accounting, tax and regulatory update - co-operatives uk · accounting, tax and regulatory update...

Co-operatives UK Practitioners forum Accounting, tax and regulatory update

November 2017

2

Document Classification: KPMG Public

© 2017 KPMG LLP, a UK limited liability partnership and a member firm of the KPMG network of independent member firms

affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

Agenda

Accounting update

Tax update

Regulatory update

01

02

03

Accounting update

4


© 2017 KPMG LLP, a UK limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative

(“KPMG International”), a Swiss entity. All rights reserved.

Agenda Distributable reserves

IFRS 16 Leases

IFRS 15 Revenue from contracts

with customers

FRC Review findings

FRED 67 - Triennial Review of FRS 102

1

2

3

4

5

5




Distributable reserves Many companies facing pressure on distributable reserves from …

… to name just a few!

Remittances

Restructuring/

impairments

General

trading

Pension deficit

FX swings

6




A refresher quiz!

A company can only

make a distribution out of

its cumulative realised

profits less its cumulative

realised losses.

True or false?

1

A realised profit is

(generally) one where the

consideration is cash or

“near cash” (e.g. a short

term debtor). True or false?

2 Subsidiary A sells a property at a

gain of £100,000 to subsidiary B;

the consideration is left

outstanding on intercompany

account. Is the profit realised?

3

Subsidiary A sells an intangible

at a gain of £100,000 to

subsidiary B; the consideration

is cash of £100,000 and a 5-

year term loan for the balance.

Is all the profit realised?

4

UK subsidiary A lent US subsidiary

B $10 million; subsidiary A has

recorded interest income and

exchange gains in respect of the

loan. Are these realised profits? 5

Parent owns subsidiary A; subsidiary

A owns subsidiary B; B waives a

receivable of £20,000 due from P; B

has adequate distributable reserves.

Are there any other considerations? 6

True Yes

7




Update to distributable reserves guidance — The ICAEW recently released TECH 02/17BL – update to generally accepted practice in relation to the

meaning of realised profits (replaces TECH 02/10)

— Effective 31 December 2016 – no need to revisit lawfulness of earlier distributions

— Before making further distributions, re-examine all existing balances in reserves in light of new guidance.

— Basic requirement not changed: only pay distributions out of realised profits (less realised losses)

— Key clarifications/changes:

Definition of a distribution

— Purpose and substance of transaction makes a distribution – not the label

— Assumption of a liability can be a distribution if no consideration of equal

value is received

— Donations to a parent that is a registered charity are distributions

— Transfer of an asset can be a distribution even if no accounting impact –

e.g. unrecognised intangible

— Distribution of a liquidated sum = amount as stated in the accounts (i.e.

after provision)

— Revised guidance includes many examples of intragroup transactions

that may constitute distributions e.g.

– Undervalue received for assets transferred/services provided (or

vice versa)

– Transfer of tax losses not at arms-length

Deferred tax

Clarification on whether deferred tax

credits are realised profits:

— If relates to previously realised loss

– credit is realised

— If results in recognition of deferred

tax asset – generally unrealised

Intragroup loans on off-market terms

Additional guidance on interest-free

loans, loans at above market rates

and loans repayable on demand.

8





IFRS 16 Leases


with customers

FRC Review findings


1

2

3

4

5

9




IFRS 16 – Project insights IFRS 16 Leases requires all significant leases to be recognised “on balance sheet”

for periods beginning 1st January 2019

Area Insight

Data gathering How many leases have you got? Gathering data has been more difficult than expected

(especially if adopting retrospective approach)

Transition choices Transition choices being made upfront before any analysis – modelling a sample of

leases will help inform decision

Cross functional

impacts

Need to involve IT, Tax etc. early in the project – new standard will have significant

impacts across the business (involve them in training)

Internal reporting Continue as currently or adopt IFRS 16? What will this do to key metrics? What about

internal leases?

Systems Lots of providers – but need a thorough understanding of business requirements pre-

selection (e.g. just accounting engine?)

Dual reporting for

tax

Tax treatment going forward unclear: System capability to deal with “old” and “new”

GAAP?

External

communication plan

December 2017 – limited comment expected as early stage. How does operating lease

commitment compare to IFRS 16 liability?

Bank covenants Based on frozen GAAP? But renegotiate to avoid keeping two sets of books?

10




Modelling of transition options

40,000,000

42,000,000

44,000,000

46,000,000

48,000,000

50,000,000

52,000,000

54,000,000

56,000,000

58,000,000

2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029

Unit: G

BP

Fully retrospective Modified retrospective (Asset recalculated)

Modified retrospective (Asset = Liability) Operating lease expense (IAS 17)

Illustrative net P&L impact

11





IFRS 16 Leases


with customers

FRC Review findings


1

2

3

4

5

12




Final transition disclosures required soon!(a)

December 2018

First reporting date (assuming December year end)

December 2016

IFRS 15 project

well underway

January 2018

Effective date (assuming no early adoption )

June 2017

IFRS 15 project near

completion

Preparers should have made

good progress on their IFRS

15 implementation projects

2016 annual report

2017 interim report

No specific requirements in

respect of issued but not yet

adopted IFRSs; few provided

disclosures

— Capita

— Rolls Royce

2017 annual report

IFRS 15 will have become effective

by the time the 2017 annual report

is prepared

— Entities should provide a

quantitative assessment of the

impact of IFRS 15

— The amounts disclosed should

analyse the impact of applying

IFRS 15 and explain the

changes to the amounts

previously reported

— Any information provided

previously should be

expanded and elaborated on

Note: (a) Illustrating ESMA guidelines.

13




Don’t forget future recurring disclosure requirements!

“Order book”

Disaggregation of revenue

Consistency with other

published information

14





IFRS 16 Leases


with customers

FRC Review findings


1

2

3

4

5

15




FRC – Review findings overview Subject Description

Judgements and

estimation

Concerns remain that companies are still using ‘boilerplate’ language and are not

explaining clearly the judgements and estimates they had to make

Alternative Performance

Measures (APMs)

The FRC believe that companies have made a step change in their disclosures in

response to ESMA guidelines – however, some still need to make improvements

Strategic reports Companies were challenged over narrative that did not discuss all relevant aspects of

performance, as well as the comprehensiveness of the review of financial position

Accounting policies Companies were informed where the FRC identified policies for immaterial matters,

unnecessary repetition and ‘boilerplate’ or irrelevant disclosures of the impact of new

standards that are not yet effective

Revenue Companies were challenged over ‘boilerplate’ accounting policies that were

insufficiently tailored to the significant revenue streams in their business model

16





IFRS 16 Leases


with customers

FRC Review findings


1

2

3

4

5

17




FRED 67 – Triennial review of FRS 102 New standard will be issued in January/February 2018 and the effective date will be

periods commencing on or after 1 January 2019, with early adoption possible

provided all of the amendments are adopted at the same time. The following main

changes are expected …

Amendment Description

Intangible assets acquired in

a business combination

Limitations on the requirement to separate intangible assets from goodwill

acquired in a business combination

Director’s Loans For small entities: Amendment to allow a basic loan from a director who is a

natural person and a shareholder (or a close member of the family of that person)

to be accounted for at transaction price – so no discounting for nil interest loans!

Financial instruments -

classification

Amendment to the criteria for classifying a financial instrument as ‘basic’ or

‘other’

Definition of a financial

institution

Amendment to the definition of a financial institution so that fewer entities will be

classified as financial institutions (and therefore more will get the exemption from

disclosures relating to financial instruments)

Intra-group investment

properties

Entities will be able to choose to measure investment properties rented to

another group entity at cost (less depreciation and impairment) or fair value

Tax update

19


© 2017 KPMG LLP, a UK limited liability partnership and a member firm of the KPMG network of independent member firms affilia ted with KPMG

International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

The current tax landscape

Paradise

Papers

HMRC

increases

number of

dawn raids

HMRC ‘shoot

first’ policy

brings in £1.3bn

disputed tax

OECD reports

‘major progress’

on fairer

international tax

system

Headline corporation tax rates 28

26

24 23

21 20

19 19 19

17

20 20 20 20 20 20 19 19 19

17

0

5

10

15

20

25

30

1-A

pr-

20

11

1-A

pr-

20

12

1-A

pr-

20

13

1-A

pr-

20

14

1-A

pr-

20

15

1-A

pr-

20

16

1-A

pr-

20

17

1-A

pr-

20

18

1-A

pr-

20

19

1-A

pr-

20

20

Large companies Small companiesAverage G20 tax rate

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From 1 April 2017 New restriction on tax relief for interest & losses

Corporate interest restrictions Corporate loss relief reform

Draft legislation 159 pages 149 pages

Draft HMRC guidance 489 pages 128 pages (first tranche)

Businesses likely to be impacted

per HMRC

3,800 large businesses More than 100,000 businesses

Corporate Loss

Relief Reform

Corporate Interest

Restriction (CIR)

22




Corporate interest restriction

£2 million minimum net interest expense - no restriction

Group ratio election

Basic rule

30% x UK tax EBITDA

Carry forwards

‘Reactivate’ disallowed amounts in future periods if excess capacity

Excess capacity carried forward (Five years)

Excess debt cap carried forward

Modified debt cap

Worldwide group’s net interest cost

Worldwide group net interest

Worldwide group EBITDA

UK tax

EBITDA X

23




CIR – Simplified example

UK Company

£250m Per annum

Tax-EBITDA Per annum interest

on loans

£100m

24




CIR – Related party debt

£250m Per annum

Tax-EBITDA

(& Group-EBITDA)

Per annum interest

on bank loans

£50m

UK Company

Per annum interest on

related party loans

£50m

25




Loss relief reform

£5 million annual allowance per Group

Compliance

A separate Group Allowance Allocation Statement will have to be filed

Greater flexibility for carried forward losses

50% cap on carried forward losses

26




Carried forward losses – New restriction

£100m B/F Losses

UK Company

£25m C/Y taxable profits

27




Carried forward losses – New flexibility for post-1 April 2017 losses

UK Group Co 2

UK Company

C/Y Non-Trade Profit

B/F Trading Losses

Offset of

B/F Losses

versus

Total Profits

28




CIR and losses – Practical implications

Accounting

impact

Role and cost of

debt finance Impact on key

financial metrics

Increased complexity

of tax reporting

29




Other tax hot topics

Country-by-Country Reporting

Base Erosion &

Profit Shifting (BEPS)

Corporate criminal

offence of failing to prevent evasion

National minimum

wage

Making tax digital

Publication of tax

strategy

Brexit

30




Autumn Budget 2017 – possible measures

— No change to previously announced reduction in corporation tax rate to 17% by 2020?

— Consultation on leasing tax reform?

— Consultation on R&D tax reform?

— Clarifying tax treatment of partnerships

— Response to non-resident landlords consultation?

— Self-employed workers –

- Rise in NICs?

- Extension of employer responsibility for IR35 compliance to private sector?

— Liability for PAYE on loans from employee benefit trusts still outstanding by 2019?

— Response to call for evidence on tax relief for employee expenses?

— Withholding tax exemption for debt traded on multilateral trading facility

— Changes to scope and administration of bank levy.

Regulatoryupdate

GDPR Less than 12 months to go!

50% 75% 100%

33


© 2017 KPMG LLP, a UK limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

GDPR - A retrospective

KEY Governance and Risk Individuals Rights Incident Management Training 3rd Parties Data

Internal

Privacy

Policy

Basic

Training

Privacy

Impact

Assess.

3rd Party

Diligence

and

Contracts

Robust

Incident

Response

Procedure

Effective Risk

Mgmt.

Established

Privacy

Operating

Model

Up to date

Notices

Personal

Information

Inventory

Consent

Collection

Rights of

Access &

Erasure

Pre-May 2018

Post May 2018

Tailored

Role

Based

Training

Legacy

Contract

Review

3rd Party

Assurance

Promotion

of Public

Awareness

Over

retention

of data

Data

Portability

May 2018

34




In the news…

35



Fact or Myth?

36



Who are the ICO focussing on?

37



What approaches have we seen?

38



What are some of the key challenges?

Individuals rights

Profiling Activities

DPO Image:

individual

39




What can I do before May 2018?

Payment practices and performance legislative reporting

41




Payment practices and performance legislation – Background The problem

— The information will be published on a government website, where it can be easily compared with the data from other

businesses

— It is a criminal offence, punishable by a fine, for every director of the business not to publish their report within 30 days

— UK companies often supply goods and services on trade credit, deferring payment for a period after delivery rather than

requiring immediate payment.

— When customers do not pay on time this causes problems for suppliers:

- Affecting their cash flow

- Diverting resources towards chasing payment and

- Potentially incurring costs of covering cash flow shortages through raising external finance.

The government solution

— When suppliers are entering in to contracts with customers, they may lack information on the reliability of the customers

in terms of paying on time and to what terms they pay on.

— Government intervention can address this absence of information by requiring large businesses to report information on

their payment practices and performance.

42




Payment practices and performance legislation – Background

Regulations introduced earlier

this year make it mandatory for

larger businesses to report on

their payment practices,

policies and procedures,

including presenting statistics

on their actual payment

performance. The new rules,

which take effect for accounting

periods ending on or after 6

April 2017, are aimed at

reducing late payment to

suppliers, particularly small

businesses

What the new rules will mean for the business and its leaders

— The information will be published on a government website, where

it can be easily compared with the data from other businesses

— It is a criminal offence, punishable by a fine, for every director of

the business not to publish their report within 30 days of the filing

date or to file a report which is misleading, false or deceptive

— The public reporting of your payment practices, particularly of

larger corporates, is likely to attract significant media scrutiny.

Experience shows, from Minimum Wage to Gender Pay Gap, the

reputational damage for both businesses and their leadership

teams can be significant

Reporting details in brief

— All companies and LLPs that meet two out of three size thresholds

will need to make six-monthly reports on the government website.

The thresholds are: annual turnover of £36 million, balance sheet

total of £18 million, and 250 employees. Every company or LLP

within a group meeting the threshold has to report separately

43




Payment practices and performance legislation – Key considerations

New legislation

has ‘gone under

the radar’. Have

you considered

how it affects all

of your

UK entities?

Financial

directors and

their finance

teams are

finding it

significantly

more

complicated

than they

anticipated

This information

will be publically

available

(politicians,

journalists,

competitors,

new suppliers

etc.)

Industry

standard

payment

practices could

distort the

statistics

reported and

lead to the

perception that

you do no pay

your suppliers

on time

Will you suffer

brand damage

(especially if

your competitors

are doing

better)?

Getting payment

practices and

performance

reporting right is

a leadership

issue, and

getting it wrong

could put your

reputation on

the line

44




Payment practices and performance legislation

The duty to report will apply to

companies and LLPs which have

exceeded two of the following three

thresholds in their last two

financial years:

— Over £36 million annual turnover

— Over £18 million balance

sheet total

— Over 250 employees

Sign-off?

A director or equivalent will be

responsible for approving the gender

pay gap calculations in a written

statement before they are published

Who? What?

Companies/LLPs must analyse and

publish the data within 30 days for a

their six month period (half-year

and year-end)

Organisations with an end of April

2017 year end will first need to report

by the end of November 2017

Where?

The information must be published on

a government website which will be

accessible by the public

Penalties for non-compliance?

It is a criminal offence not to

report or to report misleading or

false information

Employers could be 'named and

shamed‘ if they do not comply with the

new reporting requirements

When?

Companies/LLPs must publish:

Narrative

— Standard payment terms, including:

— Standard contractual length of time for payment

of invoices

— Maximum contractual payment period

— Any changes to standard payment terms during the

period and if suppliers have been notified or consulted

on these changes

Statistics

— The average time taken to pay invoices

— The percentage of invoices paid within the reporting

period (in 30 days, between 31-60 days, over 60 days)

— The percentage of invoices which were not paid within

agreed terms

Statements (tick-box)

— Are suppliers offered e-invoicing?

— Is supply chain finance offered to suppliers?

— Do you deduct sums from payments as a charge for

remaining on a supplier’s list, and whether you have

done this in the reporting period?

— Are you a member of a payment code? (Name the

code if so)

Employers can also publish a narrative to explain any gaps

in pay and actions they plan to take to close those gaps

45




Hidden complexities Large volume of

invoice level

transactional data

required for reporting

Suppliers that take

advantage of supplier

finance schemes can

distort reporting

Recording date of

receipt of invoices can

benefit a company’s

position

Affects all UK legal

entities that meet the

criteria. This could

effect a number of entities

within one group

Weekly payment runs

can adversely affect

your position unless

specifically agreed in

the contract with your

supplier

Date of payment is

when it reaches the

suppliers bank account

not when a company

processes the

transaction

46




Plan your strategy now Payment practices and performance reporting involves collating the data, understanding the results, planning the

communications strategy and putting in place a plan to improve or maintain the situation for the future

Get your data ready

Understand what data you

need to extract. Can your

system report this for you?

Have you applied the correct

assumptions?

Involve key stakeholders

You will need support in

particular from IT and also

Finance departments but may

also need advice from

Procurement/Trading. You will

also need to engage with

management to ensure you

have correct external

communication

Time it right

Organisations must report on

their payment practices and

performance every six

months (for your half year and

year end). You will have 30

days to publish your results.

Think about how this

additional reporting will put

pressure on existing financial

reporting requirements

Do a practice run

If you report a high level

of delayed payments and

long terms your

organisation could face

media, public, supplier

scrutiny. Conduct a

‘practice run’ to identify

and address issues away

from public view. Identify

potential cash

improvements at the

same time


© 2017 KPMG LLP, a UK limited liability partnership and a member firm of the KPMG network of independent member

firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

The KPMG name and logo are registered trademarks or trademarks of KPMG International. | CREATE: CRT085132A

The information contained herein is of a general nature and is not intended to address the circumstances of any

particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no

guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the

future. No one should act on such information without appropriate professional advice after a thorough examination of

the particular situation.

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