Michael Kavanagh considers the key elements of IAASA’s latest Observations document, which focuses on financial reporting in a recovery. The Irish Auditing and Accounting Supervisory Authority (IAASA), Ireland’s accounting enforcer, has published its annual Observations document highlighting key topics to be considered by those preparing, approving and auditing 2015 financial statements. The document aims to facilitate the preparation of high-quality financial reports by offering comments on selected financial reporting issues to coincide with the preparation of 2015 financial statements. IAASA’s remit extends to Irish companies trading on the regulated markets of European stock exchanges. However, the Observations document should be of interest to a wider range of companies when preparing their 2015 year-end financial statements. Furthermore, while preparers of financial statements are the primary audience for IAASA’s Observations document, it also helps users of financial statements understand the significant judgements made by directors in preparing such reports and highlights matters they, as users, should be aware of and focus on when reviewing financial statements. Some aspects of the document may also be of interest to media commentators – especially the section on alternative performance measures. These alternative measures, as the name suggests, are not governed by accounting standards and tend to be reported by journalists when analysing the financial reports of companies listed on the stock exchange. Changing climate All external indicators suggest that the domestic economy is in recovery mode and the challenges faced by many entities are abating. Previous Observations documents reflected the then economic climate and focused on what could be best described as accounting for a downturn. The focus of this year’s document is that of financial reporting in a recovery and many of the items highlighted reflect issues relevant to this new economic environment. It is certainly a challenging time for those involved in the financial reporting preparation process with a plethora of new accounting standards for those preparing IFRS financial statements and a completely new set of accounting standards for those preparing local GAAP financial reports. Companies Act 2014 also came into force during 2015 and is the most significant change to domestic company legislation in a number of decades. The following is an outline of the key topics covered within the Obervations document. Business combinations and fair value accounting A key indicator of the economic recovery is the level of acquisition and merger activity reported or planned in the near future. IFRS 3 Business Combinations is the financial reporting standard applicable when an acquirer obtains control of a business as a result of an acquisition. IAASA undertook a desktop survey of the 2013 and 2014 annual financial reports of 27 Irish equity issuers to assess the quantum of business acquisition activity and the document outlines the results of that survey. It is noteworthy that €1.8 billion was spent on acquisitions in 2014 and €14 billion of cumulative goodwill was recognised on equity issuers’ balance sheets, which equates to 59 per cent of the total equity of those entities. Given the large percentage of equity issuers’ assets that is made up of goodwill and intangible assets acquired, IAASA has examined – and will continue to examine – the accounting for such transactions. As the scale of business combinations increases, it is expected that IAASA will examine in more detail issuers’ recognition (or non-recognition) and measurement of intangible assets and, as a consequence, the amount of goodwill and intangibles recognised in financial statements. Value-in-use calculations of cash generating units  Messages on the recognition, measurement and disclosure of the value-in-use (VIU) calculation of cash generating units (CGUs) contained in IAASA’s 2013 and 2014 Observations documents continue to be of relevance to issuers in preparing future financial statements. The 2015 Observations document outlines some additional matters in relation to the discount rate that should be applied and disclosures required in instances where a reasonably possible change in a key assumption would cause the carrying amount to exceed its recoverable amount. The Consolidation Suite of Standards For most Irish issuers using IFRS, their 2014 annual financial statements were the first where the application of the new Consolidation Suite of Standards (IFRS 10, 11 and 12) was required. While it is too early to draw definitive conclusions on the quality of issuers’ application of those new standards, IAASA conducted a preliminary desktop survey of a small sample of issuers to establish the level of compliance and the document outlines the results. Directors and audit committees should ensure they carefully evaluate the accounting treatment adopted for these transactions, disclose the key judgements made and provide the new disclosure requirements introduced by IFRS 10, 11 and 12 in a meaningful way and tailored to the issuer and its particular circumstances. Deferred tax assets Certain companies that have incurred significant losses in recent years have recognised material amounts of deferred tax assets on their balance sheets. The relevant financial reporting standard, IAS 12 Income Taxes, requires the recognition of such assets  to the extent that it is probable that future taxable profits will be available against which the unused tax losses may be recovered. Notwithstanding the economic recovery, it is still relevant to draw attention to the onus on entities (by paragraph 56 of IAS 12 Income Taxes) to reduce the carrying amount of a deferred tax asset to the extent that it is no longer probable that there will be sufficient taxable profits to allow all or part of that deferred tax asset to be utilised. IAASA continues to engage extensively with issuers on this topic given that some entities – mainly financial institutions – have relied on forecasts of taxable profits over a very prolonged period of time to support the recognition of significant amounts of deferred tax asset. Clearly the longer the forecast period necessary to recover the deferred tax asset is less likely to be in the category of ‘convincing other evidence’ as required by paragraph 35 of IAS 12. As well as continuing to engage with issuers, IAASA has met the International Accounting Standards Board (IASB) and European Securities and Markets Authority (ESMA) to discuss the matter. Such engagement is continuing. Alternative performance measures Alternative performance measures (APMs) are best described as financial measures of financial performance, financial position, or cash flows other than a financial measure defined or specified in accounting standards. Common APMs presented by Irish equity issuers include operating profit, underlying earnings, adjusted earnings per share, free cash flow and constant currency performance measures. IAASA continued to engage with issuers throughout 2015 on their use of APMs to ensure they were appropriate and relevant. Various undertakings have been obtained for improvements in future financial reports. While some issuers adhere to a high standard in reporting APMs, it is unacceptable that others flatter their results by excluding certain items from performance measures. ESMA published its Guidelines on Alternative Performance Measures in 2015, which are applicable from July 2016. The ESMA’s APM guidelines are consistent with the findings and recommendations contained in IAASA’s surveys on the use of APMs by Irish equity issuers, the results of which have been published in two papers available on IAASA’s website. The coming into force of the ESMA APM guidelines will give added impetus to IAASA’s activity in this area. Judgements, assumptions, and auditors’ risks of material misstatements IAS 1 Presentation of Financial Statements requires an entity to disclose the judgements – except those involving estimations – that management has made in the process of applying the entity’s accounting policies and have the most significant effect on the amounts recognised in the financial statements. During 2015, IAASA undertook a desktop survey of 20 equity issuers’ disclosures of assumptions and judgements together with a survey of the risks of material misstatement identified by equity issuers’ auditors. While the principal findings of the survey are included in the Observations document, the more common critical accounting judgments identified by directors were specific aspects of: Taxation: identified in 75 per cent of the selected financial statements; Retirement benefit obligations: identified in 60 per cent of the selected financial statements; Goodwill impairment: identified in 55 per cent of the selected financial statements; Provisions: identified in 40 per cent of the selected financial statements. IAASA notes with interest that a number of topics identified by directors as critical accounting judgements, together with the assessed risks of material misstatements identified by the independent auditors, had already been identified by IAASA in its annual Observations documents from 2008 to 2014. Such topics have been raised with individual issuers though IAASA’s enforcement activity and include, in some instances, undertakings which had been obtained. Messages for financial institutions The Observations document also outlines some specific messages for financial institutions regarding the accounting aspects of the: Current impairment provisioning regime and the need for changes in impairment charges to be directionally consistent with observable data (IAS 39); Impact of the new standard dealing with impairment provisioning and the need for proper disclosure of this impact as soon as the information is available (IFRS 9); Deposit guarantee schemes; and Work being undertaken in conjunction with our European colleagues. Avoiding boilerplate and excessive disclosures There is much commentary about the usefulness of financial reports and the volume of information contained therein. While various initiatives by standard setters and fellow accounting enforcers are ongoing in this regard, it is IAASA’s view – as articulated in previous publications – that the current financial reporting standards are, in many instances, robust enough to deal with this issue. IAASA has in the past enforced where it felt disclosures were too boilerplate, not issuer-specific and provided limited, if any, decision-useful information to users. The document outlines IAASA’s previous messages in this regard in addition to relevant extracts from IFRS, which have been used by IAASA as part of its enforcement activities in the past. IAASA’s Observations on Selected Financial Reporting Issues –Years Ending On or After 31st December 2015 can be downloaded at www.iaasa.ie.   Michael Kavanagh is Head of Financial Reporting Supervision at IAASA.

With compliance issues set to increase in complexity in the year ahead, Peter Carroll and Dominic Walters consider the value of shared services centres. The growth in the number of shared service centres (SSCs) has been an impressive element of Ireland’s foreign direct investment (FDI) performance over the last decade. While many predicted collateral damage to Ireland’s financial services industry in the early days of the banking crisis, with hindsight it now seems clear that any fall-off in confidence was largely a matter of domestic concern as opposed to how external investors viewed Ireland. The shared services sector has gone from strength to strength over the last eight years, and is a textbook example of how a country’s ambition to move up the FDI value chain can pay off. The sector now employs more than 35,000 people, the vast majority of whom work in professional roles servicing global brands. IDA Ireland has suggested that the sector has further to go in terms of reaching its potential. A steady stream of jobs announcements would seem to confirm this, whether linked to the further expansion of companies already here or the arrival of new business. Meanwhile, a recent IDA Ireland survey found that Ireland punches above its weight globally in terms of the presence of high-end SSCs with 25 per cent of Ireland-based SSCs deemed to be at the highest end of operations compared to an international average of just eight per cent. The value of shared services also ‘hit home’ in Ireland in a meaningful way as Ireland sought to reduce its public services bill, with shared services delivery forming a key element of Government-driven reforms. Challenges The shared services model emerged from a recognition by multinational entities that the ‘traditional’ finance function model – where all compliance, transaction processing, and financial reporting activities were managed in-country and jurisdiction-by-jurisdiction – was inefficient and no longer suitable for 21st century business. By bringing these processes together in a centralised hub and eliminating duplication, the route to greater efficiencies and cost savings is relatively obvious. For US corporations looking to Europe and beyond, the appeal of SSCs as a means of addressing the daunting transnational accounting challenges of Europe, India, Middle East and Africa (EIMEA) is also clear. Centralising the domestic finance functions of multiple markets into a single, streamlined operation in Ireland, for example, has huge appeal to corporations that need to move adroitly to capitalise on the opportunities in diverse but lucrative markets. Finance functions are rarely noted for the ease with which they streamline, however, and the traditional approach – for all the cost and cumbersomeness of managing teams in individual countries – had at least one compelling argument in its favour: the sense that local risk and compliance issues could be managed comprehensively and competently thanks to the team’s immersion in the local reporting environment. While IT has facilitated the move of transaction and financial reporting to centralised back offices, there are many local compliance issues that can prove difficult – if not impossible – to capture within this model. In the midst of corporate challenges and responsibilities, compliance can be perceived as a box-ticking exercise centred on relatively minor, local issues and far removed from strategic board-level considerations. If compliance issues are not addressed and resolved, however, they can present significant operational risks and limit transformational gains. BDO uses the phrase ‘the sore toe that causes the giant to stumble’ to characterise such issues, and client CFOs of global organisations continually identify a persistent range of concerns that could precipitate such a stumble. Compliance challenges were identified in four key areas: poor process performance; problems with operational scale; people issues; and market challenges. Process performance: taking a closer look at the issue of poor process performance, the study identified challenges in terms of a lack of service level agreements (SLAs); fragmented responsibility (i.e. separate reporting lines for tax, finance and legal); and infrequent compliance processes leading to a patchwork of providers and little coordination. Operational scale: problems identified with operational scale included the huge variety of local regulation; language issues; low transaction volumes, which render the use of a large outsourcer or SSC uneconomic; and the possibility that standardisation through Enterprise Resource Planning (ERP) systems may not be feasible.   People issues: the people issues identified included limited local career progression opportunities for staff; lack of holiday or sickness cover; problems safeguarding local knowledge when key employees leave or retire; and staff retention.   Market challenges: finally, market challenges included finding suitable single service providers for payroll, for example; delivering a rapid response from the finance function on contract wins in new countries; and achieving continuity and coordination with existing structures and systems to help maintain overall corporate performance. Context Centralising finance functions is now seen as best practice among global organisations. This intensifies the pressure on finance teams to support other business functions by providing a ready stream of useful data on critical business performance issues. CFOs in turn find themselves with somewhat competing obligations. On one hand, they must make high-level financial analytics available to those who need them and on the other, ensure an ever-increasing range of reporting issues are duly managed across multiple and expanding markets. These challenges are equally pressing for newer, rapidly growing businesses as they are for established organisations that are sustaining market share. The CFO’s strategic response is likely to come under scrutiny as other members of the management team expect assurance and, indeed, verification of trouble-free finance functions. In addition, Sarbanes Oxley has created a benchmark for managing financial, regulatory and business support functions, thereby creating an ongoing need for well-documented and controlled processes. In that context, it is clear why compliance is not just about corporate cost-effectiveness and process efficiency. It is also about avoiding disruptive events or even reputational damage, and managing the knock-on consequences of such events for the entity’s corporate image and that of the finance team’s external and internal business partners. With the advantage of the traditional model noted, it could not be recommended that best practice would be to ‘turn back the clock’ and embrace an inefficient and outdated approach. Globalisation is here to stay and IT has permanently changed how we do business – a view bolstered by the premise that ‘lean business is good business’. Whatever the challenges of managing complinace, the solution must involve a continuous path to efficiency and effectiveness by the finance function. Base Erosion and Profit Shifting With 2016 set to be the year in which implementation of the OECD’s Base Erosion and Profit Shifting (BEPS) Action Plan gains momentum, a range of tax issues will bring a new urgency to this agenda. By the end of 2015, the OECD and G20 countries will have completed an action plan, which sets out an implementation package for country-by-country reporting in 2016 in addition to a government-to-government information exchange mechanism in 2017. Seen as the clearest commitment yet by the international community to address base erosion and profit shifting, the action plan means we are likely to see a comprehensive framework of tax compliance coordinated on a level not seen before. Individual countries will be able to challenge corporates and enjoy unprecedented political backing as they do so. International tax advisors have already identified a clear behavioural shift by tax authorities in many areas, and BEPS will present a new challenge that can only reaffirm the need for local compliance to be foregrounded within the strategic framework of CFOs and their teams. Options As responses are planned, they will – in many cases – attempt to build on the strategies that companies already employ, evolving and developing their strengths and, hopefully, minimising their weaknesses. With this in mind, it is worth assessing the four possible approaches to compliance. In-house and in-country: this is the traditional model, noted earlier, in which finance functions are kept side-by-side with business activity. Each country is responsible for its own compliance, with no visibility at the centre of the organisation. This approach is increasingly unpopular due to cost, lack of centralised oversight and weaknesses in terms of adding value. Country cluster: this approach can suit organisations with a large business footprint in different but ‘associated’ countries. In this model, local knowledge is provided under the control of the local entity. However, it usually requires a strong business reason to justify the combining of countries – for example, language, geography or common key customers. On the down-side, it is perceived by finance professionals as having limited career progression opportunities and so, gives rise to high staff turnover. Centralised outsourcing, central delivery: this involves bringing expertise into one hub or automating local processes to run from a processing centre. It can be seen as the ‘classic’ SSC model, and is cost-effective for larger countries where economies of scale apply. However, the volumes associated with smaller countries produce challenges in creating roles to support processes. Consideration must be given to the hub location to ensure it has the ability to attract and retain talent from diverse regions. In addition, people management and knowledge retention require ongoing attention. The issue of local knowledge creates a perennial challenge for this model, particularly when it comes to interpreting legislation and dealing with its interpretation by local authorities. The location of the compliance team outside the jurisdiction can also make authority audits highly disruptive. Centralised outsourcing and local delivery: this is an ‘alternative’ SSC model that employs local experts under service level agreements (SLAs). Local knowledge is therefore constantly available while global visibility on local compliance is also available as necessary. This approach works efficiently provided the service provider has depth of coverage in each geographical location; the finance team sources a central coordination resource; and there is a clear escalation protocol to deal with issues in the reporting process. Conclusion Constant vigilance is required if CFOs and their finance teams are to protect their business from the risk of non-compliance. Technological advances, as exemplified by the development of SSCs, have helped solved some of the key challenges but as in any business activity, people and their expertise remain an integral part of the solution. Clear responsibilities and strong relationships between an organisation’s internal teams – critically those in finance, tax and legal – are the first step. Given the increasing range and depth of knowledge required to successfully address compliance, however, further relationships with trusted external service providers are also likely to be required if risk is to be successfully mitigated. The rapid evolution of the BEPS Action Plan will bring these issues into sharp focus in the year ahead, particularly in the area of tax compliance. CFOs will be expected to bring an understanding of these challenges to the boardroom and ensure the importance of compliance is understood and reflected in actions throughout the organisation. A strategic and effective response is likely to encompass the following key principles:   Clear division of responsibility between in-house finance, tax and legal functions; Clear SLAs between finance, tax and legal functions where possible; Engagement with internal and external service providers to review and examine existing processes and facilitate process enhancement where possible; The appointment of internal champions to drive change; Assessment of the ability of web-based tools to track compliance and effectiveness; A high-level review of SLAs with outsourcing partners and external service providers to establish if they are fit for current and future purpose; Encouragement of service enhancement initiatives to reduce compliance risk; and Adoption of a common framework for providers, ensuring the selection of service providers with the international reach and scope that matches that of the business. Shared services are here to stay and have a huge amount to offer global organisations as they plan their growth in EIMEA in the years ahead. The best service offerings, however, will be those that anticipate the challenges and issues facing the business and evolve accordingly. Open, honest and informed conversations with all stakeholders will therefore be critical to success. Peter Carroll is Partner of Business Outsourcing & Support Services at BDO Ireland. Dominic Walters is a Director within the Global Outsourcing team at BDO UK.

Danny Gaffney outlines the findings of the Deloitte 2015 Shared Services and Global Business Services Survey. Over the past 20 years, Ireland has developed and consolidated its position as a leading shared services location. The country’s success has been underpinned by an increasing breadth and depth of international languages, a highly skilled workforce, increasing competitiveness and an extremely strong development agency in the IDA. Shared services and global business services entities are growing because the models’ benefits have been tested over time, and there are a myriad of examples of successful shared services and global business services models for organisations to adopt. Deloitte’s 2015 survey consolidated the views of over 300 shared services leaders from across the globe, with the findings informing the strategies of the 100-plus Irish shared services centres. This year’s results showed a greater move towards global business services, as organisations expanded shared services to a multi-function model; geographic consolidation in regional and global centres, as language barriers and local regulatory requirements were overcome; and more knowledge-based processes, as shared service centres are ideally placed to leverage and scale technological capabilities such as analytics and robotics. These advancements point to a changing shared services environment and a greater focus on talent attraction, development and retention. Key findings Organisations embarking on their shared services journey are now skipping the traditional single-function concept as a starting point and pursuing a multi-function shared services or global business services strategy from the outset. Compared to our 2013 survey, the prevalence of single-function centres has declined by 30 per cent, whereas the number of centres with more than three functions has increased. Organisations pursuing new shared services structures are also choosing to customise their delivery models by function. The survey shows a significant increase in the number of shared service centres with more than three functions, creating a greater need for centres to be located in areas that can support multi-function work. Traditional back office functions such as finance, human resources and information technology continue to dominate this landscape. When companies employ single-function stand-alone centres, meanwhile, the predominant function is finance – although this includes a number of centres on a global business services journey, but which are piloting with finance. Regional shared services centres remain the predominant deployment model, but there is a notable increase in centres serving more than one region as organisations work towards global consolidation, where practical, to achieve cost savings and leverage capability. Geographic barriers are being eroded and it is clear that companies are finding ways to address prior concerns such as languages skills, time zone coverage and regulatory requirements. Cost is often a driving factor as organisations look to centralise and globalise. The survey found that, on average, organisations can drive a 15 per cent headcount reduction on implementation with a further eight per cent productivity savings per annum thereafter. These savings come with a health warning and vary between highly-transactional activities (where savings could be higher) and insight-driven activities (where process quality is a greater driver than cost). Cost is just one factor identified by shared services leaders as driving a positive impact on the organisation. Other more qualitative factors such as process efficiencies, internal controls, process quality, data visibility and comparability and well as the ability to scale organically and acquisitively were also rated by over 80 per cent of respondents. The future The next generation of shared services will be data-driven with analytics, automation and robotics pushing shared services up the value chain. As shared service organisations aspire to become advisors and collaborators to the business, they will be challenged to become more familiar with the business in order to deliver higher-value activities such as predictive analytics. Technology-related areas such as automation and standardisation were identified as areas where more companies missed original shared services objectives rather than exceeded them. However, a majority of those surveyed are responding to these issues by investing their technology-related spend on improving the productivity of their centres. Furthermore, intimate knowledge of the business is required in order to become a ‘true’ advisor, and this is often better facilitated through a global business services model that enables cross-functional visibility and end-to-end process ownership – both of which allow for better information-gathering and insight development. Challenges in driving analytics remain, however, including data consistency and supporting technology platforms. It is notable that organisations are looking beyond enterprise resource planning software to increase automation capabilities and are instead focusing on additional capabilities such as cloud computing and robotics. Managing a high performance culture Companies are becoming better at managing the high performance culture required in shared services centres with fewer people-related challenges noted. Better management takes many forms but shared services leaders are predominantly focused on intangibles such as flexible working arrangements, brand and culture. 87 per cent of shared services leaders identified attaining or maintaining desired capability levels as a significant challenge, one that will change as the shared services and global business services concepts continue to evolve. This evolution could be beneficial to talent management as there may be opportunities for the creation of more challenging roles as an increasing number of knowledge-based activities are centralised. It may also present new challenges, however, as it may involve managing people over multiple disciplines within one end-to-end process team. Conclusion The increase in growth in shared services and global business services will continue both in Ireland and globally as the benefits of the delivery model are further tested and proven. Shared services as a concept will continue to evolve to include a broader set of functions and geographies as well as more value-added activities, including ana-lytics. Although challenges remain – with particular regard to driving more know-ledge-based activities – organisations are now shifting their focus towards growth in analytic capabilities within shared services. Danny Gaffney is a Director within the Finance Transformation team at Deloitte Consulting.

There are many issues for multinational corporations to consider arising from the Base Erosion and Profit Shifting (BEPS) project, writes Peter Reilly. The release of the final BEPS reports on 5th October has brought to an end a two-year project that delivered less than originally promised, but far more than was initially expected. In a tight timeframe, the OECD made significant strides in international tax policy reform and the BEPS reports are likely to have a bearing on tax policy decisions for many years to come. The reports released cover 14 of the 15 original actions with the final action, on the multilateral instrument, to be finalised and ready for signing at the end of 2016. In certain other areas, however, BEPS work will continue as some reports highlighted areas in need of further attention. The reports provide food for thought for both indigenous Irish and foreign direct investment (FDI) companies alike. A PwC post-Budget survey asked over 600 business leaders whether they believed the BEPS project would impact their business. 66 per cent of respondents confirmed that it would while, of those affected, almost 50 per cent have not yet started planning for that impact. A majority also acknowledged that they have not yet had time to consider the likely impact. This article sets out, at a high level, some of the main areas where businesses may be impacted by the proposed changes. Operating model The OECD’s most significant area of focus in relation to business modelling is the area of intangibles. As business models evolved over time and value drivers within companies changed, it was clear that the fundamental rules of tax and the guidance relating to the arm’s length principle were no longer fit for purpose. One of the core pillars of the BEPS project was to align taxing rights with real economic substance and as such, through Action 8 on intangibles, the OECD targeted structures that were housing valuable intangibles or intellectual property (IP) offshore in locations with very little economic substance. In its summary documents, the OECD referred to these companies as “cash box Caribbean companies” and new guidance in relation to the returns that are attributable to IP will put an end to structures using such companies. The new gold standard in the area of IP is Development, Enhancement, Maintenance, Protection and Exploitation (DEMPE). If a company earns “super normal” returns from IP, they must be able to demonstrate that they are performing all DEMPE functions. The OECD also states that, in future, the mere holding and funding of IP may only be eligible for a risk-free rate of return. While these measures generally focused on “cash box” companies, the new transfer pricing guidelines – which will be updated for the recommendations in the report on actions 8-10 – will have a broader impact on companies’ business models. It is therefore more important than ever that every entity considers what and who drives value in their business, where this/they are located and whether the answers to these questions align with the current profit profile within the group. Permanent establishment The area of permanent establishment (PE) is one that is likely to gain significant additional attention into the future. It was the view of many countries, developed and developing alike, that multinational corporations were able to do business in their countries through people on the ground but, due to the weaknesses of the current rules, were able to circumvent the need to recognise a taxable presence. As such, the report on Action 7 has reduced the PE threshold through changes to the wording of the article and an updated commentary. The dependent agent test now states that if a person or persons “habitually concludes contracts, or habitually plays the principal role leading to the conclusion of contracts that are routinely concluded without material modification by the enterprise”, that company will be deemed to have a PE. The commentary explains this new rule by stating that it is all about who convinced the buyer. Furthermore, the independent agent test has been amended so that if an agent acts exclusively or almost exclusively for connected parties, they will not be deemed independent. The broadening of the dependent agent rule along with the changes to the independent agent test could impact many groups with sales functions in foreign jurisdictions. Current operating guidelines may need to be reconsidered as a result. Transparency Transparency could easily be the biggest success of the BEPS project, as the measures are likely to continue to drive change in the international tax environment. Country-by-Country Reporting (CbCR) is the single biggest item in the realm of transparency and is the output from the BEPS project that will have the most immediate impact. This proposal will require multinational corporations with revenues over €750 million to populate and submit an annual CbCR template to the revenue authority of their headquartered jurisdiction disclosing the following data points for each tax jurisdiction in which they operate:   The amount of revenue, profit before tax, and corporate taxes paid and accrued; Capital, retained earnings and tangible assets together with the number of employees; and Identification of each entity within the group doing business in a particular tax jurisdiction, with a broad indication of its economic activity. CbCR, and the wider changes to transfer pricing documentation, will fundamentally change the way multinational corporations document intercompany transactions and create a significant administrative burden. Consideration should be given to how this information and data will be reported; whether finance systems have the necessary capabilities to gather the required data; and what ongoing additional resources are needed to implement and manage CbCR. Preparation in the form of dry runs and initial analyses of the output is key. Tax transparency is of increasing importance for multinational organisations and is no longer just an issue for the Head of Tax. Engagement at board level early on will be crucial in ensuring that CbCR – and wider transfer pricing documentation requirements – are implemented effectively and in line with the organisation’s tax strategy and approach to transparency. Financing The report on Action 4, which deals with interest deductions, proposes that countries should implement an interest to the earnings before interest, taxes, depreciation and amortisation (EBITDA) ratio between 10-30 per cent. However, there is a significant amount of freedom in relation to how the rule can be implemented and what options are included. The OECD does, however, suggest that the more options a country adds to their rule, the lower the ratio should be. There will therefore be some tough choices to be made both in Ireland and internationally if these rules are to be implemented in the medium-term. From an Irish perspective, it is likely that an interest capping rule would have a greater impact on indigenous Irish companies than their FDI counterparts. In very general terms, Irish companies use interest whereas FDI entities use intellectual property planning as a tool to manage tax charges. Any rule, however, would need to be introduced in the context of the already complex interest rules in place in Ireland. In terms of the transfer pricing of financing transactions, it is now essential to be able to demonstrate that the finance vehicle not only has the financial capacity to control risk but also has the functional capacity to manage risk. This will be increasingly important, as the guidance states that jurisdictions will be able to look through contracts in certain instances. To understand the impact of BEPS on financing arrangements, groups must review their current interest to EBITDA ratios, financing structures, pricing and finance management. Once potential issues are known, solutions can then be contemplated. Holding and repatriation The success or failure of Action 6 on treaty abuse will likely lie in the hands of the multilateral instrument (MLI). The aim of the instrument is to simultaneously introduce BEPS treaty-based changes from actions 2, 6 and 7 in all bilateral treaties of the participating parties. This instrument will be worked on in 2016 and is due to be open for signing at the end of the year. The mechanics of how it will operate are still unclear and the possibilities are somewhat confusing but for the MLI, it really is a case of ‘watch this space’. If the proposed treaty access changes do come into force through the MLI, it will no longer be possible to take treaty benefits for granted. At the core of this action is the proposed inclusion of an anti-abuse rule and the minimum standard agreed by all was that treaties should include a limitation on benefits clause (along with anti-conduit rules), a principal purpose test or a combination of both. The commentary in relation to the limitation on benefits is still in draft form as the OECD wants to ensure that it is aligned with the US approach, which is currently being decided upon in light of the recent consultation on its model treaty. However, the proposed limitation on benefits will be mechanical and there is a risk that the nature of the tests involved could lead to a denial of treaty benefits in certain unintended circumstances. The principal purpose test is a general anti-abuse rule and states that “if one of the main benefits” of establishing in a jurisdiction was the access to treaty benefits, those benefits should be denied. This wording and the associated commentary is likely to result in a significant level of subjectivity when it comes to applying the rule. This could in turn lead to uncertainty. It is likely, however, that the majority of countries – including Ireland – are likely to choose this approach to satisfy the minimum standard in their treaties. Conclusion The output from the BEPS project is extensive and the above, while merely scratching the surface, attempts to capture some of the main issues multinational corporations need to consider. Those who have yet to look at the potential impact of BEPS are not alone, but it is important that planning starts now to determine what actions need to be taken in the short, medium and longer term. Peter Reilly is Base Erosion and Profit Shifting (BEPS) Policy Leader at PwC.

With an increased regulatory focus on sustainable financial management, the world of football looks set to blow the whistle on third party ownership, writes Dan O’Toole. These days, regulation is not a word that springs to mind when one thinks of FIFA. Since the arrest of seven current and former FIFA officials in Zurich earlier this year, the global governing body for football has become increasingly perceived as the archetypal example of an under-regulated, opaque organisation. Despite their apparent regulatory issues at the governance level, much of the world remains unaware that FIFA dedicates significant resources to the regulation of the game at the club level globally, most notably in the area of player transfers. Over the past decade, initiatives such as the transfer matching system, regulations on the transfer and status of players and regulations on working with intermediaries (agents) have seen a more transparent landscape develop within the market for elite footballers. FIFA recently embarked on arguably its biggest regulatory foray into this increasingly valuable market. On 1st May 2015, a new provision in the FIFA statutes implemented a blanket ban to be phased in on the practice of what has become known as ‘third party ownership’ (TPO). To introduce TPO, the following is a disclosure extract from the latest FC Porto holding company accounts referencing a TPO transaction: “On 22nd July 2014, FC Porto – Futebol, SAD reached an agreement with Granada Club de Fútbol for the acquisition of the sporting rights, and full economic rights, of professional player Yacine Brahimi, for €6,500,000. On 24th July 2014, the company alienated, under economic association, 80 per cent of the economic rights of this athlete for €5,000,000 to Doyen Sports Investments Limited”. This type of activity is now so prevalent that it is of systemic importance to the financial and operational management of many professional football clubs. This is particularly the case in the Latin American and Iberian markets. Transfer of rights TPO refers to situations where a portion or all of the “economic rights” of football players have been purchased by entities other than the club for whom the player is registered. These economic rights represent a claim on the monetary value of the future transfer of a player’s registration. They are legally distinct from the playing rights of players, which are federative rights derived from a contract of employment that govern for whom the player plays. These can only held by clubs. Third party owners range from investment funds to individual high-net-worth investors. The above transaction disclosure cites Doyen Sports Investments (DSI) as the relevant third party. DSI is a private equity fund and subsidiary of The Doyen Group, a multi-billion euro holding with a variety of assets around the world. Such investors hope to enjoy large capital gains from the future sale of the players concerned. A number of different forms of TPO have developed over the years with the most prevalent being ‘financing’ and ‘investment’ TPO vehicles. Financing TPO occurs when a club sells a portion of the economic rights of a player to a third party for an immediate cash release. This is most frequent in South America, where clubs tend to be cash-poor feeder clubs responsible for the initial development of young players. Investment TPO occurs where a club acquires the economic rights of a player while simultaneously transferring a portion of these rights to a third party for consideration, in effect sharing the transfer costs involved. This is most common in Europe, where mid-level clubs are temporary pit-stops for young talent on their way to the elite European powerhouses. Call to action There are a number of reasons, most of which are ethical, for FIFA being so intent on banning TPO. The most frequently cited include: the motivation and ability for third parties to influence transfer decisions and promote contractual instability; the moral questionability of trading in assets linked to the rights of human beings; a lack of transparency as to ultimate rights of owners; and the propagation of dependency of clubs, undermining their sustainability. In light of these threats, FIFA first introduced a ban on TPO in 2008. The application of this ban was limited, however, in that it prohibited TPO only where the third party in question acquired “the ability to influence in employment and transfer-related matters” of a club. This “influence” was virtually impossible to police in practice, but was clearly in existence. As a result, a blanket ban was seen as the only answer. While the ethical motivations may be well-founded, there has been considerable backlash against the negative sporting and financial implications that may befall clubs accustomed to using TPO. Repercussions Detractors argue that the most immediate repercussion is the negative impact on the ability of clubs to finance new player acquisitions. Until now, sharing the cost of players was a standard method of asset finance – not hugely different from leasing or manipulating leverage to enhance performance in the business world. Now faced with the prospect of financing asset purchases in full, these clubs will have to invest in either fewer or lesser quality assets. The argument further suggests that this will make players less competitive on the pitch. It is estimated that up to 75 per cent of the 2014/15 Atlético Madrid squad was at least partially held by third parties. Would Atlético have successfully broken the Barcelona/Madrid monopoly on the Spanish league that year, or come within minutes of their first ever Champions League title, without the access to higher quality, more competitive assets that TPO afforded them? TPO has also become an important liquidity management tool for clubs. Through selling a portion of the economic rights of current players, clubs can release value immediately. This allows them to reinvest elsewhere or cover current expenditure, which is notoriously high and volitile for professional football clubs. Cost to clubs These benefits come at a considerable price, however. Where a player is sold for a large capital gain, this gain must be shared with a third party who arguably had little to do with the development and improvement of the player. A second, heavier consideration is the fact that these agreements generally feature contractual terms that place a significant burden on clubs. Conditions often stipulate that, where a player is not sold before the end of their contract (and therefore free to leave for nothing), the club must reimburse the third party with a minimum fee – often with an associated interest accrual. The clear result is an incentive for clubs to sell their assets in order to avoid punitive payments. For FIFA, this is the most direct challenge to the fundamental concept of contractual stability and self-automation of the sport. For FIFA, wherever TPO is in place, clubs are losing out either directly in the form of punitive payments or indirectly in the form of missed opportunity to enjoy the full capital gain of sale. Many detractors argue that FIFA should stop worrying about others and concentrate on sorting out its own extensive issues. Much criticism of the new regulation has also mirrored that levied at UEFA’s Financial Fair Play – a loss of competitive advantage, the consolidation of power in big clubs and the obstruction of quality players making their way to the top. In the early stages of both regulations, the long-term reality is that an increased regulatory focus on sound and sustainable financial management of the game - at least at club level if not at international governance level - is here to stay. Dan O’Toole ACA is a FIFA Master alumni and sport consultant with TSE Consulting, Switzerland.

Goind Ram Khatri outlines key financial reporting considerations as entities prepare their annual reports for the 2015 calendar year. Stakeholders rely heavily on annual reports to understand a company’s business model and form a basis for subsequent economic decisions. The expectation of such stakeholders, which include investors and regulators, in relation to the content, quality and transparency of annual reports continues to increase. To help CFOs and finance teams satisfy this requirement, this article sets out some important reminders for 2015 calendar year annual reports. Mandatory application In terms of the mandatory application of new accounting standards for the first time, two key items should be considered: 1. Annual improvements 2011/13 cycle: this is the sixth collection of amendments issued under the annual improvement process, which is designed to make necessary but not urgent amendments to International Financial Reporting Standards (IFRS).The annual improvements amend the following four Standards: IFRS 3 business combinations: the scope section was amended to clarify that IFRS 3 does not apply to the accounting for the formation of all types of joint arrangement in the financial statements of the joint arrangement itself; IFRS 13 fair value measurement: the amendment clarifies that the portfolio exception applies to all contracts within the scope of, and accounted for in accordance with, IAS 39 or IFRS 9 even if those contracts do not meet the definition of financial assets and financial liabilities within IAS 32; IAS 40 investment property: the amendment clarifies that IAS 40 and IFRS 3 are not mutually exclusive and therefore, the application of both Standards may be required; and IFRS 1 first-time adoption of IFRS: the amendment clarifies that a first-time adopter is allowed, but not required, to apply a new IFRS that is not yet mandatory if that IFRS permits early application. 2. IFRIC 21 levies: this interpretation deals with accounting for a levy that is defined as a payment to a government for which an entity receives no specific goods or services. A liability to pay a levy to a government should only be recognised when an obligating event has occurred. While levies may be calculated based on past performance (such as generating revenue), that itself is a necessary – but not sufficient – condition to recognise a liability. The obligating event is the activity that triggers payment of the levy, and this is typically specified in the legislation that imposes the levy. The interpretation does not address what to do with the corresponding debits from the recognition of a liability. In many cases, the corresponding entry will recognise an expense for the period unless an entity can demonstrate an element of pre-payment, which can be carried forward as an asset. Companies Act 2014 The following list outlines some of the ‘new’ requirements CFOs and finance teams must consider under Companies Act 2014: In respect of a single director company, the provision is made for single director signoff of the directors’ report;  In respect of disclosure of directors’ interest in shares and debentures, directors are no longer required to disclose interests of less than one per cent or non-voting interests. Also, the disclosure of directors’ interest is no longer permitted in the notes to the financial statements and must be presented in the directors’ report; the directors’ report shall disclose the amount of any interim dividends paid during the year along with the amount, if any, that directors recommend to be paid by way of final dividend; The directors’ report is required to state the names of those who signed it on behalf of the board of directors; If directors approve the statutory financial statements but are not satisfied that they give a true and fair view and otherwise comply with the Act, they will be deemed to have committed a Category 2 offence; There is no longer a requirement for directors to sign the profit and loss account as evidence of approval. Directors are only required to sign balance sheet(s) and must state the names of those signing; and In respect of disclosure of directors’ remuneration, the Act requires detailed analysis such as the split between defined benefit and defined contribution schemes and long-term incentive schemes. Corporate governance The UK Corporate Governance Code was amended in September 2014.The companies that are subject to, or have voluntarily adopted, the code must apply the amendments for accounting periods beginning on or after 1st October 2014. A key change is the requirement to produce a longer term viability statement. Taking account of the company’s current position and principal risks, the directors should explain in the annual report how they have assessed the prospects of the company, over what period they have done so and why they consider that period to be appropriate. The directors should also state whether they have a reasonable expectation that the company will be able to continue in operation and meet its liabilities as they fall due over the period of their assessment, drawing attention to any qualifications or assumptions as necessary. A longer term viability statement is an additional statement over and above the existing going concern statement. A lot of thinking is required in terms of how long the period to which it applies should be, and why. This largely depends on the circumstances of the company and what the directors have already said in the narrative reports about the position, performance and prospects of the company as well as principal risks and uncertainties. Other matters Aside from looking at the new requirements applicable in 2015, careful consideration is required in other areas that might impact on the current year annual reports: Pension accounting: this requires a lot of judgment and estimates, specifically in the case of defined benefit obligations. Where interest on high quality corporate bonds increased in comparison to last year, such an increase may result in a pension surplus. Where this is the case, CFOs and finance teams must consider whether such a surplus represents a recognisable asset within the strict requirements of IAS 19 Employee Benefits and IFRIC 14 The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction. Critical judgments: in the process of applying the entity’s accounting policies, management makes various judgements – apart from those involving estimations – that can significantly affect the amounts recognised in the financial statements. For example, management makes judgements in determining whether, in substance, particular sales of goods are financing arrangements and therefore do not give rise to revenue. Disclosure of the precise nature of the judgement and how it affects the financial statements is considered necessary. Principal risks and uncertainties: a description of the principal risks and uncertainties facing the company is a legal requirement driven by Companies Act 2014.This requirement helps the reader of the annual report to assess how the directors have performed their statutory duty to promote the success of the company. Careful consideration is required in drafting this. For example, directors should consider if the risks and uncertainties disclosed are ‘principal’ risks and uncertainties facing the company; whether a ‘description’ is provided as opposed to a mere list; and whether an explanation is provided of how the directors manage or mitigate the risks identified. Conclusion There have been a number of significant developments throughout 2015 and the implementation of Companies Act 2014 in particular will be challenging. Early assessment of the main issues is crucial. The key challenge for preparers is to maintain the clear and concise spirit of the annual report while ensuring compliance with ever-changing legal and IFRS requirements. Goind Ram Khatri ACA is Senior Manager of Financial Reporting Advisory Services at Deloitte.