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STEP Seminar – Reviewing Financial Statements & introducing the new GAAP27th February 2017
By Will Morgan
1 CONFIDENTIAL
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
2 CONFIDENTIAL
CONTENTS
• Accounting Principles
• Accounting Standards – the new GAAP! (FRS 102)
• What do the new accouting standards mean?
• Techniques used to review financial statements
3 CONFIDENTIAL
ACCOUNTING PRINCIPLES
Meaning Practical Example
Matching Principal/
Accruals Concept
Matching income and
expenses to the period that
they relate, irrespective of
when cash is paid
Prudence Carefully considering how
an item should be recorded
in the financial statements
Consistency Performing and presenting
accounting in the same
format each year
Going Concern
(Opposite - break up basis)
Financial statements
prepared on the assumption
that all assets will be
realised at expected values
Substance over form “if it walks like a duck and
quacks like a duck”
Materiality For the purpose of
efficiency and commercial
substance, only certain
items will be disclosed.
Auditors will use
approximately 1% of NAV
4 CONFIDENTIAL
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
5 CONFIDENTIAL
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 & 103
3. 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.
6 CONFIDENTIAL
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
Continue to depreciate Revaluation Surplus
FRS 102
Impact
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
7 CONFIDENTIAL
NEW GAAP – FRS 102 – The Financial Statements
FRS 102 - 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!
8 CONFIDENTIAL
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 31.12.2016. 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.
9 CONFIDENTIAL
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 beingMaterial
Accounting StandardsRegulatory
Reputational Risk
Financial Risk
Regulatory Risk
RPT (Directors)
ContingentLiabilities
PBSE/ EABS
10 CONFIDENTIAL
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
11 CONFIDENTIAL
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.
12 CONFIDENTIAL
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
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?
Further Points for Consideration
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?
13 CONFIDENTIAL
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...
14 CONFIDENTIAL
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
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