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Co-operatives UK Practitioners Forum KPMG Update: Accounting, reporting and governance Tax Cyber 2

Accounting and reporting update Nicola Quayle

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Agenda New UK GAAP

Companies Act

IFRS

The new UK accounting framework

FRS 100 Application of financial reporting requirements

FRS 101 Reduced disclosure framework

FRS 102 FRS applicable in the UK and ROI

■ Which standards to apply

■ Application of SORPs ■ Effective date ■ Meaning of ‘equivalence’ ■ Disclosure exemptions for ‘qualifying entities’ applying recognition and measurement requirements of EU-IFRS ■ Individual financial statements only

■ Operational standard derived from IFRS for SMEs ■ Disclosure exemptions from this FRS for ‘qualifying entities’

■ FRS 103 Insurance Contracts ■ FRS 104 Interim Financial Reporting ■ FRS 105 The Financial Reporting Standard applicable to the Micro-entities Regime

■ Individual and consolidated financial statements

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Timeline for adoption

UK and Irish entities will be required to prepare their 31 December 2015 financial statements under either EU-IFRS, FRS 102 or FRS 101, requiring a transition balance sheet as at 31 December 2013 The mandatory timeframe

Transition date

Comparative balance sheet date

First reporting date

31 December 2013

31 December 2014

31 December 2015

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Which framework can I apply?

Consolidated or individual accounts? Consolidated

Individual A qualifying entity is a member of a group that prepares publicly available consolidated financial statements which are intended to give a ‘true and fair’ view

EU-IFRS is mandated for listed entities EU-IFRS mandated? Yes

No

Qualifying entity? No

Yes

No reduced disclosure in consolidated accounts

EU-IFRS (with full disclosure)

FRS 102 with full disclosure

FRS 102 with reduced disclosure

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FRS 101 (EU-IFRS with reduced disclosure)

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Key GAAP differences

■ Goodwill Business combinations

■ Intangibles ■ Group reorganisations

■ Derivatives and hedge accounting

Financial instruments

■ Net investment hedging NOT allowed in individual company accounts ■ Intercompany balances

■ Different approach Deferred tax

■ More deferred tax assets e.g. business combinations and revalued assets

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Key GAAP differences (cont.)

■ Pension deficit/surplus on at least one entity’s balance sheet Defined benefit pension schemes

■ Discount rate applied to net surplus/deficit ■ Deferred tax on pension deficit/surplus presented separately

■ Treatment of plan admin costs ■ Cost only if valuation unobtainable (FRS 102)

Investment properties

■ All changes in fair value through P&L ■ No exemption for group arrangements

Foreign exchange

■ Functional currency

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Which accounting changes may affect current tax?

Tax deductible goodwill

Rent free periods and increases

Software

Functional currency

Permanent as equity foreign currency loans

Some financial instruments

Interest-free term loans

No amortisation under FRS 101

Spread over a different period Reclassify to intangibles? May change under new GAAP Retranslate to profit and loss (individual)

Fair values are recognised Recognised initially at fair value

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Amendments to FRS 101 and 102 ■ Removal of requirement to present a third balance sheet on first time adoption of FRS 101

FRS 101 Reduced disclosure framework

■ Increased flexibility in the format of financial statements – allowing a presentation more consistent with IFRS ■ Goodwill impairments no longer permitted to be reversed ■ Accounting for contingent consideration aligned with IFRS 3 (measured at fair value with changes to profit and loss)

FRS 102 FRS applicable in the UK & ROI

■ When the useful life of goodwill or an intangible asset cannot be reliably estimated, the maximum permitted life is 10 years (previously 5)

■ Goodwill impairments are no longer permitted to be reversed ■ Increased flexibility in the format of financial statements – allowing a presentation more consistent with IFRS

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New small companies regimes vs FRSSE

Format of financial statements

Accounting policies

FRS 102 Section 1A vs FRSSE

FRS 105 vs FRSSE

•

Preparation of only two primary statements required (balance sheet and profit and loss)

• Preparation of only two primary statements required (balance sheet and profit and loss)

•

Reduced number of mandatory disclosures

•

Section 1A of FRS 102 uses terminology consistent with the rest of FRS 102 such as ‘statement of financial position’ rather than ‘balance sheet’.

• Significantly condensed formats of statements

•

•

•

FRS 102 will require recognition of some financial instruments that the FRSSE did not e.g. derivatives such as options, swaps and forward contracts at fair value.

• Reduced number of mandatory disclosures • FRS 105 uses terminology consistent with FRS 102 such as ‘statement of financial position’ rather than ‘balance sheet’. • FRS 105 has simplified the accounting treatment for some transactions e.g. microentities shall not account for deferred tax.

• Fair value and revaluation accounting not FRS 102 requires small entities to recognise permitted deferred tax arising on revaluations of fixed • No accounting policy choices assets. FRS 102 requires that gains and losses on investment properties must be recognised in profit or loss, rather than in reserves as previously required by the FRSSE.

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Commercial/practical implications What New UK GAAP means for you Area

Potential Impact

Tax implications

■ What are the effects of adoption on cash tax and are any elections required to be made?

Forecasts and budgets

■ What will the effects of transitioning be on forecasts and budgets?

Accounting systems

■ Are existing systems suitable – e.g. can they accommodate postings required for derivatives?

Staff training

■ Will staff require training on the requirements of new UK GAAP? ■ How will this training be delivered, by whom and when?

Financial covenants

■ How does transitioning impact existing covenants – will these require renegotiation?

Distributable reserves

■ Position will likely be altered as a result of adoption so groups may need to consider strategies to avoid a dividend block

Remuneration schemes (including share based payments)

■ KPIs underpinning these schemes may change

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Agenda New UK GAAP

Companies Act

IFRS

IFRS – Future accounting developments

Current and proposed IFRS changes  Exposure drafts

Annual Improvements 2010-2012 Defined Benefit Plans: Employee Contributions Sale or contribution of Assets between Investor and its Associate or JV

Annual Improvements 2011-2013

2015/16

Investment entities: Applying the consolidation exemption

IFRS 16 – Leases

Disclosure initiative

IFRS 15 – Revenue

Equity Method in Separate Financial Statements

IFRS 9 – Financial instruments

Agriculture: Bearer Plants

Phase I – classification and measurement (amendments)

IFRS 14 Regulatory Deferral Accounts

Phase II – impairment methodology

Accounting for Acquisitions of Interests in Joint Operations

Phase III – general hedge accounting

Clarification of Acceptable Methods of Depreciation and Amortisation

Phase III – macro hedging

Annual improvements 2012-2014

Insurance Contracts

2016/17

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2017/18 and later

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IFRS 15: Revenue from contracts with customers The five step model

Identify the contract with a customer

Identify the performance obligations in the contract

Determine the transaction price

01

02

03

Allocate the transaction price to the performance obligations in the contract

04

Recognise revenue when (or as) satisfy a performance obligation

05

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Do you have…

…multiple goods and services in a contract? … contracts that span a period greater than one year?

… contracts with variable consideration? … licences or royalty arrangements? … costs to obtain a contract?

… frequent changes to contracts? … compensation linked to revenue? … a clear plan for transition? © 2015 KPMG LLP, a UK limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

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Effective date

Effective Date

Issue Date

2014

2015

2016

2017 2018

Early adoption permitted prior to the effective date Effective for periods beginning on/after 1 January 2018

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IFRS 15 Revenue from contracts with customers

Why think about this now?

Responsiveness to stakeholder questions

Be prepared

Revise budgets/ forecasts for decision making

Identify potential unfavourable results

Manage the unknown

Don’t get left behind

Be involved in development of industry practice

Harmonisation of group policies

Changes to IT systems or programs

Identify commercial opportunities

Modify service or product offerings

Consider comparability to peers

Determine implementation time, effort, cost

Changes to KPIs, bonus schemes

Sufficient time to respond

Modify contract terms

Evaluate current practices

Improved data collection/ monitoring

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New leasing standard

Topic

IASB (now diverged from FASB)

Lessee accounting model

■ Single lease accounting model (i.e. all leases are financing-type leases) ■ All leases on balance sheet: – lessee would recognise a right-of-use (ROU) asset and lease liability – treated as the purchase of an asset on a financed basis

Scope exemptions

■ Optional lessee exemption for short-term leases – i.e. leases for which the lease term as determined under the revised proposals is 12 months or less ■ Portfolio-level accounting permitted if it does not differ materially from applying the requirements to individual leases ■ Optional lessee exemption for small-ticket leases – even if material in aggregate

Project added to Boards’ agendas

Discussion Paper Issued

First Exposure Draft Issued

Second Exposure Draft Issued

Permission to Ballot

Earliest likely effective date

Final standard expected

? July 2006

March 2009

August 2010

May 2013

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March 2015

Q4 2015/Q1 2016

? January 2018

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Leases project update

This time around, changes to lease accounting are really on the way.

The new standard is likely to impact your ■ Timing of P&L expense – front loaded interest expense ■ EBITDA – will increase – lease cost now split into interest and amortisation ■ Credit rating – will the agencies use the new liability in their calculation? ■ Net debt – lease liability to be included ■ Interest cover – ratios will be impacted ■ Net assets – the lease asset and liability will not equal each other after day 1, may be a net asset or liability position depending where a lease is in its lifecycle ■ Bank covenants

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Agenda New UK GAAP

Companies Act

IFRS

Disclosure of related undertakings ■ Removal of exemption to disclose only principal ‘related undertakings’ ■ Disclosure required of all ‘related undertakings’ in accounts approved after July 2015 ■ ‘Related undertakings’ include – Subsidiaries – Significant holdings (greater than 20% interest) – Associated undertakings

– Joint ventures

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Applies to all who adopt the Combined Code

Viability statement – Overview Risk management and internal control

Key questions

A new long term viability statement

■ What period to chose? (the Guidance says it should be significantly longer than 12 months (but the longer the period the lower degree of certainty)

C.2.2. Taking account of the company’s current position and principal risks, the directors should explain in the annual report how they have assessed the prospects of the company, over what period they have done so and why they consider that period to be appropriate. The directors should state whether they have a reasonable expectation that the company will be able to continue in operation and meet its liabilities as they fall due over the period of their assessment, drawing attention to any qualifications or assumptions as necessary.

■ The period chosen should be significantly longer than 12 months

■ What are your comparators doing? ■ Are your business plans (budgets and forecasts) sufficient to support the statement? ■ Are process changes required?

■ Qualifications should be specific to the company’s circumstances

■ Do you have sufficient assurance over the budget and forecast processes?

■ Qualifications/assumptions should not include matters that are unlikely to arise or have a significant impact

■ Is your IAS1’information about the future’ sufficient? ■ Stress testing and sensitivity analysis – is it fit for purpose?

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Viability statement – General trends ■ Very few companies have early adopted – only six or seven! ■ Period selected for the viability statement likely to reflect one of existing forecast horizons ■ If multiple planning horizons (say 2.5 and 20 years) – consider appropriate balance of longer term outlook and a ‘reasonable expectation’ over something that is inherently uncertain. ■ It’s about what will ‘break’ the company – not about hitting growth targets or maintain earnings profile etc. ■ According to FRC and investor community, getting the risk management piece right and articulating the process by which the prospects of the company are assessed is the most important bit!

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Changing Landscape: Employment Taxes

November 2015

kpmg.co.uk

INTRODUCTION •

• • • • •

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Employment tax is currently a principal area of focus for HMRC. HMRC have committed to reduce an estimated tax gap of just under £4 billion. Greater focus on process and controls and how these are managed A team of ‘Employer Compliance Champions’ have recently been recruited by HMRC HMRC meetings now occurring Forming part of a wider agenda Within this environment, there is a challenge for employers to ensure that they are managing compliance against strategic decisions

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AREAS OF FOCUS  A ‘top-dow n’ approach to assessing Employment Tax governance – building on HM RC’s approach to Business Risk Review s and SAO Certification

 Focus on ability to go w rong rather than quantum initially  Discussion are extensive and w ide-ranging in their scope, typically covering the follow ing areas:

BUSINESS’ REWARD STRUCTURE

COMPOSITION OF THE WORKFORCE

LOCATION OF THE WORKFORCE

EMPLOYMENT TAX GOVERNANCE AND DOCUMENTATION

 Salary and bonus

 Directors

 UK-based, domestic

 Risk registers

 Pensions & Auto

 Senior employees

employees  Site-based w orkers  International assignees (UK-inbound and UKoutbound)  Business Travellers

 Policy documents

   

Enrolment Shares EBTs Salary sacrifice arrangements National M inimum Wage/Living Wage

 Other full-time and

part-time staff  Contractors and freelancers

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 Scheme rules  Process maps  Payroll parameters  Application of process

WHO DOES WHAT? WHERE, WHEN AND HOW?  Establishing an

understanding of the processes and systems to ensure effective oversight of all areas of Employment Tax risk

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CHANGING LANDSCAPE Finance, HR and Rew ard directors face an increasingly challenging people agenda as they deal w ith: ● Increased regulatory activity from HM RC and the Pensions Regulator ● Evolving case law , legislation & consultation around pay and operational tax issues ● M anaging costs of employment, statutory minimum pay rate increases and the impact of case law ● Attracting talent w hilst securing the most cost effective labour supply chain ● Evolving changes and numerous consultations

Confirmed ● IR35 Officeholder guidance ● Removal of employer Class 1 NIC for employees under 21 ● Onshore intermediaries legislation ● Abolition of forms P9D & P11D reporting dispensation ● Voluntary payrolling of benefits ● Removal of salary sacrifice for expenses ● Introduction of NLW for over 25s ● Employer NIC exemption for apprentices aged under 25 ● New 490 booklet on employee travel ● Scottish rate of income tax

Pending ● Trivial benefits exemption ● CIS online improvements ● Restriction on T & S relief for intermediary companies ● PSA changes ● Childcare vouchers to be abolished ● Pension auto-enrolment minimum employer contribution 3%

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Ongoing ● CIS review ● OTS competitiveness of UK tax administration ● Information on remuneration practises ● Review of travel and subsistence rules ● OTS recommendations submitted for accommodation benefit and termination payments ● Employment status review ● Holiday pay ● Apprenticeship levy

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QUESTIONS TO CONSIDER

“

Has HM RC contacted your business to arrange a risk review meeting?

“ “

?

Who is responsible for each of these areas?

?

? “

To w hat extent do you have documentation in place supporting your business’ employment tax strategy and governance?

© 2015 KPM G LLP, a UK limited liability partnership and a member firm of the KPM G network of independent member firms affiliated with KPM G International Cooperative (“ KPM G International” ), a Swiss entity. All rights reserved.

“

Are you aware of changes coming in and how these may impact your business?

“

What does ‘auditreadiness’ look like for your business?

How do you monitor and maintain the accuracy of your business’ PAYE/NIC payments and returns?

?

?

?

Which parts of your business make decisions affecting employment tax compliance and reporting?

?

“

Has employment tax guidance or training been given to key decisionmakers involved in each process?

?

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KEY MESSAGE KEY TAX CONSIDERATIONS  Rapidly changing landscape  Set against a backdrop of w ider people based

change  Change in HM RC approach means employers

need to consider process and controls not just reporting obligations  Wider than finance and HR, the w hole

business may need to be considered  Best tact is considered planning and review

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CONTACT DETAILS

Patrick Crookes Patrick Crookes

OUR TEAM

Manager, People Manager, Services People andServices Payroll and Payroll Advisory Advisory E: [email protected] E: [email protected] Kathryn Jackson T: 0161 246 T: 4853 0161 246 4853 Business Development Manager, People Services and Payroll Advisory Patrick Crookes Kelly Edwards-Hughes

E: [email protected]

Manager, People Assistant Services Manager, and Payroll People Services T: 0161 and 246 4389 Advisory Payroll Advisory E: [email protected] E: [email protected] T: 0161 246 T: 4853 0113 231 3615

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FEEL FREE A NEW APPROACH TO CYBER SECURITY

Sion Lloyd-Jones Cyber Security

AGENDA

THE changing landscape

THE EMERGING THREATS THE Response

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HOW BIG IS THE PROBLEM

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CYBER FIRMLY ON THE AGENDA

2013

2011 1

LOSS OFCUSTOMERS/CANCELLED ORDERS

HIGH TAXATION

1

2

TALENT AND SKILLS SHORTAGE

LOSS OFCUSTOMERS/CANCELLED ORDERS

2

3

REPUTATIONALRISK

4

CURRENCY FLUCTUATION

PRICEOFMATERIALINPUTS

4

5

CHANGINGLEGISLATION

EXCESSIVELY STRICT REGULATION

5

6

COST AND AVAILABILITY OFCREDIT

CHANGINGLEGISLATION

6

7

PRICEOFMATERIALINPUTS

INFLATION

7

8

INFLATION

COST AND AVAILABILITY OFCREDIT

8

9

CORPORATELIABILITY

RAPID TECHNOLOGICALCHANGES

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10

EXCESSIVELY STRICT REGULATION

INTEREST RATECHANGES

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CYBER RISK 3

Source: Lloyd’s board risk index – http://w w w .lloyds.com/new s-and-insight/risk-insight/lloyds-risk-index

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CHANGING LANDSCAPE

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EVOLVING THREAT

HACKTIVISM

MALICIOUS INSIDER

THREAT ACTORS

ORGANISED CRIME

STATE-SPONSORED

THE INSIDER

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WHO IS BEING TARGETED?

AUTOMOTIVE

AEROSPACE

ENERGY PROVIDERS

BANKS

PROFESSIONAL& LEGAL SERVICES

DEFENCE

ADVANCED MANUFACTURING

RENEWABLE ENERGY

BUILDINGSOCIETIES

RESEARCH INSTITUTES

PHARMACEUTICALS& BIOTECHNOLOGY

MINING& NATURALRESOURCES

COMMUNICATIONS

WIDERFINANCIALSERVICES

ACADEMIA

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WHAT DO THEY WANT

CUSTOMER / EMPLOYEE DATA CORPORATE DATA

INTELLECTUAL PROPERTY

DENIAL OF SERVICE

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…AND MORE REGULATION

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PROPORTIONATE RESPONSE

UNDERSTAND YOUR ASSETS

MANAGE THE RISK

UNDERSTAND THE THREAT

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FUTURE TRENDS

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THE RIGHT APPROACH

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KEY QUESTIONS

1 2 3

Do you have the right level of protection for your crown jewel assets?

4

How are you managing your suppliers to ensure they are not a weak point in your security?

5

How do your cyber security capabilities compare to your peers?

What would the impact be on your business if you suffered a cyber security breach? How do you know you haven’t already suffered one?

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Recap THE LANDSCAPE IS CHANGING THE THREATS ARE REAL PROPORTIONATE RESPONSE NECESSARY

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THANK YOU! Sion Lloyd-Jones Cyber Security team

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Thank you

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