As public health restrictions begin to ease, how can organisations make their workplace safe for employees? Sonya Boyce outlines the key priorities that organisations must consider before staff return. Ireland has now entered the next phase of lifting the public health restrictions that were put in place to protect our nation’s health. As many employers begin to make strides towards returning to the workplace, there are a significant number of factors to consider. Update internal policies The Health and Safety Authority (HSA) and Health Services Executive (HSE) published a Return to Work Safely Protocol (protocol) as the set of guidelines and measures for organisations to follow. Compliance with the protocol is mandatory and it will be enforced by the HSA under existing legislation. All organisations must update their policies to reflect the changes required for containing and restricting the spread of COVID-19 in the workplace. It is important to circulate the updated policies to staff in advance of returning to the workplace to ensure that all employees are familiar with their obligations and the measures put in place to protect them. Having clear, up-to-date policies ensures that there is no ambiguity in your approach to dealing with COVID-19. Updates should be made to policies around holidays, sick leave, absenteeism management, people with caring responsibilities and remote working, amongst others. The protocol requires employees to fill in a Return to Work form declaring they have not been in contact with anyone affected by the virus. This form should also contain details regarding the purpose of a contact tracing log which the employer is required to put in place. Another aspect to be considered is the management of external stakeholders and customers who are on the premises, the procedure to be followed during internal and external meetings within the workplace, and the conduct in communal areas such as kitchens, canteens and tea stations. Employing a COVID-19 Compliance Officer to ensure that policy and procedure is adhered to is also an option. Maintain workplace hygiene Organisations should prioritise regular cleaning of the workplace. Ensure contact/touch surfaces such as tabletops, work equipment, door handles, and handrails are always visibly clean, and are cleaned at least twice daily along with the washroom facilities and communal spaces. It is the employer’s responsibility to supply employees with essential cleaning materials such as wipes/disinfection products, paper towels and waste bins/bags to keep their workspaces clean. If employees are required to use Personal Protective Equipment (PPE), then they must be trained in the proper use, cleaning, storing and disposal of PPE. Employers are required to ensure employees use the PPE provided. Provide pre-return training It is the employer’s responsibility to provide training to employees prior to re-entering the organisation. COVID-19 training must be conducted for all workers to ensure they are aware of: their obligations; the organisation’s updated policies; the way the workspace has been re-organised; working practices and guidance on public health; what to do if they develop COVID-19 symptoms; and points of contact and escalation within the organisation. It is important to tailor training to your organisation’s specific needs and avoid using generic COVID-19 training. Implement infrastructure changes  Since the government guidelines for physical distancing of two metres remains in place, office spaces will need to be re-configured to adhere to this. The concept of staggering employees’ return to the office, whereby half of employees attend the workplace for two or three days per week, or on a week in/week out basis, while others continue to work remotely before rotating for the remainder of the week, may be beneficial to your organisation. This system allows all employees to attend the workplace while ensuring that safe physical distancing (e.g. having every second seat free) can be facilitated. The pandemic has impacted severely on every part of our society and our economy. We are now entering a new phase and the return to the workplace must be carefully considered. Sonya Boyce is the Director of HR Consulting at Mazars.

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.

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.

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.

Eimear McGrath explores some of the key impacts of the European Union (Qualifying Partnerships: Accounting and Auditing) Regulations 2019 and asks to what extent they will widen the financial reporting and filing obligations for partnerships. Signed into law at the end of November 2019, the European Union (Qualifying Partnerships: Accounting and Auditing) Regulations 2019 (S.I. No. 597/2019) (the 2019 Regulations) came into operation on 1 January 2020. The effect of these Regulations is to bring the statutory financial reporting and filing obligations of certain “qualifying partnerships” more in line with those of companies formed and registered under the Companies Act 2014 (the 2014 Act), the main aspect being the requirement for qualifying partnerships to file and make public their financial statements. This article explores some of the key impacts of these Regulations on such qualifying partnerships in respect of their financial reporting and filing obligations. It may be of particular interest to professionals that organise their business as a partnership. What were the financial reporting and filing obligations of partnerships until now (under the 1993 Regulations)? Prior to the commencement of the 2019 Regulations, the European Communities (Accounts) Regulations 1993 (as amended) (the 1993 Regulations) set out the scope of partnerships that were subject to requirements for the preparation, audit and filing of financial statements that were generally equivalent to those applying to companies under the 2014 Act. In summary, the requirements of the 1993 Regulations applied to any partnership (both general partnerships established under the Partnership Act 1890 and limited partnerships established under the Limited Partnerships Act 1907), all of whose partners – and, in the case of a limited partnership, all of whose general partners – were limited corporate bodies or other entities whose liability was limited. It also required that such partners or general partners that were limited corporate bodies, or other entities whose liability was limited, were registered in an EU member state. Therefore, for example, such partnerships using limited companies registered in the Isle of Man or the Channel Islands did not have to file their financial statements. These 1993 Regulations are revoked by the 2019 Regulations, except to the extent that they relate to the financial years of a “qualifying partnership” commencing before 1 January 2020. What is a qualifying partnership under the 2019 Regulations? The 2019 Regulations introduce a new definition for a “qualifying partnership”, which is set out in Regulation 5. The definition does not ultimately change the previous requirement in the 1993 Regulations of bringing certain partnerships whose members enjoy the protection of limited liability into scope for the preparation, audit and filing of financial statements. However, it does extend the definition in the 1993 Regulations and has been reworded to address the other entity types as defined in the 2014 Act. It incorporates partnerships (both general, established under the Partnership Act 1890 and limited, established under the Limited Partnerships Act 1907), all of whose partners and, in the case of a limited partnership, all of whose general partners, are: limited companies; designated unlimited companies (designated ULCs); partnerships other than limited partnerships, all of the members of which are limited companies or designated ULCs; limited partnerships, all of the general partners of which are limited companies or designated ULCs; or partnerships including limited partnerships, the direct or indirect members of which include any combination of undertakings referred to above, such that the ultimate beneficial owners of the partnership enjoy the protection of limited liability. Regulation 5(2) also further extends the above list to include any Irish or foreign undertaking that is comparable to such a limited company, designated ULC, partnership or limited partnership. However, the reference to such foreign undertakings having to be registered in an EU member state has been removed. It is worth explaining some of this in further detail. A limited company is any company or body corporate whose members’ liability is limited. Designated ULCs are defined in Section 1274 of the 2014 Act and include, amongst other entity types, unlimited companies that have a limited liability parent. Such designated ULCs are not exempt from the requirement to file financial statements with their annual return. In considering whether an undertaking is “comparable”, Regulation 5(3) sets out certain guiding principles that would suggest comparability while Regulation 5(6) states that in making the assessment, regard should be had to whether the liability of persons holding shares in the undertaking is limited. The reference to shares is cross-referenced to Section 275(3) of the 2014 Act, which sets out the interpretation of the meaning of “shares” and mentions that, in the case of an entity without share capital, the reference to shares is to be interpreted as a reference to a right to share in the profits of the entity. Regulation 5(5) defines “ultimate beneficial owner” as meaning “the natural person or persons who ultimately own or control, directly or indirectly, the partnership or undertaking”. The concept of “ultimate beneficial owner” is also referred to in Section 1274 of the 2014 Act, which provides that certain designated ULCs must prepare and file statutory financial statements with their annual return. The types of entities that fall under the definition of a designated ULC in Section 1274 are clearly set out and the definition specifically includes a guiding principle whereby if the ULC’s ultimate beneficial owners enjoy the protection of limited liability, they will fall under the definition of a designated ULC. There is, however, no definition of “ultimate beneficial owner” provided for in the 2014 Act. It has generally been interpreted to incorporate not only natural persons, but also orphan entities that directly or indirectly enjoy the benefits of ownership. It is clear from the definition in the 2019 Regulations that the “ultimate beneficial owner” must be a natural person. Whether the definition of “ultimate beneficial owner” in the 2019 Regulations carries through to the interpretation of “ultimate beneficial owner” in Section 1274 of the 2014 Act in the context of ULCs will need to be further considered. What are the consequences of being a qualifying partnership in respect of financial reporting and annual return filing obligations? Qualifying partnerships will apply Part 6 of the 2014 Act, which addresses the accompanying documentation, including financial statements, required to be annexed to the annual return. Existing partnerships that fall within the scope of the 1993 Regulations have generally been required to meet such obligations. However, the extension of the definition of qualifying partnerships means that many more partnerships (such as those using limited companies registered in a non-EEA member state, for example) will now be required to file financial statements and make them publicly available. The application of Part 6 of the 2014 Act to qualifying partnerships is addressed in Part 4 of the 2019 Regulations. The general principle of the 2019 Regulations, as stated in Regulation 7, is to apply Part 6 of the 2014 Act to a qualifying partnership as if they were a company formed and registered under that Act, subject of course to any modifications necessary to take account of the fact that the qualifying partnership is unincorporated. Part 4 further goes on to modify or dis-apply certain provisions of Part 6 of the 2014 Act for qualifying partnerships. Some notable modifications and dis-applications are discussed below. Interpretation of terms Regulation 8 outlines certain terms in Part 6 of the 2014 Act pertaining to “companies” that should be construed differently for the purposes of qualifying partnerships. Where Part 6 of the 2014 Act refers to the directors, secretary or officers of a company, it should be construed as a reference to members of a qualifying partnership (i.e. in the case of a partnership, its partners and in the case of a limited partnership, its general partners). Any duties, obligations or discretion imposed on, or granted to, such directors or the secretary of a company should be construed as being imposed on, or granted to, members of the qualifying partnership. Where such duties, obligations etc. are imposed on, or granted to, such directors and the secretary jointly, they shall be deemed to be imposed on, or granted to (i) two members of the qualifying partnership, where it is not a limited partnership; and (ii) in the case of limited partnerships, if there is only one general partner, that partner; or if there is more than one general partner, two such partners. References to the “directors’ report” of a company should be construed as references to the “partners’ report” of a qualifying partnership, unless otherwise provided. The date of a company’s incorporation will be construed as the date on which the qualifying partnership was formed. Any action that is to be, or may be, carried out at a general meeting of the company will be deemed to be any action that is to be, or may be, carried out at a meeting of the partners, or otherwise as determined in accordance with the partnership agreement. Dis-application of certain provisions in Part 6 of the 2014 Act in respect of financial statements The 2019 Regulations dis-apply certain provisions that are contained in Part 6 of the 2014 Act to the financial statements of qualifying partnerships. Amongst these are: the general obligation to maintain and keep adequate accounting records and the statement in the directors’ report pertaining thereto; and the requirement for Companies Act financial statements to comply with applicable accounting standards, to provide a statement of such compliance, and to disclose information in relation to departures from such standards. In reality, these dis-applications arise as a result of a legal technical issue. Regulations brought into law by virtue of a Statutory Instrument are often used to implement EU Directives. Such Statutory Instruments may not include provisions that do not form part of the underlying EU Directive. The purpose of the 2019 Regulations is to give further effect to Directive 2013/34/EU of the European Parliament and of the Council of 26 June 2013 on the annual financial statements, consolidated financial statements and related reports of certain types of undertakings (the 2013 EU Accounting Directive). The general obligation to maintain and keep adequate accounting records and the requirement for Companies Act financial statements to comply with applicable accounting standards did not derive directly from that 2013 EU Accounting Directive. However, since qualifying partnerships are required to prepare statutory financial statements that give a true and fair view, it stands to reason that they will need to maintain adequate accounting records to support the preparation of such financial statements, and will also need to comply with applicable accounting standards in order for the statutory financial statements to give a true and fair view. There are additional dis-applications arising from the fact that certain provisions will not apply in the case of a qualifying partnership, such as the requirement to provide details of authorised share capital, allotted share capital and movements therein, the requirement to disclose information on financial assistance for purchase of own shares, and the requirements in the directors’ report to disclose directors’ interests in shares and interim/final dividends, among other items. The relevant dis-applications and modifications are set out in detail in Part 4 of the 2019 Regulations. Application of other company law to qualifying partnerships Part 7 of the 2019 Regulations provides for the application of the European Union (Disclosure of Non-financial and Diversity Information by certain large undertakings and groups) Regulations 2017 [as amended by the European Union (Disclosure of Non-Financial and Diversity Information by certain large undertakings and groups) (Amendment) Regulations 2018] to qualifying partnerships as if they were companies formed and registered under the 2014 Act. Part 6 of the 2019 Regulations also imposes the requirements of Part 26 of the 2014 Act in respect of payments made to governments on certain qualifying partnerships.  These are subject to any modifications necessary to take account of the fact that the qualifying partnership is unincorporated. Annual return filing obligations The requirements in relation to the obligation to make an annual return are set out in Regulation 21 of the 2019 Regulations, which state that the annual return of a qualifying partnership is to be in the form prescribed by the Minister for Business, Enterprise and Innovation. Qualifying partnerships will be required to submit to the Companies Registration Office (the CRO) their annual return accompanied by financial statements, and by a partners’ report and auditor’s report, where relevant, for each financial year-end. The CRO notes that the relevant form for filing the annual return is Form P1, which requires details of the partnership name and its principal place of business. The annual return form required to be filed by companies is Form B1, which requires additional information such as authorised and issued share capital, members and their shareholdings, for example. Conclusion So, what actions should members of the Institute take?  Members should familiarise themselves with the requirements of the 2019 Regulations. While this article explores some of the financial reporting and filing provisions in the Regulations, it does not touch on other aspects such as those regarding the audit of financial statements and reporting by auditors. It is clear, for example, given the extension of the definition of qualifying partnerships by the 2019 Regulations, that Institute members should check whether partnerships they are involved with, either in an employment or in an advisory capacity, will now be required to file and make public their financial statements, with effect from financial years commencing on or after 1 January 2020. Failure to comply with this, and other specified provisions of the 2014 Act will result in an offence being committed and therefore, legal or professional advice should be sought where necessary. Eimear McGrath is Associate Director at the Department of Professional Practice  in KPMG.

Changes to quality control systems and regulation require some getting used to, but let us not forget their primary goal – to help firms complete good quality audits effectively, writes Lisa Campbell. Most accountants know that having a sound quality control system is a good idea, but people often think in terms of the various systems that feed into the quality of products and/or financial statements. A good quality control system is essential in a professional services environment as well. So, in relation to an audit firm, what does a quality control system mean and how does it interact with the regulation of the firm? What is quality control in an audit firm? The purpose of a quality control system in an audit firm is to ensure that the firm has the capacity, capability and resources required to carry out its audit engagements effectively and consistently. ISQC (Ireland) 1 applies to all audit firms in Ireland, from sole practitioners to the largest firms. It sets out requirements for all firms to implement policies and procedures covering all aspects of carrying out a proper and independent audit, from hiring and training to methodology, remuneration, accepting an audit engagement, ethics and the tone at the top of the firm. Firms are responsible for ensuring that the people employed to carry out audits, from the most junior to the most senior, are suitably qualified, trained and are aware of – and complying with – ethical requirements. The leaders in the firm are required to ensure that their communications have enough focus on quality, aiming to ensure a robust culture of performing quality audits and not tolerating anything less than that. The standard also requires firms to implement their own monitoring systems to ensure that the relevant requirements are complied with, and to action failure to do so. Furthermore, firms are required to have documented evidence of the operation of each element of its system of quality control, including whether the firm has competent personnel, time and resources; any threats to independence; and whether the firm complies with the relevant independence and objectivity requirements. How does it interact with regulation? All audit firms in Ireland, and many places across the globe, are subject to what is known as a quality assurance review (sometimes also known as an audit inspection). In Ireland, this may be done by an accountancy body or directly by IAASA. Regardless of which organisation carries out the quality assurance review, the review is split into an assessment of the firm’s quality control system, supported by the analysis of a sample of the audits completed by the firm. The inspector will review policies and procedures and assess if they appear to be appropriate given the size and complexity of the firm. The proof of the pudding, however, is in the eating, so a sample of audits are reviewed to assess whether the policies and procedures have resulted in good quality audits. Where poor quality is identified as part of an inspection or review and hasn’t been caught in advance by the firm, the firm needs to ask itself whether there was an issue with the design or implementation of their quality control systems – or both. Was it a case of an isolated incident of an audit team failing to comply with good policies? Is it a pervasive issue that might indicate a firm culture of ignoring policies? Was it a lack of policy or an unclear policy? Could another policy have been implemented that would either have prevented or detected the problem? Do the policies contain enough incentive and/or sanction to encourage a continuous focus on quality? Future of quality control Most people are aware that the best control processes will prevent an issue arising in the first place (preventative control) rather than catch a problem after the fact (detective control); and that a good quality control system is not something that is designed once and left in place forever. It needs to be part of a continuous cycle of design, implement, assess, tweak the design, implement, assess etc. It evolves in a constant feedback loop, taking inputs from internal reviews, external reviews, experiences of peers, global developments and technology developments. And that is, really, the basis for proposed changes to the international standard on quality control, which will ultimately be adopted in many countries around the globe, including Ireland. The new international standard is expected to be finalised in 2020. The standard has been updated to think in a different way about quality control and to underpin the need for firms to proactively manage quality to prevent issues arising, rather than just react to control quality issues that do arise. The existing standard has a list of policies and procedures that must be developed and implemented by firms, whereas the new standard requires a much more integrated process and a more bespoke system customised by firms to address the risks that may impact on that particular firm’s engagement quality, specific to the nature of that particular firm and its audit clients. This fundamental shift in thinking is even reflected in the name of the standard, which is changing from “international standard on quality control” to “international standard on quality management”. In addition to the components of quality control dealt with in the existing standard, the new standard introduces some other elements, looking at the firm’s risk assessment process as well as information and communication. This shift in thinking may appear subtle on the face of it. However, firms are going to be required to rethink their entire systems of control and ensure that they are mapped to the standard. The US regulator, the Public Company Accounting Oversight Board (PCAOB) announced in December 2019 that it is also considering the standards on quality control in place in the US, which is something that needs to be considered by the many firms in Ireland that carry out work on any part of a US group of companies. PCAOB has stated that it intends to use the international standard as a starting point in developing its standard, which is good news for many firms as it should allow them to comply with both standards easily should they need to. So, what will this change mean for regulation? The changes will require regulators, to the extent that they don’t already do so, to become part of the feedback loop for firms. IAASA’s inspection approach already reflects this, whereby we look at the design of controls and do some sample testing to ensure that the controls are in place. For example, we look at communications issued by the firm’s leadership to ensure that there is enough focus on quality in those communications. This test may look okay, but then, when audits are inspected, we find poor quality. If this happens, we then reconsider the tone at the top testing and consider whether, while the control might be operating as designed, is it effective enough and should we recommend changes to firms to make the control more effective? The future for quality control is, therefore, a more interlinked and integrated approach with firms needing to integrate their internal reviews, external reviews and other feedback into a continuous loop of tweaking their systems – all the while remembering the ultimate aim, which is to get consistently good quality audits completed effectively.   Lisa Campbell FCA is Head of Operations at the Irish Auditing & Accounting Supervisory Authority.

2019 was unquestionably the year when Ireland entered a new phase of transparency, writes Claire Lord. Companies Front and centre in 2019 was the launch of the Central Register of Beneficial Ownership of Companies and Industrial & Provident Societies, which opened for filings on 29 July. The first filing deadline of 22 November 2019 applied to companies and industrial and provident societies that had been incorporated on or before 22 June 2019. By this deadline, these companies and societies had to file information on their beneficial owners to the central register. Now, every company and industrial and provident society registered in Ireland must file information on their beneficial owners to the central register within five months of becoming incorporated. A beneficial owner is a natural person who ultimately owns or controls the share capital or the voting rights, or has control by any other means. The relevant legislation states that a holding (direct or indirect) of 25% plus one share will be indicative of ownership and control. The information required to be filed to the central register includes name, date of birth, nationality, residential address and PPS number. While companies and societies will be required to submit these details to the central register, the only information available to the public will be a beneficial owner’s name, country of residence, nationality, month and year of birth and nature and extent of ownership and control. Individuals acting on behalf of An Garda Síochána, the Financial Intelligence Unit, the Criminal Assets Bureau, the Revenue Commissioners and other competent authorities will be entitled to access all information submitted to the central register, save for PPS numbers. Trusts Last year, Ireland also transposed into law the requirements under the Fourth Anti-Money Laundering Directive, as amended by the Fifth Anti-Money Laundering Directive (5MLD), concerning the determination of the beneficial ownership of certain types of trusts. These requirements apply to express trusts whose trustees are resident in Ireland, or which are otherwise administered in Ireland. These new requirements oblige trustees of these trusts to create and maintain internal registers of the beneficial ownership of those trusts. A beneficial owner of a trust is a natural person who ultimately owns or controls the trust and/or the natural persons on whose behalf a transaction or activity is conducted. This includes, at least, all of the settlors, the trustees, the protectors (if any), the beneficiaries, or – where the beneficiaries have yet to be determined – the class of persons in whose main interest the trust is set-up or operates, and any other natural person exercising ultimate control over the trust through direct or indirect ownership or by other means. The information required to be maintained on an internal register of the beneficial ownership of a trust includes the name, date of birth, nationality and residential address of each beneficial owner. In addition to obtaining and holding this information, trustees are obliged, on request, to provide the Revenue Commissioners and other competent authorities with access to their internal register. Ireland is required to set-up a central register of beneficial ownership of trusts by 10 March 2020. Partnerships In late 2019, we saw the introduction of regulations that extend the requirement to file financial statements in the Companies Registration Office (CRO) to additional types of partnership. These regulations took effect on 1 January 2020. Before these new regulations took effect, the partnerships that were required to file financial statements in the CRO were partnerships where all of the partners who did not have a limit on their liability were limited companies or their overseas equivalents. The new regulations now require partnerships to file financial statements in the CRO where they are partnerships whose ultimate beneficial owners enjoy the protection of limited liability, including in circumstances where a partner is an unlimited company whose ultimate beneficial owners enjoy the protection of limited liability. Conclusion Much progress was made by legislators during 2019 to bring Ireland in line with the transparency requirements of the EU. While additional compliance requirements can place an initial burden on businesses, regardless of how those businesses are structured, normalising transparency of ownership and ensuring consistent public reporting of financial performance can only strengthen trading and the policing of money laundering.   Claire Lord is a Corporate Partner and Head of Governance and Compliance at Mason Hayes & Curran.

By Neil Gibson While the economic outlook for Ireland is slightly cooler than the last two buoyant years, it is not entirely unwelcome as the pressures of fast growth are beginning to become more visible. Here are 12 predictions for the economy in 2020. Prediction 1: GDP will rise by 3.2% Strength in the domestic economy resulting from a combination of job growth, real wage growth and government spending is projected to compensate for weakening global conditions. GDP is expected to be above trend at 3.2% in 2020. Modified domestic demand, which strips out the main distortions in Irish GDP, is forecast to grow at a similar rate (3.1%). Ireland will, therefore, remain near the top of the European growth charts. Biggest forecast risk: A global slow-down. Prediction 2: Employment to rise by 1.7% Job growth is expected to remain robust in 2020 with 40,000 net jobs for Ireland projected, a slight reduction on the 56,000 in 2019. Consumer and government spending will boost domestic businesses and strong migration will allow firms to keep recruiting. Biggest forecast risk: Skills gap and housing shortages prevent firms getting the talent they need. Prediction 3: Wage growth at 3.5% Wage growth has picked up over the last 18 months as labour supply tightens and skills gaps emerge in key sectors. The growth is also partly compositional with more hiring at the senior level, pushing up the overall average wage. Overall, average wage growth is projected to slip back very slightly from its 2019 level to 3.5% in 2020. Biggest forecast risk: Wage inflation accelerates as firms struggle to get the labour they need. Prediction 4: Consumer spending growth of 2.4% Despite signs of ebbing confidence in consumer surveys, the rate of job and wage growth should support a healthy 2.4% growth in consumer spending in 2020. With the national savings ratio at a healthy level and confidence largely restored in the property markets, fears over Brexit and the global economy appear to be only having a modest effect on consumer behaviour. Biggest forecast risk: Consumers’ confidence, which is already fragile, finally impacts behaviour and people choose to spend less. Prediction 5: Net migration of 40,000 Ireland remains a very open economy with fluid labour movements both in and out of the country. Net migration is projected to reach 40,000 in 2020 with Ireland’s economic strength and improved relative attractiveness as an English-speaking, cosmopolitan location further boosting inflows. This flow will continue to drive demand in the economy but will add to the pressure on public services and Ireland’s infrastructure. Biggest forecast risk: Insufficient housing supply leads to further rent appreciation which, in turn, deters migrants from coming to Ireland. Prediction 6: Inflation of 1.6% It is one of the great economic puzzles – how has inflation remained so low? With rising wages and a strong economy, most economic models would project a rise in headline inflation. A depreciation in sterling has helped keep Irish inflation down but high levels of competition may also have mitigated against firms increasing their prices. It may also reflect the application of new technology and data analytics as cost control measures. The twin conditions of healthy job/wage growth and low inflation has made it a very strong 18 months for domestic businesses. Biggest forecast risk: Inflation picks up sharply as wage increases lead businesses to feel confident about price increases and a wage/price spiral begins. Prediction 7: House prices to increase by 3.2% House price growth has slowed markedly in the last 12 months. Unusually, this is in not in response to a weakening economy but partly because of the lending rules that have placed a harder ceiling on borrowing. This has been a welcome outturn for the Irish economy overall, though it has not been helpful in accelerating the development of much needed additional housing supply. Our forecast is for prices to pick up slightly from the current growth rates, reflecting demand and affordability in the wider economy. Biggest forecast risk: Despite lending rules, increased cash investment triggers a rapid step up in prices. Prediction 8: Construction inflation of 7% Because of the strong overall economy, construction will continue to perform well with domestic and commercial demand remaining strong. In addition, increased levels of government capital spending are providing a further boost and, consequently, inflation in the sector is very high. Cooling global conditions may take a little heat out of the input and material prices but wages look set to continue to increase. Biggest forecast risk: An uptick in domestic building, coupled with infrastructure spending and further commercial development, creates a ‘perfect storm’, pushing construction cost up even further. Prediction 9: Housing completions: 24,000 Despite net migration of 34,000 into Ireland in the year to mid-2019 and a long-standing stock shortage, housing completion levels remained well below the required level at the end of last year. A moderation in house price growth, opportunities elsewhere in the construction sector and a challenging planning and regulation environment continue to work against a more marked acceleration in house building. Fortunately, the constrained supply has not resulted in an unwelcome sharp pick-up in prices. Biggest forecast risk: Sluggishness in granting permissions and significant opportunities elsewhere in construction lead to lower completion levels. Prediction 10: Tax receipts: 4% Tax receipts have been very robust across all major categories. Though corporation tax increases have made the headlines, income tax and VAT have also grown strongly, reflecting the broad-based economic growth under way in Ireland. It remains hard to predict tax receipts as Ireland’s fortunes have considerable exposure to a very small number of firms, but the forecast for continued job growth and healthy wage increases mean a very healthy 4% is our central forecast for 2020. Biggest forecast risk: Adverse global conditions impact the small group of firms that contribute a large proportion of corporation tax receipts. Prediction 11: Government balance at 0.1% of GDP That the Irish economy is back into general government surplus is both a cause for celebration but also somewhat concerning. The €175 billion debt mountain remains almost untouched, despite the sustained period of fast growth, making the rather cautious Budget set by the Minister for Finance both understandable and advisable. The forecast of a very modest surplus this year reflects uncertainty over the volatile corporation tax receipts and the long list of calls on government budgets across most areas of public service. Biggest forecast risk: Demand for investment in public services, partly driven by population growth, leads to higher levels of government spending. Prediction 12: Unemployment rate of 4.6% Unemployment has been falling steadily for seven years since its peak of over 15%. Employers are finding labour harder to find, though even at the 4.6% rate projected for 2020, it is still some way from being considered full employment. The steady flow of migration and demographic factors mean that the strong job forecasts will not translate into an equivalent fall in unemployment. Nevertheless, we project it will continue to fall to its lowest rate since 2005. Biggest forecast risk: A global slowdown eases hiring and with strong migration flows, unemployment levels move into reverse and start to rise again. (The predictions assume the avoidance of a no-deal Brexit in 2020.) Neil Gibson is the Chief Economist in EY Ireland.

Michael Kavanagh summarises the key points in ESMA’s recently published statement on European common enforcement priorities for 2019 IFRS financial statements. As we reach the end of 2019, it is timely that the European Securities and Markets Authority (ESMA) has issued its annual public statement highlighting the common areas that European national accounting enforcers will focus on when reviewing listed companies’ 2019 IFRS financial statements. Why should I care? Financial reporting plays an essential role in securing and maintaining investors’ confidence in financial markets. Effective financial reporting depends on appropriate and consistent enforcement of high-quality financial reporting standards. Within the EU, individual national accounting enforcers – such as the Irish Auditing and Accounting Supervisory Authority (IAASA) in Ireland and the Financial Reporting Council (FRC) in the UK – enforce financial reporting standards. European accounting enforcers are required to include ESMA topics in their examination of companies’ 2019 year-end financial statements. As such, the ESMA statement is essential reading for those within the remit of an EU accounting enforcement regime. It will also be of interest to others involved in any aspect of financial reporting. The priorities The common enforcement priorities related to 2019 IFRS financial statements include: Specific issues related to IFRS 16 Leases, especially the need to exercise significant judgement in its application, particularly in determining the lease term and the discount rate; Specific issues related to the application of IFRS 9 Financial Instruments for credit institutions relating to expected credit losses and assessing a significant increase in credit risk, and IFRS 15 Revenue from Contracts with Customers for corporate issuers, which should be in focus when revenue recognition is subject to significant assumptions and judgements; and The application of IAS 12 Income Taxes regarding deferred tax assets arising from unused tax losses (including the application of IFRIC 23 Uncertainty over Income Tax Treatments). The statement also highlights topics related to other parts of the annual report outside the financial statements. These include key non-financial information issues and alternative performance measures (APMs), the new European Single Reporting Format (ESEF) and disclosures around Brexit. Application of IFRS 16 Leases 2019 is the first year in which all entities mandatorily apply IFRS 16. To foster its consistent application, ESMA recommends that issuers monitor the discussions at the IFRS Interpretations Committee (IFRS IC) closely and highlights some of the recent IFRS IC agenda decisions. ESMA encourages issuers to assess whether these decisions have any impact on their application of IFRS 16 and, where applicable and relevant, provide specific information in their accounting policies, increase the level of transparency of the significant judgements made, and/or disclose the potential impacts. The statement goes on to discuss recent IFRS IC tentative decisions and discussions on lease terms and discount rates, and the impact they may have on financial reporting. ESMA also outlines its expectations concerning presentation and disclosure aspects of IFRS 16. The statement outlines that disclosable judgements may include, in particular, determining the lease liability (e.g. lease term, the discount rate used) as well as assessing whether a contract meets the definition of a lease under IFRS 16. Application of IFRS 15 and IFRS 9 The 2018 financial period was the first time IFRS 15 and IFRS 9 became applicable. IFRS 15 Revenue from Contracts with Customers led to major changes in the methodology used by companies in recognising revenue. ESMA states clearly that, in its view, the disclosures provided by entities need to be further improved. This is of importance in industries where revenue recognition is subject to significant assumptions and judgements. In particular, ESMA feels that: The disclosure on accounting policies needs to be detailed, entity-specific and consistent with the information provided in the other parts of the annual financial report; Financial reports should provide adequate information on the significant judgements and estimates made – such as regarding the identification of performance obligations and the timing of their satisfaction, whether the issuer is a principal or an agent under the contract, the determination of the transaction price (including the judgements related to variable consideration) and the allocation to the performance obligations identified (and notably the amount allocated to the remaining performance obligation); and Disclosure of disaggregated revenue could be improved and should take into account both their activities and the needs of users. The introduction of the new impairment model under IFRS 9 Financial Instruments had a significant impact on the financial statements of credit institutions. ESMA reiterates that the estimate of credit losses should be unbiased and probability-weighted based on a range of possible outcomes. Furthermore, this estimate should take into account forward-looking information that is reasonable, supportable and available without undue cost or effort. The statement outlines various messages around the requirements relating to the assessment of whether the credit risk has increased significantly since initial recognition, the disclosure requirements concerning the expected credit losses, disaggregation, sensitivity analysis etc. Accounting for taxation The statement provides certain messages around accounting for deferred tax assets arising from the carry-forward of unused tax losses and the application of the IFRIC 23 Uncertainty over Income Tax Treatments, which is applicable for the first time in 2019. Readers should note the recently published ESMA Public Statement on the deferred tax for such losses carried forward and ESMA’s expectation in this regard. Other matters The statement also highlights topics related to other parts of the annual report outside the financial statements. These include key non-financial information issues and APMs. ESMA also highlights the principles of materiality and completeness of disclosures, which should guide the reporting of non-financial information, including the importance of reporting information in a balanced and accessible fashion. This should include disclosures of non-financial information focusing on environmental and climate change-related matters, key performance indicators, and the use of disclosure frameworks and supply chains. Also, ESMA highlights specific aspects related to the application of the ESMA Guidelines on Alternative Performance Measures. In particular, companies are reminded of the importance of providing adequate disclosures to enable users to understand the rationale for, and usefulness of, any changes to their disclosed APMs, especially regarding changes due to the implementation of IFRS 16. New European harmonised electronic format ESMA expects issuers to take all necessary steps to comply with the new European Single Reporting Format (ESRF) for requirements that will be applicable for 2020 annual financial statements. Brexit Finally, ESMA once again highlights the importance of disclosures analysing the possible impacts of the decision of the UK to leave the EU. Conclusion ESMA and European national accounting enforcers will monitor and supervise the application of the IFRS requirements, as well as any other relevant provisions outlined in the statement, with national authorities incorporating them into their reviews and taking corrective actions where appropriate. ESMA will collect data on how EU-listed entities have applied the priorities and will report on findings regarding these priorities in its report on the 2020 enforcement activities. The ESMA public statement is available at www.esma.europa.eu   Michael Kavanagh is CEO of the Association of Compliance Officers in Ireland (ACOI) and a member of the Consultative Working Group, which advises the European Securities and Markets Authority’s Corporate Reporting Standing Committee.

In this era of multi-GAAP, it was particularly useful for Irish accountants to hear the latest from both the FRC and the IASB. By Terry O'Rourke & Barbara McCormack Chartered Accountants Ireland recently hosted presentations by representatives from the UK Financial Reporting Council (FRC) and the International Accounting Standards Board (IASB) on current developments in their respective accounting standards – UK/Irish GAAP and IFRS. Given that Irish and EU listed groups are required to use IFRS, and many other Irish companies (particularly Irish subsidiaries of EU listed groups), also do so, while most other Irish companies use UK/Irish GAAP as required by Irish company law, these developments will affect a significant number of Irish accountants. The FRC presenters were Anthony Appleton, Director of Accounting and Reporting Policy; Jenny Carter, Director of UK Accounting Standards; and Phil Fitz-Gerald, Director of the Financial Reporting Lab. The IASB presenter was Board member, Gary Kabureck. FRC and UK/Irish GAAP The FRC presentation reminded us of the most recent overhaul of the accounting aspects of FRS 102, which is mandatory for 2019 but was permitted to be adopted in advance of 2019. The main changes made by the FRC to FRS 102 in that Triennial Review arose from requests by stakeholders for simplifications and clarifications in several areas. The areas amended are set out in Table 1. Unsurprisingly, two of the main changes resulted in a relaxation of accounting for loans and financial instruments as these were aspects of FRS 102 that many companies, particularly SMEs, found quite challenging. The FRC noted too that FRS 102 and FRS 105 had also been amended to reflect the enactment in Irish company law of the small and micro companies regimes for financial reporting respectively. The FRC confirmed that the question of whether the more recent IFRS Standards should be incorporated into UK/Irish GAAP will be a topic for future consideration but is not on the immediate agenda. FRC monitoring of compliance with relevant regulatory reporting requirements In addition to its role as the accounting standard setter for both the UK and the Republic of Ireland, the FRC also monitors the financial statements of UK listed companies for compliance with relevant regulatory reporting requirements, including IFRS and UK GAAP, and engages with UK companies when it identifies concerns in this regard. Accordingly, the FRC presentation included pointers on the areas of most frequent concern in the reports of IFRS reporters identified by the FRC in this monitoring activity. These areas are set out in Table 2. It is notable that the top two areas relate to narrative aspects of the annual report – the information provided on judgments and estimates underlying the financial statements, and the strategic report provided by the board of directors. The FRC noted that a greater level of sensitivity analysis was desirable in providing adequate information on accounting estimates. Alternative Performance Measures (APMs) was the next area of concern and, as noted later in this article, the IASB plans to introduce greater discipline in relation to the inclusion of non-GAAP numbers by management. Impairment of assets continued to be a concern, as did accounting for income taxes. The FRC presentation noted basic errors in cash flow statements, often tending to overstate the amount of cash generated by the entity’s operating activities. In relation to the use by companies of reverse factoring or supplier finance, the FRC noted that insufficient detail and explanations were provided on this source of finance. The FRC also noted inconsistencies between the information provided by the directors in the front half of the annual report and the financial information provided in the financial statements. The FRC also reviewed compliance with the more recent IFRS Standards, IFRS 9 with its expected loss approach to loan impairment and IFRS 15 on revenue recognition. The FRC considered there was generally high-quality disclosure on impairment among the larger banks with a more mixed level of information being provided by non-banking corporates. On IFRS 15, the FRC found disclosure generally good, but with some accounting policy descriptions not sufficiently specific and often not easily matched to discussions of activity in the narrative reports. For 2019, compliance with IFRS 16 and the inclusion of all leases on the balance sheet for the first time is the main new challenge for many IFRS users. The FRC examined a number of 2019 interim accounts for the transitional disclosures on IFRS 16. Among the weaknesses it identified was a need for clearer descriptions of the key judgments made and better reconciliations of IFRS 16 lease liabilities and the previous IAS 17 operating lease commitments information. The FRC also suggested that care is needed in discussing year-on-year performance where prior year lease numbers have not been fully restated. Brexit and IFRS In relation to the accounting standards to be used by UK listed companies after Brexit, the FRC explained that the existing IFRS Standards would continue to be used and any new or amended IFRS Standards would be considered for adoption in the UK by a new UK Endorsement Board, using criteria very similar to those used by the EU for endorsing IFRS. FRC Financial Reporting Lab The FRC took the opportunity to outline the work of its Financial Reporting Lab, as this is an area of relatively less awareness in Ireland. The Lab was launched in 2011 and aims to help improve the effectiveness of corporate reporting. It is intended to provide a safe environment for companies and investors to work on improving disclosure issues. Areas on which the Lab had previously issued reports include business model reporting and risk and viability reporting. It recently issued a report on climate-related corporate reporting and is currently working on a workforce reporting project, looking particularly at the information companies might provide to show how the board is engaging with these critical areas. The FRC encouraged interested executives to look out for calls to participate or indeed, to contact the Lab for a discussion on its activities. The FRC reminded us of the requirements of the EU Regulation that most listed companies in the EU will be required to make their annual financial reports available in xHTML from 2021, with annual financial reports containing consolidated IFRS financial statements needing to be marked up using XBRL tags. The relevant EU Regulation is the European Single Electronic Format (ESEF) Regulation. IASB presentation Primary financial statements project The IASB presenter explained that a key issue being considered in this project relates to the statements of financial performance, particularly the income statement/profit and loss account, having regard to the concerns expressed by users and the possible means of remedying those concerns. First, users consider that the statements of financial performance are not sufficiently comparable between different companies. The IASB will propose the introduction of required and defined subtotals in those statements. The proposed changes would also provide users with more precise information through a better disaggregation of income and expenses. Users also consider that non-GAAP measures such as adjusted profit can provide useful company-specific information, but their transparency and discipline need to be improved. The IASB will propose specific disclosures on Management Performance Measures (MPMs), including a reconciliation to the relevant IFRS measure. MPMs are those that complement IFRS-defined totals or subtotals, and that management consider communicate the entity’s performance. These proposals will also require MPMs presented to be those that are used by the entity in communications with users outside the financial statements and that they must faithfully represent the financial performance of the entity to users. Goodwill and impairment The IASB has been exploring whether companies can provide more useful information about business combinations in order to enable users to hold management to account for their acquisition decisions at a reasonable cost. Users have commented that the information provided about the subsequent performance of acquisitions is inadequate, that goodwill impairments are often recognised too late, and that reintroducing amortisation should be considered. Preparers contend that impairment tests are costly and complex, and that the requirement to identify and measure separate intangible assets can be challenging. The IASB plans to issue a discussion paper in the coming months. Its tentative views to date are that amortisation should not be introduced, that it is not feasible to make impairment tests significantly more effective, and that separately identifiable intangible assets should continue to be recognised. However, the IASB considers that additional disclosures should be required about acquisitions and their subsequent performance, and that an amount for total equity before goodwill should be presented. It may also propose some simplifications in impairment testing. IBOR reform The IASB noted that it recently finalised a revision to IFRS 9 and IAS 39 on the potential discontinuance of interest rate benchmarks (IBOR reform) in order to facilitate the continuation of hedge accounting. (The FRC also plans to amend UK/Irish GAAP in this regard.) Amendments to IFRS 17 Insurance Contracts The IASB has proposed amendments to IFRS 17, particularly a one-year deferral of its effective date to 2022, as well as amendments to respond to concerns and challenges raised by stakeholders as IFRS 17 is being implemented. Other topics The IASB has taken on board the concerns raised about its discussion paper on accounting for financial instruments with characteristics of equity, and is considering refocusing that project to clarify aspects of IAS 32 as well as providing examples on applying the debt and equity classification principles of IAS 32. Given the diversity of views on how deferred tax relating to leases and decommissioning obligations should be accounted for, and the potential increase in differences arising due to the inclusion of all leases on the balance sheet under IFRS 16, the IASB has issued an exposure draft proposing to amend IAS 12. The IASB plans to respond to the absence of IFRS requirements on accounting for business combinations under common control by issuing a discussion paper in 2020, probably specifying a form of predecessor accounting. Conclusion A key feature of the presentations by both the FRC and the IASB on amendments to their accounting standards was the level of diligence applied by both standard setters in listening to the views and concerns of their various stakeholders and considering the most balanced and appropriate response to those concerns. This emphasis by the accounting standard setters on carefully considering the views of stakeholders while developing high-quality accounting standards is most reassuring and bodes well for the future of accounting standards. Terry O’Rourke FCA is Chairperson of the Accounting Committee of Chartered Accountants Ireland. Barbara McCormack FCA is Manager, Advocacy and Voice, at Chartered Accountants Ireland. 

Martina Keane explains how new technologies are helping auditors work better, smarter and faster than ever before. New technologies have always changed the way that companies do business, exposing them to new risks and opportunities. Not so long ago, the auditor’s role involved scrutinising stacks of ledgers and communicating by fax or post. Yet today, we are moving towards digital reporting and a paperless profession. When I started my career, the use of robots in the workplace would have seemed like science fiction. Now robotic process automation (RPA) – the use of software robots to simplify business process delivery – is widely used in our clients’ businesses and within the audit process itself. These changes have altered how we work, how we audit and the skills we need to recruit for. What’s different about the next wave of innovation is the growing sophistication of technology, the proliferation of data and the escalating pace and appetite for change. If futurists such as Ray Kurzweil and Gerd Leonhard are correct, we can expect to witness more change in the next 20 years than in the previous 300. For auditors, new technologies, tools and techniques are helping us to work better, smarter and faster than ever before. Our ability to capture and mine data more effectively allows us to provide more depth of challenge, richer insights and even greater levels of assurance within an increasingly complex world.  Data analytics has transformed audits across the financial services industry, allowing audit professionals to analyse larger or even entire datasets. Testing data across a full population presents a more comprehensive story than might otherwise have been achieved through sampling. This in turn leads to greater insights and a deeper understanding of our clients’ businesses, making it easier to identify risks and deliver enhanced quality. Robotic process automation RPA utilises software robots (programs) designed to replicate the actions and behaviour of a human working on a computer in a business environment. RPA is a rule-based system that executes processes without the need for constant human supervision. It can be used to automate some audit procedures that do not include judgement and are data intensive, repetitive in nature, high frequency and rule driven. The main benefits of RPA are that it reduces the time spent by the audit team on repetitive high-volume, low-risk audit procedures, thereby allowing them to focus on areas that really matter. It also helps to eliminate human error and reduce the administrative burden for both clients and audit teams due to fewer data and evidence requests. Data analytics audit tools EY has developed a global suite of data analytics tools, which are quickly becoming an integral element in the delivery of audits. Along with general ledger analysers, a suite of industry-specific technology solutions has been developed to support our financial services clients. Within Asset Management, for example, EY’s pioneering global data analytics platform captures data from multiple clients and sources (regardless of the geography of the underlying systems). Once data has been captured, it is then transformed within the platform into a standardised data format. This in turn enables a large-scale automation process that produces an audit-ready suite of work papers and client dashboards. Meanwhile, across our banking and insurance clients, a variety of analysers support the audit of mortgages, consumer loans, corporate loans, investments and claims. In many cases, this has allowed EY to embed predictive analytics within its audits. The ability to deploy data analytics tools on larger populations of data provides greater confidence in financial reporting, revealing more patterns and trends in clients’ financial data. Analysis of larger or full populations of audit-relevant data presents a fuller picture of the business activities and helps direct our investigative effort in the right areas, while relevant feedback and insights help clients improve their business processes and controls. Artificial intelligence and the audit of financial services EY is beginning to embed emerging technologies such as artificial intelligence (AI) in the audit process. Seen as the next big disruptor, AI tools provide consistent reasoning with high precision, objectivity and accuracy. When applied to the audit, the chances of human error are decreased while quality and value are increased. AI covers a range of technologies including data mining, speech/image recognition and machine learning. These technologies — particularly machine learning — enhance the audit by allowing us to analyse data with advanced pattern recognition, identifying exceptions and anomalies. Machine learning can be used to assess the internal control framework and data integrity relating to trading activity and related income. It helps us understand transaction statistics, assess data quality in front office systems and perform a critical review of key processes and controls. It can also be used to automatically code accounting entries and detect anomalies in journal entries, analyse a larger number of payment transactions, lending contracts and invoices, which in turn improves fraud detection. Deep learning technology – a form of AI that can analyse unstructured data including emails, social media posts and conference call audio files – is also impacting the audit. Mining this data provides supplementary audit evidence on a scale that was impossible to gather in the past. New skills  The impact of these new technologies will change much more than the way we audit. To fully harness the power of this next wave of innovation, we must rethink the skills we require from the next generation of auditors. Traditional accounting and auditing skills will not suffice – they must be combined with a deep understanding of AI, predictive analytics, machine learning, smart automation and blockchain. These tools are all about data and, consequently, auditors must be able to interrogate that data, understand what it is telling us and use that information to enhance audit quality. As audit professionals become more proficient in utilising the technological tools at their disposal, they must also develop the ability to interpret the data and tell the data’s story. Furthermore, audit committees must understand how these tools and technologies can be used to enhance transparency, minimise risk and provide unrivalled insights. They need to ask the right questions and have the necessary knowledge to understand the answers. Soft skills are increasingly important, too. As automation removes labour-intensive, routine tasks like account reconciliation and report generation, audit professionals can instead focus on providing insights into company performance, devoting more time to shaping business strategy and providing added value. By combining a more strategic approach with the traditional values of our profession – integrity, independence and professional scepticism – we can expect the role of audit professionals to evolve to that of a trusted business advisor. Interpersonal and influencing skills will be critical to such a business partner-style approach. As the business landscape continues to transform, the auditor of the future will be increasingly required to look beyond the numbers and provide a clear and concise narrative for clients, the audit team, audit committees and other stakeholders. Martina Keane FCA is Head of Assurance at EY Financial Services.

Could joint audit help improve audit quality and reduce market concentration? By Tommy Doherty Joint audit is a proven means of facilitating the emergence of a diverse audit sector and, in the case of France, has already led to the creation of the least concentrated audit market of any major economy. If undertaken in a spirit of collaboration, it can reinforce governance arrangements on the conduct of audits and deliver real improvements in audit quality. What is a joint audit? In a joint audit, two separate audit firms are appointed by a company to express a joint opinion on its financial statements. It is fundamentally different from a ‘dual’ or ‘shared’ audit, whereby one audit firm (or sometimes more) audit parts of a group and reports to another audit firm, which ultimately signs off on the group audit. Statutory joint auditors must belong to separate audit firms. Joint audits usually involve two audit firms, but a small number of companies have decided voluntarily to appoint three audit firms to perform their joint audit. Joint audit, audit tendering and rotation The 2014 EU Audit Regulation introduced incentives to encourage the adoption of joint audit by allowing joint auditors to benefit from a longer rotation period (i.e. a maximum tenure of 24 years with no tendering required). By contrast, sole audits are subject to tendering after 10 years and a maximum tenure of 20 years. The preamble to the Audit Regulation states that: “The appointment of more than one statutory auditor or audit firm by public interest entities would reinforce the professional scepticism and help to increase audit quality. Also, this measure, combined with the presence of smaller audit firms in the audit market, would facilitate the development of the capacity of such firms, thus broadening the choice of statutory auditors and audit firms for public interest entities. Therefore, the latter should be encouraged and incentivised to appoint more than one statutory auditor or audit firm to carry out the statutory audit.” Nine member states have decided to encourage joint audit through an extension of the maximum tenure allowed, including (in addition to France) Germany, Spain, Sweden, Finland, Norway, Belgium, Greece and Cyprus. Joint audit has long been regarded as a French peculiarity. But in the context of significant corporate failures and unsustainably high levels of market concentration, the UK’s competition regulator, the Competition and Markets Authority (CMA), is now recommending the introduction of mandatory joint audit. In April 2019, it published The Future of Audit report, recommending mandatory joint audit as part of a broader reform package for most FTSE 350 companies with at least one of the joint auditors being a non-Big Four auditor. The benefits of a joint audit From the company’s perspective, joint audit: Enables companies to benefit from the technical expertise of more than one firm; Encourages “coopetition” (cooperation and competition) between joint auditors, resulting in improved quality of service; Leads to a real debate on technical issues and offers additional scope for benchmarking; Allows for the smooth and sequenced rotation of audit firms, where appropriate; and Retains knowledge and under-standing of group operations, which minimises the disruption caused when one audit firm is changed. How joint audit works in practice The practice of joint audit is well-established in France, as it has been a legal requirement there for over 50 years and has gone through several phases of evolution to reach a level of maturity ‘signed off’ by the market. The following steps explain how the joint audit of consolidated financial statements works for the audit of large French listed groups like BNP Paribas, and how it could work in Ireland and deliver similar benefits. Joint audit of consolidated financial statements is the most common form of joint audit, and a professional French auditing standard exists (NEP-100). Step 1 Determine the annual audit approach: the yearly audit approach is jointly determined and includes the preparation of a joint risk-based audit plan. A single set of joint audit instructions (i.e. a manual of the audit procedures to be applied on a coordinated and homogeneous basis to the group’s subsidiaries by each joint audit firm or network) is issued. In practice, both joint audit firms contribute to these documents, which are consolidated before joint approval of the overall audit approach. The audit approach is almost invariably the subject of a combined annual presentation to the group’s audit committee by the joint auditors. Step 2 Overall allocation of work between the joint auditors: whatever the basis of appropriation, a balance between each of the joint audit firms is sought. This is provided for by NEP 100, which stipulates that the audit work required should be split between the joint auditors on a balanced basis and reflect criteria that may be quantitative or qualitative. If a quantitative basis is used, the split may be by reference to the estimated number of hours of work required to complete the audit. If a qualitative basis is adopted, the split may be by reference to the level of qualification and experience of the audit teams’ members. Step 3 Allocation of work on the different phases of the audit: for the accounts of consolidated subsidiaries, for joint and single audit, the parent company’s auditors are deployed as widely as possible over its subsidiaries worldwide. The allocation of subsidiaries to one or other of the joint auditors may be based on business, product or geographical location criteria. When geographical criteria are used (countries, zones, etc.), each joint auditor is deployed over one or several territories. In the case of significant groups, the joint audit approach is often applied within each of the group’s businesses to ensure oversight by ‘two sets of eyes’ for each business line. Step 4 Levels of group audit reporting: up to four levels of group audit reporting are distinguished: individual entities; geographical zones or business lines (aggregating several entities); group financial and general management; and those charged with governance. For individual entities, for example, the auditor in charge of each entity is responsible for reporting the audit conclusions by way of audit summary meetings with the local management and for expressing an audit opinion on the entity’s consolidation package. Step 5 The group audit opinion on a joint audit: the joint auditors prepare a joint audit report addressed to the group’s shareholders, which is presented during its annual general meeting. The audit opinion expressed is a single joint opinion. Special provisions exist in the event of disagreement between the joint audit firms as to the formulation of their audit opinion. In practice, they are rarely needed.  Step 6 Joint and several responsibilities: each joint auditor is jointly and severally responsible for the audit opinion provided. The exercise of joint and several obligations implies that each joint auditor performs a review of the work performed by the other. The sharing and harmonisation of the audit conclusions and the audit presentation prepared for the audited entity constitute the first step in that review. In addition, the audit summary memoranda and working paper files for the engagement are subject to reciprocal peer review. The two most common criticisms of joint audit relate to the cost and the additional risks involved. However, most of the tasks brought about by a joint audit situation are highly value adding as they are dedicated to the ‘professional scepticism’ necessary to express an audit opinion. In practice, the additional cost is borne by the audit firms involved rather than being passed on to the audited entity. The UK as a benchmark In 2020/21, the EU audit reform will be up for review. The UK reform will strongly influence the dynamic of this debate. Given the importance of its financial market, decisions in the UK will also have an impact beyond Europe. The Commonwealth countries look to the UK for best practice financial regulation and adopt rules that they consider beneficial for their markets. More countries are therefore likely to seriously consider joint audit as a measure to diversify their audit markets. Mazars believes that the UK will go ahead with the reform and that other countries will start to seriously consider joint audit for large corporates as part of a package of solutions to improve audit quality and reduce market concentration. Interestingly, on 28 May 2019, the prospect of Ireland preparing a similar report on The Future of Audit was raised at a Joint Committee on Finance, Public Expenditure and Reform. As an audit firm with a proven track record in joint audit, we believe that this is a solution than can provide tangible benefits to all stakeholders.   Tommy Doherty FCA is Head of Audit and Assurance at Mazars Ireland.

The UK’s Financial Reporting Lab recently spoke to companies and investors about what they wanted from cash disclosures, outside of the cash flow statement. This is what they found… By Thomas Toomse-Smith It has been said that investing is as much art as science. Numbers can tell you so much, but at the heart of every investment decision is a story – either that which the company tells or which investors interpret for themselves. But to allow investors to interpret that story correctly, they need disclosures that help them better understand the generation, availability and use of cash. This allows them to make an assessment of management’s historical stewardship of a company’s assets, as well as support analysis of future expectations. Cash and flow The core disclosure that supports investor needs on cash is often conceptualised to be the cash flow statement. However, while it clearly provides information about the flow of cash, does it do a good job of explaining how that cash is, and (more critically) will be, generated and used? Our discussions with investors suggest that the disclosures that help answer this question are often provided outside of the cash flow statement, and perhaps outside of the annual report completely. Our project focused on this supplemental, but nevertheless fundamental, set of disclosures; disclosures that are principally about the sources and uses of cash. What do investors want? Our discussions with investors concluded that what they want, at a high level, is an overall direction on companies’ cash position but that this should be supported by further details. We have summarised investors’ needs in the model outlined in Figure 1. A focus on drivers Companies note that communicating their strategy and performance are essential objectives of their investor communications. However, for many companies, their attention is on a number of performance-focused metrics (such as profit or adjusted profit) with cash metrics featuring as a supporting, rather than a leading, metric. While companies often do a good job of explaining some aspects of their wider performance, cash metrics and cash generation are often not fully explained. This wider cash story deserves better explanation. Both numbers and narrative are crucial for investors. However, the most effective disclosures are those where numbers and narrative are combined in a way that shows how future cash generation is underpinned by current cash generation. Two ways in which we saw companies trying to communicate this was through better disclosure around selection and use of key performance metrics (in line with the practices suggested in our recent KPI report), and through the use of narratives (that bring all the cash-related elements together). A focus on sources of cash Understanding the link between the operations of a company and its generation of cash is a key objective for investors. However, it is something that is not always easy to do from the information a company discloses. Investors that participated in our project noted that this lack of clarity is prevalent and that it can be challenging to understand how the operations of businesses are generating cash. Key areas where further enhancements would be welcomed include working capital and groups. While the generation of cash is important, to fully understand the health of a business, investors also need to understand their approach to working capital. Disclosures that provided more clarity were narratives about differing working capital requirements, cycles and metrics within different elements of a group, and disclosures detailing less common approaches to financing such as factoring or reverse factoring. While investors are interested in the overall capacity of a group to generate cash, it can also be important to understand where within the group the cash was generated, especially for credit investors. This is an area where there remain limited examples of good disclosures in the marketplace, but an area where investors were keen to obtain more information such as how much capacity was within the group and how the group manage capital and cash between its subsidiaries. Uses of cash Once investors have considered how a company generates cash, and the quality and sustainability of that generation, they then want to understand what a company intends to do with the resulting resource. While many investors feel that, in general, disclosure about the use of cash is relatively well-reported, they would like more information that supports their assessment of the future use of cash – namely, understanding priorities and the risks attached to them. Setting priorities for generated and available cash At its simplest level, capital allocation is a balance between maintaining and growing a business. However, there is a significant nuance in how these various priorities are balanced within any business and at any point in time. Differing considerations of the relative priorities will lead to a very different view when assessing a company. That is why information about how companies prioritise different stakeholders is useful. Many businesses have therefore taken to creating more formal disclosure, often in the form of a capital allocation framework. This approach is particularly popular with companies that are launching a new or refreshed strategy. While the disclosure of a framework often provides only a high-level picture of a company’s allocation priorities, it can serve to focus investor and management conversations on key aspects of the business. As such, investors often welcome such disclosure. Priorities in action Once investors are clear on management’s priorities, they then want information that supports their understanding of how those priorities are represented in the period, and how current decisions might impact future flows. Detail regarding capital expenditure, dividends and other returns are critical to achieving this understanding as they help establish whether management actions are aligned to the priorities. Variabilities, risks and restrictions To properly assess the future potential upside of a business, investors need to be able to assess the downside. Investors understand that returns are variable and should reflect the changing focus and priorities of the company, the call of other stakeholders and the availability of resources. Investors therefore value information that helps them understand the potential uncertainties and management’s reaction. When thinking about future availability of cash, they need information on: Variability of future outcomes: how does the company consider the range of possibilities for future cash use and how does that feed through to the prioritisation of decisions? Risks: what is the link between the risks facing the company and the outturn in cash generation, use and dividend? Restrictions: are there any restrictions on current or future cash, either through capital or exchange controls, availability of dividend resources or other items? Concluding message Overall, investors are not seeking to overburden preparers but they do want preparers to focus disclosure on the areas that are most fundamental to their investment story. The full Lab report is available on the Financial Reporting Council’s website, and gives more insight and examples. Thomas Toomse-Smith is Project Director at the Financial Reporting Council’s Disclosure Lab.  

The provision of environmental reporting clearly aligns to our profession’s core values, so we can all play a role in the drive for sustainability. By Kate van der Merwe Since the 1970s, the influential Business Roundtable has exclusively represented CEOs of the most prominent US companies. In August 2019, 181 CEOs issued a new mission for the group and the companies they represent. No longer singularly focused on maximising shareholder wealth, the mission proposes to benefit “all stakeholders – customers, employees, suppliers, communities and shareholders”. This represents a significant shift in how a company’s purpose is understood. Reporting business performance was traditionally one-dimensional, with an annual presentation of structured figures delivered primarily to shareholders. Over time, this has proven insufficient as it doesn’t explain “how” a company achieves its financial results. In response, the content of reporting has transformed. The increasing demand for, and provision of, non-financial reporting within the external reporting cycle is part of a broader shift. Corporate Social Responsibility (CSR), Environmental Social and Governance (ESG) and integrated reporting won’t be new concepts to readers, having been previously covered in this publication. Reporting continues to evolve, recognising the value of social responsibility, ethics, and diversity equity and inclusion (DEI) to tell a fuller, more meaningful story and in doing so, making the numbers three-dimensional.Companies’ impact on the environment is increasingly being scrutinised, driven by the visibility and awareness of the climate crisis coupled with the current expectation of corporates to be “responsible citizens”. We can see this manifesting in the investment trends of both personal and institutional investors. For the personal investor, investing increasingly requires value-alignment, with impact investing prioritised with younger investors in particular. Both pollution/use of renewables and climate change were two of the top five areas of importance for personal investors in 2018, according to Schroders. Meanwhile, 52% of young investors (18–34) always/often invest in sustainable investments instead of those that aren’t considered sustainable or contributing to a sustainable society, with at least a further $12 trillion estimated to pass to these potential investors over the next decade. Diverse institutional investors, similarly, continue to shift towards impact investing. The Global Impact Investing Network (GIIN) values the impact investment market at $502 billion while its 2019 Impact Investor Survey found that 56% of investors target both social and environmental impact objectives, with a further 7% specifically targeting environmental investments. Meanwhile, fossil fuel divestment is approaching a valuation of $10 trillion across 1,100 entities including nation states, banks, universities, NGOs and faith groups. As Jim Yong Kim, a former president of the World Bank, put it: “Every company, investor and bank that screens new and existing investments for climate risk is simply being pragmatic”. With such appetite, the need for deep understanding of the relationship between business and the environment is clear. Such environmental information exists in a number of forms – as part of non-financial reporting (such as ESG reporting); independent accreditations or affiliations (from the Forest Stewardship Council (FSC) to Certified B Corporations); award recognition (for example, the United Nation’s (UN) Champions of the Earth); and, finally, less formal self-assessments. This environmental information informs reporting and has significant benefits for the relationships with stakeholders, including employees and consumers. As environmental reporting develops, there are several players attempting to define a standard, yet relevant, framework to capture environmental performance. Multilateral bodies such as the UN and European Union (EU) have issued guidance; the Swedish government, for example, has introduced prescribed reporting; and independent organisations have issued frameworks to further this agenda. However, development has been fragmented and criticised for a lack of maturity. Two key criticisms are the lack of comparability (given the array of frameworks to choose from) and the lack of prescription or detail (succumbing to either greenwashing, or irrelevance due to a lack of nuance). The need for clarity in this area is highlighted by a Schroders investor survey, which notes that 57% of people held back from investing or investing more in sustainable investments due to information gaps. While investor appetite represents a significant carrot, the sticks of regulation and public relations (PR) penalties must also be considered. The direction of regulation can be seen with the EU’s Technical Expert Group on sustainable finance (TEG), established in 2018, whose remit includes defining metrics for climate-related disclosure. Irrespective of the current maturity of environmental reporting, there is increasing pressure to get it right. Both Ireland and the UK recently announced commitments to invest in “green” projects and infrastructure. With companies, governments and individuals looking to invest in sustainable businesses, projects and infrastructure, it becomes ever-more important for every business to be able to tell their sustainability story with credibility and depth. Accountants have an opportunity to leverage their complementary skills and experiences to aid the transition to meaningful environmental reporting. Furthermore, the provision of environmental reporting clearly aligns to our core values and serves the common good by meeting public expectations and ensuring transparency and accountability. Environmental reporting is an immature but growing area that is here to stay. It is best viewed holistically, as part of a bigger shift to intersectional environmental information. It is central to our values not just as human beings, but as accountants, finance professionals and business leaders. All businesses, whether multinationals or small- or medium-sized enterprises (SMEs), should embrace this as an opportunity to tell an authentic, winning story to an extensive audience as the absence of information will inevitably generate its own noisy static. As accountants, we have an exciting opportunity to play an integral part in solving a problem for the common good.Kate van der Merwe ACA is responsible for Global gFA Reporting Optimisation at Google.

While Alternative Performance Measures have enjoyed a rising profile, it would be folly to think that IFRS financial reporting has diminished in value. By Jamie Leavy Today’s world is fast-paced and what was the norm yesterday, in certain cases, can seem to be redundant today. We are living through a technology revolution, which has changed the corporate world unrecognisably from that of five years ago. One of the major changes is the exponential growth in the availability of real-time data that is providing existing and potential investors, lenders and other creditors (users) of companies with more valuable sources of information than ever before. This has coincided with the proliferation of Alternative Performance Measures (APMs), which provide users with information on a company’s performance and financial position. In 2016, the European Securities and Markets Authority (ESMA) released a paper on APMs that defined an APM as “a financial measure of historical or future financial performance, position or cash flows of an entity which is not a financial measure defined or specified in the applicable financial reporting framework”. APMs are commonly disclosed outside of, or as a supplement to, a company’s annual financial statements. These developments have led to a number of commentators suggesting that IFRS-based financial reporting is now of little importance and is seen as out-dated to users. It is suggested that users’ interest now focuses predominantly on APMs and non-financial information within annual reports and other announcements to provide them with an understanding of a company’s performance and financial position in order to make future investment decisions. However, before the preparers and users of financial statements place their IFRS Standards book in the nearest recycling bin, I would suggest caution in both solely relying on APMs for decision-making and diminishing the importance IFRS financial reporting provides to users. IFRS reporting Given the vast increase in information available to users, it would be somewhat naïve to expect IFRS financial reporting to have sustained its importance on a relative basis. It is logical that users will make use of APMs when predicting how a share price might move. These measures act as an important tool in deciding whether to hold, sell or buy shares in a company. However, these predictions depend heavily on one condition – the current share price being correct. This can only be the case if the underlying IFRS-based financial information is calculated consistently with other companies and is materially correct. Therefore, IFRS-based reporting, especially within the audited financial statements, remains a crucial element in the user’s decision-making process. The benefits of IFRS Comparability: financial reporting under IFRS provides a high level of transparency by enhancing the global comparability of companies’ financial statements. Users can easily compare a company’s performance and financial position to that of domestic and overseas competitors as well as to the prior year’s figures. It also provides economic efficiency by helping users identify opportunities and risks globally. It facilitates the comparison of potential investment opportunities in numerous companies globally, safe in the knowledge that the figures of each company are based on identical, sound and clearly defined accounting principles. IFRS creates a common accounting language. This level of transparency and comparability is not achieved by APMs, as they are not uniformly applied and are often uniquely adjusted at the individual company level. Not only is there a difficulty for users in comparing performance measures of different companies, it is similarly problematic to compare the current and prior year APMs. This is as a result of the various adjustments that are included or excluded in the calculation year-on-year. Accountability: the use of IFRS in financial reporting strengthens accountability by reducing the information gap between users and management. IAS 1 requires that all significant management judgement and estimates used in calculating IFRS amounts be explained within the notes to the financial statements. This ensures that users have information that provides them with an understanding of any adjustments or subjectivity involved. On the other hand, the major risk of APMs, and the reason for such regulatory interest, is the lack of accountability. In many cases, APMs lack order and structure and there is widespread concern about the potential misuse of these measures by management.   Yes, when used appropriately these measures can provide users with valuable information. However, APMs can potentially be utilised by management to adjust important figures – such as profit and revenue, for example – to show a more positive figure than the IFRS-based equivalent, or be used to ignore ‘inconvenient’ expenses by excluding them from the calculation. This has led to instances where, for example, companies have disclosed adjusted earnings figures as a positive highlight in announcements while the IFRS-based equivalent figure is actually a loss and is disclosed outside the highlights section. Further cases have been noted where a company discloses an APM in, for example, an unaudited preliminary announcement, but this measure is subsequently not repeated anywhere in the financial statements. In both examples, users need to exercise caution in interpreting these measures. They should closely analyse the adjustments being made and the associated reasoning. APMs – not all bad The intention is not to downplay the positive role that APMs, when used appropriately, can play. APMs are an important element in the communication between a company and its users. They can enhance financial analysis by segregating the effects of items that do not support an understanding of historical or future trends, cash flows or earnings. To ensure that APMs are credible, however, they should supplement the IFRS information in financial statements rather than compete with them. This requires a level of discipline regarding measurement and presentation. Working in harmony While I disagree that IFRS reporting is no longer of prime importance to users, there is room for continued improvement. Nowadays, users want all available information to better explain and understand performance; this is one reason why APMs have risen in popularity. The IASB has acknowledged that improvement is required and it is currently working on a Primary Financial Statements project. The aim is to provide better formatting and structure in IFRS financial statements, with the primary focus on the income statement. It has been suggested that this project will lead to additional subtotals, similar to current common APMs such as operating profit and EBIT, with more specific classifications of items being introduced. This should create more discipline around APMs by providing more reconcilable line items in the financial statements. The IASB has also suggested that it may require preparers to explain and reconcile APMs in the notes of the financial statements, which will provide users with a better understanding of the measures and lead to the measures being subject to audit. This project has the potential to improve IFRS-based reporting further and provide a defined and trusted link between financial reporting and APMs. It is unknown when, if any, changes from this project are to be implemented. However, in 2016, ESMA released Guidelines on Alternative Performance Measures. These guidelines are not intended to eliminate the use of APMs but instead, to ensure that APMs clarify rather than obscure the financial performance and position of a company. The prevailing principle of the guidelines is that APMs reported outside the financial statements must be consistent with the information disclosed within. The guidelines provide the opportunity for a company to present APMs while safeguarding against the manipulation of results by requiring that APMs be presented in a clear and transparent manner. The guidelines include 48 paragraphs of detail regarding the presentation of APMs, but the main aspects are as follows: APMs should be meaningfully labelled and defined; The purpose of the APMs should be clearly set out; Comparative data should be provided for all APMs; APMs should not be displayed with more prominence, emphasis or authority than measures directly stemming from the IFRS-based financial statements; Clear reconciliations should be given; and Unless there is a good reason for change, the presentation of APMs should be consistent over time. IAASA has received a number of undertakings in relation to the above aspects since the guidelines were published. Furthermore, IAASA has published a number of thematic reviews in relation to the use of APMs, namely: Alternative Performance Measures – Thematic Survey (September 2017); Alternative Performance Measures – A Survey of their Use Together with Key Recommendations: An Update (January 2015); and  Alternative Performance Measures – A Survey of their Use Together with Key Recommendations (November 2012). Conclusion The substantial increase in information available to users has meant that IFRS financial reporting is no longer the only reporting type available. The use and prominence of APMs has increased over the last five years; however, IFRS financial reporting is still as important as ever in the user’s decision-making process. The aim of every company should be to provide as much relevant and reliable information to users as possible. To achieve this, APMs will play an important role – but only when used appropriately. To ensure appropriate use, both APMs and IFRS-based reporting should work together to provide an overall view of the financial performance and position of the company. The ESMA’s guidelines will be critical in realising this goal – if companies follow the guidelines, the combined information within the financial statements should be defined, clear and reconciled in order for users to grasp and gain value from every page. Users will then benefit from the comparability and transparency that IFRS offers, supplemented by additional valuable information in the form of APMs.   Jamie Leavy ACA is a Project Manager in IAASA’s Financial Reporting Supervision Unit.

Paula Nyland considers how Chartered Accountants involved in the third sector can improve transparency and prosperity to the benefit of charities and society at large. The third sector on the island of Ireland impacts directly or indirectly on the work of every Chartered Accountant, whether as a director/trustee, audit practitioner, employee or volunteer. In the Republic of Ireland alone, the sector includes 9,500 non-profits that are incorporated as companies, more than 4,000 primary or secondary schools, and 800 friendly societies, co-operatives, trade unions, professional associations, political parties or charter bodies. Another 15,000 or so are unincorporated associations, clubs and societies. Chartered Accountants are critical to supporting and directing this sector, and it’s important that they are aware of some of the impacts of changing regulatory conditions on their practice.  Greater financial transparency and accountability Since 2014, when it was established under the Charities Act, 2009, the Charities Regulator in the Republic of Ireland has been working to bring greater public transparency and regulatory accountability to the work of the charity sector – about one-third of all non-profits. The Regulator now plans to introduce new regulations that will clarify the reporting requirements for charities in the form of an Irish version of Charities SORP. Charities SORP is a module of FRS 102, which provides guidance on financial accounting and reporting for charitable entities. It is currently mandatory for UK charities, but only recommended for charities in Ireland. Based on our analysis of all of the financial statements filed by Irish non-profits since 2015, Benefacts has discovered that just 12% of Ireland’s incorporated charities currently file financial statements using Charities SORP on a voluntary basis. This will change when the forthcoming regulations are introduced. All larger incorporated charities (more than €250,000 in income or expenditure) will be required to meet these higher standards of disclosure, and will no longer be permitted to file abridged accounts. Currently, the level of abridgement in charities’ accounts here is running at 37%, and this is something the Charities Regulator has repeatedly spoken out on – most recently after the launch of Benefacts’ Sector Analysis Report in April 2019. For the audit profession, there is a clear need to become familiar with these reporting standards, because the question is no longer whether Charities SORP will become a requirement for larger charities in the Republic of Ireland, but when. Guidelines on fundraising and internal control Even in advance of the new regulations on financial reporting, the Charities Regulator has been active in setting standards for the charity sector, with guidelines for fundraising from the public issued in November 2017 and a governance code issued at the end of 2018. These measures, coupled with the Internal Financial Controls Guidelines for Charities, have created a strong foundation for control within the regulated charity sector, in particular for the people serving on the boards of charities and non-profits. VAT repayment scheme  Elsewhere in Government, there have been measures to respond to campaigns from within the sector. Following years of lobbying to change the VAT regime for charities, Government introduced a new scheme that has made €5 million available for recovery annually by charities against VAT paid from non-statutory or non-public funds for costs after 1 January 2018. The deadline for 2018 claims was 30 June 2019. DPER Circular 13 of 2014 Without having the full force of regulations, the standards for financial disclosures promulgated by the Department of Public Expenditure and Reform (DPER) nonetheless deserve to be more widely understood by the accountancy profession. Circular 13 of 2014 is the most important statement of the disclosure standards that are expected of all entities receiving State aid, and it is the responsibility of every government funder to ensure that these are being followed. They set out the requirements for reporting every source of government funding, the type of funding provided (loan, current or capital grant, service fee), the purposes of the funding and the year in which funding is being accounted for. Abridged accounts do not meet the standards of DPER 13/2014, nor do accounts prepared using the new standard for micro-enterprises, FRS 105. FRS 105 (micro entities) When the Companies (Accounting) Act 2017 was commenced on 9 June 2017, it introduced the concept of the Micro Companies Regime, which is provided for in Section 280 of the Companies Act 2014. This allows smaller companies (with two of the following conditions: turnover of €700,000 or less, balance sheet total of €350,000 or less, and no more than 10 employees) to prepare financial statements under FRS 105 instead of FRS 102. FRS 105 provides for minimum disclosures: no directors’ report, no requirement to disclose directors’ remuneration, no disclosure of salary costs or employee numbers. In 2017, 5% of non-profit companies reported to the CRO using this standard, including some that receive funding from the public or from the State.  Charities in the UK are not permitted to report using FRS 105, but as yet there is no such regulation in the Republic of Ireland. The burdens of disclosure Many Irish non-profit organisations receive funding from more than one source – some from many sources, as will be clear from even a cursory glance at the listings of well-known names on www.benefacts.ie. As well as multiple funding sources, most major charities are regulated many times over, if you count the oversight responsibilities of the CRO/ODCE, the Charities Regulator, the Housing Regulator, Revenue, HIQA et al. The high administration and compliance burden represents a real cost – including, of course, the cost of audit fees. At a minimum, of course, company directors must confirm that the company can continue as a going concern; Charities SORP requires that trustees disclose their policy for the maintenance of financial reserves and it is expected that these will reflect a prudent approach to maintaining funds to see them through periods of unexpected difficulty. These are sensible, indeed fundamental, principles and the annual financial reporting cycle is intended to give confidence to all stakeholders that the directors/trustees fully understand their responsibilities and are fulfilling the duties of care, diligence and skill enjoined on them. The €20 million or so currently spent by non-profit companies on audit fees (as yet the public has no access to the accounts of unincorporated charities) should be money well spent. The better the quality of the financial statements, the more these can play a role in initiatives being explored by a number of Government agencies to explore cost-saving “tell-us-once” solutions, supported by Benefacts. Who is accountable? Using current data from filings to the CRO and the Charities Regulator, Benefacts reported in Q1 2019 that 81,500 people are currently serving in the governance of Irish non-profit companies and charities. 49,000 of these serve as the directors of 9,500 non-profit companies, and the rest are the trustees of unincorporated charities. All are subject to regulation, and they include many members of Chartered Accountants Ireland.  By any standard, this is a large sector with more than 163,000 employees and an aggregate turnover in 2017 of €12 billion, €5.9 billion of which came from the State (8.4% of all current public expenditure in that year). Most of this funding was concentrated in only 1% of all the bodies in the sector. Voluntary bodies enjoy some of the highest levels of trust in our society, but it has become clearer in recent years that this trust does not spring from an inexhaustible reservoir. It must be continuously invested in and replenished by the work of every non-profit, most especially in the form of ample and transparent public disclosure – about their values, their work, its impacts, and the sources of their funding. Above all, the board carries responsibility for setting a tone of transparency and accountability, and directors/trustees need to be aware of their personal responsibilities in this regard. As professionals, we are often looked to by our friends and family, by our clients, or by our fellow directors/trustees for advice or leadership. We all know that in any kind of business, the consequence of a loss of public confidence can be dire; in non-profits, it can be fatal.   Paula Nyland FCA is Head of Finance & Operations at Benefacts and Co-Chair of the Non-Profit and Charities Members Group at Chartered Accountants Ireland.

The Employment and Investment Incentive Scheme (EIIS) remains an excellent source of equity funding for qualifying companies.   The Employment and Investment Incentive Scheme (EIIS) has been a critical source of funding for Irish small- and medium-sized enterprises (SMEs) over the years. The scheme allows Irish taxpayers to claim up to 40% income tax relief on an investment in a qualifying Irish SME. While the scheme has been on the receiving end of some bad press of late, the legislation governing EIIS was updated as part of Finance Act 2018. The new legislation has re-written and re-ordered the previous legislation to make it easier to follow. While there has not been much change to the tax relief or the type of companies that can qualify for EIIS funding, there have been significant changes to the administration of the scheme and to the permitted investment structures, which I believe will have a positive impact. Up to €15 million available for companies The changes to the Finance Act did not materially alter the type of company that can qualify for the relief. The European Union’s (EU) General Block Exemption Regulations (GBER) continue to govern companies that are eligible for EIIS investment. A company must be carrying on a qualifying trade within the State or through a branch in the State, or it must act as the holding company to a qualifying company. An EIIS investment cannot be made directly into a subsidiary, although a subsidiary can benefit, and its tax affairs must be in order. The Finance Act introduced a new definition to the legislation called a ‘RICT Group’. A RICT Group can raise up to €5 million EIIS in any 12-month rolling period and up to €15 million in its lifetime. When looking at a qualifying company, one must also consider its RICT Group, the definition of which aims to identify other companies connected to the qualifying company through common control or ownership. A qualifying company or any company in its RICT Group can raise only one of the following three types of EIIS investment: Initial risk finance: any past or present member of the RICT Group cannot be trading for more than seven years; Expansion risk finance: for a RICT Group trading for more than seven years, the EIIS investment must exceed 50% of the average turnover for the preceding five years, and the company must be entering a new market or launching a new product or service; or Follow-on risk finance: for a second or subsequent EIIS investment, the RICT Group must have foreseen this investment in the original business plan from the time of its initial risk finance. Any companies raising EIIS investment must consider their original business plan and all future needs for EIIS funding. The legislation continues to contain significant anti-avoidance provisions. Qualifying investment A positive change introduced in the Finance Act is the type of shares in which an EIIS investor can invest. Previously, an EIIS investment could only be by way of ordinary shares with no preferential rights. From 1 January 2019, the EIIS investment can be made by way of redeemable preference shares, which is very similar to the investment structure used by Enterprise Ireland. As always, the shares must be newly issued, fully paid up, and the investor’s capital must be at risk (i.e. no guarantees for the four-year minimum holding period). 40% tax relief for investors An EIIS investor must not be connected to the company in which they invest unless they have been granted EIIS or SURE relief on all previous subscriptions into the company. The SURE and SCI schemes were also re-written in the Finance Act, and are aimed at founders, promoters and other connected parties. The scheme is open to all Irish taxpayers who can claim income tax relief of up to 30% in the year of investment and a further 10% three years later subject to the company meeting particular employment or research and development (R&D) expenditure requirements. As you can see from the example in Table 1, investors can earn a good after-tax return if the company merely returns the investment after the four-year minimum holding period. Quicker tax relief claims The process for claiming tax relief is the most significant change contained in the Finance Act. In the past, a company would typically apply to the Revenue Commissioners for outline approval in advance of raising an EIIS investment. Revenue would indicate whether it believed the company would qualify or not. This opinion was not legally binding. Once the investment was completed, the company would again apply to Revenue for tax relief certificates. This process caused the majority of delays and generated negative press for EIIS. Since 1 January 2019, companies can only ask Revenue a limited number of questions before it raises EIIS investment: What is included in the RICT Group? What type of investment is proposed (i.e. initial, expansion or follow-on)? Is the company a firm in difficulty? Once the company has received the investment, it now self-certifies the initial tax relief (up to 30%) to the investor by issuing a ‘Statement of Qualification’ or ‘SQ EII 3’. The certificate can only be issued to the investor once at least 30% of the funds invested have been spent. The SQ EII 3 certificate is required by the investor to make their tax relief claim. The company is also required to file a RICT Form with Revenue to advise that they have issued EIIS tax relief certificates. The company must also include the investment in its corporation tax return for the relevant year of assessment. On meeting the relevant employment or R&D expenditure conditions after three years, the company will follow a similar process to issue further tax relief certificates for the second tranche of tax relief (up to 10%). Market size In the years following the recession, EIIS grew annually. However, the implementation of the full GBER regulations in 2017 caused a significant decrease in tax relief approvals due to the increasing complexity of cases. It also caused Revenue processing delays, which have been well publicised. There is insufficient data available for 2018, but it is likely that tax relief approvals will experience another significant drop. With the improved legislation and self-certification process, EIIS should see resurgence from 2019 onwards and hopefully grow towards the €100 million level again. Funding options There are a large number of EIIS providers in the market, from regulated designated investment funds to various investment brokerages that offer access to their private client base. Companies should continue to seek EIIS funding, as the tax break for investors can facilitate access to significant equity funding. Given the amounts raised in the past, there is plenty of demand from investors at a time when there is a concurrent shortage of growth capital in the Irish market.   Mark Richardson ACA is an investment director with the Goodbody EIIS Funds in association with Baker Tilly.

Accountants involved in preparing financial statements can expect increased scrutiny and challenge of their accounting estimates from their auditors. I suspect that most accountants would agree that non-accountants believe the numbers in financial statements are more precise than they really are. Accountants, on the other hand, are much more conscious of the level of estimation that goes into many of those reported numbers. I must admit I didn’t become aware of the level of estimation involved until I entered the real world of auditing and accounting. I certainly don’t recall gleaning it from my accounting lectures or from the texts I read for my exams. I spent many long days patrolling the aisles and shelves of warehouses and stockrooms torturing myself about the best estimate of just how much could be realised from excess and out-of-date lines of inventory, conscious that they had to be written down to their estimated selling price less estimated costs to complete and sell.   What followed was long hours quizzing credit controllers while worrying about whether the 5% bad debt provision was the best estimate of the extent to which the amounts due from customers would not be collected, and whether the credit controller was too optimistic or too pessimistic. Estimating the useful life of buildings and plant is key to the depreciation charge, an area of estimation where you might think an engineer would be more qualified than an accountant, though a futurologist might be better when it comes to the question of technological obsolescence. On the liabilities side of the balance sheet, significant judgement is applied in estimating the amount of defined benefit pension obligations, including mortality and inflation assumptions, as well as assessing the likely outcome of legal claims and court cases, where the assumption about success or failure can be critical to the numbers included in the financial statements. These are the some of the traditional areas of estimation uncertainty an accountant needs to consider. And, all of this was before the challenge of estimating value in use and fair values poked its head into so many areas of accounting.  The implications of the new auditing rules for accountants in business So, why is it appropriate to focus on estimation at this point? Well, since the issue of IFRS 9 and its emphasis on expected credit losses on loans and receivables upped the ante on estimation still further, auditing standard setters have seen fit to upgrade the rules on how to audit all types of estimates. Inevitably, as auditors direct more attention to estimates, accountants in business involved in financial reporting will feel the heat of incisive questions from their auditors as they apply the new rules to the myriad of estimates underlying the financial statements.  The Irish auditing standard setter, the Irish Auditing and Accounting Supervisory Authority (IAASA), issued its new standard on auditing accounting estimates (ISA 540) in late 2018 with mandatory effect for audits of financial statements for periods commencing on or after 15 December 2019. That may seem some time away but, of course, early adoption of the more demanding rules is permitted, and some auditors may consider it appropriate to apply the new rules early. The implications of this for accountants in business are likely to vary significantly depending on the auditor’s assessment of the risk that incorrect estimation may cause a material misstatement. Among the areas of particular focus in the updated ISA 540 is the requirement for the auditor to show adequate professional scepticism and to be on alert for management bias.  There is also a strong emphasis on the auditor documenting – in detail – the management estimation process, including the assessment of material misstatement risks. The level of subjectivity underlying these estimates, and the degree of estimation uncertainty, will affect the design and completion of this process. Of course, some auditors may have already been applying the new rules or, indeed, may have assessed that the new rules will not add to their audit effort. Accountants in business will wish to avoid any late surprises as a result of their auditor introducing additional audit procedures or placing increased demands on them. It is worth remembering, too, that the auditor will seek written representations from management on certain matters, including areas of accounting estimation, and will often report to the board or the audit committee on areas of judgement and estimation, both of which can take up more senior audit effort. Further, for many listed companies, the auditor’s report to the shareholders will explain how the auditor has addressed significant estimates. When the updated ISA 540 was being developed, many commentators, including some Irish auditors, had concerns that it might put an unnecessarily large burden on the audits of smaller companies. The final version of ISA 540 has attempted to allay those concerns by suggesting that the risk of material misstatement may be less significant in smaller companies with a consequent lower level of audit effort required. It will be useful for company accountants to be aware of where their auditor’s assessment of this risk lies along the spectrum and the consequences for the degree of audit effort required. Preparing to justify accounting estimates The degree to which the auditor decides it is necessary to devote effort and focus to the estimates can affect how accountants in business should prepare to justify their own estimates. That preparation might include more detailed documentation of the appropriateness of the estimates, the level of estimation uncertainty involved and the rigour of the internal control process surrounding the estimation process. This should help the auditor conclude on their reasonableness, and reduce the degree of effort spent drafting documentation they are required to complete.  For some complex or specialised areas of estimation, company accountants may wish to ensure that their auditors have the necessary skills or expertise to assess the reasonableness of the estimates to reach their conclusions promptly. This may arise in areas such as actuarial assumptions for pension obligations, valuation techniques for derivatives and unquoted financial assets, the likely outcome of legal claims and uncertain tax positions, and technical provisions in insurance companies, to name a few. Conclusion There is no getting away from the vital role that estimation plays in financial reporting. Consequently, there can be no denying the importance of the auditor’s procedures in auditing those estimates, notwithstanding the level of interrogation and challenge this may entail as the auditor seeks to conclude on the reasonableness of the estimates. Clearly, it is desirable that maximum co-operation between management and auditor is achieved by early communication, explanation and clarity on the level and type of audit work planned, and the degree to which management and accountants in business can enhance their documentation of the estimation process. After all, making accounting estimates is the prerogative of management, and management should have every opportunity to justify them to the auditors to ensure that the new, more onerous auditing rules neither add significantly to the cost nor disrupt the harmony of the audit.   Terry O’Rourke FCA is Chair of the Accounting Committee at Chartered Accountants Ireland. 

With increased pressure being placed on Irish plcs to improve their human capital reporting practices, Anthony Wall, Martin McCracken, Professor Ronan McIvor and Raymond Treacy look into why Irish companies’ reporting is coming up short compared to the UK.   For many years there have been attempts to place a value on an organisation’s employees, either for financial statements or for internal purposes. Despite a plethora of suggestions, no method has gained universal approval. More recently, though, the focus has switched from placing a value on an organisation’s workforce to understanding and leveraging human capital (HC) effectively. The term ‘human capital’ has been defined by Gary Becker, an American economist Nobel Prize winner, as the knowledge, information, ideas, skills, and health of individuals. In 2016, we developed a framework to ascertain the HC reporting practices of UK companies (see Table 1).  The KSA area includes items that employees need to participate effectively in the workplace, and, therefore, contains elements that an employee either brings with them when they start working for an organisation or that they can subsequently develop.  ‘HRD’ is concerned with how organisations develop and enhance the KSA of their employees.  ‘Employee welfare’ is the notion that the organisation will act as a good citizen, within its environment, and how well it treats its employees.  ‘Organisational justice and equity’ involves organisations treating employees in a fair and equitable way, and offering equal access to opportunities. This framework has been used to investigate the reporting practices of the 53 companies currently quoted on the Irish Stock Exchange (Euronext) by examining their latest annual reports. Any sentence within the annual reports containing the items listed in the HC framework was counted. Subsequently, the sentence count for each element was aggregated for all of the Euronext companies in order to analyse the current standard of HC reporting.  The overall sentence count for each of the four areas can be seen in Table 2 below.   The first thing to note is the relatively low sentence count for HC items. A study of the FTSE 100 companies in 2018 by the Chartered Institute of Personnel and Development (CIPD), ascertained that the total sentence count for UK plcs was 18,162, compared to the Irish 3,142. This works out at an average of 182 items per UK company to the 59 items for each Irish plc, a difference of 68%.  You can see that Irish plcs attach the most importance to HRD, followed by KSA, employee welfare and organisational justice and equity. Three Irish plcs did not report on any HC items, and 15 reported on ten or less. The highest overall sentence count for an Irish plc was 211.  KSA Of all the framework items listed, ‘leadership’ was the most reported item followed by ‘expertise’, with these two items accounting for 80% of all HC elements reported in this category. The remainder of the KSA items had relatively low levels of reporting, ‘flexibility’ in particular. Other related workforce flexibility concepts such as ‘entrepreneurship’ and ‘innovation’ also had low sentence counts. This is an important area in an era of flexible working arrangements. However, a study by the Economic and Social Research Institute  in 2018 found that Ireland lags behind the EU average when it comes to contingent employment (McGuinness et al, 2018). Therefore, it is perhaps not surprising that reporting levels are low.   HRD Table 4 shows that training was the highest reported HRD item, with ‘talent management’ and ‘succession planning’ in second and third place respectively. The high level of references to training is expected, as unemployment has decreased in Ireland to its lowest level in 10 years (Central Statistics Office, 2018). With more people re-entering the workforce, the demand for training programmes will be high. In terms of talent management, key skills gaps in certain areas of Irish business have emerged in recent years. Employee welfare ‘Health and safety’ made up over a third of the employee welfare items in annual reports. However, a reference to ‘ethics’ was fairly low. It was found that while Irish firms tended to report broadly on issues such as employee codes of conduct and whistleblowing policies, disclosures relating to specific ethical issues, such as corruption, bullying and harassment, were quite rare.  ‘CSR’ and ‘employee engagement’ both had reasonable levels of reporting but everything else in this category dipped into the one digits. However, one might have expected more references to employee wellbeing given the prominence of mental health awareness campaigns. Given the recent emphasis on diversity, the levels of reporting of this is not surprising (see Table 6). However, the relatively few referrals to ‘equality’ are unexpected. This low level of reporting may be down to firms’ tendency to report equality issues under the heading of ‘diversity’, as there is invariably some overlap between the two. Nevertheless, as Ireland now requires companies to report on any gender pay gaps, reporting in this area may improve.  ‘Employee rewards’ were also referred to quite frequently, while ‘human rights’ had fairly low levels of reporting even though EU legislation requires more reporting of such issues.     This study shed some light on the HC items that Irish firms value most, while also identifying areas where HC reporting can be improved. Compared to the UK, the disclosure of HC items by Irish plcs is quite low, and there was generally far less information included in the Irish companies’ annual reports. Irish firms could and should disclose more HC information. The lack of information provided suggests that the EU directive may not be enough on its own, and Ireland could benefit from amending its own 2014 Companies Act to encourage more comprehensive and in-depth HC reporting. Anthony Wall is a Senior Lecturer in accounting at Ulster University. Martin McCracken is a Research Director of business and management at Ulster University.  Professor Ronan McIvor is a Professor of operations management at Ulster University.  Raymond Treacy is a Research Consultant at Ulster University. The authors would like to thank the Chartered Accountants Ireland Educational Trust (CAIET) for funding this research.

IFRS 16, the new international accounting standard on accounting for leases, will change many companies’ balance sheet metrics – but will it change behaviour as well?   When the IASB issued IFRS 16, the new accounting standard on lease accounting, in early 2016, its chair Hans Hoogervorst went to the trouble of asserting that the new standard would not put the leasing industry out of business and that leasing would remain attractive as a flexible form of finance. This was an unusual and, indeed, sympathetic statement for an IASB chair to make. It contrasted with the often-quoted statement by former chair of IASB, Sir David Tweedie, that he wished to fly on an airplane that was on an airline’s balance sheet before he died. Mr Hoogervorst’s statement was also considerably more sympathetic than the IASB’s attitude to concerns expressed some years ago that the revised rules on accounting for defined benefit pension schemes in IAS 19 would threaten the popularity of those schemes. The IASB noted at the time that it was not its problem if changing IAS 19, in the interests of better financial reporting, had such consequences. The IASB was equally unsympathetic to the concern that bringing a pension liability onto the balance sheet would cause difficulties with debt covenants, pointing out that it was up to companies to take action, such as renegotiating covenants, in these circumstances. What is the concern? So why did Mr Hoogervorst feel it necessary to address the question of whether IFRS 16 would affect the attractiveness of leasing as a form of finance? To understand this, let us recall some of the main changes in lease accounting brought about by IFRS 16 as compared to the previous standard, IAS 17. Under IAS 17, leases were classified as either operating leases or finance leases. Finance leases were recognised on the balance sheet as an asset and liability, with depreciation and interest in the income statement. Operating leases were not recognised on the balance sheet, giving rise to their being referred to as off-balance sheet finance, with the lease rental expense being recognised on a straight line basis in the income statement. The distinction between finance and operating hinged on whether substantially all the risks and rewards of ownership of the asset had transferred to the lessee. IFRS 16 represents a fundamental change to this approach. Under IFRS 16, all lease obligations are recognised on the balance sheet as a right-of-use asset and a lease liability (except for low value and very short leases). Depreciation on the asset and interest on the lease liability is recognised in the income statement, as with finance leases under IAS 17. IFRS 16 also sets out rules on how to determine the discount rate to apply to the lease payments when bringing the asset and liability onto the balance sheet, as well as how to determine the length of the lease term and how to deal with variable lease payments. So, how do these accounting changes affect financial metrics that are calculated on the basis of IFRS accounts? The most obvious one is that it will increase the amount of liabilities that are recognised on the balance sheet, as well as the amount of assets. Allied to this is the effect on the key financial metric of gearing because of the change in the relationship between the amount of liabilities recognised on the balance sheet and the amount of balance sheet equity.  In the income statement, while earnings before interest, tax, depreciation and amortisation (EBITDA) will increase, as will operating profit, the interest expense will increase with consequences for debt covenants with interest cover requirements. Where the lease obligation is in a foreign currency, exchange gains and losses will arise on the full amount of the lease liability as exchange rates change. As we will see later, this can be particularly significant in some industries. Compared to the straight line operating lease expense under IAS 17, recognising interest on the lease liability will tend to front-load the total expense, with dramatic effects for companies that are financing their growth through leasing. Although the mandatory commencement of IFRS 16 is for years commencing 1 January 2019, accounting regulators such as IAASA (the Irish Auditing and Accounting Supervisory Authority) have reminded listed companies that IFRS requires this year’s accounts to provide information about the impact that IFRS 16 is expected to have when it is implemented. Indeed, IAASA published a survey in 2016 of Irish listed companies’ operating lease commitments to provide a possible indication of the scale of lease commitments that will be recognised under IFRS 16. Industries affected by IFRS 16 While the IFRS accounts of all lessee companies with operating leases obligations will be affected by IFRS 16, it is generally recognised that the retail, airline and telecoms industries are likely to be particularly affected. This is because of the scale of property leases in retail, aircraft leases among airlines and equipment and network asset leases in telecoms. In each of these industries, leasing offers the key benefit of flexibility in relation to how long and at what cost the lessee wishes to be committed to the use and cost of the property, aircraft or equipment involved. Under IAS 17, there was also the additional perceived benefit that operating leases represented off-balance sheet finance. Under IFRS 16, some lessee companies may consider shortening the duration of their leases so that the amount of the lease liability and asset to be recognised on the balance sheet is reduced. Alternatively, options in leases to extend or renew the lease term that give rise to further liability where they are reasonably certain to be exercised may be renegotiated or eliminated. In the airline industry in particular, where leases are often denominated in US dollars, euro companies are exposed to exchange losses on the whole lease liability under IFRS 16. Lessees may consider seeking to alter the currency of the lease or, more realistically, hedging the accounting exposure by using derivatives. In telecoms, where lease arrangements may include access to an asset together with the receipt of other services from the lessor, the expense for the access to the asset may be separated from the service element in order to restrict the amount to be recognised on the balance sheet to the amount relating to the lease rental for the asset. As IFRS 16 applies where the lessee controls the use of a specific asset for a period, some lessees may be content to leave control over the choice of asset to the lessor in order to avoid being scoped into IFRS 16. Recognising right-of-use assets on the balance sheet under IFRS 16 will expose those assets to the risk of becoming impaired for accounting purposes, with the resulting charge against profit being recognised perhaps earlier than an onerous lease charge would have been recognised before IFRS 16. This is likely to be particularly relevant in industries where technological obsolescence is a feature of the industry. Practical challenges for companies affected by IFRS 16 include the cost and effort of developing systems to capture the detailed data about their operating leases that they need to bring these leases onto the balance sheet, communicating the accounting impact to stakeholders and considering whether compensation arrangements need to be amended in order to accommodate the revised numbers. Under UK and Irish GAAP, operating leases remain off-balance sheet. Some companies that had adopted IFRS may consider whether IFRS continues to be the appropriate accounting framework to use where they believe the negative accounting effects of IFRS 16 are very serious. While some lessee companies may see fit to consider one or more of the avenues referred to above to minimise or reduce the negative accounting effect of IFRS 16, there remains the larger question of whether some companies will conclude that those negative effects would justify a fundamental change in their lease or buy decisions. This may be more likely where the benefits of leasing are marginal and do not outweigh the negative effects of worsened financial metrics. Clearly, a key factor in all of this is whether lenders and investors are likely to change their attitudes to lessee companies solely because of this accounting change. So, the follow-on question is whether this is likely to occur. Conclusion As Mr Hoogervorst noted in a speech on IFRS 16, it is a well-known practice of lenders and investors to adjust the balance sheet borrowing numbers of companies for the effect of off-balance sheet leasing when establishing the real gearing position. Given this well-established practice, together with the degree of publicity that the change in lease accounting under IFRS 16 has received, I think it would be disappointing if lenders and investors were to change their behaviour based on an accounting change that reflects no change in commercial reality. Such a change in behaviour might indicate that lenders and investors had not already been seeking out and utilising the relevant information on companies’ leasing arrangements. Even if the negative effects of IFRS 16 on balance sheet metrics, such as gearing, and on the volatility of profit do alter the behaviour of certain lenders and investors, lessee companies that are convinced that leasing is the right commercial decision may well stick to their guns and maintain their leasing strategy. After all, it would be a pity if the accounting tail were to wag the commercial dog now, wouldn’t it? Terry O'Rourke is Chairperson of the Accounting Committee of Chartered Accountants Ireland.

Seemingly minor tweaks to the definition of materiality could be more significant than they might appear.   The International Accounting Standards Board (IASB) recently refined its definition of that fundamental concept in financial reporting – materiality. These revisions to the financial reporting standards add to the 2017 practice statement issued by the IASB and concludes their deliberations on this important topic. Given all the changes to financial reporting standards which people are currently dealing with, these seemingly minor tweaks to existing standards seem to have slipped by unnoticed. The IASB has stated that the amendments to the standards are not expected to “change existing requirements substantially”. However, this article explores whether that is actually the case and suggests that the changes are more significant than people may think. Why is materiality important in financial reporting? In my view, materiality is the most important concept in financial reporting. Its application impacts on decisions such as how an entity should recognise, measure and disclose specific transactions and information in the financial statements; whether misstatements require correction; and whether assets and liabilities or items of income or expense should be separately presented. Indeed, most definitions of the fundamental concepts of “true and fair” or “present fairly” revolve around financial information being materially correct. Where information that is required by a financial reporting standard is omitted or misstated and such information is deemed material, those financial statements cannot then be said to achieve a fair presentation or give a true and fair view. So what has changed? The refined definition of material is as follows: “Information is material if omitting, misstating or obscuring it could reasonably be expected to influence decisions that the primary users of general purpose financial statements make on the basis of those financial statements, which provide financial information about a specific reporting entity.” The main changes are embodied in the references to “obscuring”, “could reasonably be expected to” and “primary users”. The definition is also now aligned across the various IFRS Standards and the Conceptual Framework. Furthermore, the amendments provide a definition and explanatory paragraphs in one place (IAS 1) and remove the definition of material omissions or misstatements from IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors. While some have felt that the IASB is merely playing with words and the IASB itself doesn’t feel that the changes are significant, some of the altered emphasis could lead to changes in practice. Let’s explore this a little further. First, the amendment replaces the term “could influence” with “could reasonably be expected to influence”. This, in my opinion, can only be read as increasing the materiality threshold and encouraging entities not to disclose immaterial information in their financial statements. Second, the concept of “obscuring” information has been added to the requirements against “omitting” and “misstating” information. This can only be seen as an effort to alleviate stakeholder concerns that the previous definition encouraged entities to disclose immaterial information in their financial statements, which could inadvertently obscure information relevant to users. And third, the previous definition of material was also seen to be lacking in explaining why it is unhelpful to include immaterial information. To prevent this, the characteristics of users have also been expanded on, as it is now explained that they are the “primary users of general purpose financial statements”. Previously, the characteristics of users were not explained, which some people felt required an entity to consider all possible users when deciding on what information to disclose. It is worth recalling who the IASB has deemed to be the primary users of general purpose financial statements. In short, they are current and potential providers of finance to the entity (i.e. present and potential investors, lenders and other creditors who use the financial statements to make decisions about buying, selling or holding equity or debt instruments, providing or settling loans or other forms of credit, or exercising rights to vote on, or otherwise influence, management’s actions that affect the use of the entity’s economic resources). Up to 2010, the definition of users of financial reports was much wider than that and explicitly included suppliers, customers, government and the public. The practical result was that the materiality threshold was much lower at that time, given that information could be deemed to affect the decision-making of a wider user group. Practice statement: making materiality judgements The changes outlined above build on the 2017 practice statement, Making Materiality Judgements, issued by the IASB. As well as offering comprehensive guidance on various principles, the statement outlined a four-step process for entities to follow when making materiality judgements. Step 1 The entity identifies information that has the potential to be material. In doing so, it considers the IFRS requirements applicable to its transactions, other events and conditions, and its primary users’ common information needs. Step 2 The entity then assesses whether the information identified in step one is material. In making this assessment, the entity needs to consider quantitative (size) and qualitative (nature) factors. The practice statement notes that the presence of a qualitative factor lowers the thresholds for the quantitative assessment (i.e. the more significant the qualitative factors, the lower those quantitative thresholds will be). Step 3 The entity organises the information within the draft financial statements in a manner that supports clear and concise communication and the statement provides guidance on this. Step 4 In this, the most important step, the entity steps back to assess the information provided in the draft financial statements as a whole. It needs to consider whether the information is material, both individually and in combination with other information. This final assessment may lead to the introduction of additional information or the removal of information that is now considered immaterial; aggregating, disaggregating or reorganising information; or even beginning the process again from  step two. Evolution of the materiality concept The current iteration of the materiality concept is part of an ever-evolving process in which I have had the dubious honour of being centrally involved. As the then Head of IAASA’s Financial Reporting Supervision Unit, I was responsible for the production of a paper in 2010 entitled IAASA’s Observations on Materiality in Financial Reporting. That paper outlined IAASA’s interaction with issuers at that time as well as specific recommendations as to how companies should be dealing with, and applying, the concept of materiality in their financial reports. Resulting from this IAASA paper, I was asked to chair a group on materiality established by the European Securities and Markets Authority (ESMA). The main output from that group was the hosting of a roundtable with key European stakeholders, the issuance of an ESMA consultation paper entitled Considerations of Materiality in Financial Reporting followed by a feedback statement which provided an overview of the key messages from the responses received. I subsequently engaged with the IASB, which ultimately led to the issue of the IASB practice statement, Making Materiality Judgements, in 2017. The present revision to the standards is the conclusion of this journey and both the practice statement and revised standards will have effect in over 120 countries globally. The amendments to the standards, once endorsed by the European Union (EU), will be effective for annual reporting periods beginning on or after 1 January 2020, but earlier application is permitted. Conclusion The application of the concept of materiality is of critical importance in the context of the preparation of financial statements. It needs to be clearly understood so that preparers can apply it appropriately and users are provided with useful information in the financial statements. The revised definition and accompanying practice statement should go some way to meeting this objective. Michael Kavanagh is a Director in the Department of Professional Practice at KPMG Ireland.