Co-operativesUK Accountants’ Forum 2010. 2010 update Nicola Quayle.

Co-operativesUKAccountants’ Forum 2010

2010 update

Nicola Quayle

© 2010 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.

3

What is worrying people in 2010?

Refinancings

Carbon Reduction

Commitment

Bribery and corruption

act

What? Why? When?

iXBRL


4

Refinancing graph

Maturing investment grade loans in EMEA

Source: Thomson Reuters LPC/DealScan


5

Our advice

Recognise there are less banks around!

Remaining banks are tight on liquidity

Go early – it takes longer

Robust model

Run sensitivities

Explain your business – 3 years historical / 3 year future

Expect more diligence

Work on new multiples

Covenants will be tighter

Treat bankers with respect!

Don’t be last in the queue!


6

iXBRL – What, Why, When

WHY?

HMRC will be able to electronically review accounts and automatically identify inconsistencies and inaccuracies through ratio analysis and electronic profiling. It will also facilitate the identification and closure of tax loopholes

The process will give HMRC paperless storage providing quick and easy access to significant volumes of information.

XBRL has already been adopted by regulatory bodies in the US, Japan, Australia, Belgium and the Netherlands


7

iXBRL – What, Why, When

WHEN?

All corporate tax returns filed after 31 March 2011 must be in iXBRL format along with supporting computations and accounts

All companies which are required to submit a tax return must comply


8

How does this affect my business?

COST

The move to electronic submission passes the cost of preparing the data to the tax payer

ONEROUS

In the majority of cases the only place where all of the required data is maintained in one place is the statutory accounts. These are typically in Word or Excel formats which do not facilitate direct conversion to iXBRL

The process of converting statutory accounts to iXBRL is onerous and manually intensive

NO EXEMPTIONS

The requirements apply to all companies which file a tax return regardless of size. There are no exemptions from the rule

LOOKING FORWARD

As disclosure requirements change, so does the format of statutory accounts

Technical update


10

IASB work programme until 2011

Discussion Paper

Exposure Draft

Final Standard

Guidance

Roundtable

* Indicates Practice Statement

FSP - Disc Ops

Liabilities

Annual Improv. IV

CF Phase B

CF Phase C

2010 Q4 2011 Q1

Hedging

FSP – IAS 1 and IAS 7

Leases

Consolidation disclosures

Joint Ventures

Leases

Consolidation

Mgmt Commentary*

FI w/equity

Revenue Recognition

Insurance

Annual Improv. IV

Narrow Scope Income Taxes

CF Phase C

CF Phase A

2011 Q2+

Emission Trading

InsuranceConsolidation

(Invest Co)

FI Asset & Liab Offsetting

FI Impairment

FI Hedge Accounting

FI C&M Liabilities

Consolidation (Invest Co)

FI Asset & Liab Offsetting

Revenue Recognition

CF Phase DFair Value

Measurement

FSP – Presentation of OCI

FSP - Disc Ops

FSP – IAS 1 and IAS 7

FI w/equity

Narrow Scope Income Taxes

Termination Benefits

Extractive Activities

Defined Benefit Plans


11

What’s driving this frantic pace?

Responding to financial crisis/G20

FASB-IASB MoU

SEC workplan leaves little room to manoeuvre

Chair and 5 other IASB members retire by June 2011

End of the 10-year Tweedie era

IASB actively recruiting

Practical implications

Push to publish by June 2011

Reconsideration of other projects in progress

Change in tone/priorities?

The future of UK GAAP


13

The end of UK GAAP


14

Exposure Draft – Future of financial reporting

Proposals for a three tier framework

Includes two draft FRSs:

Application of Financial Reporting Requirements

Financial Reporting Standard for Medium Sized Entities

Includes explanation of proposals, impact assessment and two new standards

Comment deadline is 30 April 2011

Effective for accounting periods beginning on or after 1 July 2013

Early adoption permitted


15

Proposed regime

Tier Accounting regime

Type of entity Example

Tier 1 EU-IFRS* EU-listed entities

AIM entities

Other publicly accountable entities

Parent company in a listed group

Tier 2 FRSME* Large and medium non-publicly accountable entities

Small publicly accountable entities that are prudentially regulated

Subsidiaries in a listed group (not publicly accountable)

Tier 3 FRSSE Small non-publicly accountable entities

Small private companies

*Certain disclosure exemptions proposed for non-publicly accountable subsidiaries


16

Key differences between IFRS for SMEs and the proposed FRSME

Conflicts with legal requirements

Consolidation

Income tax

Disclosures

Dormant companies


17

The real impact

Selected GAAP differences

Current UK GAAP Proposed FRSME EU-IFRS

Goodwill Amortised over rebuttable max life of 20 years

Intangibles generally subsumed within goodwill

Presumed life of 5 years or less unless goodwill has a longer UEL

Intangibles recognised separately

No amortisation; annual impairment test

Intangibles recognised separately

Derivatives Generally off balance sheet (non-FRS 26)

On balance sheet On balance sheet

Net investment hedging

SSAP 20 cover concept in individual accounts - can hedge with loans

On consolidation only – cannot hedge with loans unless IAS 39 fully applied

On consolidation only

Functional currency Level of autonomy not considered in determining functional currency

Determination of functional currency – consider if subsidiary is autonomous

Determination of functional currency – consider if subsidiary is autonomous

Deferred tax Timing difference basis Permanent differences

Temporary difference basis Initial recognition exemption applies

Temporary difference basis Initial recognition exemption applies

Borrowing costs May capitalise Must expense Must capitalise when criteria met

Development costs May capitalise Must expense Must capitalise when criteria met

Group defined benefit plans

Can all be off balance sheet (individual accounts)

Treatment unclear Must be in at least one individual company balance sheet


18

How will it affect you in practice?

Area Potential impact

Distributable profits Change in accounting policies may create dividend traps

Systems and internal control environment

Systems will need to be updated to calculate EU-IFRS/FRSME compliant data


19

How will it affect you in practice?

Area Potential impact

Training and resource Accounting staff will be required to be trained in EU-IFRS and/or the FRSME

Additional time will be required to effect the changes

Financial covenants Impact on interest cover ratios and other KPIs

Bonus scheme Potential implications for performance-related remuneration schemes


20

Will it affect the tax I pay?

Will not affect cash tax

Research and development

Pensions

Share-based payments

Assets taxed under capital gains

Borrowing costs whether expensed or capitalised in fixed assets

Will affect cash tax

Tax deductible goodwill – unless 4% election is made

Financial instruments – unless the disregard regulations apply

Some tax planning – UK to UK financing ideas that rely on specific accounting treatments

Rent free periods/upward only rent reviews

IASB Exposure DraftsLeases and Revenue


22

Leasing


23

Exposure Draft LeasesThe “right-of-use” model

Lessor Lessee

Recognise “right-of-use”

asset

Recognise liability to pay

rentals

Right to use leased asset

Consideration(lease rentals)

Performance obligation approach

Derecognition approach

Underlying asset Right-of-use asset


24

Key impacts

Leases “on balance sheet”

Increases in assets and liabilities

Impact on key ratios and covenants

Impact on income statement

Front-loading of expenses vs. increase in EBITDA


25

Example income statement impact

Company has an office lease that is 15 years with a tenant-only break clause at 10 years:

Rent £50,000 p.a.

No Retail Price Index reviews

6% discount factor


26

Key impacts

Leases “on balance sheet”

Increases in assets and liabilities

Impact on key ratios and covenants

Impact on income statement

Front-loading of expenses vs. increase in EBITA

New liability measurement basis

Reassessment → volatility

Likely effective date 2013 – 2014?


27

Initial measurement – lease liability

Lease liability

PV of lease paymentsIncludes expectations

aboutPurchase options

Lease termContingent

rentalsRV guarantees Term option penalties

Discount rate


28

What is the lease term?

Lessee has entered into a non-cancellable lease contract with Lessor to lease a building. The lease term is 4 years, and Lessee has the option to extend the lease either by another 2 years or by another 4 years

At inception of the lease, Lessee’s expectations about exercising the option to extend the lease term are as follows:

Lease term of 4 years i.e. option to extend not exercised: 40%

Exercise of option to extend by 2 years: 30%

Exercise of option to extend by 4 years: 30%

What lease term should be used to calculate the present value of the obligation to make lease payments?


29

Initial measurement – lease liability

Lease liability

PV of lease paymentsIncludes expectations

aboutPurchase options

Lease termContingent

rentalsRV guarantees Term option penalties

Discount rate


30

Discount rate

The rate of interest that, at the date of inception of the lease, the lessee would have to pay to borrow over a

similar term, and with a similar security, the funds necessary to

purchase a similar underlying asset.

Lessee’s incremental borrowing rate Rate the lessor charges the lessee

A discount rate that takes into account the nature of the

transaction as well as the specific terms of the lease such as

lease payments, lease term and contingent rentals

OR if readily

determinable


31

Initial measurement – right-of-use asset

Right of Use Asset = Initial lease liability + initial direct costs

Initial direct costs

Commissions

Legal fees

Costs in respect of evaluating and recording guarantees, collateral and other security arrangements

Costs associated with negotiating lease terms

Costs of preparing and processing lease documents

Costs of closing the transaction

Other costs that are incremental and directly attributable to negotiating and arranging the lease

General overheads

Advertising costs

Costs associated with soliciting potential leases

Costs of servicing existing leases

Costs related to other ancillary activities


32

Subsequent measurement

Lease liability

Amortised cost using the effective interest method

Re-assess lease payments if facts and circumstances indicate a significant change to amount of lease liability

Generally, do not revise discount rate used at initial recognition

Accounting for reassessment of liability

P&L, if relates to current period

Otherwise generally adjust ‘right-of-use’ asset

Right-of-use asset

Amortise over lease term (or underlying asset life if shorter)

Impairment test in accordance with IAS 36 Impairment of Assets


33

Lessor Accounting: Sub-leasing

Company has entered into sub-lease agreements for unutilised property space in the UK

Accounting for head lease

Dr ‘right of use’ asset

Cr lease liability (for future lease payments)

Accounting for sub-lease

Dr lease asset (lease payment receivable)

Cr lease liability for obligation to deliver use of asset (performance obligation approach)

or Cr lessee ‘right of use’ asset (de-recognition approach)


34

Exposure Draft Revenue from contracts with customers The Proposed Model

Step 2: Identify the separate

performance obligations in the contract

Performance obligation 1

Performance obligation 2

Step 4: Allocate the transaction price to the separate

performance obligations

Transaction price allocated to performance

obligation 1

Transaction price allocated to performance

obligation 2

Step 5: Recognise revenue as

each performance obligation is

satisfied

Recognise revenue

Recognise revenue

Step 1: Identify the

contract

Step 3: Determine the

transaction price

Contract Transaction price for the contract


35

Step 2: Identify the separate performance obligations in the contract

A promised good or service is distinct from others if

the entity or another entity sells an identical or similar good or service separately; or

the entity could sell the good or service separately, because it has

a distinct function; and

a distinct margin.

Is promised good or service distinct from other goods or services in the contract ?

Separate performance obligations

Yes No

Combine good or service with other goods or services


36

Step 5: Recognise revenue when a performance obligation is satisfied

A performance obligation is satisfied when the customer obtains control of a good or service. Control is transferred to the customer when:

Control also includes the ability to prevent other parties from directing the use of and receiving the benefit from the asset

and

The customer has the ability to receive the benefit from the asset

i.e. the present right to obtain substantially all of the potential cash flows from that asset (either cash inflow or reduction in cash outflow) through use, sale, exchange, etc.

The customer has the ability to direct the use of the asset

i.e. the present right to:

use the asset for its remaining economic life; or

to consume the asset in the customer’s activities


37

The customer has legal title

The customer has an unconditional

obligation to pay

The customer has physical possession

The design or function is customer-specific

Indicators that the customer has obtained

control of a good or service

Step 5: Recognise revenue – indicators that control is transferred

No single factor in isolation is decisive.


38

Specific application issues

Sale of product with a right of return

Product warranties

Customer incentives

Licensing and right of use

Bill-and-hold arrangements

Consignment arrangements


39

Key changes and their impact

Key change

Segmentation of contracts into performance obligations

Revenue recognition based on transfer of control

Withdrawal of percentage of completion method

Measure revenue using probability weighted outcome approach

Implication

May accelerate or defer revenue

Requires judgement. May accelerate or defer revenue

Deferral of revenue if control not passed continuously to customer

More judgement and estimates required

Reduction in revenue

May accelerate or defer revenue

The UK Bribery Act 2010

Louise Thompson


The UK Bribery Act – a brief overview

• UK Bribery Act 2010

• Consequences of violation

• The usual suspects and red flags

• Managing the risk

• Questions


Amec to pay out after SFO action

Mabey and Johnson agrees corruption plea bargain with Serious Fraud Office

Daimler charged for bribery

Innospec's $40 million global settlement

BAE pays out

£300million

Recent Enforcement Actions


UK Bribery Act 2010 - objective

"to provide a modern, single piece of legislation criminalising bribery, allowing the police,

prosecutors and the courts to tackle bribery effectively whether committed at home or abroad”.

Enacted on 8 April 2010 and Received Royal Assent – scheduled to be in force April 2011.


Replaces existing common law offence of bribery; creates new offences covering:

The offer, promise, and giving of an advantage

The request, agreeing to receive, or acceptance of an advantage

Public and private organisations

Creates a new “corporate offence” for failure of a commercial organisation to prevent bribery

Means an organisation would be criminally liable for bribery committed in connection with its business by those working for it or on its behalf

Penalties could include:

Unlimited fines and/or maximum of 10 years imprisonment

Immediate disqualification from any public sector work within the European Union

Defence provided if “adequate procedures” are in place

Ministry of Justice expected to issue guidance – however this will be “non-prescriptive” as a compliance framework model is not “one size fits all”

The Bribery Act received Royal Assent on 8 April 2010

Due to come in force April 2011

UK Bribery ActDraft - For Discussion and

Demonstrative Purposes Only


Consequences of Violation

Consequences of Violations

Investigations

Penalties

- Fines

- Jail terms

- Disgorgement of profits

- Independent Monitorships

Other significant costs

- Reputational loss

- Debarment

- Extradition, prosecution, and imprisonment

- Reduction of shareholder value


The “Usual” Suspects

Some of the usual suspects – things to watch out for…

- Commissions

- Gifts & entertainment

- Discounts, rebates, refunds and returns

- Travel and expenses

- Charitable and political contributions

- Fictitious employees, vendors or customers

- Any other method to conceal a kickback, embezzlement, fraudulent financial reporting or steering business


What are the Red Flags?

An industry with a history of violations

A poor business reputation

A country with greater propensity for corruption, bribes and kickbacks

Inadequate third party due diligence

Unusual bonuses, advances and / or special payments

Unusual payment terms

Inflated or inaccurate invoices

Extensive M&A activity

Joint ventures with government officials / parties

Parties refuse to agree to comply with policies & laws

Refusal to divulge identities of owners

Unusually high commissions paid versus the market (or

versus the contracts)Government customers and/or heavy reliance on governmentContracts lacking economic sense


What We Sometimes See…


“Red Flags mean stop…….not slalom around!”

Richard Alderman, SFO Director


An Effective Compliance Programme

Investigation

De te

c t io

n

Prevention

Re

sp

on

se

Enforcement

Measures for addressing

compliance breaches, including

sanctions, disciplinary etc

Monitoring & Auditing

In -house and third party reviews

monitoring for compliance using

data analytics and interviews

Channels for raising issues

and concerns

A confidential mechanism for

reporting unethical behaviour

Education & Training

Governance

KPMG Compliance Framework

Prevention

Response PlanMeasures for addressing compliance breaches including

sanctions and disciplinary actions

Monitoring for ComplianceIn-house and third party reviews monitoring for compliance using data analytics and interviews

Channels for raising Issues and Concerns

A confidential mechanism for reporting unethical behaviour

Risk Assessment

Risk profiling operations using input from policies, procedures, interviews and other sources

Policies and Procedures

Governance

Comprehensive A-B&C policies and procedures developed under direction of Legal and Compliance

Education & Training

Training and Education

Setting the direction in appropriate training; then tracking

Investigation Strategy

Response

Det

ectio

nTimely and appropriate response to investigate non-compliance

The role of the accountant in carbon

accounting

Ben Wielgus


Why is KPMG talking to me about carbon accounting?


Why are stakeholders concerned about carbon accounting?

New and evolving

May not have been audited

before

Don’t know what to expect

May know there are some issues

May be reliant on others’ data

May have this in their goals

Skills may not exist

Requires

cooperation

Data systems may not be

ready


Carbon footprint – Simple isn’t it?

No...

not reallyMethodology

Boundaries

Verification

Accuracy

Completeness

Relevance

Conversion

factors

Audit trail

Skillset


Who’s involved in the carbon accounting?

and others…

Carbon

accounting

Estates

Energy Legal

Finance

Procurement

BoardMarketing


Why might this be an issue for the Board?

• Cost?

• Cash flow?

• Reputation?

• Risk?

• Opportunity?

• License to operate?

• Penalties ….or prison?


Carbon Reduction Commitment (CRC) Scheme

Energy bills more than 6000MWh/pa = £1m pa in 2008

4000 UK organisations are full participants

Originally designed to be a cap and trade scheme

Originally designed to be revenue neutral- Now it functions as a retrospective levy on emissions

League tables on performance

April 2010 was the first month of measurement

Expense impact starts in April 2011

Annual evidence packs to regulators

20% of participants a year will be audited


CRC: The first 3 years (Phase 1)

For Phase 1

Sept

2010

Registration period

April

2010

April

2011

April

2012

April

2013

For Phase 2

Sept

2011

July

2011

July

2012

July

2013

Oct

2013

Oct

2012

Oct

2011

Energy use monitoring period

Purchase of allowances

Submission of evidence packs

League tables published


How much is the CRC going to add to costs?

£2million pa on electricity and gas = 15k tonnes carbon pa

Assumes an escalating carbon price of £2 / tonne pa

Year 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16

Outlay in April

£0

% of energy bills

0%

Minimum fine at 5% misstatement

= £30,000

£180k £180k £210k £240k £270k

Note this simplifies the impact and ignores fees and change in price of energy.

Possible Fines

Note: Numbers are illustrative only

9% 9% 11% 12% 14%


How do I account for CRC or other carbon allowances?

IASB IFRIC 3 was withdrawn 5 years ago

There is no other standard

Allowances are likely to be an intangible asset

CRC appears likely to be a levy, not a tax

- Therefore we suggest, in most cases, it is OpEx linked to energy

Other carbon offsets etc are entirely voluntary

- Therefore we suggest, in most cases, they are also OpEx

There is a need to accrue for the CRC liability during the year


Financial implications of carbon pricing

Footprinting

Forecasting for budgets

Cash flow and accounting

Modelling

Investment appraisal

Trading….?


CRC Readiness Reviews – Cause of data errors

Boundaries

3rd party data

Availability

Conversion factors

Technology

Estimates/restatements

Human error/typos

Primarily come from findings relating to recording/reporting issues. These can be broken down by cause:


What questions are we asking our clients?

Could finance, estates and energy teams talk more?

Should someone be checking carbon numbers?

Does the strategy consider carbon?

Are your systems ready to report for the CRC?

Do investment decisions factor in a cost of carbon?

What do you need to do to manage these risks and turn them into opportunities for your organisation?

Any questions?

You can read more about KPMG’s Carbon Advisory Group, including our guidance on various issues at:

www.kpmgcarbonadvisory.com

You can read more about KPMG’s Environmental Tax Group, including our free ETHiC tool at:

www.kpmg.co.uk/services/t/etig/index.cfm

Ben Wielgus

Climate Change and Sustainability Advisor

[email protected]

+44 7881 917 557

http://www.kpmg.co.uk/services/t/etig/index.cfm

mailto:[email protected]

Co-operativesUK Accountants’ Forum 2010. 2010 update Nicola Quayle.

Documents

Transcript of Co-operativesUK Accountants’ Forum 2010. 2010 update Nicola Quayle.