We are in the middle of an unprecedented health emergency. In recent weeks, many of us have had loved ones, friends and acquaintances suffer illness, hospitalisation or worse. It is an extremely difficult time for many. We must hope that the actions of businesses and the general public in following the official safety guidelines, combined with the herculean efforts of healthcare workers, will effectively curtail the spread of COVID-19 and a more normal life can resume sooner rather than later. After safety, our key priority has been to ensure that we maintain the highest level of service possible for members and students during the health crisis. In terms of our staff, the collaboration across the board to bring all of our processes into a new way of working has been rapid. For members, we have provided a vast range of insights, services and supports – from CA Support to Practice Consulting and Professional Standards supports – to individual members and firms through a busy schedule of webinars. The COVID-19 Hub also provides a one-stop-shop for members seeking information and guidance. We are providing our members with the best information, skills, and guidance that we can. For students, we have moved quickly to accelerate the changes that were already planned. Our e-assessment pilot interim exam has now concluded and sets us up well for the next development phase, to cover main exams later this year. On the delivery side, we see great innovation as we move online, supporting digital enrolment and changing how we support training organisations. We exist to serve our members and students, and Chartered Accountants Ireland is a mirror of the profession. Our member firms, members, their clients, and students are under severe pressure and are experiencing some very challenging circumstances. The crisis will also undoubtedly have some longer-term economic effects, and the expertise of our members will be vital in helping business and broader society overcome these challenges. Over the past weeks, the Institute has moved quickly to step-up service to our members in their time of need, and our staff have responded rapidly to adapt to new ways of working. I know that our Institute will come through this crisis as a stronger, smarter organisation. As an Institute and as a profession, we are all in this together. Our Officers, our volunteers, and our staff right across the island of Ireland and beyond may be required to work from home, but they continue to work hard to support members in their professional lives. We know that the skills of our members will be needed more than ever throughout the crisis and in the period of rebuilding ahead. We pledge to do all that we can to continue to effectively support our members, member firms, and students to make that vital contribution. Barry Dempsey Chief Executive

Jun 02, 2020

Given the world’s fragmented approach to the COVID-19 crisis, Dr Brian Keegan considers the potential for lasting suspicion of international standards of all sorts – not least accounting. There is a theory that suggests that 150 is the maximum number of people with whom any one individual can meaningfully interact. This number, known as Dunbar’s number after the anthropologist who came up with the idea, feeds into a myriad of management texts. Working in Chartered Accountants Ireland, whose staff complement is close to 150, Dunbar’s idea feels right. There is a sense of community and shared purpose here which, if anything, has been highlighted by the coronavirus crisis. But just as there may be a ‘best’ maximum number of staff in an organisation or business division, is there a maximum population beyond which meaningful government responses to crises cannot be developed? Big is not always best The varying coronavirus experiences and responses of countries right across the world suggest that big may not be best unless the government is of a totalitarian hue, as in China. It is surely no coincidence that the most populous countries in Europe – Spain, Italy, France, and the UK – have suffered some of the worst impacts of coronavirus per head of population. Germany, of course, is somewhat of an outlier; but then again, when is it not? The challenges of scale seem even more pronounced beyond national borders. Where the power of local or national government is subordinated to international organisations – or international treaties or federal systems, as in the case of the EU and the federal government in the US – official responses seem either inappropriate or inadequate. A fragmented response The EU’s approach to tackling the pandemic has been, to put it charitably, fragmented. The EU does not have a core role in health matters, but it does when it comes to financial supports. The Commission seemed slow out of the blocks in its initial response. Countries that usually see eye-to-eye on fiscal issues, such as Ireland and the Netherlands, found themselves at odds with each other over the issue of eurobonds to support bailouts for individual member nations. The G7 group of the world’s wealthiest nations couldn’t even come up with a joint declaration on the pandemic in March, apparently because the US Secretary of State, Mike Pompeo, insisted on referring to the disease as the “Wuhan virus”. The US also very publicly pulled its support for the World Health Organisation (WHO), but perhaps more insidious than that were the suggestions that its Ethiopian chief executive was unduly influenced by Chinese investment in his home country. The seemingly unstoppable momentum for international corporation tax reform sponsored by the OECD has waned, with crucial decisions adjourned sine die by governments with more pressing matters on their agendas. A newfound suspicion If the authority of major agencies like the EU Commission, the OECD, the WHO and the G7 is being diluted, undermined or plain ignored as governments attempt to tackle the pandemic, it seems that global approaches aren’t entirely cutting it. An international reach used to be enough for these agencies to assert their authority, but not anymore. That is not great news for a profession like accountancy, which prides itself on its global approach. One lasting legacy of the pandemic could be a suspicion of, and resistance to, efforts to establish international standards of all descriptions, accounting among them. Who will be trusted by governments to set and maintain the standards in accounting if countries can’t even agree on who should set the standards on issues like healthcare? A new Dunbar’s number is becoming apparent for the number of countries that can act together in any kind of meaningful way when dealing with a crisis. That number is not higher than one.   Dr Brian Keegan is Director, Advocacy & Voice, at Chartered Accountants Ireland.

Jun 02, 2020

There are several signs that the EU may be splintering at the edges, writes Cormac Lucey. One of our weaknesses as a species is our self-regard. Sitting at the top of the evolutionary tree, we are in danger of overlooking some fundamental weaknesses. One is the conceit that we make critical decisions based on our thoughts when there is considerable evidence that feelings heavily influence our decision-making. A prime example of feelings misleading decision-making occurred in the Irish property market in the years 2006 and 2007. In a Davy research note published in March 2006, Rossa White (then the stockbroker’s chief economist, now occupying that position with the National Treasury Management Agency) issued a warning in the note’s title “Dublin house prices headed for 100 times rent earned”. He cautioned investors that “the fundamentals suggest that it will be an adjustment in prices – rather than rents – that will eventually bring valuations down to more realistic levels”. The problem was that investors had extremely positive feelings about property as an investment class resulting from its extremely strong performance in the preceding decade and a half. Feelings trumped thought. Thousands got caught in the resulting carnage. There is a danger that similar forces may blindside us to weaknesses developing within the European Union (EU) today. When we look back, we see a relatively strong and united body. From an Irish perspective, we associate the dramatic rise in our prosperity in recent decades with our EU membership (much more than with our turbo-charged foreign direct investment sector). But there are several signs that the EU may be splintering at the edges. Faultline one… There have been recent calls from the Élysée Palace for the EU to issue jointly guaranteed bonds (debt securities) to help those member states worst afflicted by COVID-19. The alternative, according to the French president, is to risk the collapse of the EU as “a political project”. What you may not be aware of is that in 2019, before any of us had heard of the virus, France and Italy already had the second and third largest budget deficits in the EU. Having maxed-out their own national credit cards, they now want to use the hard-won creditworthiness of others to borrow more. Faultline two… The differing borrowing capacity of various EU member states has resulted in widely varying budgetary responses to the pandemic. Germany, which went into the crisis with relatively healthy public finances, plans to spend more than 6% of GDP to boost its economy, before considering the effect of loans and guarantees. Italy, by contrast, entered 2020 with a weak fiscal position and can afford an immediate fiscal impulse of less than 1% of GDP, even though it has been hit much harder by the pandemic than Germany. France is similarly constrained. We can look forward to more wailing from the Élysée Palace. Faultline three… The actions of the European Central Bank (ECB) are increasingly running up against political and legal constraints. The German Federal Constitutional Court recently ruled that the ECB had exceeded its legal mandate and “manifestly” breached the principle of proportionality with bond purchases made under previous quantitative easing programmes. How might it rule on the ECB’s current programme, which has been deliberately disproportionate to reduce financial strains in Italy? A related problem concerns the ECB’s Target 2 balances. They are a key measure of financial market strains within the euro area. They record how much a national central bank is borrowing from the ECB to lend to domestic commercial banks that are suffering deposit withdrawals. For years, Italy and Spain have been borrowers while Germany has been on the opposite side of the equation, helping to fund the ECB. In March, the Italian central bank’s borrowing jumped by over €100 billion to €492 billion, while the amount the Germans lent into the system rose by more than €100 billion to €935 billion. As the US economist Herb Stein quipped, “if something cannot go on forever, it will stop”. We just do not know when. Cormac Lucey FCA is an economic commentator and lecturer at Chartered Accountants Ireland.

Jun 02, 2020

Annette Hughes outlines the four consumer behaviour trends that have emerged from the COVID-19 pandemic. The COVID-19 crisis is being defined by four distinct consumer behaviour responses, according to the first edition of the EY Future Consumer Index. The survey tracks consumer sentiment and behaviour across several geographies, but these four behaviours, outlined below, are all evident in Ireland and have implications for the pending economic recovery. Cut deep (27%): these consumers are mainly more than 45 years old and have seen the biggest impact on their employment status. Almost one-quarter have seen their jobs suspended, either temporarily or permanently. 78% are shopping less frequently, while 64% are only buying essentials. Stay calm, carry on (26%): these consumers do not feel directly impacted by the pandemic and are not changing their spending habits. Just 21% are spending more on groceries, compared with 18% who are spending less. Save and stockpile (35%): this segment has a particular concern for their families and the long-term outlook. 36% are spending more on groceries, while most are spending less on clothing (72%) and leisure (85%). Hibernate and spend (11%): usually aged between 18-44, these consumers are most concerned about the impact of the pandemic with 40% shopping less frequently. Rationalised personal consumption From the Irish economy’s perspective, the unprecedented impact on the labour market has a significant effect on consumer spending. Personal consumption accounts for around one-third of Ireland’s GDP. Before COVID-19, the economic recovery was associated with a healthy annual average growth in consumer spending of 3.5% over the last five years. With the categories affected by containment measures accounting for around one-half of consumer spending, according to the Central Bank of Ireland, a sharp contraction in consumer spending is expected in 2020, which in turn impacts on investment and overall GDP. Recent projections from the Department of Finance forecast that personal consumption will contract by 14.2% this year, with GDP down by 10.5% (April 2020). The impact of the pandemic on employment, supply chains, travel and tourism, and mobility has hugely reduced consumer confidence and spending – and the shock is likely to be felt for some time to come. Looking beyond the immediate effects of COVID-19, few consumers expect to revert to pre-crisis behaviours any time soon. Overall, 42% of respondents believe that the way they shop will fundamentally change as a result of the COVID-19 outbreak. Plummeting consumer confidence While these four segments could morph as the crisis abates, the adverse impact of the pandemic on consumer confidence remains. In an Irish context, the KBC Consumer Confidence Index fell to its lowest level in the survey’s 24-year history due to a combination of weak conditions and the risk of poorer prospects. 584,600 people are in receipt of the Pandemic Unemployment Payment while the unadjusted Live Register total for April 2020 was 214,741. An additional 425,204 are being facilitated through Revenue’s Temporary COVID-19 Wage Subsidy Scheme. This implies that in the region of 1.224 million people – or almost 50% of the workforce – are in receipt of some form of income support. Joined-up thinking required The recovery in consumption will depend on the extent to which the unemployment situation is reversed. Companies that were struggling to keep up with changing consumer behaviour before the pandemic are now faced with the challenge of anticipating how consumers will evolve beyond the pandemic. The Government’s roadmap to ease COVID-19 restrictions and re-open Ireland’s economy and society on a phased basis are welcome, but the pace at which different sectors and regions begin to recover will vary greatly. While smaller towns may benefit from increased local spending, online sales are likely to remain high, at least in the short-term. We must look at what business and governments can do together to help everyone get through what continues to be an incredibly difficult period to ensure that they are all ready to participate in the recovery when it comes.   Annette Hughes is an Economist and Director at EY-DKM Economic Advisory.

Jun 02, 2020

Des Peelo shares his one guiding principle for setting a fair professional fee. Professional fees occur in many occupations including dentists, doctors, accountants, solicitors, barristers, and architects. Public relations practitioners, management consultants, estate agents, investment bankers and technical advisers of all kinds also charge professional fees, as do lecturers and conference speakers. But how should you calculate a professional fee? There are no guidelines as such, other than custom and practice within a particular sector. Competition law prevents price-fixing within a sector. Nevertheless, norms or rules of thumb usually develop over time. Enquiry suggests that a routine GP visit costs between €55 and €70, while a medical consultant may charge between €250 and €300. An estate agent may charge 1-2% plus outlays and VAT on the sale price of a property, and an architect may charge a percentage of the project costs. Practising accountants typically charge an hourly rate for routine services such as audit, accountancy, and tax work. For more complex work, mainly carried out by larger firms, such as a major investigation or a difficult liquidation, an hourly rate of €450 per hour plus VAT has been quoted in the High Court for a partner’s time. This €450 currently seems a benchmark rate and is scaled downwards for less senior staff. In general, straightforward work such as audits for an accountant, conveyancing or probate work for a solicitor or routine dental work for a dentist is competitive, and fees fall within identifiable ranges. It is difficult, however, to generalise in linking a fee to the mix of expertise provided, responsibility taken, and the value to the client. What is the value of a careful and competent diagnosis of a malady from a GP, or a substantial tax saving through expert knowledge? What is the value of the identification and rectification of a serious IT glitch, or a crisis successfully managed by a skilled public relations practitioner? Round sum fees are common for non-routine work or work not measured in terms of time incurred. There is the story of a computer glitch that closed down an entire business. A technician arrived, turned a nut, and got the system up and running again. The bill was €1 million, and the client demanded a breakdown. The response was €100 for the hour in turning the nut, and €999,900 for “knowing which nut to turn”. Legal fees, apart from routine matters, can be a mystery – particularly in litigation. There are regular reports of substantial fees across all types of litigation. A UK judge once remarked that the Savoy Hotel and the courts are open to everyone. In my experience, this is because of the extensive input necessary in almost any litigation, such as identifying the issues and the law relating thereto; assembling the relevant documentation and preparing the required procedural paperwork; accessing expert evidence; consultations; and, of course, the actual court hearing. There is an amusing story about legal fees allegedly involving a firm of solicitors in the United Kingdom. A long and complex litigation case had come to a satisfactory conclusion, and it was time to finalise the bill. The more technical aspects had already been completed as to measuring the files at £100 per inch and weighing the files at £150 per pound. Instead, each partner had to review the files and put his or her estimate of the total fee in a sealed envelope, placed in a box. When the box was opened, the partner with the lowest estimate did not share in those fees and the partner with the highest estimate had to collect the fees. An optimum balance. Investment bankers charge astronomical fees. This is because they can. The transactions involved are mega takeovers or the funding of large projects. The enormous sums of money involved are often backed by prestigious names, not necessarily professional expertise, and this is what underpins the hefty fees. Fees of 1-3% of the amounts involved do not seem unduly high when expressed that way, but these percentages translate into millions of dollars or euro. George Bernard Shaw observed that professions were conspiracies against the laity. This, of course, does not refer to Chartered Accountants and professional fees. A guiding principle as to good professional practice is to ensure that the subsequent fee is not a surprise to the client. Service before remuneration.   Des Peelo FCA is the author of The Valuation of Businesses and Shares, which is published by Chartered Accountants Ireland and now in its second edition.

Jun 02, 2020

Richard Day and Alannah Comerford look at how Chartered Accountants can explore the potential for robotic process automation using UiPath. In this series of articles, we are exploring the power of visualisation and data analytics and the benefits it can bring to Chartered Accountants. As you may know, the FAE syllabus was recently updated to include data analytics concepts and tools such as Tableau, Alteryx, and UiPath. Previous articles dealt with the concept of data visualisation and the value it can bring to an accountant, and most recently we covered the data processing tool, Alteryx, and the significant advantages it affords when performing data transformations and calculations. In this article, we will move to the more advanced area of automation. Robotic Process Automation (RPA) is an acronym you are probably familiar with, as more and more businesses seek to streamline their operations and exploit the advantages of automation. UiPath, which has been selected by the Institute, and similar tools enable RPA at a practical level. UiPath is a software solution that acts like a robot, programmed to perform the various activities in a process just as a human would. The tool can be used to run without human supervision or can work as an assistant. Automation without human supervision is extremely difficult and may not be the answer for complex processes that require significant judgement, reasoning or analysis from the person performing them. In such cases, automation may still support the person who is completing these tasks as an assistant, but human intervention is vital. However, if we consider those processes that are suitable for automation, they can usually be described as highly repetitive, manual processes where the employee does not exert judgement. All decisions are made based on business rules and pre-defined logic. Significant value can be derived from automation where there is interaction between multiple systems, but the inputs required are standard, making the process tedious and time heavy. Similarly, when the current manual procedure is inadequate for standardising a process and remains subject to error, automation – which has the power to perform the process accurately every time – can be invaluable. As an accountant, you might think that opportunities for automation should fall under the remit of those working in IT. Accountants, with their holistic knowledge of how a business operates and analytical nature, are ideally placed to identify potential automation opportunities and act as a key stakeholder throughout the process. Automation at work Consider a simple process whereby you are required to run reports or extracts from different systems and perform some data transformation and analytics on the information to produce an output, perhaps in the form of a reporting dashboard. Alteryx can be set-up to run workflows to deal with inputs from different systems and produce the desired output. However, you would still need to run the input files and refresh the dashboard manually. Incorporating UiPath can automate the process even further. UiPath can log-in to each system and can be used to run specific reports from different systems at set times, replacing the need to download data manually. It can then load this data into Alteryx, run a pre-defined workflow, and produce the desired dataset. This information can then be brought into Tableau to refresh a dashboard with the current information. In this way, UiPath can be configured as an interface between systems to offer a fully integrated solution. These processes can be as simple as taking a list of suppliers from one system, along with balances from another. UiPath can automate the production of these lists and balances for processing in Alteryx to produce a customer statement. This statement is then converted to a named PDF document and emailed to each customer. In an audit context, where proof of delivery can provide recognition of a sale, client records can be reconciled with those from a third-party delivery company, exceptions identified and presented for further investigation by the auditor. A business can reap many rewards from automation. While efficiency and time-saving with a shorter cycle time immediately spring to mind, increased quality and compliance as a result of a reduction in errors and an increase in accuracy are also often seen. Unlike mere mortals, robots never sleep and processes can operate autonomously 24/7, driving real-time transactions and analysis. While certainly more challenging to measure than the benefits outlined above, increased employee satisfaction through a focus on higher-value activities and a reduction in time spent on menial, repetitive tasks is a clear benefit. It helps shift the priorities of the employee to innovation, strategy and activities that add value to the business proposition, resulting in a happy and productive workforce and consequently, higher output. While the benefits that automation can bring when applied to appropriate processes are clear, we must bear in mind that, while automation can reduce hours in the long run, up-front investment is required to get it right. Also, control-aware accountants would know that any automated process requires ongoing review. A successful move towards automation requires the skills that accountants use all the time. For example, detailed process maps that are validated by walk-throughs are essential as well as thorough testing with scenario analysis. Consideration of the impact on controls, appropriate training, procedures, and user manuals are also required along with a measurement of actual versus expected results and periodic performance assessments. Accountants are likely to be key stakeholders in each of these activities. Admittedly, we have only just skimmed the surface of the potential of UiPath and what it can be used for. Still, given the myriad of considerations included above, this is hopefully understandable. We hope we have sparked a reflection on potential use cases in your own business and perhaps demonstrated areas where Alteryx alone may not go far enough. We encourage you to consider these use cases, investigate whether your organisation has the necessary experience and consider a proof of concept. In the world of RPA, do not be afraid to consult and draw on experience.   Richard Day FCA is Partner, Risk Assurance Leader, at PwC Ireland. Alannah Comerford ACA is Senior Manager, Data Analytics & Assurance, at PwC Ireland.

Jun 02, 2020

For the Credit Guarantee Scheme for COVID-19 to succeed, the Government must act quickly to enact the necessary legislation, argues Claire Lord. At a special cabinet meeting on 2 May 2020, the Irish Government agreed to introduce additional measures to support companies that have been negatively impacted by COVID-19. One of these measures is the Credit Guarantee Scheme for COVID-19 (COVID CGS). The COVID CGS is a repurposing of the existing SME Credit Guarantee Scheme. Under the COVID CGS, the Irish Government will guarantee up to €2 billion of loans granted by Irish banks to small- and medium-sized enterprises (SMEs) with the hope that these companies will be able to access funds from Irish banks. The participating Irish banks, initially being AIB, Bank of Ireland and Ulster Bank, will make loans of amounts between €10,000 and €1 million to SMEs for terms of between three months and up to seven years. The guarantee The credit risk on these loans will be shared between the Government and the participating banks. The Government will guarantee the banks in respect of 80% of losses on each loan, and the banks will be responsible for the other 20%. However, the guarantee provided to the banks will also be subject to a 50% portfolio cap, which means that if a bank needs to call upon the COVID CGS in respect of every such loan made, they will only be guaranteed by the Government in respect of 40% of losses. There are arguments for and against the limitations on the guarantee being offered by Government in respect of these loans. The preference from the banks’ perspective would clearly be for a 100% guarantee. However, where some element of credit risk rests with the banks, it is arguable that the banks, who will make all decisions on lending, will more stringently assess the creditworthiness of businesses before granting a loan, thereby reducing some element of the associated moral hazard. Availability of the scheme A new law must be passed for the implementation of the COVID CGS. This new law will not be finalised until a new Irish government is in place. This unavoidable delay presents an immediate impediment to eligible SMEs accessing funds that could assist them in sustaining their businesses during this period of economic uncertainty. Eligibility for the scheme The COVID CGS is available to certain, but not all, SMEs established and operating in Ireland. SMEs that are in financial difficulty, other than cashflow pressure caused by the impact of COVID-19, are ineligible. Also, the Department of Business, Enterprise and Innovation states that SMEs involved in primary agriculture, horticulture and fisheries are excluded from the scheme due to particular restrictions under the De Minimis State Aid rules. Notwithstanding this exclusion, the Minister for Agriculture, Food and the Marine, Michael Creed T.D., has expressly stated that the COVID CGS will apply to farmers and fishermen. In light of this inconsistency on perceived eligibility, it is hoped that the enabling legislation will set out explicitly the eligibility criteria for the scheme. Lending criteria The participating banks will make the necessary assessments to determine if an SME applicant is eligible and to decide whether or not to make a loan available to them. As the intention of the COVID CGS is to support businesses that would not otherwise be able to obtain new or additional funding as they are higher-risk businesses due to COVID-19, banks will need guidance on how to make lending decisions. For example, how might a bank assess the long-term prospects of a business in the current unprecedented economic climate? Clear lending criteria will be essential to encourage both banks to offer, and SMEs to consider, the COVID CGS as a realistic option. Survival The availability of cash is crucial for SMEs that, but for COVID-19, would be trading profitably. Sustaining these businesses through this crisis is vital to enable our economy to restart once more ordinary activities are again permitted. The COVID CGS can only be of assistance where the scheme is readily available, and the eligibility and lending criteria are sufficiently clear to give lenders confidence to make the loans, and businesses confidence to avail of them. To be of any assistance in protecting the businesses that the scheme is designed to assist, the enabling law must be published and enacted quickly. Claire Lord is a Corporate Partner and Head of Governance and Compliance at Mason Hayes & Curran.

Jun 02, 2020

Peter Vale considers the items that could become long-term features of Ireland’s tax regime under the new government. In the April issue of Accountancy Ireland, I wrote about the expected impact of COVID-19 on Exchequer receipts for 2020 and beyond. We have now seen the evidence with both VAT and excise down roughly 50% on similar months last year. While some of the drop in VAT receipts might be down to timing with companies deferring payments, a large chunk is an unquestionably permanent loss in VAT revenue due to lower spending. The income tax figures for May are also expected to show a significant drop, due to vastly lower numbers in employment. The Department’s view is that corporation tax figures will hold up better. I hope this forecast is right, but I fear that the hit to corporate profits will be higher than anticipated, with refunds for prior years and losses carried forward likely to feature. What is next? So, what does this mean for future taxes? Will the relatively healthy state of our public finances entering the crisis make for a less painful exit? The Minister for Finance, Paschal Donohoe T.D., has stated that he will not raise taxes this year as doing so would stifle the ability of the economy to recover. This makes sense, assuming we can afford to do it. You also cannot simply raise taxes and expect to collect more tax revenue; you reach a tipping point, after which further hikes result in less tax collected. And many of our taxes are already high. Tax reliefs Of course, ruling out impending tax increases does not mean that there will not be a focus on tax reliefs. While many tax reliefs have been abolished over the last decade or so, certain targeted reliefs remain available to taxpayers. It is unlikely that tax reliefs incentivising environmentally friendly behaviour will be targeted. Furthermore, the research and development (R&D) tax credit is also unlikely to be affected as it encourages more sustainable jobs. Reliefs that allow business assets to be passed (typically) to the next generation are more likely to be in scope. Generous reliefs exist for both the disponer and the recipient. These reliefs escaped the guillotine in the past as they continued to make economic sense; a large tax bill was avoided on a potentially illiquid event, allowing the business to be driven forward by the next generation. Capital taxes Capital taxes are likely to be targeted by the Minister, perhaps initially by way of curtailment of reliefs and in the medium-term via an increase in rates. That said, capital tax rates are already high with our 33% rate one of the highest in the EU. In contrast, the UK capital gains tax rate is 20%. We know that when the capital gains tax rate was halved from 40% to 20% some years back, the tax-take doubled. An increase in capital gains tax rates could see the opposite effect, with fewer transactions and potentially more tax planning resulting in a lower tax yield. Broadening the tax base One thing the Minister may look at in the future is broadening the income tax base. It is questionable as to whether this would be regarded as an increase in taxes, but it would generate more tax revenue. Broadening the tax base would mean more people paying tax, albeit many would pay very little. Adjusting the current exemption limits and credits would facilitate this. Broadening the tax base was a recommendation of the Commission of Taxation over a decade ago, but we have not seen it followed by governments since. While the notion of everybody contributing something may resonate more in the current environment, it may still prove politically unpalatable. Property tax In the medium-term, depending on the state of the public finances, other tax-raising measures may be considered. The options aren’t exactly limitless. Our VAT rate is already comparatively high, as are our income taxes. Our corporation tax rate is low but effectively untouchable. One tax rate that is low in a European context is property tax, in particular for residential property. Many economists see property taxes as the least distortive, so an increase in property taxes might be the ‘least bad’ way to raise taxes. Tackling property taxes would be a brave move for a new government, but potentially something that could be done in year one or year two of a new term. Conclusion In summary, tax increases later this year are unlikely – although we may see certain reliefs targetedand the ‘old reliables’ such as cigarettes and alcohol are unlikely to escape. In the medium-term, COVID-19 will mean that tax-raising measures are likely to feature. In my view, a broadening of the tax base and an increase in property taxes are the most likely outcomes. Both of the above could be long-term features of our tax regime, although much will depend on future government priorities.   Peter Vale FCA is Tax Partner at Grant Thornton.

Jun 02, 2020

Geraldine Browne provides food for thought as employers prepare to report end-of-year expenses and benefits. At the time of writing, I am adjusting to working from home and seeking the best working station in the house (I lost). Much of my time is spent assisting clients with queries on the UK Government interventions introduced to help businesses survive in this challenging time. The most common questions relate to furloughed workers as companies struggle to maintain productivity. It is difficult to choose a topic for this article amid the human tragedy unfolding before us on a global scale. As this article will publish in June, employers will be gathering the necessary information to complete Forms P11D and share scheme reporting for the year ended 5 April 2020. For this reason, I will focus on P11D reporting and consider the changes employers face in benefit-in-kind (BIK) reporting in light of the coronavirus emergency. The due date for P11D reporting is 6 July 2020 for BIK provided for the year ended 5 April 2020. While this may have been delayed in line with other announcements from HMRC, the preparation process will nevertheless be the same. What do I need to file? If the employer paid any benefits and/or non-exempt expenses, or if they payrolled any BIKs, a P11D (B) form must be filed. The employer must include the total benefits liable to Class 1A, even if some of the benefits have been taxed through payroll. Employers are also required to give employees a letter informing them of the benefits that were payrolled and the amount of the benefit. What do you need to include on the P11D form? Taxable benefits typically include private medical and dental insurance, company cars, and gym membership, for example. HMRC has published a useful guide for P11D completion, which is a good starting point. Company cars and vans Employers are required to disclose the company car BIK for the full tax year where it is made available for the entire period. The question has been asked as to whether an employer can reduce the BIK value since employees have been asked to remain indoors and business travel in a company car ceased temporarily from March 2020. If an employee is furloughed and the vehicle remains at the employee’s home, the car is seen as being available under the current rules. At the time of writing, HMRC has not yet issued formal guidance on this matter. There have been suggestions that HMRC may accept that company cars will not be deemed available for BIK tax purposes where they are ‘virtually’ handed back by returning keys and fobs. It is worth reminding ourselves of the rules regarding the cessation of the car benefit. The benefit may cease, but remember: The car must be unavailable for at least 30 days to pause or cease a company car benefit; and HMRC will accept that the car is unavailable to the employee if it is broken down and has not been repaired or if the employee does not have the keys. If you have not already considered the company car policy, it is worth seeking advice in this area. Taxable expenses when working from home If employers provide a mobile phone without restriction on private use, limited to one employee, this is non-taxable. If the employee already pays for broadband, no additional expenses can be claimed. If broadband was not previously available in the employee’s home, the broadband fee paid for by the employer may be provided tax-free although in this case, private use must be restricted. Laptops, tablets, computers, and office supplies will not result in a taxable benefit if mainly used for business. If the employee purchases a desk and chair and seeks reimbursement from the employer, this will be viewed as taxable, and you may wish to include this in a Pay-as-you-earn Settlement Agreement (PSA). Some employers may provide employees with an allowance for additional expenses incurred in connection with working from home. This was increased to £6 per week from 6 April 2020 and can either be paid to the employee or reimbursed to them. Businesses and the economy are facing unprecedented financial pressure. It is worth reviewing your current benefits and expenses to identify ways in which you can reduce the cost to your business and reduce the taxable benefit to the employee. With many employees now furloughed and under severe financial pressure, any assistance an employer can provide to increase net pay will be welcome.   Geraldine Browne is Tax Director at BDO Northern Ireland.

Jun 02, 2020

David Duffy discusses recent Irish and EU VAT developments. Irish VAT updates VAT payment deferrals  In response to the economic impact of COVID-19, Revenue announced that interest would not apply to late payments by SMEs of their January/February 2020, March/April 2020 and May/June 2020 VAT liabilities. SMEs in this context are defined as businesses with a turnover of less than €3 million and which are not dealt with by either Revenue’s Large Cases Division or Medium Enterprises Division. Businesses that do not meet the definition of an SME but are experiencing VAT payment difficulties are advised to contact Revenue and these issues will be dealt with on a case-by-case basis. Revenue also advised that all taxpayers should continue to file VAT returns within the normal deadlines. Where key personnel are unavailable to prepare the VAT returns due to COVID-19, businesses should file on a ‘best estimates’ basis and any subsequent amendments can be completed on a self-correction basis without penalty.  Furthermore, on 2 May 2020, a scheme was announced to allow businesses that have availed of VAT and PAYE deferrals during the COVID-19 crisis to defer or “warehouse” the payment of those outstanding liabilities for a period of 12 months without accruing any interest. A lower than normal interest rate on late payment of tax (3% per annum instead of 10% per annum) will then apply until the warehoused tax liability has been repaid. Further details of this scheme are available on the Revenue website and legislation will be enacted in due course. Temporary relief from VAT and duty on PPE On 8 April 2020, Revenue announced that the 0% rate of Irish VAT and customs duties would apply to Irish imports (from outside the EU) of personal protective equipment (PPE) and other goods used to combat COVID-19. This relief applies to imports in the period from 30 January 2020 to 31 July 2020. Revenue also confirmed in eBrief 63/20, issued on 17 April, that the 0% rate of Irish VAT concessionally applies to domestic and intra-EU acquisitions of similar goods in the period from 9 April 2020 to 31 July 2020. These reliefs are subject to certain conditions, which are summarised below. For imports from outside the EU, the goods must be imported by, or on behalf of, State organisations, disaster relief agencies, or other organisations (including private operators) approved by Revenue. The goods must be intended for free-of-charge distribution or be made available free-of-charge to those affected by, at risk from, or involved in combating COVID-19. Furthermore, the importer must have both an EORI number and be pre-authorised by Revenue for the relief. In addition, import declarations must include the relevant customs codes in the appropriate SAD boxes. Where VAT and customs duties have already been paid but the relevant conditions for relief are met, a refund of such amounts can be claimed. Application forms to avail of the relief and to seek a refund of VAT or customs duty previously paid are available on Revenue’s website. For domestic supplies and intra-EU acquisitions, the 0% VAT rate temporarily applies to PPE, thermometers, ventilators, hand sanitiser and oxygen supplied to the HSE, hospitals, nursing homes and other healthcare facilities for use in the delivery of COVID-19-related healthcare services to patients. The sale of these products in other circumstances will continue to attract the VAT rate that would typically apply. VAT grouping In eBrief 053/20, Revenue issued guidance in respect of VAT groups. The guidance primarily outlines the requirements and implications of VAT grouping and includes examples, which show how the rules apply in certain circumstances. Businesses that are considering forming or breaking a VAT group should review the guidelines to ensure that the appropriate procedures are followed. The guidance includes a section on the territorial scope of Irish VAT groups and confirms that, where an entity that is established or has a fixed establishment in Ireland joins an Irish VAT group, it is the entire entity, including any overseas branches, that is considered to join the Irish VAT group. Consequently, charges from a foreign establishment of an Irish VAT group member to other members of that Irish VAT group are disregarded for Irish VAT purposes. This has been the Revenue position for some time, but it is helpful to have it reconfirmed – particularly for the financial services and insurance sectors. ROS enhancements In eBrief 58/20, Revenue announced several VAT-related enhancements to Revenue’s Online Service (ROS). Taxpayers now have the option to add a second VAT agent. To add the second VAT agent, taxpayers will need to complete an Agent Link form in the usual manner. Also, the Revenue Record (Registration Details) on ROS now indicates the VAT basis of accounting (i.e. the cash receipts or invoice basis) adopted by a given taxpayer. EU VAT updates VAT treatment of staff secondments The Court of Justice of the EU (CJEU) concluded in the San Domenico Vetraria (SDV) case (C-94/19) that the secondment of staff by a parent company to its subsidiary in return for a payment equal to the parent company’s cost (but excluding any profit margin) is a supply of services within the scope of VAT. The case highlights that VAT can arise on cross-charges for staff time and this should be carefully considered, particularly in cases where there may be no or partial VAT recovery in the recipient entity. In analysing the case, the CJEU re-stated that VAT arises on a supply of goods or services effected for consideration within the territory of an EU member state by a taxable person. A supply effected for consideration requires a legal relationship between the supplier and recipient, and reciprocal performance, meaning that the payment received by the provider of the service is in return for the service supplied to the recipient. In the present case, the CJEU was satisfied that there was a legal relationship between the parent and subsidiary and that there was a payment in return for the service provided. Consequently, where the Italian court, which had referred the case to the CJEU, established based on the facts that the amounts invoiced by the parent company were a condition for the secondment and that the subsidiary paid those amounts only in return for the secondment, VAT would apply to the secondment. The CJEU confirmed that the fact that the payment did not include a profit margin did not impact the VAT analysis, as it has been previously held that a supply for VAT purposes can take place where services are supplied at or below cost.   David Duffy FCA, AITI Chartered Tax Advisor, is an Indirect Tax Partner at KPMG.

Jun 02, 2020

John Slattery shares his simple three-step process to help you make a career choice you will not regret. In adulthood, bar sleep, we spend more time at work than anything else. Our career will have a massive bearing on the happiness, success, and fulfilment we experience in life. It is critical, therefore, that we make the best career choice possible at every professional junction. Making a career choice is a complex process, and there are many nuances to consider. Inspo’s three-step guide to making good career choices is designed to steer you toward the right decisions for you. The three steps are as follows. Step 1 Create an uninhibited list of career choices One measure of success around career choice will be the absence of any regret upon deciding. For this to be the case, we must identify all possibilities that appeal to us as possible career choices. This will enable us to feel confident that we are choosing from a complete list. You may be able to identify all possibilities yourself. Alternatively, you may need to bounce it off one or more people to help you formulate the list. If so, chat with someone you know who will give you a genuine opinion as to what career options they think would be worth considering. You must also ensure that you build an understanding of what each role entails. You can then make an informed decision as to whether to pursue or discard each option (more on that in step three). The end-goal for step one is to feel that you have identified a complete list of career choices and to have an informed understanding of each option. Step 2 Self-reflect To decide on the suitability of each option, you must self-reflect. You will use the output of your self-reflection to evaluate each option that has emerged in step one. There are three elements of self-reflection to carry out: Vision Positive psychologists Scott Barry Kaufman and E. P. Torrance claim that inspiration is the attempt to realise a future vision of oneself. Making career choices that align with our vision can, therefore, create a sense of inspiration in our professional lives. Research also suggests that making a career choice that is connected to our vision can lead to higher levels of productivity, motivation, and positivity. Therefore, our vision is a critical evaluation criterion. Strengths and interest areas This focus area of self-reflection derives from a definition of meaning by positive psychologist, Martin Seligman. He defines meaning as “using your signature strengths in the service of something greater than you are”. Seligman’s research identifies meaning as the most significant contributor to happiness. Strengths and interest areas are a simplified extraction of Seligman’s definition, but tapping into these two areas will give us excellent access to meaning and joy through our work. So, as with vision, strengths and interest areas are crucial evaluation criteria. Priorities Our career choices must be grounded in the priorities that exist in our lives at the time we make a choice. They might be personal, such as a desire to travel or buy a house, or they might be related or separate financial priorities. Honouring our priorities through our choice gives us the best chance to meet our goals, ambitions, and desires. It is the final critical element of evaluation. Our end-goal for this step is to have a clear vision, a sense of what our strengths and interest areas are, and an understanding of our priorities in life. Step 3 Evaluate, pursue, and decide In the final step, you first evaluate each option against the self-reflection criteria. For each option, you decide whether you are going to pursue or discard that option. This will leave you with a shortlist of options. From here, you pursue each shortlisted option further by furthering your understanding and actively exploring opportunities related to each career option. As you do this, you check-in with yourself regularly as to which prospect feels like the right one. You continuously repeat this check-in exercise during this final stage of exploration until you feel ready to make your career choice. I wish I could offer you a process that guarantees success in your career choice. Alas, neither I nor anyone else can do so. What I can say is that I have seen, through my work, that this process helps people make good career choices – and I hope it can do the same for you. The referendum effect Career choices are an imperfect process simply because the ‘perfect choice’ is rare if non-existent. So here is a concept I call the ‘referendum effect’ to help define success when it comes to career choices. Let us look back to the two most recent Irish referendums – the same-sex marriage referendum and the referendum on the Eighth Amendment. In both cases, there was high-quality information available and thorough debate and discussion on the merits of both sides of each argument. This allowed people to make an informed choice at the polls. In both scenarios, the consensus was that the right outcome was achieved. However, in both cases, more than 30% of people voted against the outcome. For me, these referendums are a good metaphor for what you should hope for with your career choices – that is to collect high-quality, accurate information regarding your options, to self-reflect, and to discuss the issues with people you trust and respect. At the end of the process, you will hopefully have a substantial majority for one choice. That for me would be the best outcome you could hope for when making a career choice. There is another side to this metaphorical coin. Consider Brexit – the quality of information shared with the UK electorate was of questionable quality and clarity. In some cases, the information was alleged to be factually incorrect. Voters therefore went to the polls with much higher degrees of uncertainty and a narrow, unconvincing majority voted in favour of Brexit. It has taken Britain several years to make any type of progress on the back of the referendum result and all the while, a vast cloud of doubt looms over the outcome itself. This is a good metaphor, in my view, for a poor career choice – poor or incorrect information, lack of clarity on the options available, and a very uncertain choice. Given the importance of our career in terms of our overall happiness, fulfilment and success, there is only one approach to take. Take the right one. Given the importance that we’ve discussed our career has in terms of our happiness, fulfilment and success – there is only one approach to take of these two shared in the Referendum Effect. Take the right one. John Slattery ACA is Founder of Inspo.

Jun 02, 2020

Is your battery full on Monday, depleted by Wednesday, and empty by Friday? Dr Eddie Murphy considers why we take care to charge our phones, but not ourselves. We have all been there – when you think your phone has been charging all night only to find that you did not flick the switch. You immediately accept that it will not function, or you will have limited usage until your next charging opportunity. Yet, when it comes to our bodies, we push on, potentially until we are stressed, exhausted, or burnt out. I am convinced that people who are continually in stress/overwork mode by choice or by necessity will eventually succumb. Illness will always catch up and then the person is forced to reprioritise. What if it did not have to be this way? What if we could manage our energy levels so that we can thrive rather than survive? As we all try to stay safe and healthy, here are my top five tips to help you keep your body’s battery in the green. 1 Sleep Sleep is the quickest way to emotional health and a fully charged battery. Ireland is a sleep-deprived nation. In general, we do not go to bed early enough or get enough good-quality sleep. Too often, the mobile phone is brought into the bedroom – invest in an old-fashioned alarm clock.    2 Exercise As paradoxical as it sounds, the more you exercise the more energy you self-generate. The issue is often motivation or planning the right time for physical activity. For me, I know that I am a poor trainer on my own but when I get out with the athletic club, the chat and social element keep me going. While social distancing makes that more challenging, you can always look into virtual ways to train as part of a group. 3 Savour moments Be mindful. Each morning when you wake up (before you check your phone), notice your breath and take two or three long deep breaths in and out. Throughout your day, do this whenever you think of it. It calms down the fight or flight stress response and allows the adrenaline to drain from the body. Your body will be less depleted as a result. 4 Write a real  to-do list Making an unrealistic list of everything you have to get done in one day and then attempting to accomplish everything will lead to immense frustration and a feeling of failure. This also wears down the body’s battery. Make a realistic list and you will, therefore, feel that you have set and reached some – if not all – of your goals in that day as best you can. This will not only conserve your battery life, but it will also give you some energy. 5 Call in help If you are struggling, admit it. It is okay; we all struggle. If you feel overwhelmed, share it with family, a colleague, or a friend. You will be amazed at how much better you will feel when you face the problem and how much energy you will save by merely addressing the issue. When asked for help, I know very few people who say no – and if they do, are they a true friend? Conclusion Remember, your battery life is your life, and you only have one of those. We are what we do daily, so check-in with yourself right now. What do you do? Do you need to add or subtract from it? If so, that could make all the difference in keeping your battery life a little healthier than usual. We all want to do a lot in our lives, yet our bodies and brains have finite daily resources. So, as you stick your phone on charge for the night (ideally not right under your pillow), just remember to keep an eye on your own battery life too.   Members and students can contact CA Support on 01 637 7342 or 086 024 3294, by email at casupport@charteredaccountants.ie or online at www.charteredaccountants.ie/ca-support. Dr Eddie Murphy is a clinical psychologist, mental health expert and author.

Jun 02, 2020

Pamela Gillies shares her thoughts on the future of the profession, wealth distribution and the therapeutic art of mowing the lawn. What do you most enjoy about your role at BDO? I started my career in BDO Northern Ireland 23 years ago, and today, I am a Director within the Advisory team in the Belfast Office. Depending on the cycle the broader business environment is going through, I see my role as either helping my clients’ businesses to grow or helping them navigate challenging commercial and financial situations. Being able to help and guide my clients gives me enormous satisfaction. What is your professional highlight thus far? One of my earliest career highlights was the sense of achievement when we completed the first M&A transaction I managed. Other highlights range from successfully securing new funding for my clients to helping clients develop their strategic plans and returning to see that they have been successful in achieving their targets. The aftermath of the financial crisis was an interesting period in my career when our team was managing around 200 jobs covering insolvency and land/property receiverships. I worked on several high-profile cases at that time and enjoyed the challenge of managing complex transactions and working to save as many jobs as possible, while maximising the return to creditors – often a delicate balance. How will the profession change in the next ten years? Like all professions, we must evolve with the times. Our clients are becoming much more innovative and we are no different; going forward, we will all need to be adaptable and more agile in the services we provide and how we support them. While the majority of our clients are Northern Ireland-based, we see an increasing number with global reach, and we need to be equipped to support this with a broader knowledge of the global marketplace. As a profession, integrity must be the absolute cornerstone upon which our work is based and as such, I expect to see more advanced regulations, standards, and change for the better in the years ahead. What is the most memorable lesson you have learned? Patience is a virtue. When I was younger, I was probably quicker to react to situations than I am now. This usually came as a result of trying to impress someone with my speed of action and the desire to move onto the next task. I have since learned to take in all the facts, to listen, and to assess all of the information calmly and thoroughly before deciding on the best course of action. What do we most need in this world? We need a more balanced and sustainable approach to the generation and distribution of wealth. As we have, once again, seen over the last 12 weeks, we are all collectively facing unprecedented challenges. The statistics show, yet again, that it is the poorest who are suffering most. The 26 wealthiest people in the world control the same level of wealth as the four billion poorest. There must be a more equitable solution so that everyone can benefit from wealth creation but, importantly, that the creators of wealth are not penalised in doing so.    How do you recharge? I get my energy from staying busy. I like to be ‘on the go’ both during the working week and as a family at weekends. I am not the sort of person who likes to sit down a lot. A perfect Saturday is mini rugby with the boys in the morning, a walk up the Cavehill in the afternoon, followed by a great meal (prepared by my husband) around the kitchen table with the kids. My guilty pleasure is cutting the grass – one day I am going to write a book entitled ‘Zen and The Art of Mowing the Lawn.’

Jun 02, 2020

Although the cost of examinership may be prohibitive for smaller entities, Companies Act 2014 provides two alternative restructuring mechanisms that are both less complicated and less costly. Declan de Lacy reports. The restrictions imposed to stem the spread of COVID-19 have caused an unprecedented economic shock. The IMF’s Economic Outlook forecasts that the global economy will experience its worst recession since the 1930s, with Ireland experiencing a fall of nearly 7% in GDP and a rise of almost 150% in unemployment. The oncoming recession will inevitably result in companies failing at even higher rates than were seen during the downturn a decade ago. It is equally inevitable that many of the companies which will ultimately fail could be made viable by restructuring their debts and other obligations. It is incumbent on our profession to steer troubled companies through this crisis and give them the best possible chance of survival. The examinership process is the most widely recognised mechanism for restructuring insolvent companies. This mechanism is not suitable for small and medium-sized enterprises (SMEs), for whom the cost of examinership is prohibitive. That is not to say that formal debt restructuring is not accessible for SMEs. Companies Act 2014 provides two alternative restructuring mechanisms that are both less complicated and less costly. These mechanisms are the schemes of arrangement provided for by Sections 449-455 and Section 676 of Companies Act 2014. Neither mechanism is well-known or widely used, even though they have existed in one form or another for more than 50 years. Companies Act 2014 introduced the most recent version of these schemes and made the Section 449 scheme much more accessible. The infrequency with which these mechanisms are used is not a reflection on their effectiveness. They have recently been used by international companies to restructure hundreds of millions of euro worth of debt. They were also used to restructure the obligations of the property funds operated by Custom House Capital and by the company at the centre of the pork dioxin scare of 2008. Both schemes provide mechanisms by which a company may propose an arrangement in which the amounts due to creditors are either written off, deferred or otherwise compromised. If the requisite majority of creditors approve the arrangement, it can then become binding on all creditors. In practice, creditors need to be offered some quid pro quo to induce them to accept the proposals. This might be the introduction of new funds to partially reduce creditor balances or future payments linked to trading results. In each case, the outcome for creditors must be no worse than in a liquidation scenario as otherwise, an aggrieved creditor would have grounds to ask the court to refuse to permit the implementation of the arrangement. It is not necessary to treat all creditors in the same manner. Indeed, it is likely that any arrangement would involve secured creditors, preferential creditors and trade creditors being treated differently. Unlike examinership, neither scheme provides a mechanism by which onerous leases may be disclaimed. Notwithstanding this, landlords are likely to support proposals to reduce excessive rents to market rates if the alternative is the termination of the contract when their tenant goes into liquidation. A significant advantage of a scheme of arrangement over an examinership is that a company’s directors can commence the process without going to the High Court. There is also no requirement for an independent accountant’s report to be prepared. This means that a scheme of arrangement can be implemented for a fraction of the cost of an examinership. A further advantage of a scheme of arrangement is that the company does not automatically go into liquidation if a scheme is proposed, but not approved. The Section 449-455 Scheme There are no criteria that a company must satisfy before proposing a scheme of arrangement under Section 449-455. The first step in preparing to implement an arrangement is to identify the separate classes of proposed affected creditors. These might typically include preferential creditors, secured creditors, trade creditors, and related parties. A meeting of each category of creditor must be convened to consider the proposed arrangement. A ‘scheme circular’ must be prepared, in which the company sets out details of the proposed arrangement and how each class of creditor will be affected. Once notice of the class meetings has been issued, the company may apply to the Court for an order giving it protection from existing and new proceedings. This application is unlikely to be made unless a company is under immediate pressure from creditors. An arrangement becomes binding on all of a company’s creditors if 75%, by number and value, of the creditors represented at each class meeting votes in favour, the arrangement is sanctioned by the Court, and a copy of the order is filed with the Companies Registration Office (CRO). The Court has recently held that it should sanction a scheme unless “it is satisfied that an honest, intelligent and reasonable member of the class could not have voted for the scheme”. By comparison, a proposal by a company in examinership may be approved by the Court if it is agreed to by more than 50% of only one class of affected creditors. The Section 676 Scheme Any company that is either being, or is about to be, wound-up may propose a scheme of arrangement under Section 676 of Companies Act 2014. This means that the company must be in liquidation, or that a winding-up petition has been filed, or that an extraordinary general meeting (EGM) and creditors meeting to pass a winding-up resolution and appoint a liquidator has been summoned. Of course, if the proposed arrangement is approved, the winding-up need not proceed. A scheme pursuant to Section 676 is less complicated to implement than either an examinership or a scheme under Section 449-455. There is no requirement to distinguish separate classes of creditors or to obtain separate approval from each class. Additionally, an arrangement approved by the requisite majority of creditors becomes binding without the need to be sanctioned by the Court. The Court only becomes involved in the arrangement if an aggrieved creditor applies to have it amended or varied. The major disadvantage of the Section 676 arrangement is that it must be approved by 75% of all of the company’s creditors, and not only by 75% of those represented at the meeting where it is considered. This means that a proposed arrangement could fail through creditor apathy and not because of any opposition by creditors. Conclusion Neither scheme offers a perfect solution, either for companies or their creditors. The requirement in a Section 449 scheme to obtain the agreement of a majority of all classes of creditor means that a class comprising a small fraction of a company’s overall indebtedness can frustrate the wishes of the majority. The requirement in a Section 676 scheme to obtain the agreement of 75% of all creditors, and not only those who choose to make their views known, means that a meritorious proposal could fail due to creditor apathy. In many cases, onerous contracts, including leases, may be the reason for insolvency and the absence of a means to repudiate them is a defect in these schemes. It is not controversial to say that the restructuring options available to SMEs require improvement. As long ago as 2011, the programme for government adopted by Fine Gael and Labour included plans to introduce new restructuring mechanisms for SMEs that did not require court involvement. The Company Law Review Group made recommendations on the matter in 2012. More recently, in 2019, the European Union issued a new directive on restructuring and insolvency, which will require changes to our restructuring law and must be implemented by July 2021. In the meantime, directors of SMEs will need expert guidance if they are to avail of the imperfect restructuring options available to them today. Members of the Institute should be mindful that they must hold an insolvency practising certificate to advise companies in connection with arranging schemes of arrangements. The approach of Revenue and public bodies to schemes of arrangement In most companies, the debt due to the Collector General will represent more than 25% of the debts due to the preferential class of creditors. In such circumstances, Revenue’s agreement will be essential to securing the agreement of 75% of each class of a company’s creditors, as required for a Section 449 arrangement to succeed. Companies Act 2014 explicitly states that State authorities may accept proposals made under a scheme of arrangement that would result in their claim being impaired. This means that debts for taxes, local authority rates, and redundancy payments may be compromised as part of an arrangement. Notwithstanding this, the section of the Revenue Commissioners’ collection manual dealing with Section 449-455 proposals indicates that, where a company “wishes to put forward proposals, Revenue would be prepared to consider them but that they are unlikely to be accepted if they do not provide for full payment of the tax debt”. Interestingly, the section of the same document that deals with examinership indicates that “Revenue’s position will depend on the circumstances of the case (e.g. previous tax collection history, whether there will be a change of directors etc.)”. It therefore seems that Revenue approaches proposed write-downs of tax debts in examinership cases with a more open mind than they would for Section 449 proposals. This suggests that SMEs, for which the cost of examinership is prohibitive, may be treated less favourably by Revenue than larger enterprises, for which examinership is an option. Revenue’s response to the COVID-19 pandemic has been extraordinary and has gone so far as to suspend debt collection procedures entirely. In this context, it might be expected that Revenue will now adopt a more open mind to proposed arrangements in the interest of preserving industry and employment.   Declan de Lacy leads the Advisory and Restructuring Department at PKF O’Connor, Leddy & Holmes.

Jun 02, 2020

The accountancy profession needs to engage with  how emerging technologies like artificial intelligence will disrupt traditional career pathways. By Dr Patrick Buckley, Dr Elaine Doyle, and Ruth Gilligan Information technology has become inextricably embedded in virtually every aspect of our professional and personal lives. Data about what we do, what we are interested in, with whom we communicate and where we go can all be captured and stored at a scale unimaginable even five years ago. Technology giants such as Google, Amazon and Alibaba are engaged in a competitive race to capture the data generated by this new reality, lending credence to The Economist’s claim in 2017 that “the world’s most valuable resource is no longer oil, but data”. The data captured is valuable for several reasons. For one, traditional activities such as advertising can be personalised and optimised to a revolutionary degree – think of Facebook. Data also allows companies to build entirely new products. For example, the utility of Google Search results depends on analysing what information others have found useful in the past. A further value assigned to these data streams is linked to the development of artificial intelligence (AI). A host of mathematical and algorithmic tools – some novel, some more mature but turbocharged by the advent of big data – has propelled the development of AI. Leaving aside philosophical questions such as to what extent these systems are intelligent, every-day and now familiar examples of AI (Siri and Alexa, for example), are demonstrably practical and effective. These visible successes, combined with the breakneck pace of development, pose a multitude of questions about the impact of AI on our future – not least its impact on the future of work. The future of work Concerns about automation and jobless futures are not new. Two centuries ago, Ricardo proposed that technology caused unemployment. In the 1930s, Keynes predicted that new technologies would reduce the demand for human labour. In the 1980s, Leontief compared the role of a human in the modern economy to that of a horse in agricultural production – first diminished, and then eliminated by automation. Until the advent of AI, the consensus was that such predictions were overly simplistic. While new technologies can have a destructive effect on a particular industry or sector, their introduction often leads to increased opportunities in other areas. The overall effect is to change the structure of the jobs market, rather than result in a reduction in the work available. The jobs eliminated by new technology are replaced by jobs requiring higher-order cognitive skills (e.g. a robot replaces a welder but requires a software engineer to program it). Though this can be frightening and stressful for individuals, at a societal level, as long as education and training enable people to adapt to changing conditions by acquiring new skills, the long-term impact of technological change on the jobs market should be positive. The rise of AI has disrupted this consensus. In brief, the suggestion is that the human monopoly on tasks requiring significant cognitive processing is being broken. Education and training may become ladders to nowhere if AI systems that match or surpass human cognitive abilities are feasible. A glance at the world today demonstrates that many tasks humans once performed are being automated by AI systems, with virtually all studies showing that the process is accelerating as the capability of AI systems improves. For example, two Oxford economists, Frey and Osborne, predict that 47% of jobs in the US will be automated by 2030. The impact of AI Investigating how this disruption is likely to impact the accountancy profession, our research profiled the tasks that practitioners perform at different stages of their career and at three levels: trainee/junior, manager, and director/partner. We then calculated the probability of each task being automated by aggregating information from a range of sources, including academic studies and reports from professional, industry and government organisations. Our analysis makes it clear that, taken as a whole, accountants perform an enormous variety of tasks for their clients and employers. Some tasks, such as preparing accounts or tax returns, are considered extremely vulnerable to automation. Others, such as designing effective financial control strategies for clients, building relationships, or mentoring juniors and trainees are not. This feature of the profession has two implications: Given the enormous variety of tasks performed and roles fulfilled by accountants, assigning a single probability and suggesting that this represents an objective assessment of how vulnerable the profession as a whole is to automation is a simplification to the point of absurdity. The large number of tasks not vulnerable to automation means that for the foreseeable future, the profession as a whole does not face an existential threat. Tasks like designing effective tax strategies or the financial structures of businesses will require a mix of quantitative and soft skills as well as a deep, strategic understanding of the world beyond the capabilities of AI. Career pathways However, this does not mean that the profession can afford to be complacent. Analysing the potential effects of AI at different stages of a traditional career pathway reveals that the tasks vulnerable to automation belong predominately to early career stages. This is particularly the case for trainees/juniors, but also applies substantially to certain work at manager level. Therefore, while accountants may always be needed, the current economic case for most trainees and some managers may disappear. This presents challenges for the profession. Most obvious is the need to redesign career pathways in response to these trends. A traditional career pathway through the profession follows the well-worn path of trainee to manager to director to partner. A key question for firms and the profession is how to replenish senior ranks if the bottom rungs of the career progression ladder are removed. If there are no trainees or junior staff, where does the next generation of managers, directors and partners come from? A second, related issue is that of skills and knowledge development. Generally, the more experienced individuals in organisations perform the more cognitively demanding tasks. The tasks most vulnerable to AI automation are often seen as repetitive and undemanding. At first glance, the automation of such tasks may seem a positive development for employers and employees alike. However, this perspective takes no account of the knowledge and skills gained by performing these tasks in a real-world setting. For example, designing effective tax strategies requires experience that can only be acquired by spending time working on basic tax compliance. It may be possible to develop the skills and aptitudes required by more senior practitioners without a long, real-world apprenticeship. However, there is no evidence to support this position. At the very least, it seems likely that the entry pathway to the profession will need restructuring, with substantial changes required to curricula and entry requirements. In an extreme case, firms may face severe skills shortages a few years after engaging in significant automation. Higher-order skills may atrophy and disappear due to the lack of entry-level positions rupturing the supply pipeline of employees capable of performing higher-order tasks. Perception of the profession A third potential issue is the attractiveness of the profession to new entrants. If some of the tasks traditionally performed by managers are automated, then this will presumably have the effect of reducing the total number of individuals required at this level. The profession may evolve towards a position where a relatively small number of individuals (say 5%) do high-value, well-remunerated work while the other 95% are relegated to low-value, poorly paid tasks. A rational and risk-weighing decision-maker, the very type of intellect the profession seeks to attract, may select away from careers where the odds seem stacked against being able to access opportunity. In the long run, this selection bias may have a significant adverse effect on the profession’s ability to attract high-calibre candidates. The future of the profession Forecasting the future is a notoriously uncertain endeavour. Any predictions regarding the impact of AI on the accountancy profession (including those in this article) should be treated with scepticism. Reports of the imminent demise of the accountancy profession are, in all likelihood, greatly exaggerated. However, it would be equally short-sighted to discount the potential impact of AI on the profession entirely. It does seem likely that in the medium-term, the traditional career pathways associated with accountancy will be significantly dislocated. Responding to this will require meaningful, profession-wide dialogue and debate about how the next generation of accountants will be recruited, educated, and motivated.   Dr Patrick Buckley and Dr Elaine Doyle lecture at the Kemmy Business School, University of Limerick, and Ruth Gilligan is a Tax Associate at PwC Ireland.

Jun 02, 2020

What does ISA 570 (Ireland) Going Concern (Revised) mean for directors and statutory auditors? Noreen O’Halloran explains. Trust matters. The importance of accurate and reliable corporate information, especially information subject to external audit, is fundamental to the confidence of shareholders, investors, and the wider public. Recent corporate failures, particularly in the UK, severely affected that confidence and unsurprisingly led to public concern over whether more could have been done to prevent these failures from occurring. The collapse of several high-profile companies prompted the UK government and regulators to conclude that radical action was necessary to restore public trust and confidence in audit quality and the effectiveness of the audit in the UK. To identify the required changes, the UK government commissioned several very significant reports on the regulation and operation of statutory audits in the UK. These reports included Sir John Kingman’s Independent Review of the Financial Reporting Council (FRC), which stated that it was time for the FRC “to build a new house”. The report proposed that the FRC be replaced with a new independent statutory regulator with a clear focus on shareholders, investors and the wider public, and the power and support to regulate appropriately. Separately, the Competition and Markets Authority (CMA) conducted a study of the statutory audit market and provided its recommendations thereon. Sir Donald Brydon also carried out an independent review of the quality and effectiveness of the audit. The FRC has witnessed examples of audit weakness through its inspection and enforcement work and believes that a revision of the International Standards on Auditing (ISAs) UK will assist in restoring public trust. One of the most noteworthy of these revised standards is ISA (UK) 570 Going Concern (Revised). The standard sets out significant changes from the previous standard, with the aim of strengthening investor confidence. The Irish Auditing and Accounting Supervisory Authority’s (IAASA) stated policy concerning standard-setting in the Republic of Ireland is to follow the FRC standards, amending where there is a conflict with Irish or EU law. IAASA has therefore released ISA 570 (Ireland) Going Concern (Revised), which is largely based on the FRC’s version. This standard is effective for statutory audits of Irish entities, like the FRC version, for periods commencing on or after 15 December 2019. The standard addresses the auditor’s responsibility in the audit of the financial statements relating to going concern and requires the auditor to include an independent assessment of the entity’s ability to continue as a going concern. Nevertheless, attention must first be given to what the directors will be expected to provide to the auditor. The responsibility for making the going concern assessment of an entity has, and always will, rest with the directors. But going forward, directors must be prepared for increased scrutiny and challenge from the entity’s auditor in respect of their assessment of going concern, which may result in more work for the directors of an entity when making and supporting their going concern assessment. Directors’ assessment Where directors have not performed a going concern assessment, the auditor must request that one be completed and shared with the auditor. If the directors cannot, or will not, make an assessment, the auditor must consider whether there is a significant deficiency in the entity’s internal control system. The inability or unwillingness to prepare a going concern assessment will result in a limitation of scope in terms of the evidence available to the auditor. This limitation is likely to result in a qualified opinion in the auditor’s report. The assessment made by the directors should take into consideration both the environment in which the entity operates and its internal systems and controls. The auditor will expect the directors to be able to show how developments in the industry or economic environment, along with internal operations, current and future business risks, and any future or prospective plans, have been taken into consideration to assess going concern. The directors’ assessment should explain how alternative methods, assumptions and data were considered. The directors of smaller companies or companies that may not have previously performed, or provided the auditor with, such a detailed assessment on going concern must identify the necessary additional steps. A transparent process of internal review and challenge will also be important, as the auditor will need to understand the nature and extent of the entity’s oversight and governance regarding its going concern assessment. The oversight and governance within the entity will influence the auditor’s understanding of the effectiveness of the directors’ assessment of going concern. When the assessment has been delegated to management, the auditor should expect that the directors possess the skills and knowledge to understand the methods used by management, the ability to evaluate the assumptions used, and the authority to challenge management. Entities will need to consider whether changes to their systems of internal control are required. These changes will inevitably lead to increased costs for entities when making their going concern assessment, perhaps disproportionately so for smaller entities. Nevertheless, the UK market has demanded more reliable corporate information and IAASA believes that the public interest in Ireland is best served by adopting the FRC’s standard with minimal change. The standard will also require increased work effort from the auditor: As part of the auditor’s risk assessment procedures, the auditor must design procedures that actively look for matters or conditions that may cast significant doubt on the entity’s ability to continue as a going concern; The auditor is required to obtain adequate support from the directors for the going concern assessment including methods, assumptions and sources of data used in the analysis; The auditor will need to evaluate how the directors have determined the relevance and accuracy of the methods and data used and understand whether alternative methods, assumptions and data have been considered; The auditor must maintain professional scepticism and probe the directors when audit evidence obtained suggests that there may be bias or contradictory evidence included in the assessment; and The auditor may perform a retrospective review of previous outcomes and forecasts to assist in measuring the effectiveness of the directors’ process for assessing going concern. Events or conditions not identified by the directors If the auditor identifies events or conditions that may cast doubt on the going concern assessment, and which the directors have not identified, the auditor must understand why the relevant events or conditions were not identified. They must also determine whether there is a significant deficiency in internal controls and perform additional audit procedures regarding the newly identified events and conditions. Audit report implications Shareholders and investors can expect to see a change in the auditor’s report with respect to reporting on going concern. The auditor previously reported by exception as to whether the directors’ use of the going concern basis of accounting was appropriate and whether appropriate disclosures were made. Going forward, the auditor must carry out a process of independent testing and examination on the entity’s assessment of its prospects and conclude based on sufficient and appropriate audit evidence. When the going concern basis is appropriate, the auditor’s report will include a conclusion that the auditor has not identified, either individually or collectively, any events or conditions that result in a material uncertainty that may cast doubt over the entity’s ability to continue as a going concern and that the directors’ use of the going concern basis of accounting is appropriate. Also, for public interest entities and certain other entities, the auditor must make additional disclosures in the auditor’s report over and above those previously required. This includes an explanation as to how the auditor evaluated the directors’ assessment of the entity’s ability to continue as a going concern and, where relevant, key observations arising concerning that evaluation. Conclusion Re-establishing shareholder confidence and trust in the audit is critical. Society wants and expects more from auditors concerning the future prospects of entities. Sir Donald Brydon stated in his Independent Review into the Quality and Effectiveness of Audit that “audit is not broken, but it has lost its way and all the actors in the audit process bear some measure of responsibility”. The regulators are of the view that this new standard will go some way to re-establishing trust in the audit. The intention of the standard is not to create a checklist for directors and auditors. Instead, it is to ensure that the directors and the auditors focus on the prospects of the entity and consider all available information. It will put the directors’ assessment of the entity’s ability to continue as a going concern under increased scrutiny and challenge by auditors. It will also, in some cases, lead to significant additional cost and effort for the directors and their auditors. However, if it can provide the earlier warning signs concerning corporate distress that are envisioned, this can only be of benefit to society.   Noreen O’Halloran ACA is a Director in the Department of Professional Practice  at KPMG.

Jun 02, 2020

Why is a target operating model important to your organisation? Kieran O’Brien explains.To succeed in today’s challenging marketplace, organisations must be capable of a continual process of transformation and renewal. To achieve this, an organisation must have an in-depth understanding of its existing business operating model and how this model can be changed to optimise operations with resulting increased returns on investments, better service delivery for customers, as well as new offerings. Recent studies indicate that optimum business models are most often found in start-up entities. In more established entities, however, operating models are often no longer appropriate for the business and the challenges the unit is facing. Your organisation’s business model may have served you well in the past, but there is no guarantee that it will be successful for the future. Business models need to be continuously reviewed and refreshed to deliver on the organisation’s goals. Technology plays a vital role in supporting your business model. However, it is only one of the pillars supporting your business model alongside organisation/people, go-to-market approach, and process. The reality is that many organisations do not fully understand the strengths and weaknesses of their existing business operating model and are often slow to conduct a deep-dive analysis and embrace an enhanced operating model. In this article, we look at how your organisation might review your current operating model to move to a target operating model that creates a platform for sustainable future growth. Definition Although the term is familiar, there are various definitions for the target operating model (TOM). We would characterise it as a representation of the structures needed for an organisation to create and deliver optimal value for its customers in a repeatable manner while delivering on the organisation’s vision and growth strategy. Organisation, market strategy, process, and technology are the key underlying components of a TOM and are critical to its success. Ultimately, the TOM should provide a visual overview of how a business can be ideally structured to implement the organisation’s strategy by showing how each of the main business activities is represented. Common issues In my experience, TOMs can be ineffective due to several common factors. These include: The inflexible nature of historic business models, which fail to support a business that is evolving its operations (for example, a financing organisation that is moving from supporting large/complex transactions to a flow business operation); In financial services, the continuation of the historic segmentation between ‘front office’ and ‘back office’ when it is evident that both cannot continue to operate independently of each other effectively; and Having an operating model that is not aligned to a specific business operation, with the consequence that the organisation develops functional silos that result in process inefficiencies and poor communication. Key elements There can be several aspects to a TOM, but the critical interdependent elements we consider to be essential are:    1.   Organisation/people;    2.  Go-to-market;    3.  Process; and    4.  Technology. We discuss each of these elements in turn below and outline scenarios or questions for consideration under each category.Organisation/people The objective of a TOM is the development of an organisation that will support the business strategy and has clear roles and responsibilities with measurable skills and capabilities. The organisation should have the right number of people with the appropriate remuneration, expertise and experience across all functions. Also, the structure should be transparent, easy to understand and adaptable to changes that will arise over time.  Before determining the appropriate organisational structure, consider the following elements: Define the existing organisational structure; Review current role profiles, reporting lines and the number of people in each role; Review the type of people in each position (full-time, temporary, outsourced etc.); Complete a competence, performance and experience audit; Analyse performance evaluation methods; Analyse remuneration and incentive schemes; Analyse decision-making and governance structures; Analyse the degree of headquarter control versus local/regional autonomy; In a banking/leasing entity scenario and where the entity is bank-owned, determine the level of bank control versus the lease organisation control for critical functions (e.g. credit, pricing, asset management etc.); and Determine whether the entity is a functional or a product organisation. Go-to-market The successful business model should have a go-to-market (GTM) strategy that delivers a range of products and/or services to its customers on a profitable and cost-effective basis. The various GTM channels should be clearly defined and operate effectively. Let’s take the scenario of reviewing the GTM approach for a leasing/financial services provider with a supporting bank branch network. Areas that could be subject for review before deciding on the optimum GTM strategy include an analysis of: The entity’s commercial approach; The revenue and profitability model by product and service; The sales/operations approach, with a focus on the direct and inside sales route; How the supporting bank branch network operates and is controlled; The distribution routes to market through brokers, partnerships and others, and how this operates and is controlled; The typical customer profile and segmentation; The product and service offerings; Regulated and non-regulated product offerings; ‘X as a service’ and pay-per-usage products and services; Value-added data and customer insights in the customer value proposition; Various product portfolios for cross-selling opportunities; The ancillary product offerings including insurance, maintenance and others; Ancillary product offerings provided by associations, partnerships and joint ventures; and The asset management, end-of-lease operations and systems capabilities. Process Organisations must analyse and define the optimal business processes that support their business objectives. This involves the development of processes that are scalable, repeatable and the performance of which is measurable. An end-to-end ‘as is’ process review is recommended to map out the process suppliers, inputs, outputs and customers, and detail all critical dependencies. An essential element of this analysis is the identification of the core and non-core processes of the business to determine where value is added. Areas that could be subject for review before deciding on the optimal processes include: A review of the existing operational model, and determining whether it is centralised or decentralised; A review of the organisation’s governance and control procedures; Analysis of the processes and services that are supported in-house versus outsourced along with their interfaces and management; Analysis of the level of outsourcing, including the types of outsourcing and whether outsourcing is single-vendor or multi-vendor; Analysis of any shared service centre(s) supporting the organisation; In a bank-owned leasing entity scenario, an analysis of any processes and services supported centrally by the bank; A review of any flow business processes, mass customised processes, and any bespoke solution processes; and A review of the customer interfaces and aspects of online/offline elements of the customer journey and their interfaces. Technology The chosen business model must have the necessary technology infrastructure to support both people and processes. There is a requirement to identify and implement the technological and digital systems required for the optimum delivery of products and services to customers. Areas for consideration include digitalisation, data analytics and services automation. Taking the scenario of a bank-owned leasing organisation, areas for review before deciding on the optimal technology platforms include: A review of the core supporting systems/platforms covering front-end, back-end, CRM (customer relationship management) and reporting; A review of the level of integration, if any, of lease entity systems with bank systems; Analysis of the level of end-customer and intermediary systems linkage and automation; Analysis of the systems for quotation, credit approval and asset management; Analysis of technology capabilities and the technological ecosystem to support new products, especially in the areas of ‘X as a service’, and pay-per-usage models; and A review of the extent and quality of both internal and external data sources and the analytical techniques used to support better decision-making, as well as unlocking economic value and generating customer insights. The ‘Triple S’ approach The design of an effective TOM that supports your business should incorporate the essential elements described above. At the outset, we recommend that you consider what we call the ‘Triple S’ approach. Strategy: what is the overall business strategy, and what are the key underlying elements supporting the strategy? These elements should include the offer (products, solutions and services); go-to-market (the segment/category of clients to whom the offer is addressed); and channel (the route through which the customer will be serviced); Structure: what organisational and operational structure is required to support the strategy? This is the framework of the operating model; and Systems: what operational procedures and IT systems are required to make the structure work effectively? This is the detailed design and implementation of the TOM. Considering that the TOM is the combination of structure and systems, this approach should ensure that the TOM is aligned to a specific business model. However, variations of the model may be required within an organisation to support individual business lines.The benefits An optimised TOM enables your business to implement its vision and business strategy effectively. Working towards the right TOM for your business will identify deficiencies and gaps in your organisation that require remediation, such as redundant roles and role duplication. It provides an opportunity to optimise your business operations and reduce your operating cost by looking at various insourcing/outsourcing alternatives. It also provides a significant level of internal transparency to your staff, giving clarity around roles and decision-making and often accelerating customer outcomes. Before embarking on a significant TOM review, it is worth completing an independent evaluation of the TOMs employed by your peer entities. This can provide invaluable insights into your competitors’ operations and allow you to focus on the ‘best in class’ elements for adoption in your organisation. But beware – making changes to your organisation’s TOM can result in major transformational projects, which requires a robust governance structure. In summary, designing a new TOM provides an opportunity to optimise the size, structure and shape of your business and ultimately, deliver on your organisation’s strategies.Kieran O’Brien FCA is Executive Director at Invigors EMEA Limited (part of The Alta Group).

Jun 02, 2020

With fintech innovation transforming the financial services sector, banks must undergo a strategic revolution – as IBM did in the 1990s – to survive and thrive. When your Irish mammy says she’ll “Revolut ye some money” for her grandson’s birthday, you know that fintech has moved mainstream. Leading fintech firms now have market cap valuations to rival the banks, with investors (or speculators) pricing in significant growth expectations at the expense of incumbents.  As banking boardrooms grapple with their response to the fintech onslaught, they could do worse than look through the lens of history to find inspiration from a similarly disruptive period in the IT sector in the 1990s.    Sword to a gun fight Gary Hammel, who is one of the most significant strategic thinkers of the 20th century, once prophesied that “in the new economy, those who live by the sword will be shot by those who don’t”. He observed that, when technological disruption occurs in a mature sector, dominant incumbents often suffer from the “tyranny of success”. They rigidly stick to the business model that delivered decades of success in the misguided belief that it will sustain success into the future. Before they know it, they become irrelevant and decline. Roll forward to 2020 and observe the vast sums of global capital that have been invested in fintech organisations over the past decade, as investors believe they can tap the vast profit pools (and data) that banks have had to themselves for centuries. While global bank CEOs were at first in denial, and even complacent about the fintech threat, many are now concerned by the exponential disruption to their core revenue lines. In considering a response, bankers could do worse than study IBM’s resurrection in the 1990s and how it underwent a strategic revolution to renew its lease on success. But before we go there, let us delve deeper into the disruption that is happening in financial services in 2020 and the banks’ response thus far. Fintech disruption A holy trinity of tailwind forces are driving fintech’s disruption of banking: A technological revolution (e.g. data and artificial intelligence); A paradigm shift in customer expectations (e.g. those who demand low effort and excellent user experience banking); and Favourable regulatory changes (e.g. the second Payment Services Directive (PSD2), which has opened up banks’ transaction data to fintech companies). Fintech companies have developed superior value propositions across nearly every product line. This allows consumers to send and convert money more cheaply, pay for goods and services much more easily, borrow money in an instant (no form-filling), and invest money smartly at a fraction of the cost charged by incumbents. They have perfected these propositions with helpful feedback from digital-savvy early adopters and now have their focus set on acquiring the banks’ core customers. Bank executives attempt to counter the fintech threat by allocating finite investment resources to one product line under massive attack (payments, for example), leaving other product lines open to disruption (business lending or investments, for example). The multi-flank offensive is stretching banks beyond their capacity to respond, but the fintech companies are only getting started. The greatest corporate turnaround of them all Before a mortal blow is delivered, banking CEOs should learn from the greatest corporate turnaround of them all. When Lou Gerstner took over as IBM CEO in 1993, he inherited a sprawling, rigid, loss-making organisation in rapid decline. They could not match the pace of product innovation from a new breed of agile competitors. Each competitor’s specialist focus on a part of the IT value chain enabled them to develop value propositions far superior to the ‘jack of all trades and master of none’ IBM. Within a decade, Gerstner had led IBM through one of the most successful corporate turnarounds and reinventions of all time. Gerstner and his team observed that, while corporate CEOs/CIOs were choosing IT products from competitors, the result was an IT architecture stack encompassing many different suppliers, which brought huge frustrations. These same corporations now needed a ‘technology integrator’ partner with a whole-market knowledge who could help them select, integrate and manage their portfolio of IT suppliers. For Gerstner, this was the eureka moment. This significant emerging customer need showed him that the future of IT would be services-led, not product-led. IBM’s perceived greatest weakness became their most significant asset, as they had the market knowledge needed to win in this lucrative new services market. How could this play out for banking? Let us imagine how this could play out for banking. We are in the year 2030 and the ‘platformification’ of financial services has occurred, with a handful of trusted financial platforms banking all of Europe’s consumers and offering any banking/fintech product these consumers could need. Think Amazon, but for financial services. 90% of incumbent banks will have missed the boat by 2030. They either went bust or are now operating as a utility company, offering commoditised financial products through these platforms. Fintech companies are also resigned to offering their products through these platforms, as the cost and effort involved in customer acquisition became too high. ABC Bank is the exception and has become the dominant consumer financial services platform player in the UK, Ireland, Benelux and the Nordics with 50 million customers. In 2020, ABC Bank saw an emerging market need for a trusted ‘financial integrator’, one that could make sense of – and harness – the multitude of great fintech offerings for the benefit of the consumer. The bank was brave and decisive, investing heavily in the right capabilities to become the Amazon of financial services. In particular, it invested in its digital front-end, third-party management capabilities, and data analytics capabilities. Consumers in these markets know that ABC Bank’s intuitive and secure platform can help them find the leading and best value fintech product offerings on the market. Customers are reassured that ABC Bank has properly scrutinised any fintech offering listed on the platform before giving the green light to offer their services. They have no worries, therefore, about their data or the security of their money. As consumers’ financial affairs (and data) are managed within one platform – cash, investments, pension and expenditure – ABC Bank has a holistic view. Remember, data is more valuable than gold. ABC Bank is, therefore, in a unique position to provide higher value in-house services, such as holistic analysis and advice to help consumers make better-informed financial decisions. If all this seems a bit far-fetched and futuristic, it is worth noting that this change has already occurred in Asia with the meteoric rise of Ant Financial. This financial services platform did not exist five years ago and is now worth $150 billion. Conclusion As banking boardrooms regroup following the pandemic and look once again to the future, perhaps they can dust-down the IBM playbook. They can position themselves at the centre of their customers’ financial lives as the financial integrator, making sense of – and harnessing – the power of fintech innovation for their customers’ benefit. Those who move swiftly and decisively can seize the day. Those who procrastinate and live by the sword will be shot by those who don’t. Vincent Colgan is a financial services strategist with expertise in banking and fintech collaboration.

Jun 02, 2020

Although the weeks and months ahead will undoubtedly be challenging, quality should not be compromised argues Fiona Kirwan. Full-year and interim year reporting deadlines are fast approaching for accountants both in industry and practice. Companies’ financial reporting functions and their auditors are getting used to working in ‘new normal’ circumstances. However, these changed circumstances must not compromise the quality of the work we all deliver day-to-day. Here are some issues Chartered Accountants should consider as they seek to maintain the highest level of quality in all aspects of their work. People COVID-19 has transformed the way we live and work. We have heard this phrase a lot in recent weeks, but it remains true. Almost instantly, employees who are used to the rhythm of the workplace became remote workers – many without the chance to prepare adequately. This creates challenges for managers of both finance and audit teams in leading teams remotely. It is more challenging to coach and supervise people who are not physically in the same location. It is therefore important to stay in touch and stay close to your people. Connecting as a community during this time takes imagination. It could mean developing new channels or social tools for employees to share stories; it could mean embracing video calls to create a sense of physical presence. Virtual social events are becoming the norm. Even small investments in building a genuine community can have a significant impact on your employees’ morale. This sense of community helps when coaching teams. People who are closely aligned on a personal level will find it easier to communicate complex information simply and team members will feel more comfortable asking questions and querying essential messages. Teams must be aware that some colleagues may not have optimal ‘work from home’ environments; some are juggling home-schooling with office hours; others are working from their bedrooms in shared living spaces. Organisations should implement flexible working structures to allow teams to deliver quality work while maintaining processes to ensure confidentiality and transparency. Such flexible working structures mean that everyone in the financial reporting process, both finance teams and auditors, must allow extra time to execute tasks remotely. Technology Almost all finance functions and accounting firms transitioned to remote working arrangements overnight, and the quality of an organisation’s technology is critical to day-to-day operations and ensuring business continuity in this scenario. Some organisations may have challenges arising from the fact that their teams are heavily reliant on desktop computers, second screens, or printing facilities that are not available in the home environment. The move to remote working could also leave team members isolated, but this is where the ability to host video conferences, share screens, and collaborate in files in real-time has become vital. Not only do these technical solutions allow teams to communicate internally, they have also become critical channels for communication between auditors and their clients. At PwC, we utilise our combined suite of audit tools – Connect, Aura and Halo – to communicate with our clients and colleagues across the globe. We also use Google’s G-Suite of collaboration tools, and Datashare to help us work with the data of clients with less complex IT systems. The recent uptake in the adoption of these technologies has seamlessly transitioned a lot of this work, which was historically done in person, into the digital realm.  Controls One area where the successful application of technology solutions has become essential is the implementation of internal controls over financial reporting. The appropriate tone from the top is vital; managers need to remind people that remote working might change how controls work, but it does not lower the bar. How companies operate their controls has been amended to allow for remote working. For example, a manual sign-off may now be replaced with a confirmation by email. In these uncertain times, companies will want to ensure that shortcuts are not being taken and rigour – both in procedures and the provision of appropriate evidence to support the implementation of controls – are maintained. Auditors will need to consider whether the controls, as they currently operate, remain fit for purpose and any increased risks that may have arisen from recent changes. Financial reporting The COVID-19 outbreak, and the measures taken to mitigate its impact, are having a significant effect on economic activity. This, in turn, has implications for financial reporting. Companies and auditors must work together to ensure that quality is not compromised – even in challenging circumstances. The following is a sample of the wide range of accounting issues that companies and auditors have considered in recent weeks: Going concern and viability statement: companies must assess going concern at each annual and interim reporting period, with a look-forward period of one year from the financial statement issuance date. Companies impacted by COVID-19 have had to update their forecasts and provide appropriate disclosures to alert investors about the underlying financial impact and management’s plans to address it, including if conditions give rise to uncertainties about the company’s ability to continue to operate; Subsequent events: the consensus is that COVID-19 was a non-adjusting post-balance sheet event for 31 December 2019 reporting. However, the appropriate disclosure of impact on the overall financial statements is a critical element of the financial statements; Measurements of assets: for year-end reporting and interim statements after December 2019, companies and auditors must assess the timing of COVID-19-related events to determine the impact on assets, including goodwill and indefinite life intangible assets, inventories, and deferred tax assets. Companies and their auditors must consider disruptions to the entity’s business or the broader market in determining recoverable amounts of assets. Careful consideration must be given to the net realisable value of inventory and, in the event of a price decline, whether prices will recover before the inventory is sold; Revenue recognition and receivables: identify the appropriate sales price given increases in expected returns, additional price concessions, or changes in volume discounts. Companies and auditors should be mindful that revenue can only be recognised for new sales if payment is probable under IFRS 15; Alternative performance measures: the European Securities and Markets Authority (ESMA) has provided guidance relating to the use of Alternative Performance Measures (APMs) in the context of COVID-19. Consistent with previous guidance relating to the maintenance of consistency of APMs from one reporting period to another, ESMA advises that rather than adjusting existing APMs or including new APMs, issuers should improve their disclosures and include narrative information in their communication documents to explain how COVID-19 impacted and/or is expected to impact on their operations and performance; the level of uncertainty; and the measures adopted – or expected to be adopted – to address the COVID-19 outbreak; and Internal consultations and reviews: audit teams face significant additional internal consultations and reviews in the current environment. Early agreement on timetables and collaborations between companies and auditors will ensure that quality is not compromised. As events continue to unfold, the challenges faced by accountants both in industry and practice are mounting. The weeks and months ahead will undoubtedly be challenging. However, quality should not be compromised. Supporting our colleagues and utilising our technology capabilities will ensure that control frameworks continue to operate, financial reporting will be clear and transparent for all users, and audit quality will not be compromised. Fiona Kirwan is a Director at PwC’s Assurance Practice.

Jun 02, 2020

After lockdown eases, will the economy face ‘revenge spenders’ or ‘tentative consumers’? Either way, warns Andrew Webb, ‘business as usual’ is going to look very different and businesses will need to adapt hard and fast. As lockdown restrictions begin to ease across the island of Ireland, it is natural that we start to think about the shape of the economy into which we are emerging. Will the various measures taken to protect jobs and businesses succeed in cocooning the economy from a sharp and protracted downturn, or are we facing into a long decline? The hope as we entered lockdown was that the economy would go into a deep freeze and then would pick straight back up from where it left off after the thaw. This is the much hoped for V shape decline and immediate bounce back. While that remains the hope, there is a growing body of emerging data to suggest that some lasting damage is being inflicted, and a longer recovery might be more likely. Astounding decreases in employment and vacancies, coupled with reduced consumer and business confidence, is leading economists to think about whether the path over the next couple of years is a U-shape, where output wallows in a trough before climbing back to pre-pandemic trends. While not an ideal scenario, it would be a much better outcome than the feared L-shape which sees output declining and remaining permanently below where it would have otherwise been. Regardless of the path the economy takes, the pandemic and subsequent lockdown have prompted consumers and businesses to make dramatic changes in behaviours and practices. Consumer behaviour will now go one of two ways – ‘revenge spend’ for all the leisure and socialising that we missed would be a considerable economic boost, whereas the opposing ‘tentative consumer’, fearful about job security, will likely save more, thus reducing demand and prolong the recovery. For businesses, there is much to consider. That dangerous phrase which can hold new and better processes back – ‘we’ve always done it this way’ – can surely never be uttered again without robust challenge. We recently had to try new things at a pace, and we pushed our technology hard. In most cases, it held up and should now embed into ‘business as usual’. At a more macro level, business (and indeed country) resilience and contingency planning will come to the fore like never before, and I would expect this will lead to fundamental shifts. There is increasing talk of the end of globalisation as firms that were reliant on suppliers from thousands of kilometres away faced massive disruption, and countries without key capabilities in certain manufacturing sectors experienced difficulty in obtaining PPE, ventilators and testing capability. A quickening of the pace on automation across the economy is likely to follow, building in efficiency gains and more resilience to any future lockdowns.    Of course, it isn’t just consumers and businesses that drive the economy. The Government’s role, particularly around providing job/income support, has come into particularly sharp focus. How we pay for the large public spending increases will come to the fore in due course. Given the austerity and public sector cuts that remain in our collective memories, I sense no appetite that an austerity agenda will fly again. That’s a discussion for another time. For now, the consensus view accepts that the economic and social cost of mass unemployment far outweighs the financial cost of supporting people to remain in work and supporting businesses remain viable. Andrew Webb is the Chief Economist at Grant Thornton NI.

May 21, 2020

How can SMEs prepare for the severe economic shock that is going to hit? Ger Foley outlines how businesses can adapt and continue in a different way. I will not pretend to be an advisor who has all the answers for business owners on this. I absolutely don't. However, as a business owner myself, I can relate to all the uncertainty that business owners are facing. Short-term actions Things are clearer when viewed in front of you – on a spreadsheet or even just on paper – it doesn't matter what you use, but it is essential for business owners to make the financial state of their business visible. This will help with the decision-making process and will continue to be critical in the future. You should approach this by: Determining the cash reserves of the business. Finding out how much is owed to you from customers, and what exposure you have to debtors that are unable to pay in the short-term. Finding out the sales pipeline or order book for the short-term (three to six months). Risk profile this pipeline based on the customer, their industry and how their business might be impacted. Determining what the profit margin will be on certain sales. Finding out the current fixed weekly/monthly costs of the business – rent, lighting and heating, insurance, etc. Ignore wages/loan repayments for now. Establishing your payroll cost on a weekly/monthly basis. Determining business loan repayments on a weekly/monthly basis. You are now armed with data to allow you to make decisions. It may be possible to defer or get some extension from suppliers concerning the fixed costs mentioned. The banks will help, although this situation is evolving clarity is needed on exactly what this help will look like. Contact your bank and tell them you are trying to understand your position and will need support. Request a holiday or some other short-term reprieve from your loan repayments. Have a very transparent and open conversation with your team regarding payroll. Allow them to look at the numbers and ask for suggestions or input to the discussion. Longer-term actions We are in for a severe economic shock in the short-term. We are all in the same boat. All we can do in the immediate term is to survive but, more importantly, help each other and our communities. Business owners need to have practical positivity and approach the next chapter with the same level of enthusiasm they had when they started their business. Businesses have been built to where they were pre-COVID-19 so they can be built again. Will they look the same? Possibly not, but the SME sector is excellent at being agile. There are certain approaches that can be followed by the business community: Show leadership as business owners in following HSE advice and return to work protocols. Support their local economy where possible by using local products and services. Local businesses able to operate also need to support the community, e.g. ease of access, quality of service, coming up with innovative ways of ensuring the community has access to the products and services they want. How do you make your product or service relevant in these new circumstances? Businesses that remain strong have a responsibility not to take advantage at this time. They need to pay suppliers quicker than they have previously. Local and national government need to continue to help business owners with whatever supports are needed. We need a period where SME owners can focus on reinventing and adapting their business without the immediate pressure of cash flow and liquidity concerns. Over the coming weeks, as we understand more about what the medium-term future environment will look like, all business owners are going to have to consider their business models and how they can adapt to a new environment. Ger Foley is a Partner at Comerford Foley.

May 21, 2020
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