STEP Seminar Reviewing Financial Statements & introducing the new GAAP

Transcription

1 STEP Seminar Reviewing Financial Statements & introducing the new GAAP 27 th February 2017 By Will Morgan

2 TUTOR & COMPANY BACKGROUND Team of Accountants & Project managers (23 staff) Provide outsourced accounting functions to licenced entities Provide client accounting support to trust and fund structures Offers project management and consultancy services to businesses in Guernsey, Jersey and Switzerland Assists companies with a variety of projects including operations, accounting and systems Also offer public and in house training courses 1 CONFIDENTIAL

3 CONTENTS Accounting Principles Accounting Standards the new GAAP! (FRS 102) What do the new accouting standards mean? Techniques used to review financial statements 2 CONFIDENTIAL

4 ACCOUNTING PRINCIPLES Matching Principal/ Accruals Concept Prudence Consistency Going Concern (Opposite - break up basis) Substance over form Materiality Meaning Matching income and expenses to the period that they relate, irrespective of when cash is paid Carefully considering how an item should be recorded in the financial statements Performing and presenting accounting in the same format each year Financial statements prepared on the assumption that all assets will be realised at expected values if it walks like a duck and quacks like a duck For the purpose of efficiency and commercial substance, only certain items will be disclosed. Auditors will use approximately 1% of NAV Practical Example 3 CONFIDENTIAL

5 OTHER CONSIDERATIONS Accounting Standards UK GAAP US GAAP IFRS GAAP Old School financial statements, limited disclosure Sometimes preferred to IFRS, soon to merge with IFRS. Applies to all EU Listed entities. Likely to be used more in the future Changes FRS 101,102,103 UK GAAP will no longer apply for entities with 31 December 2015 year ends. Results in a series of changes to the financial statements, and will be much more similar to IFRS Watch out for: - Cashflow statements - Consolidation - References to GAAP - Revaluations 4 CONFIDENTIAL

6 NEW GAAP FRS 102 Regulated companies/ audited companies need to determine whether they: 1. Adopt full IFRS 2. Adopt the new Financial Reporting Standards FRS 101,102 & Continue with the FRSSE (due to be abolished in 2 years) FRS 102 This will replace the existing FRS/ UK GAAP model. The existing FRS 1 to X standards will be replaced by a new model that although is similar, adopts a model that is more similar to IFRS. As previously mentioned, for many companies this was adopted for 31st December 2015 year ends and required the following highlights: Restating the prior year figures under the new regime Reconciliation between the primary statements for the change in standards Changes to reporting for: Revaluation of Assets/Investment Property Derivatives Holiday pay accruals Exceptional items no longer recorded on the face (FRS 3) Lease incentives The document is 335 pages and includes 35 sections that relate the new framework being adopted. Interestingly all fair value disclosure items carry the undue cost option effectively giving an opportunity for companies to non-comply on undue cost. It will be interesting to see how this is applied, and the impact that this has on the adoption. 5 CONFIDENTIAL

7 NEW GAAP FRS 102 Property Investment Property Valuation NBV = Cost less Depreciation Market Value Ongoing Consider revaluation Then ongoing (3/5 years) Assessment ongoing (3/ 5 years) Revaluation Impact FRS 102 Impact Continue to depreciate Revaluation Surplus Revaluation Surplus Future changes in revaluation will be recorded in the profit and loss account/ income statement Continued Increased depreciation Revaluation as frequently as required 6 CONFIDENTIAL

8 NEW GAAP FRS 102 The Financial Statements FRS Impact on the Financial Statements The financial statements do not need to be presented differently following the adoption of the new standards. They do not insist that the titles are changed, although one would expect that some parties will choose to adopt a more IFRS look to the financial statements: Statement Of Comprehensive Income Statement of Financial Position Statement of Cashflow Previously probably not required! Statement of Change in Equity (SOCE) Other Comprehensive Income (STRGL) What does this mean for clients: - Valuation becomes more material - Accounting policy disclosure becomes more important (which GAAP?/ how are we valuing) - The financial statements become comprehensive - Some will understand, some will not care! 7 CONFIDENTIAL

9 FRS 102 Case Studies Scenario 1: A client has approached you and asked that you prepare his financial statements using FRS 102 following a discussion with his UK accountant. He has been told that there is very little impact and therefore does not feel that his accounting costs should change in any way? Scenario 2: You are reviewing a set of financial statements for In the notes to the accounts its states that the company has taken an exemption under FRS 1 to not prepare a cash flow statement. Scenario 3: Your employer has asked to change the holiday calendar to ensure that all employees take leave during the financial, rather than old holiday calendar year. They have blamed this on FRS 102 Scenario 4: One of your clients is audited. The audit company has requested that you undertake a review of the clients financial statements on a line by line basis and compare this to the new FRS 102 standard. They have explained that this is really important. They have explained they would charge 5,000, but cannot undertake the work as they will be auditing the client. 8 CONFIDENTIAL

10 ERRORS Error Classification Type Impact E.G Spelling/ Grammatical Reputational Risk Morgaan Omission of fact Reputational Risk Additional fund legal advisors missing from FS Omission of fact being Material Accounting Standards Regulatory Reputational Risk Financial Risk Regulatory Risk RPT (Directors) Contingent Liabilities PBSE/ EABS 9 CONFIDENTIAL

11 UNDERSTANDING SIGNIFICANT AREAS OF RISK Where are the significant errors most likely to be? Accounting disclosure Material parties Post Balance Sheet Events Contingent Liabilities Provisions Contingent Assets Revenue v capital expenditure Related Party Transactions Legal or regulatory reference 10 CONFIDENTIAL

12 TECHNIQUES USED TO REVIEW FINANCIAL STATEMENTS Step 1: Always re-performing the accounts preparation process will be inefficient and it is unlikely that you will be able to identify errors in the financial statements Understanding the performance of the entity is the first step in conducting the review. Once the performance of the entity has been understood, the review should be conducted to prove the performance: NAV at the start of the period: 102,000,000 Income for the period 10,000,000 (rental Income) Expenses for the period 500,000 (IM Fees and Admin) Realised Gains 150,000 (Sale of Property) Unrealised Gains 1,000,000 (Revaluation of property) Forex Losses (50,000) (Due to USD/GBP annual movement NAV expected at end of period 113,600,000 To compare to financials Once the reconciliation has been completed the reviewer will determine whether the movements are realistic. 11 CONFIDENTIAL

13 TECHNIQUES USED TO REVIEW FINANCIAL STATEMENTS Step 2: Select a suitable checklist: Overall Performance Review Comments Opening NAV Value 10,000,000 Capital Additional Capital/ (distributions) 1,000,000 ASF Realised Gains/ (Losses) 4,500,000 Property Sale Unrealised Gains/(Losses) (2,000,000) Investments Income Income Earned 800,000 Rental Income Expenses (600,000) Admin/ Tax Fees Closing NAV Value 13,700,000 Points to Consider 1. Are these first year financial statements? 2. Have all the key transactions been recorded? 3. Have there been any asset sales realised gains/losses? 4. Are the fees accurate given client mandate? 5. Are all parties involved in relationship covered, e.g. property / investment manager? 6. What transactions have taken place with related parties? 7. Is there any requirement for provisions or contingent liabilities caused by tax liability / legal fees / pending disputes? 8. How are investments being valued is this misleading? 9. Have property expenses been capitalised correctly? 10. What has happened since the year end? Do notes need to be included for change in directors / additional finance / new contracts? Techniques to complete Further Points for Consideration 1. Pairing do all P&L/BS items correlate? 2. Are gains recorded correctly? gains / (losses) (losses)? 3. Are brackets being used correctly? 4. Is terminology correct, e.g. Trustee v Director? 5. Have template changes been presented correctly? 6. Is the regulation referred to relevant, e.g. Guernsey Company Law, Trust Law, GAAP? 7. Has the review been formally endorsed? 8. Are there any solvency issues / negative NAV issues that need to be communicated / addressed? 9. Are all the counterparty names spelt correctly, including any client details? 10. Benchmark income and expenses with asset/liability and prior year, e.g. 10% rental yield. 11. Does the entity appear solvent is the going concern basis appropriate, or should the break up basis be used? 1. Have any new contracts been entered into and have these been disclosed? 2. Does the entity form part of a group do all intercompany positions agree? 3. Have all the key expenses been identified? Is there any post year end correspondence indicating additional fees? 4. Are accounts sent to a wider audience, e.g. tax advisers / client advisers? 5. What problems were identified in the prior year accounts, and have these issues been addressed this time round? 6. Have any loan agreement terms/covenants changed since the prior year? 7. Are the investments listed have relevant values been used? 8. Are the investments unquoted, has the valuation been reconsidered? 9. Are there any significant receivables outstanding, has the recoverability of these been considered? 10. Does the entity have foreign exchange exposure, has this been recorded? 11. Will the accounts be used as a basis for making distributions, do they identify the key risks? 12. Have there been any significant changes to the structure since the year end, have these been recorded in the notes? 12 CONFIDENTIAL

14 TECHNIQUES USED TO REVIEW FINANCIAL STATEMENTS Step 3: Understand the Accounting Policies Unfortunately most accounting readers avoid the accounting policies within the financial statements. The accounting policies are: Clearly defining the responsibilities of the directors Will determine whether the comments / issues raised are relevant Can be critical in determining liability Key things to identify are: What accounting standards are being used why are they being used? Are all accounts prepared on an accruals or cash basis? What impact does this have? What do the policies say about asset revaluation? Is this clear to the reader? Are there any additional disclosure points that could be added to reduce the liability to directors?* *e.g. Valuation information has been provided from the custodian due to... Therefore directors cannot acccept CONFIDENTIAL

15 Lessons Learned Focus on a practical approach to reviewing financial statements: 1. Review the notes to the financial statements 2. Initially focus on the fundamentals rather than the detail 3. Complete a NAV Review of the entity 4. Consider a client summary what would they be considering in their review 5. Consider the responsibilities of the Trust Officer 6. Focus on the detail 14 CONFIDENTIAL

16 THANK YOU PLEASE VISIT TO VIEW OUR FULL RANGE OF COURSES This course is the property of Offshore Consulting (Guernsey) Limited for the purposes of and in accordance with the Copyright (Bailiwick of Guernsey) Ordinance All rights reserved. No part of this document may be reproduced, stored in a retrieval system of any kind or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior written permission of Offshore Consulting (Guernsey) Limited. Please note that this document is intended to provide training materials only. It is not intended to provide specific financial or legal advice and should not be relied upon as such. Offshore Consulting (Guernsey) Limited 2017