Comment

Brian Keegan considers the poignant parallel between Brexit and New Zealand in the 1970s. "Earthquake? Best thing that ever happened to us.” This isn’t the best response to the damage done to the city of Christchurch in New Zealand in the wake of the terrible earthquake in 2011. My man had the grace to acknowledge as much after he remembered the appalling loss of life and limb from this particular natural disaster. Nevertheless, as someone who was deeply involved in the New Zealand construction industry, he was all too happy to see the opportunities created by the devastation. It isn’t the first time that New Zealanders suffered due to powerful circumstances outside their control. While the memories of the 2011 earthquake are clearly fresher, there is also a folk memory among New Zealanders of the economic damage caused to them when the United Kingdom joined the European Union in 1973. For a country largely dependent on agriculture exports to its former Commonwealth headquarters, the British accession to what was then the European Economic Community some 40 years ago was a disaster. The economic disruption of 40 years ago is comparable to the threatened damage from Brexit to the food industry of Ireland – north and south. In the 1970s, New Zealand’s main exports were butter and lamb. Despite being on the other side of the world, the UK was a key market for these goods and, in fact, accounted for some 30% of New Zealand’s exports. Being members of the Commonwealth, New Zealand had preferential access to UK markets. That access was to be a casualty of Britain’s accession to the EU. In fact, so great was the problem for New Zealand that London committed to doing what it could to protect New Zealand’s vital interests in the course of negotiating the British accession treaty. The so-called Luxembourg agreement guaranteed limited access for New Zealand produce for a five-year transition period. The idea was to give New Zealand breathing space to negotiate free trade deals with other markets and diversify its export offering, but the economy tanked nevertheless. If all this sounds familiar, that may be because we are witnessing history repeating itself in a way that would have considerable entertainment value if the issues weren’t quite so serious. Leo Varadkar’s mischievous remark that Westminster should offer pay-per-view wasn’t that far off the mark. We may, however, be watching the wrong channel if we are to learn from this repeat – it’s the New Zealand experience we should focus on. In the 1970s, New Zealand wine was virtually unobtainable in Europe and kiwi fruits were a rarity. Now they are mainstream. 40 years on, New Zealand’s export destinations are Australia, China, the United States (US) and Japan in order of importance. The country’s volume of trade with the UK has declined by over 60%. Our Brexit discussions must now move on from brinkmanship and dead-in-a-ditch rhetoric. We are going to have to figure out how to co-exist and trade with our nearest neighbours, culturally and geographically. Business will have to work out how to diversify and establish new markets, and hopefully avoid a repeat of the worst aspects of the 1970s suffered in New Zealand. I doubt very much that any of us will ever be exclaiming, however thoughtlessly like my earthquake man, that Brexit was the best thing that ever happened to us. That’s because there’s one other point about the New Zealand experience. Even though it was clear for about a decade that the trading relationship with the UK would inevitably change in 1973, the New Zealanders seem to have done precious little about it until the hammer fell. Sometimes it takes a crisis to deliver change. Dr Brian Keegan is Director of Advocacy & Voice at Chartered Accountants Ireland.

Brexit deadline The 31 October Brexit deadline is fast approaching and clarity on the issue is as far away as ever. At the time of writing, many options seem possible, including a Brexit delay and a UK general election, but perhaps the most likely prospect is a no-deal or limited-deal Brexit. Both the Irish and British governments have urged businesses to prepare for Brexit, particularly those that import, export or transport goods, animals or animal products. It seems that the UK government is operating on the assumption that a hard border will return to the island of Ireland, as revealed in a UK no-deal contingency document codenamed ‘Operation Yellowhammer’, which was eventually published in mid-September after leaks to the press. The document warns of potential unrest in Northern Ireland along with road blockades, job losses and disruption to the agri-food sector, as well as an increase in smuggling and the potential for disruption to electricity supply. We must hope that this is a dire overestimation of a worst-case scenario. Meanwhile, in Dublin, Institute President Conall O’Halloran recently met with Minister for Finance, Public Expenditure and Reform, Paschal Donohoe TD, to discuss the post-Brexit scenario as well as the Institute’s 2020 Budget submission and other business issues. Brexit support Our Institute will do everything it can to support members and member firms at a time of great uncertainty. You can read our latest updates on www.charteredaccountants.ie, particularly in our Brexit Web Centre and our page dedicated to no-deal Brexit planning. We are encouraging businesses across Ireland and the UK to ensure that they can continue to trade with each other post-Brexit. Applying for a customs registration (an EORI number) is just the first step in the process. Getting an EORI number takes between three and five minutes and can be completed online. While some traders have experience in the customs formalities required to import and export outside of the EU, it will be a first for many – particularly smaller enterprises. Businesses need to upskill in the area of customs using Government supports. They should also assess whether they have gaps in customs knowledge. Revenue estimates that customs declarations are expected to increase from 1.4 million to 20 million per year post-Brexit. HMRC estimates that declarations will grow five-fold to around 250 million. It’s best to be as prepared as possible. New academic year As we move into October, our Institute is about to welcome a new crop of students following a campaign to recruit the brightest and best to the profession. A new programme of specialist qualifications covering areas as diverse as corporate finance and cybersecurity are also getting underway. A central part of our strategy is to train the very best business professionals so that they can make a significant contribution to the economy on the island of Ireland, and further afield. We’re working hard to ensure that whatever the economic climate, we’re providing high-quality Chartered Accountants who will make a valuable contribution to firms and businesses. On behalf of my colleagues in the Institute, I’d like to offer our best wishes to all of our new students as they start out on their Chartered journey. Barry Dempsey Chief Executive

Charities in Northern Ireland may have to provide more detail to the Charities Commission in the near future, but any initiative that restores the public’s trust is to be welcomed. By Angela Craigan On 27 August 2019, the Charity Commission for Northern Ireland opened a public consultation in respect of new questions charities must answer in their annual returns plus additional information that organisations applying for charitable registration online must answer. The proposed questions cover topics such as safeguarding, data protection, loans and payments to related parties, and the use of commercial fundraising partners. The Charity Commission NI advises that the questions are designed to help it gather important information on individual charities and the charity sector as a whole. The format of the proposed new questions requires each charity to reveal if any trustee owes money to it, whether any of the charity’s assets are leased from a trustee, and whether a trustee has been paid for carrying out their role. These questions are already asked in the annual monitoring return, but will now be asked when applying for registration. The Charity Commission NI also intends to ask charities if they have reported a data breach to the Information Commissioners Office in the past year. It will also collect information on what percentage of charitable expenditure relates to charitable purposes for organisations of less than £250,000 a year. All of the new and revised questions Charity Commission NI propose to include in the registration application and the Annual Return Regulations 2019 are available to view in the consultation document. The public consultation will focus on the most significant questions, and will allow an opportunity to voice opinions on the proposed changes. The consultation process will run for eight weeks, closing on Tuesday 22 October 2019. The changes will be of particular interest to members working in the charity sector and those who are trustees of Northern Ireland charities. The consultation has arisen as a result of increased risks within the charity sector including safeguarding, cybercrime and fraud. These increased risks have had a negative impact on the public’s perception of the charity sector. A key role of the charity commission is to increase public trust and confidence in charities. The commission is of the opinion that the additional questions will increase transparency and, as a result, public confidence in charities. The recent safeguarding failures in some high-profile charities have highlighted the importance of trustees being aware of their responsibilities and the safeguarding standards expected of them. The commission has added questions in relation to the ‘expression of intent’ form that is completed by those waiting to be called forward for registration. The commission also proposes to add more questions to the classification section of the charity registration form. In this section, applicants describe their charitable purpose, the focus of the charity and the beneficiaries of the organisation. It is important that trustees understand their responsibilities in respect of the information filed with the Charity Commission. Trustees may delegate the task of submitting an application or annual monitoring form, but they cannot delegate the responsibility of making sure they are accurate and submitted on time. If an annual monitoring form is late, the register of charities shows them as being in default. Once submitted, the register will read “Due documents received late”. This is of increased importance as funders are now using the register to check if forms are being returned late and will look less favourably on charities that file late when awarding grants. As an advisor to a large number of local charities, and as a trustee of Action Mental Health and New Life Counselling, I firmly believe that this sector is invaluable. I therefore welcome any move to increase public confidence in the charity sector.  Angela Craigan FCA is a Partner with Harbinson Mulholland, the accountancy and business advisory firm.

There is no active market for the sale and purchase of privately owned businesses. Any belief that there is a constant search by active purchasers is false. The reality is that many businesses – probably half, or more, of medium-sized companies – are likely not saleable. Erratic history, poor profitability, inadequate finances and uncertain prospects are the usual reasons cited for this circumstance. Realistically, the realisable value of a business to its owners may only be in its continuity. The surprise is that even profitable and well-run businesses are not necessarily saleable. Obviously, this is a disappointment for the owners and an enigma as to why this happens. After an initial flurry of interest in purchasing such a company, the closer assessment takes place. The cooler review by a potential purchaser is guided by the rule that there must be a worthwhile commercial reason to acquire a business, and not simply because it is for sale. Experience suggests that the principal reasons why one business acquires another are as follows: The acquired business is complementary to the acquiring business – for example, a light engineering business acquiring a metal fabrication business, or a transport company acquiring a warehouse business; The businesses share common characteristics that enable synergy and/or joint cost reductions as an added-value benefit to the purchaser; The acquisition protects and/or enhances an existing advantageous relationship between the two businesses; and The acquired business has knowledge, expertise, intellectual property or a location that provides added value to the acquiring business. It follows that the potential for the sale of a ‘standalone’ business (i.e. with none of the above reasons) is limited and only likely in the form of a management buyout. A further restricting factor, and this is true for acquisitions generally, is financing the purchase. Marketplace experience suggests banking caution on lending for acquisitions. There are many reasons why, not least that the underlying assets in the acquired company are not likely available as security due to company law and tax complications. The ‘asset’ being financed (i.e. the shares in the acquired company) is not tangible security, being no more than an expectation of future profitability. In any event, it takes time to sell a business. In an ideal world, the decision to sell would be made up to two years beforehand (although this will likely only be known to the owner). It isn’t that the best market conditions for a sale can be confidently predicted that far ahead; instead, there will be a readiness for sale that can be deferred if necessary, or brought forward if the pre-sale planning is in good order. As with most decisions, timing is important and good forward planning gives flexibility. This planning means not being your own advocate. An experienced corporate finance advisor is essential to a successful sale. Once a sale is contemplated, an informal discussion with an advisor will help you decide whether to sell or not and what will happen subsequently with regard to timing and process. Advance due diligence work means identifying and tidying up awkward circumstances that could derail a sale or adversely affect a sale price. The entire sale and purchase process, when commenced, will likely take between three to six months from start to finish.  It is the job of the corporate finance advisor to direct, coordinate and manage the process from start to finish. The advisor will operate in parallel with a legal advisor; and the same for the purchaser. The process, and the transaction itself, will generate an amount of legal and related documentation – all of which has to be identified, drafted, negotiated and completed. Third parties such as banks, landlords and regulators may also be involved and could, in turn, require documentation and cause delays. Properly done, the sale of a business is a backwards process known as ‘begin with the end’. In other words, the thrust at the outset is to identify prospective purchasers or sectors that likely fit one or more of the reasons for an acquisition, as set out above. Then, ensure that the information and sales approach is directed accordingly. Des Peelo FCA is the author of The Valuation of Businesses and Shares, published by Chartered Accountants Ireland and now in its second edition.

Claire Lord explains why it’s better to get your business’s record-keeping right in your own time and on your own terms. "Run your company like you are planning to sell it” was a piece of advice given to a room full of early stage companies attending a talk being delivered by a tech entrepreneur, who had successfully navigated the pathway from idea through development and scaling to a lucrative exit. He was calling it as it was: you are pursuing your respective endeavours to make money, so do everything you can to maximise that return. When great ideas are being converted into profit-generating businesses, the focus is often on the development of complex technologies, the routes to market, the sales strategies, the hiring of the very best employees quickly. Often the paperwork, the record-keeping, the ‘routine’ pieces of the puzzle are put on the long finger, to be dealt with when there is time. But rarely is there ever time and the longer the record-keeping is neglected, the harder and more expensive it becomes to put right. Irish companies are required by law to maintain a number of books and registers. These include proper accounting records that correctly record and explain the transactions of the company and that enable its assets, liabilities, financial position and profit or loss to be determined with reasonable accuracy at any time.  A company must keep registers of its members, directors and secretary, and disclosable interests. It must also keep copies of instruments creating charges and copies of directors’ service contracts. The Companies Act 2014 further requires companies to keep minutes of shareholder and director meetings. In respect of minutes from shareholder meetings, the minimum detail to be recorded is a summary of the proceedings of the meeting and the terms of the resolutions passed. In respect of minutes from board meetings (which includes meetings of committees of the board), the minimum detail to be recorded is the appointments of officers made by the directors, the names of the directors present, a summary of the proceedings and details of all resolutions passed. In the case of both meetings of the shareholders and directors of a company, the minutes should be prepared “as soon as may be” after the meeting has been held. Certain of the registers and documents required to be kept by a company can be inspected by the shareholders of that company. These are its registers of its members, directors and secretary and disclosable interests, and the instruments creating charges and directors’ service contracts. Members of the public are entitled to inspect a company’s registers of members, directors and secretary and disclosable interests. A company is permitted to keep any of these registers and documents electronically (other than minutes of meetings of shareholders) once it puts adequate measures in place to guard against, and detect, falsification and once they can be easily reproduced in legible form at a place in Ireland. When it comes to the day-to-day running of an Irish company, it would be unusual for a request to be made by a shareholder or a member of the public to inspect the registers and documents that the law permits them to inspect. On the other hand, if a company was the subject of an interested investor or acquirer, it would be most usual for them to require production of all these registers and documents for due diligence purposes without delay (subject, where the need permits, for obligations of confidentiality to be agreed and documented). When there is a gap in record-keeping, which is likely to occur when ‘the paperwork’ has been neglected, not only is the prospective investor or acquirer unable to satisfy themselves that they have the full history of the company in terms of its governance proceedings and compliance with its statutory obligations, but the impact in terms of cost on the target company and its owners to rectify that neglect under time pressure and the scrutiny of an impatient investor or acquirer can be significant. Record-keeping is one of the things that you as a business owner can control. Record keeping can be routine and inexpensive when the time is taken at the outset to get the processes, procedures and resources right. Even if you don’t have plans to sell your company, run it like you are planning to sell it. It’s better to get the record-keeping right in your own time and on your own terms, rather than it being one of the elements that undermines or adds unnecessary cost to that lucrative exit when it does come.   Claire Lord is a Corporate Partner and Head of Governance and Compliance at Mason Hayes & Curran.

Could the fall in interest rates result in an economic ice age for western economies? By Cormac Lucey Across the developed world, interest rates have collapsed over recent decades. Yields on German government 10-year bonds fell below -0.7% this month while yields in Japan were hovering at -0.3%. Japan has struggled to combat low growth and low interest rates for 30 years. Only America, where rates on government bonds remain at about 1.6%, has avoided Japanification. So far. The trouble is the US may be headed that way too – its rate has halved since last October. Why have interest rates fallen so far, and where might they now be headed? Several factors influence underlying interest rates. The first is the rate of inflation. In theory, real interest rates (after we exclude the inflation factor) should be relatively stable. So, if inflation drops sharply, we would expect a sharp drop in interest rates. And inflation has indeed dropped sharply in western countries over recent decades since it peaked in the inflationary 1970s. Nonetheless, in recent times real interest rates have also dropped. It used to be the case that bank depositors got a rate of interest that exceeded the rate of inflation and provided them with real capital appreciation. That is no longer the case. Today, depositors get negligible or nil rates of interest income even though inflation persists and erodes the underlying value of their savings. There are other factors at play. The biggest cause of ultra-low rates is weak economic growth. If growth rates are high, there is substantial demand for investment funds which stokes demand for deposits (so that banks will have sufficient funds to lend) and supports higher interest rates. Low economic growth pushes interest rates down. Over the twentieth century, productivity per worker grew in the developed world at about 2% per annum. Since the turn of the century, underlying growth amounts to half or less than half of that rate. This problem has been described as “secular stagnation”. There has been extensive academic debate on the subject, but nobody has come up with a convincing explanation for this drop in underlying economic growth. Ageing populations are another factor propelling interest rates downwards. The longer we anticipate our life after retirement will be, the more we need to save to fund our retirements. If the supply of savings increases then, all other things being equal, we would expect the price of savings (i.e. the rate of interest) to fall. There are several problems with interest rates being this low. Central bankers have less interest rate-cutting ammunition with which to fight the next recession. It is notable that the European Central Bank is already contemplating monetary policy relaxation to fight the next downturn without having once felt able to increase its base rate of interest during the economic recovery since 2010. Commercial banks also have big problems as a significant element of their profits – interest income generated from current account deposits on which they pay no interest – has dried up in today’s low interest rate environment. That helps explain why the index of euro area bank equities has fallen in value by over 40% since January 2018. Albert Edwards, a strategist with the French investment bank, Société Générale, has long predicted this fall in interest rates and an economic ice age for western economies. He recently asked: “Do market participants really believe fiscal stimulus and helicopter money will save us from a gut-wrenching global bust that will make 2008 look like a picnic?” He argues that the current government bond rally is not a bubble, but an appropriate reaction to the market discounting the next global recession. This means that “the bubbles are not in the government bond market in my view. They are in corporate equities and corporate bonds”. Ouch! Cormac Lucey FCA is an economic commentator and lecturer at Chartered Accountants Ireland.