FRS One Year On - a practical review

FRS 102 - One Year On - a practical review Bill Telford Telford Financial Training Ltd

Introduction Chapter 1 Telford Financial Training Ltd

Are you on the right webinar?? o FRS 102 One Year on o It is easy to underestimate the impact of FRS 102 on auditing o Small company reporting issues o This course will look at the current hot topics for the preparers of small company accounts. o John Selwood 6 March

The issues GAAP What s changed? Did you get it right last year? Audit standards What s changed Did you get it right last year?

Large and medium Small Revised FRS 102 1/1/15 1/12/17 1/1/19 1/1/16 New audit standards (17 June) 1/1/18 Can early adopt 31/12/19

FRS 102 version control o September 2015 o March 2016 o December 2016 o March 2017 o December 2017 o February 2018? 6

Initial guidance and feedback Chapter 2 Telford Financial Training Ltd

TECH 13/14 AAF 1. Introduction 2. Ethics and FRS 102 3. Issues for audited entities what the auditor should expect management to be doing 4. Appendix 1 Technical issues on compliance with specific issues 5. Appendix 2 Support from ICAEW FR Faculty 6. Glossary of terms and abbreviations used

Audit management o Project management o Identifying resources o Involvement of experts o Client experts o Auditor experts o Ethical issues o Advising on issues o Assisting in compliance

Feedback on transition by early adopters o Planning and recording the effects of transition o Often there were no transitional adjustments but not evident that the question had been asked whether there should have been o No statement to that effect or documentation on the file o Using the true and fair override to justify an indefinite useful life for goodwill, amortisation over long periods without reason;

Feedback on transition by early adopters o Eligibility o Incorrect accounting policies o Missing primary statements o Inadequate disclosure of transition

Feedback on transition by early adopters o Incorrect accounting policies o Were they incorrect under FRSSE? o Are they incorrect under FRS 102 1A? o Presentation, classification and transitional disclosure issues (including the accounting policy note not being updated); o Not including the new statements e.g. Statement of changes in equity o Disclosure of transition

Feedback on transition by early adopters o Inappropriate adjustments on increases in stakes in a subsidiaries o Business combinations post transition not revisited for the valuation of intangibles; o No deferred tax on investment properties or revalued PPE; o Gains on investment properties and deferred tax going to OCI rather than P&L

Audit objectives and FRS 102 Chapter 3 Telford Financial Training Ltd

Objectives of FRC ISA audit o To obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, thereby enabling the auditor to express an opinion on whether the financial statements are prepared, in all material respects, in accordance with an applicable reporting framework; and o To report on the financial statements, and communicate as required by ISAs (UK), in accordance with the auditor s findings.

The risk based audit- an overview o Prepare / update PAF etc o Fraud risk o Laws and regulations o Risk assessment checklists

The risk based audit- an overview

New UK GAAP and audit Technical Ethical

Interesting issue Can you audit a micro-entity Chapter 4 Telford Financial Training Ltd

Can you audit a micro-company? o All micros are by definition small o shareholders have a right to demand an audit

Two types of reporting framework o Fair presentation framework o True and fair o Compliance framework o Prepared in accordance with GAAP o Prepared in accordance with CA 2006

Technical issue 1 Classifying clients Chapter 5 Telford Financial Training Ltd

Classifying clients (see Audit & Beyond June 2017) The issues: Regulator; EQCR; Non-audit services; Firm rotation; Partner rotation. Public interes t entity Other Other listed SME Listed

Public interest entities o Entities with securities admitted to trading on a regulated market (full listing), o Banks, o Building societies, and o Insurers.

Classifying clients (see Audit & Beyond June 2017) Regulator = FRC EQCR = Yes Non-audit = Prohibited Blacklist Public interest entity Other Other listed SME Listed Firm rotation = Yes (20 years) Partner rotation = 5 years

Other listed or non-pie listed entity o Listed on a non-eu regulated market and where public can trade shares, stock or debt

Other listed or non-pie listed entity Regulator = FRC? EQCR = Yes Public interest entity Other listed Firm rotation = No Non-audit = Some prohibited Other SME Listed Partner rotation = 5 years

SME Listed o Other listed company with: o Average market capitalisation < 200m on basis of 3 previous years; o Entity issues exclusively non-equity financial instruments if nominal value does not exceed 200m; o According to last accounts meets at least 2 out of 3: o.average employees fewer than 250; o Total balance sheet not exceeding 43m; o Annual net turnover not exceeding 50m.

SME Listed Regulator = ICAEW EQCR = Yes Non-audit = Some subject to threats Public interest entity Other Other listed SME Listed Firm rotation = No Partner rotation = 5 years

Other Regulator = ICAEW EQCR = No Public interest entity Other listed Firm rotation = No Non-audit = Threats Other SME Listed Partner rotation = No

Technical Issue 2 Auditor reporting Chapter 6 Telford Financial Training Ltd

Revised standards o ISA 700 Forming an opinion and reporting on financial statements o ISA 701 Communicating key matters in the independent auditor s report o ISA 705 Modifications to the opinion in the independent auditor s report o ISA 706 - Emphasis of matter paragraphs and other matter paragraphs in the independent auditor s report o ISA 710 - Comparative information - corresponding figures and comparative financial statements o ISA 720 The auditor s responsibilities relating to other information

ISA 700 Independent auditor s report to the members of [XYZ Limited] Opinion We have audited the financial statements of [XYZ Limited] (the company ) for the year ended [date] which comprise [specify the titles of the primary statements] and notes to the financial statements, including a summary of significant accounting policies. The financial reporting framework that has been applied in their preparation is applicable law and United Kingdom Accounting Standards, including Financial Reporting Standard 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland (United Kingdom Generally Accepted Accounting Practice).

In our opinion, the financial statements: o give a true and fair view of the state of the company s affairs as at [date] and of its [profit/loss] for the year then ended; o have been properly prepared in accordance with United Kingdom Generally Accepted Accounting Practice; o have been prepared in accordance with the requirements of the Companies Act 2006.

o Basis for opinion o We conducted our audit in accordance with International Standards on Auditing (UK) (ISAs (UK)) and applicable law. Our responsibilities under those standards are further described in the Auditor s responsibilities for the audit of the financial statements section of our report. We are independent of the company in accordance with the ethical requirements that are relevant to our audit of the financial statements in the UK, including the FRC s Ethical Standard [, and the provisions available for small entities, in the circumstances set out in note [X] to the financial statements], and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion

Conclusions relating to going concern We have nothing to report in respect of the following matters in relation to which the ISAs (UK) require us to report to you where: o the directors use of the going concern basis of accounting in the preparation of the financial statements is not appropriate; or o the directors have not disclosed in the financial statements any identified material uncertainties that may cast significant doubt about the company s ability to continue to adopt the going concern basis of accounting for a period of at least twelve months from the date when the financial statements are authorised for issue.

o o o Other information The other information comprises the information included in the annual report, other than the financial statements and our auditor s report thereon. The directors are responsible for the other information. Our opinion on the financial statements does not cover the other information and, except to the extent otherwise explicitly stated in our report, we do not express any form of assurance conclusion thereon. In connection with our audit of the financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit or otherwise appears to be materially misstated. If we identify such material inconsistencies or apparent material misstatements, we are required to determine whether there is a material misstatement in the financial statements or a material misstatement of the other information. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard.

Opinions on other matters prescribed by the Companies Act 2006 In our opinion, based on the work undertaken in the course of the audit: o the information given in the directors report for the financial year for which the financial statements are prepared is consistent with the financial statements; and o the directors report has been prepared in accordance with applicable legal requirements.

Matters on which we are required to report by exception In the light of the knowledge and understanding of the company and its environment obtained in the course of the audit, we have not identified material misstatements in the directors report.

We have nothing to report in respect of the following matters in relation to which the Companies Act 2006 requires us to report to you if, in our opinion: o adequate accounting records have not been kept, or returns adequate for our audit have not been received from branches not visited by us; or o the financial statements are not in agreement with the accounting records and returns; or o certain disclosures of directors remuneration specified by law are not made; or o we have not received all the information and explanations we require for our audit; or o the directors were not entitled to prepare the financial statements in accordance with the small companies regime and take advantage of the small companies exemptions in preparing the directors report and from the requirement to prepare a strategic report.

Responsibilities of directors As explained more fully in the directors responsibilities statement [set out on page...], the directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view, and for such internal control as the directors determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. In preparing the financial statements, the directors are responsible for assessing the company s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the company or to cease operations, or have no realistic alternative but to do so.

Auditor s responsibilities for the audit of the financial statements Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements. A further description of our responsibilities for the audit of the financial statements is located on the Financial Reporting Council s website at: [website link]. This description forms part of our auditor s report.

Bannerman paragraph o Awaiting updated version Audit 1/03 o In example audit reports appears at end of report o Revised guidance likely to be after the opinion and basis of opinion paragraph

Bannerman paragraph o Use of our report o This report is made solely to the company s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the company s members those matters we are required to state to them in an auditor s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than [the company and the company s members as a body, for our audit work, for this report, or for the opinions we have formed

Technical issue 3 Other information Chapter 7 Telford Financial Training Ltd

Two types of other information o Statutory other information o For statutory audits of financial statements. Those documents or reports that are required to be prepared and issued by the entity (including any reports or documents which are incorporated by cross reference) in relation to which the auditor is required to report publicly in accordance with that legislation o Other information

Misstatement of other information o A misstatement of the other information exists when the other information is incorrectly stated or otherwise misleading (including because it omits or obscures information necessary for a proper understanding of a matter disclosed in the other information).

o Other information o The other information comprises the information included in the annual report, other than the financial statements and our auditor s report thereon. The directors are responsible for the other information.

o Our opinion on the financial statements does not cover the other information and, except to the extent otherwise explicitly stated in our report, we do not express any form of assurance conclusion thereon.

o In connection with our audit of the financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit or otherwise appears to be materially misstated.

o If we identify such material inconsistencies or apparent material misstatements, we are required to determine whether there is a material misstatement in the financial statements or a material misstatement of the other information. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. o We have nothing to report in this regard.

o If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. o We have nothing to report in this regard.

Work required o Understand the legal requirements and how the client complies o Obtain and read in a timely manner o Assess whether there are inconsistencies o Report as required

Illustration 2 o What is the implication for the auditor if your client refuses to include information required by law or accounting standards in the following clients: a. The client is a limited company? b. The client is an unincorporated charity? c. The client is a pension scheme?

Part (a) o Required to make an explicit report under CA 2006 o Need to qualify

o If, based on the work we have performed, we conclude that there is a material misstatement of the other information, we are required to report that fact. o We have nothing to report in this regard

o If, based on the work we have performed, we conclude that there is a material misstatement of the other information, we are required to report that fact. o As described in the Basis for qualified opinion on other matters prescribed by the Companies Act 2006 section of our report we have concluded that a material misstatement of the other information exists.

o Basis for Qualified Opinion on other matters prescribed by the Companies Act 2006 o Based on the work undertaken in the course of the audit, the information given in the trustees report including the strategic report has not been prepared in accordance with applicable legal requirements because of the omission of the following information [provide details].

Qualified opinion on other matters prescribed by the Companies Act 2006 Except for the matter described in the Basis for Qualified Opinion on other matters prescribed by the Companies Act 2006 section of our report, in our opinion, based on the work undertaken in the course of the audit: o the information given in the strategic report and the directors report for the financial year for which the financial statements are prepared is consistent with the financial statements; and o the strategic report and the directors report have been prepared in accordance with applicable legal requirements.

Matters on which we are required to report by exception Except for the material misstatement described in the Basis for qualified opinion on other matters prescribed by the Companies Act 2006 section of our report, in the light of the knowledge and understanding of the company and its environment obtained in the course of the audit, we have not identified material misstatements in the strategic report or the directors report.

Part (b) o Implied term of audit report o Need to qualify

Part (c) Neither express nor implied term of report If, based on the work we have performed, we conclude that there is a material misstatement of the other information, we are required to report that fact. We have concluded that a material misstatement of the other information exists because the trustees report with applicable legal requirements because of the omission of the following information [provide details].

Technical Issue 4 The auditor and disclosures Chapter 8 Telford Financial Training Ltd

IAASB/FRC auditing disclosures o FRC reflection of IAASB revisions o p/c 17 June 2016 o Greater focus on disclosure o Now more complex o May not be located in accounts

IAASB/FRC auditing disclosures Impact enhanced requirements o Understanding systems o Outside of general / subsidiary ledgers (FV, leases, valuation models, tax returns) o Evaluation of financial statements o Significant accounting policies o Consideration of accounts as whole, including whether information obscured & adequacy of presentation o Reconciliation of disclosures to supporting information

IAASB/FRC auditing disclosures Impact other o Engagement letter terms o Discussions with those charged with governance o Integrated assertions o Assessing risk re: qualitative disclosures o Considering information requirements o Focus on disclosure earlier in the audit process

Small companies and the encouraged framework o Structure FRS 102 1A o General approach; o Appendix A gives guidance on adapting the balance sheet; o Appendix B gives guidance on adapting the profit and loss account; o Appendix C outlines the required disclosures; and o Appendix D gives the additional encouraged disclosures encouraged.

Need for true and fair accounts (1) o A small entity may need to provide disclosures in addition to those set out in order to enable the financial statements to give a true and fair view

Need for true and fair accounts (2) o A small entity is encouraged but not required to include: o A STRGL (Statement of other comprehensive income) where there are gains or losses not recognised in the profit and loss account (1A.9(a)); o A Statement of changes in equity, or a Statement of income and retained earnings ((1A.9(b))

Encouraged disclosures (1) o A statement of compliance with this FRS adapted to refer to Section 1A; o A statement that it is a public-benefit entity as set out in PBE 3.3A; o The going-concern disclosures relating to going concern set out in paragraph 3.9.

Encouraged disclosures (2) o Dividends declared and paid or payable during the period (for example as set out in paragraph 6.5(b)); o On first-time adoption of this FRS an explanation of how the transaction has affected its financial position and financial performance as set out in paragraph 35.13 (1AD.1)

Technical issue 5- Going concern Chapter 9 Telford Financial Training Ltd

Illustration 3 o Brownlee Ltd has net current liabilities, makes a small loss and is dependent on the support of its shareholder / directors. They have indicated their willingness to continue to support the company for the foreseeable future. It has a material overdraft facility which it uses regularly and is due for renewal in 18 months. o How would you expect the auditor to report in the following alternative situations?

Illustration 3 o How would you expect the auditor to report in the following alternative situations? a) The company has never exceeded its overdraft facilities and you have no reason to believe that the facility will not be renewed. The directors have agreed to include a note outlining the directors continuing support in the basis of preparation / accounting policies note. b) The company is unable to control cash flows and has in the past exceeded the overdraft facility and there is some uncertainty whether the facility will be renewed at a sufficiently high level to allow the company to maintain its cash flows. c) The directors refuse to include the necessary wording d) The auditors consider the use of the going concern basis is inappropriate

Illustration 3 (a) o Management s use of the going concern basis is considered appropriate and no material uncertainty is identified, the auditor includes a Conclusions Relating to Going Concern section in the audit report in accordance with the revised ISA (UK) 700;

Illustration 3(b) o When management s use of the going concern basis is considered appropriate but a material uncertainty exists and has been adequately disclosed, the auditor expresses an unmodified opinion but now includes a separate Material Uncertainty Related to Going Concern section in the audit report;

Illustration 3(c) o When a material uncertainty exists that has not been adequately disclosed a modified opinion is issued. o When this is deemed material but not pervasive then a qualified opinion is given but if considered pervasive then an adverse opinion is issued. o The basis of opinion paragraph is amended accordingly.

Situation 3(d) o When the auditor disagrees with management s use of the going concern basis, an adverse opinion is issued.

Technical issue 6 Fixed assets Chapter 10 Telford Financial Training Ltd

Intangible fixed assets o Disaggregation of intangibles o Old FRS 102 o Revised FRS 102 o Valuation o Assessing useful lives o Eligibility for revaluation

Disaggregation of intangibles Licence Client list Goodwill Database Domain name Software Goodwill

Tangible fixed assets o Accounting policy choice o Basis of valuation o Open market value o Not existing use o Computation of deferred tax if asset revalued o Assessment of residual value

Technical issue 7 Investment property Chapter 11 Telford Financial Training Ltd

FRS 102 o No exemption for properties let to another group member FRS 102 revision o Unless involved undue cost or effort o Mixed December use property 2017 had to removes be included at fair value the undue cost or effort o Unless involved undue cost or effort exemption

Revised FRS 102 Let to group member o Accounting policy choice o Transitional exemption to include fair value as deemed cost Mixed use o Only fair value if could be sold or let on a finance lease

Transfers Fair value of investment property becomes deemed cost Investment Property Inventory / Tangible fixed asset

Revalue to fair value before transfer gain to OCI and revaluation reserve Tangible fixed asset Investment property

Transfer to investment property at fair value and recognise gain in profit and loss Inventory Investment property

Technical issue 8 Financial instruments Chapter 12 Telford Financial Training Ltd

Financial instruments o Identification o Classification o Amortised cost o Computation of effective interest rate e.g. treatment of transaction costs o Fair value o Valuation o Treatment of gains / losses o Disclosures

FRS 102 updated o New definition of a basic financial instrument o Accounting policy choice for loans with directors and close family of small companies

Technical issue 9 Group accounts Chapter 13 Telford Financial Training Ltd

Acquisition accounting o Merger accounting prohibited except for group reorganisations o No change in definitions o Treatment of minority interest o Changes in subsequent acquisitions

Two transition issues o Business combinations before the date of transition o Choice of whether or not to restate o Treatment of non-controlling interest o Not permitted to restate

Ethical issue 1 recognising application of Ethical Standard Chapter 14 Telford Financial Training Ltd

Structure of Ethical Standard 2016 o Part A o Overarching principles o Supporting ethical provisions o Part B o o o o o o Section 1: General Requirements and Guidance Section 2: Financial, Business, Employment and Personal Relationships Section 3: Long Association with Engagements and with Entities Relevant to Engagements Section 4: Fees, Remuneration and Evaluation Policies, Gifts and Hospitality, Litigation Section 5: Non-audit / Additional Services Section 6: Provisions Available for Audits of Small Entities (PAASE)

Part A: Overarching principles o The firm, its partners and all staff must behave with integrity and objectivity in all professional and business activities and relationships

Part A: Overarching principles o For each audit engagement the firm and each covered person must ensure that they are free from conditions and relationships which would make it probable that an objective, reasonable and informed third party would conclude the independence of the firm or any covered person is compromised

Covered persons 1. Team responsible for managing engagement performance (incl. day-to-day on-site and EQCR) 2. Other engagement team members 3. Others under control of firm involved in audit 4. Person with supervisory / management / oversight responsibility over conduct of firm s audits / the audit / engagement partner / other key partners involved o At each level up to firm management / governance o In position to prepare/approve appraisal/remuneration of 1,3 & 4 5. Any other Pipticoa

Ethical issue 2 Demonstrating independence Chapter 15 Telford Financial Training Ltd

And finally. Chapter 16 Telford Financial Training Ltd

Don t forget to revisit last year s file o Did you get accounts right last year? o FRS 102 requires restatement for material errors o Do you need to revise o Engagement letter? o Audit approach? o Letter of representation? o Audit report?

FRS 102 - One Year On - a practical review Bill Telford Telford Financial Training Ltd