Co-operatives UK Practitioners forum Accounting, tax and regulatory update
November 2017
2
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Agenda
Accounting update
Tax update
Regulatory update
01
02
03
Accounting update
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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 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
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(“KPMG International”), a Swiss entity. All rights reserved.
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
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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
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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
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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
9
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© 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.
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
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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
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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
12
Document Classification: KPMG Public
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(“KPMG International”), a Swiss entity. All rights reserved.
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
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Don’t forget future recurring disclosure requirements!
“Order book”
Disaggregation of revenue
Consistency with other
published information
14
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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
15
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(“KPMG International”), a Swiss entity. All rights reserved.
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
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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
17
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(“KPMG International”), a Swiss entity. All rights reserved.
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
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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)
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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
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CIR – Simplified example
UK Company
£250m Per annum
Tax-EBITDA Per annum interest
on loans
£100m
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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
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(“KPMG International”), a Swiss entity. All rights reserved.
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
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(“KPMG International”), a Swiss entity. All rights reserved.
Carried forward losses – New restriction
£100m B/F Losses
UK Company
£25m C/Y taxable profits
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(“KPMG International”), a Swiss entity. All rights reserved.
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
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CIR and losses – Practical implications
Accounting
impact
Role and cost of
debt finance Impact on key
financial metrics
Increased complexity
of tax reporting
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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
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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%
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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
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In the news…
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Fact or Myth?
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Who are the ICO focussing on?
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What approaches have we seen?
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What are some of the key challenges?
Individuals rights
Profiling Activities
DPO Image:
individual
39
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What can I do before May 2018?
Payment practices and performance legislative reporting
41
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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
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(“KPMG International”), a Swiss entity. All rights reserved.
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
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(“KPMG International”), a Swiss entity. All rights reserved.
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
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(“KPMG International”), a Swiss entity. All rights reserved.
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
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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
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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
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