Daniel O’Donovan and Siobhan Orsi summarise the main changes in the Ethical Standard (Ireland) for Auditors, the International Standards on Auditing (Ireland), and the International Standard on Quality Control (Ireland) 1. In November 2020, the Irish Auditing and Accounting Supervisory Authority (IAASA) issued revised ethical and auditing standards in a bid to support the delivery of high-quality audit and strengthen confidence in audit in Ireland. The revisions build on changes made to the standards in 2017, which implemented the requirements of the EU Audit Regulation and Directive. These new amendments, which were the subject of a formal consultation earlier in 2020, are effective for audits of financial statements for periods beginning on or after 15 July 2021, with early adoption permitted. This article summarises the main changes in the Ethical Standard (Ireland) for Auditors, the International Standards on Auditing (Ireland), and the International Standard on Quality Control (Ireland) 1. Revisions to the ethical standard IAASA’s aim in amending the ethical standard was to simplify and restructure the standard to ensure a better understanding of the ethical requirements. It also introduces more prohibitive requirements, including removing the exemption for SME-listed entities that were not subject to many of the prohibitions applied to listed entities. These concessions, offered in the 2017 IAASA Ethical Standard to entities of this nature, have been removed. Other key changes to the ethical standards include, but are not limited to, the following: Third-party test: the new standard sets out a clearer and stronger definition of the “objective reasonable and informed third-party test”, which is a core element of the ethical standard. It requires audit firms to consider whether a proposed action would affect their independence from the perspective of public interest stakeholders rather than another auditor. Additional guidance has been inserted to assist in application. Internal audit services: firms will no longer be able to provide internal audit services to audited entities or their significant affiliates. IAASA’s view was that the provision of internal audit services to audit clients created a risk, both real and perceived, to independence that needed to be addressed. Recruitment and remuneration services: the standard incorporates amendments that now prohibit auditors from providing recruitment and remuneration services or playing any part in management decision-making. Gifts and hospitality: the requirement to establish policies on the nature and value of gifts, favours, and hospitality that may be accepted from and offered to other entities has been extended to apply to those entities that are likely to subsequently become audit clients. Enhancements to the ethics partner’s authority: new provisions incorporated into Section 1 of the ethical standard highlight the increased importance placed on the ethics partner. Enhancements include a requirement for reporting to those charged with governance where an audit firm does not follow the ethics partner’s advice. Partner rotation: the cooling-off period for engagement partners on public interest entity audits has been relaxed and amended from five years to three years, as was the requirement in the EU Audit Regulation in 2014. The change has also been applied to listed entities. Clarification has been added that when the engagement partners rotate off an audit, they cannot have significant or frequent interaction with senior management or those charged with governance during the cooling-off period. A new requirement has been introduced so that, where audits and those providing audits move from one firm to another, any rotation “on periods” for partners and staff include any time before they and the audit changed audit firms. Reporting breaches of the ethical standard The extant Ethical Standard for Auditors (Ireland) 2017 requires auditors to respond to all possible or actual breaches of the standard and keep records of any contraventions. A requirement has been introduced in the new ethical standard for auditors to report breaches of the ethical standard on an annual basis to IAASA, the relevant recognised accountancy body for auditors of public interest entities, and the relevant recognised accountancy body for non-public interest entity auditors. Such reports are to be submitted at least annually. IAASA indicated in its feedback paper on the consultation that it will issue guidance to auditors regarding the format of reports to be submitted. It also stated that any action taken by IAASA or the relevant recognised accountancy body in response to such reports will vary on a case-by-case basis depending on factors such as the nature of the breach, the appropriateness of the firm’s response, and the firm’s regulatory history. The new ethical standard permits firms to complete non-audit service engagements that were previously permissible provided they were entered into before 15 July 2021 and for which the firm has commenced work, while applying appropriate safeguards. IAASA did not introduce prohibitions on contingent fees for non-audit services, loan staff assignments, and tax advocacy services – all of which were proposed in the consultation paper. In addition, IAASA made changes to specific auditing standards: ISQC (Ireland) 1 and ISAs (Ireland) 210, 220, 250, 260, 600, 620, 700, 701 and 720. Hereafter, we will briefly discuss the most significant changes auditors and entities should be aware of for audits of financial statements with periods beginning on or after 15 July 2021. Revisions to ISAs IAASA has revised ISA (Ireland) 700, Forming an Opinion and Reporting on Financial Statements to extend the requirement for auditors of public interest entities to explain the extent to which the audit is capable of detecting irregularities and fraud to audits of listed entities also. There has been a significant expansion of the application guidance to the standard in relation to this requirement, which guides auditors to provide more detailed and granular explanations tailored to the entity being audited. IAASA acknowledged in the feedback statement that, in some situations, legislation (e.g. ‘tipping-off legislation’) would prohibit auditors from disclosing certain information in the audit report. ISA (Ireland) 600, Special Considerations – Audits of Group Financial Statements (Including the Work of Component Auditors) has been revised to clarify that the work of component auditors used for the purpose of a group audit must be evaluated and reviewed by the group engagement team. Application guidance has been added to the standard to assist group engagement teams in determining whether the nature and extent of such evaluations and reviews of component auditor work are appropriate in their professional judgement. ISA (Ireland) 220, Quality Control for an Audit of Financial Statements now requires the engagement quality control reviewer (EQCR) for audits of group financial statements of public interest entities to perform their quality control review over each component for which work has been performed for the purpose of the group audit, and to discuss the results of the review with the relevant key audit partner. This is a significant enhancement of the quality control review required for such entities. ISA (Ireland) 701, Communicating Key Audit Matters in the Independent Auditor’s Report has been revised to require that the auditor’s report specify the threshold for performance materiality and explain the judgements made in determining performance materiality tailored to the circumstances of the audit.  This package of revisions to the standards is designed to enhance audit quality and public confidence in audit in Ireland. However, for group audits of public interest entities in particular, there is likely to be significant incremental associated effort and cost in complying with the new requirements. Chartered Accountants should familiarise themselves with all changes to the standards, which are available on IAASA’s website. Daniel O’Donovan is Principal in the Department of Professional Practice at KPMG Ireland and Chair of the Institute’s Audit & Assurance Committee. Siobhan Orsi is Associate Partner at EY Ireland and a member of the Institute’s Audit & Assurance Committee.

Leigh Harrison outlines the practical issues, for both the auditor and management, that may arise when applying the revised going concern standard. As auditors rapidly approach the start of ‘busy season’ and management near the end of the financial year, one of the biggest challenges that will impact on both the auditor and management are the changes to the going concern auditing standard. The revised standard, applicable for periods beginning on or after 15 December 2019, increases the auditor’s work effort, which includes expanded risk assessment procedures over going concern, increased scrutiny over management’s going concern assessment and enhanced reporting requirements in the auditor’s report. The directors’ responsibility for going concern is seated in company law, with the duty to prepare financial statements that give a true and fair view, in accordance with the applicable financial reporting framework. The accounting standards require the preparation of a going concern assessment, taking into account all available information about the future, for a period of at least 12 months. The financial statements are prepared on a going concern basis unless management determines that they intend to liquidate the entity, cease trading, or have no realistic alternative but to do so. Complexities in the current year The world is now a very different place than it was at the start of 2020. In a matter of months, COVID-19 swept across the globe. The pandemic subsequently led to travel restrictions, business closures, cancelled events, and lockdowns. Governments responded with a range of financial supports in an attempt to support jobs and businesses. During this time, management will have had to revisit their business plans, forecasts and cash flows in response to the ever-changing economic environment. Meanwhile, calls for better climate change reporting and the end to the Brexit transition period compound the complexity. Practical issues for management Although the directors are ultimately responsible for the assessment of going concern, in many cases, they may delegate the preparation of the assessment to management. The directors will need to possess the skills and knowledge to understand and challenge the assessment prepared by management and have a robust governance, oversight and approval process to challenge and validate management’s assessment. For management in smaller businesses, where an assessment of going concern may not have been formally prepared and documented in previous years, the requirement in the current year is likely to be a step-change. In some ways, the continually changing economic environment in which businesses currently operate will have prepared management for the preparation of their going concern assessment as they continuously re-assess the impact of change on their business. Ahead of year-end, management should engage with their auditor to agree on the expected audit deliverables and ensure that they have the processes in place and resources required to perform the assessment. Remote working may add further complications as inputs required for the assessment are likely to be prepared across the finance function, and team members may be on furlough. Management will need to factor in additional time for scenarios where, for example, additional funding is required or waivers of covenants must be negotiated and agreed, as credit approval may be delayed due to the impact of bank staff working remotely. Management will need to have specific processes in place, including a risk assessment process to identify, assess and address risks facing the business relating to going concern. Management will also need to explain to the auditor how they measure and review financial performance, use their information systems to identify and capture events or conditions that may impact the going concern assessment, and how management identified the relevant method, data and assumptions used within their going concern assessment. The assessment must be prepared and documented by management in all cases and should be tailored and right-sized for the business. For some non-complex businesses with high levels of cash reserves, management’s assessment may not require detailed cash flow forecasts. A memorandum detailing management’s analysis and considerations may suffice. In contrast, more complex entities will require a thorough assessment of current and future risks, forecasted cash flows, consideration of current funding available, and the identification and assessment of plans to address identified risks. The area management must consider when preparing their assessment is wide-ranging and includes risks facing the business (both internal and external, current and future), the business environment, developments in the industry, and future prospective plans. The purpose of the assessment is to determine whether certain events or conditions may cast significant doubt on going concern and whether those events result in a material uncertainty to exist. In preparing and documenting their assessment of going concern, the auditor might expect to see the following: Analysis of the core operations of the business as they relate to going concern, including the business model, types of investments or disposals planned, how the business is financed and so on. Analysis of the current financial position compared to the prior year, considering key metrics such as net current assets/liabilities, operating cash inflow/outflow for the year-to-date, funding arrangements in place and related covenants, and so on. Analysis of the results post-year-end compared to the prior year, including revenue, profits, and status of funding. Details of events or conditions identified by management that may cast significant doubt on going concern and may affect the future performance of the business. For example, changes in demand for products or liquidity challenges. Where events or conditions are identified by management, management should document their plans to address those events. When management consider that a detailed assessment is required, they should document the model, assumptions and source of data used in their assessment. Management may find it useful to prepare a sensitivity analysis, where there are several potential assumptions or actions. The assumptions and data used in the assessment of going concern must be consistent with those used elsewhere in the business – when considering the valuation of goodwill, for example. Practical issues for the auditor In the planning phase, the auditor will need to ensure that the team has the resources and experience necessary to perform the required procedures. Where the new requirements present a step-change for clients, it will be particularly important for the auditor to engage early. Doing so will help clients better understand the extent of audit evidence expected, and the level of input that will be required from management throughout the audit process to assist the auditor in their enquiries and procedures. There is no prescribed methodology for management to use when preparing their assessment of going concern. In scenarios where management has determined that detailed forecasts and cash flows are not required, the auditor will need to use their professional judgement to determine whether they consider the assessment to be appropriately detailed. This may lead to difficult conversations. At the other end of the scale, management’s assessment may include, for example, detailed forecasted cash flows that are built on complex models with multiple assumptions and sources of data. In these situations, the auditor will need to obtain a detailed understanding of the model, and careful consideration will be required to determine which assumptions and sources of data are critical to the assessment. Professional judgement will be needed when designing the required audit procedures, which may include evaluating the design, implementation, and testing management’s controls over the process for preparing the assessment. For 2020 year-ends, more entities will likely face liquidity issues given the continuing impact of COVID-19 on business. As such, management’s plans may include seeking reliance on group support. Auditors of components within groups will need to get a ‘big picture’ view of the group’s ability to provide the support required. More than ever, there is a greater need for the auditor to maintain their professional scepticism, challenge management throughout the audit process, and evidence that on the audit file. Conclusion For some businesses, the implementation of the revised going concern standard will be a step-change that will result in changes to processes, controls, oversight arrangements and increased management input to prepare management’s assessment of going concern. For the auditor, greater audit effort will be required, resulting in additional time input throughout the audit process. The auditor will need to exercise their professional judgement when evaluating management’s assessment, identifying the critical assumptions and data, considering whether sufficient appropriate audit evidence has been obtained, and concluding on going concern in the audit report.  Leigh Harrison is Director at KPMG’s Department of Professional Practice.

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.

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.

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.  

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.