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All sectors of the Irish commercial property market are performing well and are expected to continue to do so over the coming months, writes Marie Hunt. Following a bumper first half to the year in the Irish commercial property market, a very busy autumn season is now commencing with several large transactions due to conclude and a surge in the volume of property assets expected to be formally launched for sale before year-end. Although there are understandably some concerns about the potential impact of recent stock market volatility and the uncertain macroeconomic and financial backdrop, as long as interest rates remain low, real estate remains an attractive proposition and supply shortages in some sectors of the Irish market will prolong this momentum, particularly when economic and rental growth projections are factored. Investment sector The investment sector of the market is particularly active at present and continues to perform well. Indeed, the most recent performance data for the Irish commercial property market produced by MSCI shows that a total return of 6.4 per cent was achieved from Irish real estate in Q2 2015 with annualised returns of 33.7 per cent being achieved to the mid-year point. There is particularly strong demand for large property assets as investors look to get money into the market quickly, as demonstrated by the appetite for assets such as Dundrum Town Centre – part of the Project Jewel portfolio that is due to conclude shortly. This appetite for large assets will become even more pronounced over the coming months as investors seek to deploy capital before year-end. In addition to continued loan sale activity, a large volume of commercial real estate assets are due to be offered for sale over the coming months. Retail properties with a combined value of more than €400 million are due to be launched for sale over the coming months with a further €400 million of office properties also expected to be formally offered to the market. Some additional multifamily investment opportunities are expected to emerge, although investors will invariably tread cautiously until there is more clarity on proposed Government plans to introduce rent controls in the residential sector. Office sector A number of new requirements have been activated in the office sector recently, which will see strong activity recorded over the course of the coming months. With a number of the larger requirements in the market satisfied over the last 12-month period, many of the requirements in the market at present are relatively small with particularly strong demand for accommodation of between 465m2 and 1,395m2 (5,000 sq. ft. and 15,000 sq. ft.). Landlords are now placing greater emphasis on covenant strength and this will invariably prove challenging for some occupiers, particularly ‘high growth’ companies such as some of those in the technology sector. There are now 19 office schemes under construction in Dublin. However, the new accommodation these schemes will provide amounts to just over one year’s annual average take-up and approximately 45 per cent of this new accommodation is already committed. Prime rents in Dublin city centre now stand at approximately €565 per square metre (€52.50 per square foot). Although there is an increased focus on office development, it will be 2017 before there is a meaningful improvement in supply and rents will inevitably continue to rise in the interim. There has been considerable activity in the development sector over recent months with several new schemes entering the planning process and others commencing construction. This has led some commentators to suggest that there is potential for oversupply in the Dublin market after 2018. However, delivery dates will depend on the pace at which schemes progress through the planning process and, more importantly, if these schemes can subsequently obtain development funding. Retail sector The retail sector of the property market also witnessed a notable recovery in the first half of 2015 and continues to strengthen. The recovery in consumer spending and retail sales appears to have strengthened further over the summer months with bad weather actually boosting footfall and trading patterns in many locations around the country. The biggest challenge facing the retail sector of the market just now is a scarcity of properties in the locations and schemes that retailers are specifically targeting, with many prime high streets and shopping centres now boasting full occupancy. This will force some pop-up or temporary retailers (who normally start to look for Christmas premises at this stage in the year) to opt for secondary streets and schemes this year. Industrial sector Demand for prime industrial sites, which has been increasing of late, is fuelled by an increase in demand for greenfield design-and-build solutions from occupiers that are frustrated by the scarcity of supply of modern accommodation along primary road networks. With a large proportion of available stock now reserved and no new stock expected to be developed anytime soon, there is potential for a notable spike in prime rental values over the coming quarters as new market evidence materialises. Demand for new industrial and logistics stock continues to strengthen, although speculative development is not expected to occur until well into 2016 primarily because prime rents, which are currently in the order of €70 per square metre (€6.50 per square foot), don’t yet justify speculative development. Hotels sector Another sector that is on target for record performance in 2015 is the hotels sector. Following an extremely busy first half to the year in which 39 hotel properties totalling €575 million changed hands in the Irish market, the months of July and August were the busiest on record in terms of hotel transactional activity. In total, more than 12 Irish hotel transactions closed during the summer months. This coincided with one of the busiest tourist seasons experienced in the Irish market for many years, which in turn boosted hotel performance around the country – despite the weather. Chartered Land and ADIA emerged as the successful bidders on the Project Trinity sale of 6.8 acres in Ballsbridge, Dublin 4. This sale included both the Clyde Court and the Ballsbridge Hotel. It remains to be seen what impact, if any, this noteworthy sale will have for hotel availability in the capital over the coming years with developments expected to be closely monitored by hoteliers and industry observers alike. There is now a scarcity of hotels to satisfy inherent volumes of demand from hoteliers and investors. The need to release more hotel assets for sale during the autumn to cater for this demand is becoming increasingly apparent. Development land The €276 million of development land sales that transacted in the first half of the year is set to be significantly surpassed in the second half of 2015 considering some of the larger transactions that were announced over the last couple of months. With the exception of these large transactions, most land sales remain relatively small in size. This in itself is hampering efforts to increase residential supply. An increase in the volume of land being offered for sale is expected, as pressures to increase housing supply intensify even further. Conclusion All sectors of the Irish commercial property market are clearly performing well and are expected to continue to do so over the course of the coming months as the year-end deadline looms. This sectoral overview is published in association with CBRE Ireland. Marie Hunt is an Executive Director and Head of Research at the firm.

Since the final quarter of 2007, the Irish economy has experienced the fastest growth in the developed world but conditions in Northern Ireland remain challenging writes Jim Power. 2015 is turning out to be a good year for the Irish economy. The recovery that commenced strongly during 2014 has been sustained and built upon in the first nine months of 2015. The external trade performance continues to be strong; manufacturing activity is strong; the labour market is continuing to improve; the public finances are getting steadily better; construction activity is improving, albeit from a very low base; the number of inward visitors to the country is strong, helped by the weakness of the euro against sterling and the dollar; and consumer spending is steadily gaining strength. The external environment is proving generally constructive with activity levels in the US and UK holding up well, and there are gradual signs of improvement in the euro zone. The interest rate environment remains very benign, with absolutely no pressure on the European Central Bank (ECB) to increase interest rates. The US rate cycle is close to turning and a move away from a prolonged period of historically low interest rates could be seen before the end of the year – although recent Chinese concerns might just delay any move. The Bank of England is under slightly less pressure to increase rates, but gradual rates rises are likely to be seen during 2016. Economic growth We now have official national accounts data for the first half of the year and the story of recovery continues to be very compelling. In the first six months of the year, Gross Domestic Product (GDP) expanded by 6.9 per cent and Gross National Product (GNP), which strips out the net profit repatriations of the multinational sector and some other smaller flows, expanded by 6.6 per cent. All components of activity have shown strong growth in the first half. Personal consumption of goods and services expanded by 3.3 per cent; gross domestic fixed capital formation (basically business investment spending and construction output) expanded by 21.7 per cent; exports of goods and services expanded by 13.8 per cent and imports of goods and services expanded by 16.2 per cent. These growth numbers are strong and show that, since the final quarter of 2007, the Irish economy has experienced the fastest growth in the developed world. The level of GDP and GNP has now surpassed the levels of economic activity seen in 2007, just prior to the crash. This is a remarkable achievement following such a calamitous economic crash and the very severe fiscal adjustment programme that has seen significant pressure on public expenditure and a very severe increase in the personal sector tax burden. Consumer activity The consumer dynamics in the economy are steadily improving. In the first seven months of the year, the volume of retail sales was 8.8 per cent higher than the same period in 2014 and was 5.6 per cent higher in value terms. When sales in the motor trade are excluded, the growth in retail spending is more subdued. In the first seven months, the value of sales increased by 2.3 per cent and the volume of sales increased by 5.8 per cent. Consumers remain price sensitive and there is still considerable resistance to higher prices across the consumer spectrum. However the situation is improving steadily. In the first eight months of the year, new car registrations were 30 per cent ahead of the same period last year. Consumer confidence continues to trend upwards and, in August, was at the highest level since 2006. This improvement in confidence is gradually translating into stronger consumer spending and this trend looks set to continue. It will be helped by an expansionary budget in October, stronger earnings and employment growth. The labour market The labour market has continued to improve in 2015. In August, the number of people unemployed on a seasonally adjusted basis declined to 206,500, which represents a decline of 66,800 over the past two years and a decline of 12,900 in the first eight months of the year. The unemployment rate stood at 9.5 per cent of the labour force in August, down from a high of 15.2 per cent at the beginning of 2012. The latest employment data from the CSO show that, in the second quarter of the year, the number of people at work in the economy stood at 1.96 million. This represents an increase of 57,100 over the past year, equivalent to a growth rate of three per cent. Total employment in the economy is now 133,700 higher than the low point in 2012. Just over 99 per cent of the increase in employment over the past year was in full-time jobs and employment increased in 11 of the 14 sectors, with employment in construction increasing by 18.5 per cent. Public finances and Budget 2016 In the first eight months of the year, the Exchequer ran a deficit of €1.29 billion – down from €6.3 billion in the same period last year. The total tax take, at €27.3 billion, was almost €1.4 billion ahead of what the Department of Finance expected and is 9.8 per cent higher than the equivalent period last year. Income tax is running six per cent ahead of last year and is €146 million ahead of target. This reflects the growth in employment and the commencement of a recovery in earnings. The VAT take is 7.9 per cent ahead of last year and is €107 million ahead of target. This reflects stronger consumer spending and particularly strong growth in car sales. The corporation tax take is 38.1 per cent ahead of last year and is €912 million ahead of target. This is a clear indication of much-improved trading conditions for the corporate sector, although anecdotally it is far from certain that the SME sector is sharing in the recovery to the same extent. Nevertheless, business conditions are getting markedly better. Time will tell what the Minister for Finance is going to do in Budget 2016, but it will be an expansionary budget (circa €1.5 billion) that will give a further boost to employment and strengthen the broad-based recovery that is becoming more firmly established by the month. GDP looks set to expand by at least six per cent in 2015 and the prospects for 2016 look promising at this early stage. The economic outlook for Ireland is positive. Based on the evidence so far this year, real GDP looks set to expand by up to six per cent and growth of 4.5 per cent looks achievable for 2016. Northern Ireland Economic conditions in the Northern Ireland economy remain challenging and business confidence will not be helped by recent political uncertainty. Over the past couple of years, the unemployment rate has been the highest of the 12 UK regions and the level of economic output is currently estimated to be eight per cent below the pre-crisis level in 2008. The economy is estimated to have expanded by 2.2 per cent in 2014 but slower growth of 1.8 per cent and 1.7 per cent respectively is expected in 2015 and 2016. The productivity performance of the region is still weak and is lagging England. It will continue to prove a significant challenge to create a self-sustaining entrepreneurial economy, characterised by an entrepreneurial and innovative private sector. Jim Power is Chief Economist at Friends First and part-time lecturer at UCD Michael Smurfit Graduate Business School.

While economic prospects are strong in the Republic of Ireland, the outlook for Northern Ireland remains much more challenging, writes Prof. Neil Gibson. Despite the latest EY Economic Eye Summer Forecast highlighting contrasting outlooks for the Republic of Ireland (ROI) and Northern Ireland (NI) economies, the all-island economy had a remarkable year of 4.4 per cent growth in 2014. While ROI is set for another strong year of growth in 2015 as the strengthening domestic economy provides support to the impressive export base, the EY forecast suggests that growth will moderately slow in ROI from 4.8 per cent in 2014 to 3.7 per cent in 2015. Conversely, the rate of growth in Northern Ireland (NI) will increase this year from 1.7 per cent to 2.0 per cent in 2015, with Gross Value Added (GVA) growth set to average at 2.0 per cent over the period 2016-2020. This is a modest revision to the EY Economic Eye Winter 2014 forecast of 1.4 per cent and 1.5 per cent in 2015 and 2016 respectively. However, a tough period of austerity lies ahead for NI’s public-sector dependent economy. A repeat performance for ROI? As a more sustainable form of economic growth takes hold, there are a number of factors underpinning ROI’s positive outlook and broad-based recovery. A sustainable economy needs both a strong domestic and international sector and Ireland’s welcome graduation into this mode should begin to spread the recovery across more sectors and people. Nevertheless, repairing the damage of the last half decade will take a concerted and sustained focus. While many risks abound, including the socio-economic unrest in Greece, these have lessened in terms of likely impact and Ireland’s return to the top of the euro zone growth charts is not projected to be a one-off. Low inflation helped by cheaper oil, low interest rates, an improving labour market, rising house prices, anticipated 2016 tax cuts and the prospect of rising real wages, are all contributing to growing consumer confidence. This, coupled with continued jobs growth and rising disposable incomes, will see consumer spending growth accelerate from 1.2 per cent in 2014 to 2.5 per cent in 2015. The ending of austerity and the announcement in the Spring Statement of scope for spending increases and tax cuts will further boost the domestic sector. Surprising as it may seem, the greater risk may be that particular markets – prime commercial rents or domestic property in and around Dublin, for example – accelerate too rapidly, causing bubbles and ultimately a loss of competitiveness. Given the lack of control over interest rates, this is an important area for policy-makers to monitor. ROI’s exports remain positive While export prospects remain positive for ROI, the double-digit export growth of 12.6 per cent in 2014 is unlikely to be sustained. The EY Economic Eye forecast expects export growth of 5.5 per cent in 2015, revised upwards from 3.9 per cent in our winter forecast. The positive economic outlook for ROI’s major export markets – the US, UK and euro zone – continues to improve and demand prospects are strong for ROI’s major export sectors including computer and business services, pharma, agri-food and tourism. With some emerging economies – China, in particular – set for a managed slowdown in the coming years, it is important for Irish exporters to continue to focus on traditional markets in tandem with a managed expansion into new global markets. The Irish business and political communities have worked hard to remove barriers to trade, particularly in the agri-food sector, and this presents a solid platform on which to continue to grow the export base. Businesses are talking about investing, acquiring, and recruiting. This is a hugely encouraging sign and, with consumers beginning to feel the benefits of recovery, ROI can now consign the difficulties of the great recession to the rearview mirror and focus on the future. Depreciation has left the euro seven per cent weaker against the dollar than at the start of 2015, and weaker still against the sterling. This has reinforced euro zone competitiveness in key export markets as the dollar continues to strengthen. The EY Eurozone Forecast expects the euro to weaken to US$1.10 by the end of this year and about US$1.05 by the end of 2016, potentially reaching parity if US interest rates increase as expected. The resulting weaker euro should boost Irish exports over the course of the year, as the UK and US account for more than a third of Irish exports combined. The shifting exchange rates, however, have altered the relative competitive positions on the island and sales of Northern Ireland goods into Great Britain are now relatively more expensive compared to their Irish competitors. This is presenting a significant challenge to sectors such as agri-food in Northern Ireland. Age of austerity for Northern Ireland Economic growth in NI in 2014 was relatively strong, as it was in ROI and the UK, but maintaining this momentum will be difficult given the risks presented by the forthcoming austerity ramp-up in the UK, fluctuating exchange rates and changes in EU State Aid rules. Improving conditions for consumers are forecast, however, as wage levels are set to outstrip the current low rate of inflation and more people find work. This will also support expansion in domestic-focused sectors, which have also begun to exhibit job growth. The small size of the private sector export base in NI means it is less well-positioned to benefit from positive growth outlooks in key trading partners like the UK, US and an improving euro zone. While the recent exchange rate movements have boosted the all-island economy’s export competitiveness, they have favoured ROI more than NI, and the strengthening of the sterling versus the euro already appears to have hit NI’s export sector in 2014. This will be an important factor impacting north versus south export competitiveness throughout 2015 and into 2016, before the euro moderately recovers. While sterling’s fall against the dollar means NI exports to the US have become more competitive there in recent months, in nominal terms the value of NI goods exports fell by one per cent in 2014 compared to a rise of 16 per cent in ROI. NI’s largest export sector – machinery and transport equipment – saw exports fall by some five per cent in 2014. On the other hand, exports of chemicals and related products rose by four per cent while tourism as well as food and live animals both rose by three per cent. All eyes turn to NI private sector Employment expanded by more than 12,000 net jobs in NI in 2014, fuelled by impressive growth in professional services and administrative support services employment. However, the exceptionally strong 2014 performance will moderate in the coming year with net job creation in NI in 2015 forecast to halve to a still-respectable 6,000 jobs. The impact of austerity on employment will also be evident with job losses (or voluntary redundancies) expected in public administration, education and health, and social care in the period to 2020. Similar to ROI, the recovering retail and construction sectors are expected to contribute to overall employment growth, with high levels of job creation also expected in the professional services and administration and support services sectors over the next five years. Overall, the Economic Eye Summer 2015 report forecasts that just over 20,000 net jobs will be created in NI during the years to 2020, with the private sector offsetting the job losses expected in the public sector. Risks to NI’s long-term FDI picture During 2014-2015, Belfast was second only to London in terms of the UK FDI performance. This has been a blockbuster year for FDI in Northern Ireland with record levels in the value of investment in the local economy, the number of new investments secured, and the number of jobs created. Looking to the future, changes to the EU State Aid rules will impact on the ability to maintain FDI levels with the nature of support likely to switch to different forms of aid that are still eligible. That said, if corporation tax-setting powers are devolved to NI, this could provide a significant boost to its attractiveness to multinational investors. Such an effect could potentially more than offset the adverse impact of the changes to state aid rules and assist in driving medium- and long-term growth. The main rate of corporation tax has already been cut from 28 per cent in 2010 to 20 per cent in order to boost UK competitiveness. It will now fall further, from 20 per cent to 19 per cent in 2017, and then to 18 per cent in 2020, benefiting over a million businesses. In terms of the debate as to whether NI should set and reduce its own corporate tax rate, one of the most contentious consequences is that NI needs to fund the cost of this. Under the proposals in the most recent Chancellor’s Budget, the difference between the UK headline rate and NI rate is set to reduce, suggesting that the cost of funding such measure could reduce by up to 25 per cent. The impressive recent record in attracting inward investment bodes well for the private sector’s ability to offset the impact of any likely significant cuts. However, difficulties in agreeing budgets and determining a strategy to deal with public spending cuts presents a clear and present danger to NI’s economic prospects. Not only does it jeopardise the prospects of a corporation tax cut, it may also impact the confidence of consumers and businesses, which could derail the forecast from the steady growth projected in our report. Balancing the all-island recovery The all-island economic outlook is certainly much improved, but it is important for policymakers to sustain efforts across the island of Ireland. The contrast across budgets in 2015/16 will be striking as austerity ends on one part of the island and accelerates in the other. Ultimately, the strength of the private sector will determine the rate of growth on the island. While the prospects are strong in ROI, the outlook for NI remains much more challenging with tough choices looming that will determine if NI can keep pace with its southern neighbour. It is particularly important for governments to push ahead with economic reforms that improve competitiveness and prioritise spending in areas that boost future potential growth. Prof. Neil Gibson is Economic Advisor to EY Ireland.

Falling oil prices are good news for the Irish economy although but heighten concerns about deflation, says James McCann.   It is well known that oil lubricates the global economy. Indeed there is a large body of research that shows a clear relationship between oil price spikes and global recessions. How then should we interpret the crash in oil prices seen over recent months?  Is this unambiguously positive for the global economy, or are there reasons to be alarmed? Overall cheaper oil is generally regarded as positive, although there are winners and losers. While Ireland, as an oil importer, sits among the winners, the impact of lower oil prices on inflation may heighten concerns over deflation. In this regard the reaction of the European Central Bank (ECB) will be important to steady expectations and further stimulus could provide an additional boost to the Irish economy.   Oil accounts for around 50% of Irish energy from electricity generation to powering vehicles. To meet this demand Ireland imports an estimated 53,560 barrels of crude and 166,000 barrels of refined oil each day. Cheaper prices therefore benefit producers and consumers and the income boost can be used to pay down debt which remains high on both household and corporate balance sheets or alternatively may be used to finance consumption and investment which would further benefit the domestic economy.    The price of Brent crude oil has fallen from over $100 per barrel to below $60 since the summer -- the lowest price since the depths of financial crisis in early 2009. Market factors are partly responsible for this fall. We have seen a broadly based appreciation in the dollar with the greenback up by some 10% against a trade-weighted basket of currencies since June 2014. Positioning in financial markets has also been important. There was evidence that some investors hedged the possibility of a sharp spike in oil prices during the worst of the Ukraine crisis. Hence, the appearance of an uneasy peace caused such contracts to be unwound, adding to downward pressures on oil prices into the autumn.   While these market drivers should not be ignored, it is more important to look at the evolution of supply and demand. On the demand side there have been signs of a moderate slowdown in the global economy -especially in some of the major emerging countries -- into year end. The evidence for this includes the latest Purchasing Managers’ Index reports for China and parts of Europe. However, while activity has been weaker than hoped, it is unlikely that the global economy is falling off a cliff. Instead, a more important development was increased supply from US shale and other non OPEC sources during 2014. At the time of the OPEC meeting in November 2014 where the surprising decision was taken not to cut output, there were estimates of up to two million spare barrels per day of production.    The assumption that the recent decline in oil prices has been predominately supply driven is important: it implies that the aggregate impact of lower energy costs will be positive through a decline in headline inflation, a rise in real incomes, and eventually an improvement in consumer and business spending power. Whether this positive cash flow is saved or spent will depend on a second factor – namely whether confidence is materially damaged by the immediate effects of the oil price decline, for example through the wealth effect of a stock market crash or other financial crisis. On balance, it seems likely that the impact on the financial economy will be limited, while the real economy will continue to benefit from positive employment growth. Hence, the fall in oil prices should prove a net positive for the world economy into 2015.    If current levels of oil prices are sustained then global GDP growth in 2016 could be over 1% higher than currently estimated. This rosy macro story however hides some potential losers: large oil exporters will feel the strain as oil revenues slide and investment falls and, in some cases, this could be very painful. This is before any second round effects from further monetary policy easing are taken into account. One of the effects of lower oil prices is a sharp fall in headline inflation (the Bundesbank has estimated that its forecasts for German inflation in 2015 will be lowered from 1.1% to 0.7% pa and one could expect a similar impact on prices in Ireland). On this basis, pressure on the ECB to provide more stimulus to bring inflation back towards target is likely to grow. With more conventional tools exhausted we expect to see sovereign bond purchases (quantitive easing) in early 2015. This would deliver further stimulus to the Irish economy through a number of channels. Quantitative easing supports asset prices as investors rebalance their portfolios in the wake of bond purchases. In some cases it can even help loosen credit conditions and support bank lending. By raising inflation expectations quantitative easing would also encourage consumption and investment. This policy should weaken the euro further which would provide support for the large Irish export sector.      James McCann is UK and European Economist with Standard Life Investments.

Many Chartered Accountants have been used to preparing dual accounts for US parent companies while also meeting local statutory requirements so the news that the IASB and FASB had issued a combined revenue recognition standard was welcomed by all. But if the world did not have problems to solve, it would not need chartered accountants.  Richard Howard  and Karen Frawley turn the spotlight on some problems with the potential to create a perfect storm. Irish GAAP has never been as prescriptive as US GAAP or IFRS when it comes to revenue recognition. As a result, many preparing statutory accounts applied the same revenue recognition principles as US GAAP. With the adoption of IFRS 15 in 2017 (or ASC 606 for our US counterparts) Irish and US companies will apply the same revenue recognition standard, waving good bye to SOP 97-2 and 200+ other pieces of revenue recognition guidance under US GAAP. This means that IFRS and FRS 101 will be the same as US GAAP and the wording it uses suggests that FRS 102 will draw on the same guidance. So what changes? Under existing US GAAP, the concept of Vendor Specific Objective Evidence (VSOE) requires that where there are multiple deliverables in a contract, and some of those deliverables do not have a separate identifiable sales price, revenue is recognised either over the term of the longest deliverable or when the final deliverable is provided.   Example: A company sold a perpetual software licence for $100,000 and as part of that deal gave the buyer a right to upgrades over a 12-month period. Since the right to upgrades was not sold separately, the $100,000 is required to be recognised over the 12 month period and not upfront.    This differs from IFRS and the new revenue recognition standard which allows multiple deliverables to be fair valued. So, in our example, the software could be assessed as being worth $85,000, while the right to upgrades could be assessed as having a fair value of $15,000, with the software revenue recognised up front and the right to upgrades recognised over the period the upgrade right exists. It is expected that the new revenue recognition standard will see billions of dollars recognised earlier by US listed companies increasing profits and hence tax. This will especially apply to the enterprise software and telecommunications sectors. The implementation dates for new Irish GAAP and the US GAAP reporting framework illustrated in Figure 1 together with the tax filing deadlines shows the potential impact on reporting and tax payments. For the company in our example, under  new Irish GAAP, $85,000 of revenue would be recognised up front in 2015 with $15,000 deferred over 12 months. However, under US GAAP the full $100,000 would be recognised over 12 months. Imagine you are the Finance Director of an Irish subsidiary of a US MNC with thousands of similar contracts (many non-standard) and you will quickly see how interesting life is likely to become over the next three years. To complicate matters further, the taxation of transitional adjustments, ongoing cash tax implications and tax accounting changes also need to be considered. Moving to new accounting standards has an immediate impact on the taxation of transitional adjustments. Irish tax rules on a change of accounting policy were introduced by Revenue in anticipation of the transition to full IFRS by some companies in 2005 but this legislation will have much wider application from 2015 as many Irish entities move to FRS 102. The transitional measures involve identifying the profits, losses and expenses that would otherwise fall out of the reckoning and subsequently taxing or allowing those items as appropriate over a five year period. Entities will need to consider the impact of these adjustments on cash tax payments and incorporate them into their budgeting and planning activities. On a group basis, companies may also need to assess the transfer pricing impact. Where local companies recognise revenue differently from their parent company this may have an impact on royalty rates based on revenue or on other transfer pricing considerations. The language in inter-company agreements may also need to be tightened up to reflect the appropriate GAAP. The cash flow significance of the adoption arises from the ongoing impact on tax calculations. The starting point for taxable income is profit or loss as stated in the local GAAP accounts. Where income is recognised earlier, cash tax payments will also fall earlier. A potential deferred tax effect arising on the different accounting treatment for tax purposes may also arise. Since we have asked more questions than provided answers in this article, it may be appropriate to continue in that vein by concluding with some further questions that Finance Directors may need to ask:    Do I have the necessary information to assess the fair value of my deliverables for revenue recognition and who is going to make that assessment of fair values? Do I have a system that will then allow me to pull the required information? (For the bonus point, don’t forget your comparative figures.) If the answer to 1 and 2 above is ‘No’, the next question must be, do I have the budget or time to then allow me to do what needs to be done? If I make the above assessments for local GAAP purposes, am I happy that others in my group will agree with the same fair values when they change over in 2017? Have I assessed the knock on impact of any royalty payments based on sales? Does our agreement state US GAAP or local GAAP numbers are the base or is it silent? If the basis changes, will this affect transfer pricing arrangements? Have I considered the tax and cash impact of earlier revenue recognition, including any adjustment to opening reserves? And finally, for US GAAP reporting in 2015 and 2016, do I have a deferred tax impact based on deferred revenue differences? For many multinational companies (especially enterprise software vendors), the next three years could be a complex and costly time. Preparation and early consideration of the issues raised in this article will be critical.     Richard Howard, ACA is an audit partner in the TMT industry group at Deloitte. Karen Frawley, ACA is a director in the firm’s corporate and international tax team. She is also a Chartered Tax Advisor.

Ireland’s credit unions have implemented significant change over the past two years. Now is the time to take stock and reflect on the next steps, suggests Paul Kennedy.   With over three million members and – until recently  some 400 locations, any change to Ireland’s credit unions was going to be challenging to implement. The last two years have seen significant change in the sector brought about by the implementation of the Credit Union and Co-Operation with Overseas Regulators Act 2012 (CUCORA). Arguably, what is now required is a period to bed down those changes. Background Ireland’s Credit Union movement began in the 1950s when three single minded and resolute individuals – Nora Herlihy, Sean Forde and Seamus P MacEoin – responded to the needs of people they saw struggling to make ends meet with poor levels of employment, poor social welfare, large housing issues and emigration. They believed that by working collectively people could more effectively control their financial situation. The idea was to allow people who shared a certain common bond – such as geographical or occupational – to own their own credit union where they could save together and lend at a fair and reasonable rate of interest. That ethos continues to the present day with credit unions quick to point out they are owned by members and operated solely for members.    So, you might ask, why then was CUCORA required? The answer, perhaps, lies in the extensive growth of the credit union movement in Ireland, something certainly not envisaged by the three founders back in the 1950s. Credit Unions in Ireland now have:   3.3 million members; €14.3bn in assets; €11.83bn in savings; and €4.28bn in loans. Based on these numbers, the average credit union member saves €3,500 with the Credit Union, borrows €1,297 and roughly 70% of the population are members of  their local credit union.    Following the recent financial crisis, a Commission on Credit Union group, formed in 2011, carried out a root and branch review of the sector in Ireland and produced a report for the Minister for Finance setting out what it saw as the main issues affecting credit unions and making significant recommendations for change in the sector.  The report acknowledged the financial challenges facing credit unions but said that “a strengthened and re-vitalised sector can be in a position to play an increasing role in the retail financial landscape” and across credit unions it was widely expected that this sentiment would inform any new legislation affecting the sector.   In summary, the Commission’s main findings and recommendations were:   Credit Unions should be restructured on a voluntary, incentivised and time bound basis; The regulatory framework should be strengthened with a tiered regulatory approach introduced over time; The Central Bank of Ireland (CBI) should prepare a  Risk Impact Analysis Governance changes should be intro-duced in certain areas including: The size and role of the board; The role and responsibility of the manager; Fitness and probity; Internal audit; Changes in legislation (Credit Union Bill); Establishment of new services through sharing and collaboration; Changes in the role of volunteers; Changes in financial inclusion and social lending. The Commission went a significant way in attempting to drive change in the sector, and while it would be easy to comment on each of the above, in many ways that ship has sailed so it is easier to review the implementation of these recommendations. CUCORA CUCORA was published in 2012, following a period of consultation between stakeholders and many of the areas envisaged by the Commission were addressed in the Act, which included provision for:   Establishment of the stabilisation levies on all Credit Unions; Introduction of new prudential requirements;  Introduction of new governance requirements;  Introduction of a fitness and probity regime; The establishment of the Credit Union Restructuring Board (REBO). These changes have been implemented over the last two years and the impact across the sector has been significant. Prudential requirements New prudential rules brought about changes in internal audit, operational risk, outsourcing, risk management, compliance and strategic planning. These rules had significant cost implications for many credit unions. While the time frame for implementation had been known for some time, credit unions had a relatively short period to ensure compliance with the requirements. Many credit unions sought professional advice as they considered outsourcing their needs, with some upskilling internal resources and redeploying existing staff into new roles. Governance - internal audit The introduction of internal audit was seen as a direct replacement for the credit unions’ old Supervisory Committees where volunteers carried out a quasi-internal audit role. Internal audit is a very useful tool for credit unions, primarily for the board of directors, as it provides an independent view of operations on a regular basis. Many accountancy practices have become involved in providing this service to credit unions and their experience and professionalism will continue to be vital to credit unions in the coming years.    It is important for credit unions to fully understand the role of internal audit which, when used correctly, provides a benchmark against which they can improve their internal standards over time.  Compliance and risk management While compliance is an area where credit unions traditionally were relatively strong, now they must document their compliance procedures and carry out regular checks. Each credit union must also complete an annual compliance statement confirming their compliance with certain parts of  CUCORA  following year-end.   Risk management is a new concept for many credit unions and something that requires fresh thinking as they set about establishing risk registers, appointing risk management officers and risk committees to ensure that they understand the concept of risk and manage it on an ongoing basis. The challenge for many credit unions has been ensuring that board directors understand the concept of risk and how it fits into the overall governance structure. Credit unions must realise that outsourcing this new function does not absolve them of their responsibility for risk management. Strategic planning The concept of strategy and looking into the future makes many credit unions nervous however effective strategic planning should provide real vision and direction that allows members, staff, management and boards to see where they will be going over time.   In our own credit union, we carried out many surveys, engaged with stakeholders and held workshops as part of our strategic planning process. Strategy is considered at our monthly committee and board meetings to ensure it remains measured, fit for purpose and practical.    The role of the board of directors has moved away from doing to thinking, from operational to strategic, and the use and review of a robust strategic plan is something that helps this transition and allows boards to focus on where credit unions are going rather than worrying about the ‘how’.   From a regulatory perspective, CBI has begun reviewing credit unions over certain periods based on their size and risk weighting via the Probability and Risk Impact System (PRISM). The first wave of PRISM visits has been carried out and CBI has issued follow up Risk Mitigation Plans to credit unions for implementation.    As part of the first round of visits, CBI issued a summary of its findings and identified some 2,000 risk issues. The review was a fairly stark indictment of practices in many credit unions, with particular negative commentary on lending, risk management, credit control and strategic and financial considerations. The report serves as a reminder to all of the CBI’s new focus on credit unions. Fitness and probity Fitness and probity was one of the most difficult practical changes for many credit unions, as it impacted directly on the board of directors, management and supervisory committees.    Boards of Directors were required to limit their size to no more than 11, which meant certain directors would have to resign from the board despite years of loyal service. There were also time limits introduced for directors to ensure fresh thinking was introduced on boards on an ongoing basis.   Directors were also required to develop succession plans to ensure the right mix of skills and experience was maintained on the board at all times. This role was given to the newly formed Nominations Committee which became the board’s gatekeeper.   The Supervisory Committee was replaced by a Board Oversight Committee whose role is to ensure that the board complies with certain parts of  CUCORA.   The role of the manager or CEO is now central to the overall operation of each credit union and has moved operational management away from the board. While many credit unions already had managers, for some recruitment was necessary as the role had to fit into a new organisational structure with defined and precise responsibilities.    The final governance piece was to ensure that the key roles in credit unions were filled by people who were of a certain standard and set of skills. Key roles or controlled functions are subject to fitness and probity rules to ensure that the people involved act within certain standards and are competent, capable and financially sound. This raises challenges for many people within the credit union movement, particularly Nominations Committees who must ensure that their credit union conforms to independent standards. Certain positions must now also be pre-approved by CBI, meaning managers or chairmen must be vetted and authorised by CBI before taking up any new appointments. This again raises challenges to ensure that the right people are selected and no embarrassment arises from not being approved by CBI. REBO REBO’s primary role was to facilitate and encourage restructuring or merging of credit unions on a voluntary basis. As everyone knows, 1+1 does not always equal 2 and merging isn’t always the best answer.  Many credit unions sought mergers, perhaps not fully realising the process involved and REBO set about assisting this process as practically as possible. This process has worked for a number of credit unions; however REBO is set to expire at the end of 2015 and the entire process may not be completed before then. Questions remain to be addressed about how restructuring will proceed post-REBO and these now need to be addressed so as to alleviate concerns in the sector. CBI consultation The CBI’s Consultation on Regulations for Credit Unions on commencement of the remaining sections of the 2012 Act  (CP88) envisages lending by the credit union sector to people, businesses and community groups. CP 88 contains positive proposals on home loans that would allow credit unions to take the space of  the financial institutions that  have closed local and regional branches and could help to eradicate private money-lenders. It also mentions placing limits on members’ savings and using concentration limits to restrict certain types of lending however some in the credit union sector regard this as potentially counterproductive arguing that it could send the wrong message to their members. The consultation period closes on 27 February 2015. Conclusion The last two years have seen credit union directors, board oversight committee, management, staff and members working rapidly to implement changes that required new thinking, changes in attitude, increased regulation and supervision and a stronger strategic focus. This would be difficult in any industry and has been particularly challenging for one that traditionally was based on volunteerism and it will take some time to bed in the changes that have taken place. What is important in the meantime is that we maintain our focus on the Commission’s statement that a strengthened and revitalised credit union sector can play an increasing role in Ireland’s retail financial landscape.    Paul Kennedy, FCA is CEO of Edenderry Credit Union.