Secret Accountant returns with their take on how they once again survived January. 

It’s that time of year again which fills all accountants with dread! Long hours (more than usual and weekends) all because the majority of my lovely clients leave it to the very last minute. 

Why oh why do they leave everything until the last couple of days? 

You can submit any time after 6 April, I tell everyone who will listen. 

We offer reduced costs if done early and we start chasing in May that year….. But still on 1 January (or first working day back after Christmas) they start trickling in, week two of January sees a few more and by the last week it’s almost like a tsunami and on the 31st – yes, the 31st – at least a handful! 

So we have the information and one of two things happen: 

  1. we process then the questions start
  2. we get the information and we contact for missing information and questions.


Never ever does the first batch of information we receive provide everything we require, which in any of the other eleven months of the year is acceptable, but in January, come on… 

You probably experience the same most frequently asked question as I do – what expenses can be claimed for? 

My standard answer is always that HMRC doesn’t produce a definitive guideline on this, but anything that is incurred generally in the course of business is deductible. I give the example: 

  • I drive to the station for a meeting, mileage deductible
  • car parking
  • train ticket
  • Tube ticket
  • coffee for client and me
  • taxi to next meeting
  • lost earphones for my phone replaced
  • sandwich with new client
  • Tube to next meeting
  • taxi back to the train station so I don’t miss train.


I think this is fairly straightforward, but I think it only right I should share with you some of the best deductions I have been asked to process but didn’t! 

  • can I put through a tuxedo? – he was a plumber
  • a bearded dragon, yes a bearded dragon, for his secretary to relieve stress
  • dental work - new shiny teeth for an IT contractor
  • foreign holidays for the family – these are not tax deductible
  • manicures and facials for a finance director (male not female, although I’m not judging)
  • receipts from an 'adult shop'
  • can I get tax relief for my school fees, they are a charity?
  • hiring a pod on the London Eye to propose, even if she worked for you!
  • tennis lessons, Wimbledon - maybe networking but I am yet to be convinced…


We always work through the information. No matter how demanding the client or obscure the question we always complete and make sure submitted on time. 

Who said accounting was boring! And I really do love my job. 

By the way I submitted mine at 21.53 on 31 January…

Digital engagement with HMRC
HMRC is holding webinars and workshops to ask accountants how it should engage with them digitally.

HMRC is holding both webinars and workshops to ask accountants how it should engage with them digitally. 

HMRC is reviewing how it engages with accountants as it moves to more digital ways of working. Using digital channels will enable it to share information with more accountants, help raise issues for resolution and provide tailored education tools. 

HMRC is holding two one-hour webinars in March, which will be interactive sessions giving you an opportunity to share your thoughts on the challenges and barriers, the benefits and opportunities as well as to make suggestions for ways for HMRC to engage digitally with the agent community. 

Register now by following the links below: 

10 March at 10am 

19 March at 2pm 

Alternatively, attend one of a series of workshops taking place around the country. These will be interactive sessions giving you an opportunity to network with other tax professionals and as well as giving HMRC your feedback it will explain what current digital services it provides for SMEs. 

The full schedule of events are shown below and it is anticipated that each meeting will last no longer than three hours. 

Register for the workshop closest to you now by email to steve.massey@hmrc.gsi.gov.uk
 

Location

Name(s)

Contact email

Glasgow 03 March at 10:00am

 

 

Glasgow 03 March at 2:00pm

 

 

Manchester 04 March at 10:30am

 

 

Aberdeen 05 March at 10:00am

 

 

Aberdeen 05 March at 2:00pm

 

 

Coventry 06 March at 10:30am

 

 

Coventry 06 March at 2:30pm

 

 

Bradford 09 March at 10:00am

 

 

Bradford 09 March at 2:00pm

 

 

Kings Lynn 11 March at 10:00am

 

 

Kings Lynn 11 March 2015 at 2:00pm

 

 

Belfast 13 March at 10:00am

 

 

Belfast 13 March at 1:30pm

 

 

Preston 20 March at 10:00am

 

 

Preston 20 March at 2:00pm

 

 

Croydon 23 March at 10:30am

 

 

Croydon 23 March at 2:30pm

 

 

Exeter 24 March at 10:00am

 

 

Exeter 24 March at 2:00pm

 

 

Newcastle 26 March at 9:30am

 

 

Newcastle 26 March at 1:30pm

 

 

Cardiff 27 March at 10:00am

 

 

Cardiff 27 March at 2:00pm

 

 

Lincoln 27 March at 10:00am

 

 

Central London 30 March at 11:00am

 

 

Central London 30 March at 3:00pm

 

 

 

Places will be allocated on a first come first served basis, so please book early.

Insolvency Service podcasts
Insolvency Service launches podcast.
The Insolvency Service has launched a new podcast. Listen now to the first episode which features Nick Howard talking about the regulation of insolvency practitioners.

CPD
The latest Professional Courses from ACCA
Book your place now, for events including the Budget Breakfast and Saturday CPD Conferences.

Book your place now, for events including the Budget Breakfast and Saturday CPD Conferences.


SATURDAY CPD CONFERENCE FOR PRACTITIONERS
 

CONFERENCE ONE

• VAT and Cross-Border Transactions  
• Property Taxes
• The Tax Impact of FRS 102 and the New UK GAAP
• PAYE
                      

CONFERENCE TWO

• R&D Patent Box
• The Powers of HMRC
• Finance Bill/Act 2015
• Anti-money Laundering

                      

CONFERENCE THREE

• UK GAAP Reporting
• Self Employed Status and IR35 Issues and Planning

Please Note: The remaining two sessions have been left open to deal with issues arising during 2015.

 

BUDGET BREAKFAST

19 March 2015, London

 

Date for Your Diary

Residential Conference for Practitioners
Burleigh Court, Loughborough
10-11 July 2015

Online learning opportunities
Choose from a variety of online learning courses.

Keep your IFRS knowledge up-to-date with some great online learning.  

IFRS Fundamentals – access to over 47 online modules – one year’s access for £99. 

You can still listen to all of Kaplan’s IFRS webinar recordings – two hours for £20. 

We have lots of corporate reporting online courses and articles here 

Practice management 
If you are looking to improve the management of your practice and enhance your chances of success then you may be interested in these courses (priced at £75 (inc VAT) each for four hours of learning):  


Promoting your Professional Practice

Succession Planning

Building and growing your firm

Practical models and networks

 

Other online learning bundles
Here are some useful learning bundles developed by BPP and Crossknowledge:

Business and IFRS skills – 23 hours for £295

 

FRS Procedures

5 hours for £99

10 hours for £195  

Personal Growth

5 hours for £99

10 hours for £195 

How to book 
Click on any of the course titles above and follow the booking instructions. 



Here is some useful documentation to guide you through your CPD requirements: QUICK GUIDE TO CPD

 

 

Alternative & Receivables Finance
Second annual summit will focus on exploiting new developments in SME finance.
Second annual summit will focus on exploiting new developments in SME finance.

Monday 11 May
Clifford Chance, Canary Wharf, London, UK
Introducers (practitioners) and SMEs attend free*
Other ACCA members eligible for a discounted rate of £495. 


Glenn Collins, head of technical advisory at ACCA, will be one of many top speakers at the second annual BCR conference exploring the future of financing for growing businesses in the UK and beyond. 24 speakers have already confirmed, including: 

  • Adam TavenerHeadALTERNATIVE BUSINESS FUNDING
  • Andrew van der Lem, Managing Director Strategy & Markets, BRITISH BUSINESS BANK
  • John Bevan, Managing Director Commercial Finance, SECURE TRUST BANK
  • Philip King, Chief Executive, CHARTEREDINSTITUTE OF CREDIT MANAGEMENT
  • Greg McDonald, Managing Director, GOODFISH LTD
  • Ayan Mitra, Chief Executive, CROWDBNK
  • Brian Bartaby, Founder & CEO, PROPLEND
  • Darren Westlake, CEO, CROWDCUBE
  • Tom Britton, CTO andCo-founder, SYNDICATE ROOM
  • Chris SkinnerAuthor of ‘Digital Bank’, ChairThe Financial Services Club, UK

Voted one of Top 40 most influential people in financial technology in 2014. 

Key themes 
Cash-flow finance; debt models; innovations in receivables and supply chain financing; new technologies; client relationship management; credit risk and control 

Speakers/audience
A mix of traditional invoice financiers (bank-owned and independent), challenger banks, auction/platform solutions, technology providers with a broader interest in supply chain finance, SMEs, introducers and accountants; investors and advisers. 

Download advance programme or visit the conference website

*To claim your free pass or discounted ACCA rate of £495 please contact Julie Hawkins 
jh@bcrpub.com or call the booking hotline 020 8466 6987 


Trade Receivables Securitisation Summit
The inaugural Trade Receivables Securitisation Summit is a unique opportunity to gain an understanding of the new deal sizes and structures, collateral valuation and cash flow under a trade receivables securitisation, as well pinpointing where the new emerging opportunities lie. This event is running parallel with the Alternative and Receivables Finance Conference, taking place at the same venue on Tuesday 12 May.

ACCA members working in corporate treasurer roles are eligible to attend for free. Other ACCA members can attend for £495 or attend both events for £890. To book your place, contact Julie Hawkins (as above).


For more information about getting involved in either event please contact: 

Malou Lindholm – director, BCR Publishing
T: 020 8466 69867
E: ml@bcrpub.com

CAREERS
Legal advice service
Details of a competitively priced legal advice service that covers both business and personal issues.

Members often call ACCA asking for legal advice so we have teamed up with iQ Business to bring you a competitively priced legal advice service that covers both business and personal issues. 

In today's complex business environment there are potentially dozens of issues that require professional legal interpretation or guidance. This can prove prohibitively expensive if you have to consult local lawyers who charge for every minute they spend on your issue. 

The ACCA Legal Advice Service is available 24 hours a day, 7 days a week and covers both business and personal issues for just £95+VAT per year. 

Unlimited access to a constantly available advice line is the sensible way to ensure your organisation always acts lawfully. 

Examples of business issues covered include, but are not limited to:  

  • business motoring problems
  • company formation
  • company law
  • contract disputes
  • copyright & IP
  • data protections
  • e-commerce and internet
  • employment law
  • health & safety legislation
  • immigration law
  • labelling requirements
  • law
  • negligence
  • real estate
  • supplier / customer disagreements
  • tenancy disputes
  • trade statutory licences.
     

Click here for more details and information on how to subscribe. 

The ACCA Legal Advice Service, available 24 hours a day, 7 days a week for just £95+VAT per year.

Government consultation on R&D tax credits
Hurry – one week left to input into tax credits survey.

Hurry – one week left to input into tax credits survey. 

During last year’s Autumn Statement, the government announced that it would hold a consultation on R&D tax credits, focusing on the needs of smaller companies. This consultation has now been published. It addresses what HMRC thinks are the four key factors that affect whether businesses make claims:  

  • awareness of the credits
  • design of the rules
  • understanding of the rules
  • claims process/administration. 


HMRC is inviting views on all of these issues, and will in particular be using them to shape improvement of the guidance and the design of the new advance assurance service. 

An online consultation is open until Friday 27 February to allow for a government response during next month’s Budget.  

This is an opportunity to influence the direction of R&D tax credits for the future; do pass these links to your contacts/members/networks (especially sharing via social media) and encourage them to complete the survey. 

The right KPIs for your practice
Why risk the health of your accountancy practice by measuring the wrong things?

Why risk the health of your accountancy practice by measuring the wrong things? 

Is your firm focused on the RIGHT KPIs? 

Lose major money for three months, one after the other, and you’d be stressed. 

Lose an important client and you’d feel fretful. 

Receive the resignation of a key employee and you’d have a gut-wrenching reaction. 

This might sound odd, but such strong emotional reactions are good things – they result in corrective action. 

But doesn’t corrective action all feel a bit late? 

£300,000 is missing… 

Not too long ago, in my capacity as a non-exec for a three-partner accountancy firm, we experienced a somewhat emotionally charged meeting. The partners had been optimistic at the start of their new financial year of achieving £1.8m in fees. Three months later the forecast was £300,000 short. 

Audit threshold changes, three large clients sold and a few client losses meant the forecast now showed £1.5m not £1.8m. 

Feelings were running high and the commitment to corrective action was also high. 

Never before had they been so heartfelt and committed to the measures that drove sales. Nine months later their healthy heartfelt focus had clawed back the lost £300,000. 

In a nutshell 
A big hairy problem created lots of stress and enough motivation to act. A focus on measuring the right things, and taking the right action, quickly resolved their problem. 

Hard-earned lessons 
This firm, most firms, and most of your business clients, do not bring enough emotional commitment to measuring the right things. Until there’s a big problem. Why? Because ‘cure’ is easier to get emotional about than ‘prevention’. 

It’s the wrong obsession 
Accountants measure historical results. 

Annual accounts and management accounts focus on sales, costs, profits. A balance sheet shows cash and other assets and liabilities. These are all lagging ‘after-the-horse-has-bolted’ KPIs. 

Improving results or preventing disaster comes from a focus on leading KPIs. Just like Continental Airlines did. 

Use cleverer KPIs…
In 1994 Continental Airlines was failing miserably. In the previous decade it had filed for bankruptcy twice. But then Gordon Bethune took over. 

Bethune simply got every employee focused on three KPIs. Together they delivered a remarkable comeback. Continental became one of the most profitable airlines in the sky in the late 1990s. 

The game changed because Bethune changed the KPIs. He dumped most measures and got every employee focused on three leading KPIs: 

  • less lost luggage – a quality KPI
  • fewer complaints – a customer satisfaction KPI
  • on time arrival – a speed of delivery KPI.
     

Notice how these three company KPIs don’t show up in annual accounts or management accounts. 

Bethune managed to get all Continental employees taking regular action to improve these three customer focused KPIs. 

What’s your firm’s equivalent to Bethune’s three customer focused KPIs? 

Critical question… 
What happens to your firm’s results when you start to measure the KPIs that matter most to your customers? What happens if you start doing the same for your clients? 

Only when you bring enough emotion and motivation to leading KPIs will you get the result you want. Or do you want to wait till something goes badly wrong before focusing on customer critical KPIs? 

KPIs deliver £300,000… 
The three-partner firm were focused on sales. So you won’t be surprised that the leading KPIs the three partners focused on were: 

  • number of client meetings
  • number of introducer meetings
  • number of referral requests
  • number of follow up actions taken.


Of all of these the top one is the one that matters most to their clients. It was managing this KPI that increased cross-sales and client referrals. This in turn delivered most of the £300,000.

Time for action…
What’s your firm’s current focus or challenge? What KPIs should now get your full attention?

If you want a list of 40 possible KPIs for an accountancy firm – plus a four-page report on KPIs with additional support materials to help you measure what matters most – simply  email –  paul@remarkablepractice.com
 

Paul Shrimpling is a consultant and non-exec for accountancy firms only.

Paul will be sharing more insights about KPIs at the ACCA conference in North Wales on 17 November 2015.