New GAAP has meant some significant changes with consequences in calculating how much a company can pay out as dividends. ICAEW and the Institute of Chartered Accountants of Scotland (ICAS) issued an exposure draft of updated guidance on this complex subject earlier this year.
The biggest change relates to more use of fair value accounting. The big issue for many more companies is that fair value is now used for most financial instruments. Here the question of whether the gains are realisable will depend on the nature of the instrument concerned.
Fair value is also an issue for investment property. Gains on these properties are now recorded in the profit and loss account, rather than a revaluation reserve. However, as these gains are not realised profits they do not form part of the company’s distributable profits.
ICAEW and ICAS are currently working through comments on the exposure draft before finalising their guidance. “For instance, there were many comments on the highly complex area of intra-group off-market loans,” says business law manager Charles Worth. “We’re continuing to work through the examples and there are a couple of issues which we are referring back to counsel. We are also waiting for the government to change regulations for the separate distributable profits regime for certain long-term insurance companies to reflect Solvency II.”
Exposure draft TECH 05/16 BL is now available on icaew.com
Current work-in-progress at ICAEW includes guidance to deal with aspects of the new FRC standard on auditor independence, which was issued in its final form as Revised Ethical Standard 2016 in June this year. The standard takes into account changes to auditor independence requirements resulting from the new EU audit Regulation and Directive. The changes mainly affect the audits of public interest entities.
Although the FRC’s standard is final, a number of issues still need to be clarified. “It’s not always clear how things apply in certain situations or what is different – or not – from the previous standard,” says Tony Bromell, ICAEW’s head of integrity and markets.
The FRC has established a technical advisory group to get stakeholder views on the main issues that need clarification. Following these discussions it is starting to issue staff guidance notes (SGNs), which give guidance on what certain aspects of the new standard mean. SGNs issued to date include guidance on the provision of non-audit services to non-EU subsidiaries and on auditors playing any part in management or decision-making.
If the SGNs are clear, ICAEW will probably simply point at them, says Bromell. “But if we feel more direction is needed then we will issue it. And we will probably cover a wider set of issues than the FRC does.”
Bromell points out that ICAEW’s guidance will be clarification of, not an add-on to, the FRC’s standard.
“If members don’t have any queries on the standard, they don’t need to look at the guidance. If they do look at the standard and wonder what certain things mean, then they should go to our website, where there will be links from both advisory services and on the ethics side.”
The law around preventing money laundering is on the move. The bill setting out the details of the government’s anti-money- laundering (AML) action plan was published in October.
Meanwhile the fourth EU Anti-Money-Laundering Directive is currently being transposed and is due to become UK law by June 2017. While the former is likely to mainly affect law enforcement, the latter is expected to include provisions that will directly affect practitioners.
Key points include triggers for client due diligence, due diligence on politically exposed persons, and changes to the supervisory regime. ICAEW will issue guidance for members after the law is passed.
In the meantime, and as a separate project, the Institute is playing an active role in re-writing the CCAB guidance on AML, last issued in 2008.
“We’re making it more readable, more practical, stripping down lengthy legislative analysis and making it more useable,” says integrity and law manager David Stevens.
The changes reflect membership feedback that the guidance could use more examples and tools to show how the various processes work. “Rather than have walls of text, the guidance will have many more flow charts, examples on areas such as client due diligence, and more aide memoirs for processes such as suspicious activity reporting,” says Stevens. The CCAB is expected to release its revised guidance soon, updating it subsequently for the legislative changes expected next year.
Back in 2006 ICAEW published technical release AAF 01/06 on assurance reports on internal controls of service organisations made available to third parties. Despite the less-than-catchy title, over the past decade the document has become one of the most widely read technical releases, accessed at least 100 times a week from the ICAEW website alone.
AAF 01/06 has been updated a number of times since its release, the most recent of which, in July 2016, reflected changes to the international standard on audit engagements ISAE 3402.
Now the Audit & Assurance Faculty has decided to carry out a much more in-depth revision. In part this is because there has not been a thorough review of the technical release since it was first issued more than a decade ago, says technical manager Ruth Ward. “Over the past decade the IAASB standards for assurance in general and assurance over internal controls have developed, as has other ICAEW assurance guidance. We think a more consistent approach to assurance technical releases would be valuable, as would creating a sensible brand for the collection of these releases.”
It will be carried out by a small working group of assurance practitioners and will also consider the control objectives in the technical release – in particular, those on cyber security.
The latest version of AAF 01/06 is now on icaew.com
ICAEW published revised guidance on accountants and legal services in January 2016. The technical release discusses the provision of legal services by members to their clients, whether directly or in conjunction with a law firm, and the legal and regulatory conditions which may apply.
The guidance lists and clarifies the boundaries of the reserved legal services – that is, reserved to lawyers. An exception is probate, which ICAEW can already authorise. ICAEW is applying to authorise firms to carry out reserved services in respect of tax (including advocacy and conducting litigation) and will update its guidance when it starts authorising firms for these services.
The guidance will also be updated for non-reserved legal activities, in particular members being granted power of attorney over their clients’ affairs. “The need for guidance has arisen because this is a service which members are providing more frequently for clients but where the law and the legal requirements are quite complex,” says Felicity Banks, head of business law.
Members will have to wait longer for ongoing legal services reforms, including the outcome of the Competition and Markets Authority (CMA) study. The CMA’s final report, which is currently expected to include recommendations on transparency of pricing, is due in January 2017. “The CMA study is interesting and important, but is not going to result in swift change,” says Banks. “We will have to see how or whether the recommendations are implemented before drafting guidance.”
Tech 01/16 BL can be found on icaew.com
The heart of the matter
Earlier this year the FRC identified root cause analysis as the tool of choice for auditors to find out the underlying reasons for problems with quality control over audits at a practice.
While the FRC’s review concentrated on the audits of public interest entities, root cause analysis (RCA) has a wider audience: the International Auditing and Assurance Standards Board (IAASB) is looking into this area too. “We think regulatory pressure means the IAASB might introduce requirements on this for all auditors,” says Chris Cantwell, technical manager of practice regulation in the Audit and Assurance Faculty.
With this in mind, the faculty issued a paper on RCA in October this year
to help firms wanting to use this tool to improve the quality of their audits. The contents are not formal guidance and there is no expectation that members must follow its suggestions. Instead, the paper gives an outline of RCA: what it is; why firms should be considering it; and how it can help improve their audit quality.
The paper’s key message, says Cantwell, is that firms need to steer away from the typical, and generally unhelpful, responses to problems. “Often problems are down to behavioural-type issues, which the firm needs to get to the bottom of. Root cause analysis allows for a deeper probing of what’s going on – finding out not just what has happened, but, more importantly, why.”
Improving audit quality using root cause analysis is available on the Audit and Assurance Faculty website