Aidan Clifford is advisory services manager, ACCA Ireland

Credit unions

The Central Bank of Ireland (CBI) has issued guidance for credit unions on the accounting for pensions and investments in terms of both their prudential return and in their annual financial statements.

Regarding pensions, the CBI points out that provision needs to be made for the multi-employer defined benefit scheme deficit and specifies that this should be a separate line item. The CBI also acknowledges that most credit unions will also get a refund from the savings protection scheme (SPS), and this is to be booked as a separate line item as well.

Although not specifically addressed by the CBI, credit unions are splitting the SPS receivable into realised and unrealised reserves for the amount due within and after one year. This is notwithstanding that this splitting is only required for ‘investments’ and is not strictly specified for other income, such as SPS income. The treatments proposed are consistent with FRS 102.

Some credit unions will have investments, accounted for at amortised cost, that have a book value that is higher than the investments' market value

Given rising interest rates and some credit unions holding long-term government bonds, some credit unions will have investments, accounted for at amortised cost, that have a book value that is higher than the investments' market value. The CBI advises that these should be written down to market value ‘unless a capital guarantee applies’.

Government bonds would be considered capital guaranteed as are almost all corporate bonds.  However, it would be prudent to book the unrecognised loss to Operational Risk Reserve where there is any risk of the bond needing to be encashed early, which could happen in the event of a liquidity squeeze.

An impairment will be required where the guarantee itself becomes impaired – for example, in the event of sovereign default or the default of a corporate guarantor.

For complex investments, there will be a requirement to write all complex bonds down to market value. Complex investments include anything with a ‘kicker’ or a return linked to a stock market index.

All complex investments must still be accounted for at fair value

The fact that such bonds have capital guarantees, is not relevant other than it may affect market value at any one point in time during the bond’s life. The fact that there is only a tiny ‘kicker’ is not relevant. All complex investments must still be accounted for at fair value. Note that encashment value is not usually the same as fair value.

Calculating fair value is a three-step process:

  • Look at market values in a deep and liquid market.
  • If there is no deep and liquid market, look at similar products with similar liquidity and similar maturity.
  • If there is no similar product, use a mark to model, where you model the discounted cashflows to come up with an estimated market value.

Credit unions may accept valuations made by the stockbrokers selling such complex bonds, but it is unlikely that an auditor would be happy accepting this value as the stockbroker is not independent. Because most interest rates have increased, some long-term bonds have decreased substantially in market value, some by as much as 40% from the initial investment.

What is going wrong in audit?

ACCA compliance officers have put together a list of the most common deficiencies being identified during audit monitoring. The list is here.

Group audits

The UK auditing standard on group audits has been updated.  The standard is applicable to both component auditor and lead auditors. In a related announcement FRC has also published its thematic review of the accounting and reporting for business combinations.

A number of provisions in the ethics code are proving to be a challenging while the war in Ukraine continues

Ukraine conflict

The International Ethics Standards Board for Accountants (IESBA) released a Staff Alert, The Ukraine conflict: key ethics and independence considerations. The paper identifies a number of provisions in the ethics code that are proving to be a challenging while the war in Ukraine continues. Issues such as dealing with sanctioned individuals and countries, and disclosing the impact of the war in financial statements are addressed.

The position that Irish auditors of Russian resident-owned Irish-registered companies found themselves in following the sixth package of sanctions is also addressed. The sixth package of sanctions, in summary, banned the provision of accounting, audit and tax services directly or indirectly to any business or natural person ‘established’ in Russia.

For an Irish auditor part-way through such an audit at the time of the sanctions, this can lead to difficult decisions and difficult discussions with local management.

Financial statements disclosures

The Irish Auditing and Accounting Supervisory Authority (IAASA) has published its 2022 Observations paper. The paper deals with some of the current uncertainties surrounding increasing interest rates, inflation, covid recovery, the war in Ukraine and slowing economic growth.

The recommendations from the IAASA are that preparers pay particular attention to disclosure of:

  • judgements, estimates and assumptions
  • the impact of Covid on performance and cashflows
  • the likely impact of climate change.

The IAASA also advised against the misuse of alternative performance measures and the practice of greenwashing.