Accounting for invasion
The European Securities and Markets Authority (ESMA) has recently issued two Public Statements, one of which was on the accounting implications of the Russian invasion of Ukraine. This notes that issues such as impairment of assets and loss of control will need to be addressed, as well as the implications of the war on judgements made, significant uncertainties, and the impact on going concern.
ESMA also expressed expectations regarding disclosures of the direct and indirect impact of Russia’s invasion of Ukraine and sanctions on entities’ strategies, operations, financial performance, financial position and cashflows, measures taken to mitigate the impacts, and cybersecurity risks.
The second public statement relates to obligations for fund managers.
Accountants will need to seek legal advice prior to undertaking work that may fall under the sanctions
Russian sanctions
The EU Council has decided to impose a sixth package of economic and individual sanctions targeting both Russia and Belarus. Article 5n of Council Regulation (EU) 2022/879 states: ‘It shall be prohibited to provide, directly or indirectly, accounting, auditing, including statutory audit, bookkeeping or tax consulting services, or business and management consulting or public relations services to: (a) the government of Russia; or (b) legal persons, entities or bodies established in Russia.’
There are exclusions, including ‘services intended for the exclusive use of legal persons, entities or bodies established in Russia that are owned by… a body which is incorporated… [in the EU]’.
Article 5m of the regulation restricts the ‘provision of a registered office, business or administrative address, as well as management services, to a trust or any similar legal arrangement having as a trustor or a beneficiary:
- (a) Russian nationals or natural persons residing in Russia
- (b) legal persons, entities or bodies established in Russia
- (c) legal persons, entities or bodies whose proprietary rights are directly or indirectly owned for more than 50% by a natural or legal person, entity or body referred to in points (a) or (b)
- (d) legal persons, entities or bodies controlled by a natural or legal person, entity or body referred to in points (a), (b) or (c)
- (e) a natural or legal person, entity or body acting on behalf or at the direction of a natural or legal person, entity or body referred to in points (a), (b), (c) or (d).’
It is important to note that articles 5n (accounting services) and 5m (registered offices) each have a different scope, and in the absence of formal guidance, accountants will need to exercise caution and seek legal advice prior to undertaking work that may come in scope of the sanctions. Members are advised to keep up to date with the evolving situation via ACCA’s Ukraine information hub.
Users of financial statements require information on the expected impacts of new, but not yet effective standards
Enforcement decisions
The European Securities and Markets Authority (ESMA) has recently issued a compendium of enforcement decisions, including a decision taken by the Irish Auditing and Accounting Supervisory Authority (IAASA). The published extract comprises eleven decisions taken by European enforcers between March 2020 and November 2021.
It covers the measurement of expected credit losses, and the measurement of net realisable value of inventory and sales costs being included in inventory. A number of areas of revenue recognition are discussed, including recognition over time, a significant financing component, and the presentation of litigation proceeds as revenue. In terms of impairment there is discussion of CGUs and Covid-19 impairment indicators.
IFRS 17
The deadline for implementing the new insurance accounting standard has been postponed to January 2023. However, there remains the requirement to provide users of financial statements with information on the expected impacts of new, but not yet effective standards.
Given the expected impact that IFRS 17 will have on insurers’ financial statements, ESMA has issued a guidance statement: Transparency on implementation of IFRS 17 Insurance Contracts.
Discount rates
Discount rates are used extensively in accounts in areas such as rehabilitation expenses, impairment, pension accounting, provisions, financial instruments and many others. The profile and size of a company will have an effect on its cost of capital and, therefore, the discount rate that it uses will not necessarily be similar to that used by other companies.
The Financial Reporting Council (FRC) in the UK has published a Thematic Review of Discount Rates, which discusses the need for the rates used to be internally consistent and reflective of current market rates.
The FRC urges companies to consider third-party advice where internal expertise on interest rate choice is not available, and also calls for high-quality disclosures about matters such as the rate actually used and the explanation as to how that rate was determined.
The UK’s corporate reporting and audit regime is to be revamped and strengthened
FRS 100
For GB and NI accountants, there are proposed changes to FRS 100 to reflect changes to company law and decisions on equivalence related to the UK’s exit from the European Union. The FRED is here and is open for comments until 26 August.
R&D
The Consulting Committee of Accounting Bodies in Ireland (CCABI) has responded to the Department of Finance’s call for comments on the R&D Tax Credit and Knowledge Development Box. The CCABI response noted the issues SMEs were having with the schemes, and identified areas that would improve the attractiveness and accessibility of the R&D tax credit in particular.
UK audit quality
The Financial Reporting Council (FRC) has published anonymised key findings and good practices reported by its Audit Quality Review team in relation to its 2020/21 audit quality inspections at the seven largest audit firms.
These provide a useful aide memoir list of common weaknesses identified on audit files for all sizes of entity, as well as highlighting some of the key aspects that, when done well, contribute significantly to the delivery of a good audit.
UK audit regulation
The UK’s corporate reporting and audit regime is to be revamped and strengthened through a new regulator, greater accountability for big business and by addressing the dominance of the Big Four audit firms. More details here.
