State of Accounting in the UK

Transcription

1 Accounting update. Accounting developments in the HE sector University of Leeds Monday 4 th December 1 Presentation Name (View / Header and Footer) 2003 Firm Name/Legal Entity

2 The small print! Deloitte & Touche LLP 2006: This seminar has been written in general terms and therefore cannot be relied on to cover specific situations. Applications of the principles set out will depend on the particular circumstances involved and we recommend that you obtain professional advice before acting or refraining from acting on any of the contents of this seminar. We would be pleased to advise you on the application of the matters covered at the seminar to your specific circumstances. Deloitte & Touche LLP accepts no duty of care or liability for any loss occasioned to any person acting or refraining from action as a result of any material in this seminar. 2 An overview of key trends

3 Your speaker today Tony Firth Director in Leeds Audit Practice, specialising in HE and Financial Services. 3 An overview of key trends

4 Today s agenda The big picture of accounting UK Accounting update Pensions update (including FRS 17) Narrative reporting update Sector Specific issues - HEFCE agenda - Difficult areas Deloitte e-room 4 An overview of key trends

5 Accounting the big picture 5 Presentation Name (View / Header and Footer) 2003 Firm Name/Legal Entity

6 Overview of accounting integration The University accounts under the HE SORP (based on UK GAAP) Subsidiaries account under UK GAAP Though the expectation remains that UK GAAP will converge with IFRS, there has recently been a marked slow down in the convergence of UK GAAP with IFRS. Initially it was understood that all firms would be required to adopt FRS 26 (IAS 39 UK equivalent standard for periods ending after January 2007) but following a cooling of attitudes, convergence is now largely on hold until probably at least Potentially there could be a three tier system IFRS for Plcs and Public Interest entities (not defined) IAS Lite for Large Private companies New FRSEE for smaller entities. Still all up in the air! 6 An overview of key trends

7 Recent activity Update Standards IFRS UK Financial instruments: disclosures IFRS 7 FRS 29 Exposure Drafts Vesting conditions and cancellations ED (IFRS 2) ED (FRS 20) Operating segments ED 8 -- Performance reporting (part A) ED (IAS 1) -- Interpretations Members shares in co-operatives.. IFRIC 2 UITF 39 Revenue recognition -- UITF 40 Scope of IFRS 2 IFRIC 8 UITF 41 Reassessment of embedded derivatives IFRIC 9 UITF 42 Group and treasury share transactions D17 Info/s 77 Interim reporting and impairment D18 -- Service concessions D An overview of key trends

8 IASB projected output Update Final standards Segment reporting (4 th quarter) Share based payment: vesting conditions and cancellations (4 th quarter) Exposure drafts Borrowing costs (2 nd quarter) Conceptual framework part 1 of 8 (2 nd quarter) Financial instruments puttable at fair value (2 nd quarter) Earnings per share: treasury stock method (2 nd quarter) Income taxes (3 rd quarter) Fair value measurement guidance (3 rd quarter) SMEs(3 rd quarter) First time adoption: cost of investment in subsidiaries (3 rd quarter) Joint ventures (4 th quarter) Discussion papers Revenue recognition (4 th quarter) Insurance contracts (4 th quarter) 8 An overview of key trends

9 UK standards: effective dates Reminder UK standards fully effective in 2005 FRS 17 Retirement Benefits (full implementation) FRS 21 Events after the Balance Sheet Date FRS 25 Fin. instruments: presentation FRS 27 Life Assurance FRS 28 Corresponding amounts UK standards fully effective 2006 FRS 20 share-based payments 9 An overview of key trends

10 Some implementation issues - share based payments - debt/equity classification - pensions 10 Presentation Name (View / Header and Footer) 2003 Firm Name/Legal Entity

11 Share-based payments Reminder: IFRS 2 applies to IFRS preparers FRS 20 fully effective for 2006 (supersedes UITF 17) Charge in P&L account For services received Based on grant date fair value All companies: mandatory for 2005 or 6 Not applicable to University 11 An overview of key trends

12 Financial instruments: classification Reminder: IAS 32 applies to IFRS preparers FRS 25 part 1 applies to all UK preparers Covers Classification of debt / equity Compound financial instruments Treasury shares Offset rules All companies: mandatory for 2005 Not applicable to the University as no preference shares, may need to consider in some of the subsidiaries depending on structure of funding 12 An overview of key trends

13 Pension accounting Reminder: IAS 19 applies to IFRS preparers FRS 17 fully effective for 2005 (supersedes SSAP 24) Defined contribution schemes No change Defined benefit schemes Fully on-balance sheet Annual actuarial input required to generate numbers All companies: mandatory for 2005 Applicable for the first time this year in the Consolidated accounts only 13 An overview of key trends

14 Pension accounting FRS 17 Deficits benchmarking We set out below for comparison the FRS 17 deficits disclosed in the latest accounts of a number of non profit organisations and the effect it has had on their unrestricted funds. Organisation Year end date Net surplus/ (deficit) 000s Unrestricted funds total 000 Leeds July , ,307 A July 2006 (9,740) 71,905 B July 2006 (33,150) 112,800 C July , An overview of key trends

15 Pension accounting FRS 17 Assumptions - benchmarking We set out below assumptions used by those charities Organisation Year end date Discount rateinflation Salary increase PIP increase Leeds July % 3.0% 4.0% 3.0% A July % 3.1% 4.6% 3.1% B July % 3.0% 4.0% 3.0% C July % 3.1% 4.6% 2.9% 15 An overview of key trends

16 Pension accounting Common problem #1 How does the double entry work? Example Opening pension fund assets 1,000 Opening pension liability -1,500 Service cost 100 Interest cost 120 Expected return on assets 80 Contributions paid 150 Pensions paid 90 Closing pension assets 1,150 Closing pension liability -1, An overview of key trends

17 Pension accounting Pension Pension P&L STRGL/ assets liability a/c SORIE 17 An overview of key trends

18 Pension accounting Pension Pension P&L STRGL/ assets liability a/c SORIE Opening balance +1,000-1,500 Net deficit An overview of key trends

19 Pension accounting Pension Pension P&L STRGL/ assets liability a/c SORIE Opening balance +1,000-1,500 Service cost Interest cost Expected return Contributions paid +150 Pensions paid Sub-total 1,140-1,630 Actuarial gain (bal.) Closing balance 1,150-1,600 Net deficit An overview of key trends

20 Pension accounting Pension Pension P&L STRGL/ assets liability a/c SORIE Opening balance +1,000-1,500 Service cost Interest cost Expected return Contributions paid +150 Pensions paid Sub-total 1,140-1,630 Actuarial gain (bal.) Closing balance 1,150-1,600 Q1 The pensions regulator asks for a special contribution of 200 to be paid in the next period. Should we provide for it? 20 An overview of key trends

21 Pension accounting Pension Pension P&L STRGL/ assets liability a/c SORIE Opening balance +1,000-1,500 Service cost Interest cost Expected return Contributions paid +150 Pensions paid Sub-total 1,140-1,630 Actuarial gain (bal.) Closing balance 1,150-1,600 Q1 The pensions regulator asks for a special contribution of 200 to be paid in the next period. Should we provide for it? A No, since entry for payment is Dr Pension assets, Cr Cash 21 An overview of key trends

22 Pension accounting Pension Pension P&L STRGL/ assets liability a/c SORIE Opening balance +1,000-1,500 Service cost Interest cost Expected return Contributions paid +150 Pensions paid Sub-total 1,140-1,630 Actuarial gain (bal.) Closing balance 1,150-1,600 Q2 The scheme is closed with no further service accrual. The actuary calculates the liability at 1,200. What entry is required? 22 An overview of key trends

23 Pension accounting Pension Pension P&L STRGL/ assets liability a/c SORIE Opening balance +1,000-1,500 Service cost Interest cost Expected return Contributions paid +150 Pensions paid Sub-total 1,140-1,630 Actuarial gain (bal.) Closing balance 1,150-1,600 Q2 The scheme is closed with no further service accrual. The actuary calculates the liability at 1,200. What entry is required? A Dr Pension liability 400, Cr P&L a/c An overview of key trends

24 Pension accounting Pension Pension P&L STRGL/ assets liability a/c SORIE Opening balance +1,000-1,500 Service cost Interest cost Expected return Contributions paid +150 Pensions paid Sub-total 1,140-1,630 Actuarial gain (bal.) Closing balance 1,150-1,600 Q3 Pension levy is 15 pa. How is this accounted for? 24 An overview of key trends

25 Pension accounting Pension Pension P&L STRGL/ assets liability a/c SORIE Opening balance +1,000-1,500 Service cost Interest cost Expected return Contributions paid +150 Pensions paid Sub-total 1,140-1,630 Actuarial gain (bal.) Closing balance 1,150-1,600 Q3 Pension levy is 15 pa. How is this accounted for? A (i) If paid by company, then charge to P&L as operating cost (ii) If paid by pension fund, either deduct from expected return (annually), or add to pension liability (NPV of future payments) 25 An overview of key trends

26 Multi employer exemptions PAS scheme is a multi employer scheme (within the group) USS scheme is also a multi employers scheme (with other entities outside of the group) As the employer's contributions are affected by a surplus or deficit but the employer is unable to identify its share of the assets and liabilities on a consistent and reasonable basis, e.g., contributions are set for the scheme as a whole rather than reflecting the actuarial characteristics of the employees of the individual employer. In this case additional disclosures are required to those normally given for a money purchase scheme, namely: (i) the fact that it is a defined benefit scheme but that the employer cannot identify its share of the underlying assets and liabilities; and (ii) any available information about the existence of the surplus or deficit in the scheme and the implications of that surplus or deficit for the employer. 26 An overview of key trends

27 Narrative Reporting Update 27 Presentation Name (View / Header and Footer) 2003 Firm Name/Legal Entity

28 What we re covering. Operating and Financial Review (OFR) Enhanced Business Review (EBR) in directors report Statement of info given to auditors Liability provisions 28 An overview of key trends

29 OFR - Background Requirement for Operating and Financial Review may have been withdrawn but still seen by many as best practice Non quoted company enhanced directors report ( EBR ) Not for profit sectors Treasurer s reports: Charities Yes RSL s - Yes HE s - No Historically HE reports have been weak in this area SORP working party looking at this Plan to be ahead of the game 29 An overview of key trends

30 The organisations vision and values are supported by its strategy and structure What is our purpose? What values guide us? VISION VALUES How do we achieve our goals? STRATEGIC IMPERATIVES What structure best supports us? STRUCTURE & GOVERNANCE REQUIREMENTS 30 An overview of key trends

31 Key elements of the OFR Principles Purpose-Greater emphasis on matters significant to the entity Audience - Focus on matters relevant to the interests of members Time-frame - Forward looking orientation Content-Should complement as well as supplement Comprehension - Should be comprehensive and understandable Balance - Both good and bad aspects Comparability - Comparable over time 31 An overview of key trends

32 Key elements of the OFR Disclosure framework The nature, objectives and strategies of the business - Operating business and external environment Current and future development and performance - Significant development and performance in year Resources - Those available and how managed Risks and uncertainties - Facing entity and how managed Stakeholder Relationships - How they influence the performance Financial position - Position at year end Cash flows -During the year and requirements to fund growth Liquidity-Level of borrowings and future requirements 32 An overview of key trends

33 Enhanced Business Review (EBR) 33 Presentation Name (View / Header and Footer) 2003 Firm Name/Legal Entity

34 Directors Report content (s234zzb CA85) Small Medium Others Existing requirements Business review (EBR) Fair review of the business Principal risks and uncertainties Review must be balanced and comprehensive Include financial KPIs 1 Include non-financial KPIs 1&2 (incl. info on environment/employees) 1 to extent necessary for an understanding of the development, performance or position of the business of the company 2 where appropriate 34 An overview of key trends

35 EBR - The Current Situation EBR mandatory for ALL companies (except small) for periods commencing on or after 1 April 2005 Group needs to prepare and include EBR in: Group directors report on consolidated basis Each individual subsidiary directors report (unless small) Key changes (requirements in s234, s234zza&b CA85) Requirements for business review extended Principal risks and uncertainties KPIs (far less onerous than OFR) Director offence knowing failure to comply or reckless re compliance Auditors positive statement of consistency with accounts 35 An overview of key trends

36 March 2006 Update Full explanation of current situation Frequently asked questions Illustrative EBR for wholly owned subsidiary Illustrative OFR Checklists for EBR and OFR 36 An overview of key trends

37 Statement of info given to auditors 37 Presentation Name (View / Header and Footer) 2003 Firm Name/Legal Entity

38 Statement of info given to auditors New Companies Act requirement for periods commencing on or after 1 April 2005 (s234za) Statement on behalf of each director that there is no relevant audit information of which the auditors are unaware Subject to same liability regime as rest of directors report Deloitte guidance coming out in next CG Update 38 An overview of key trends

39 Some recommended steps Inform board, establish process, allocate responsibility Identify risk areas Ensure sufficient discussions held amongst directors Hold early discussions with audit partner Request early draft of representation letter Consider legal advice Document the process 39 An overview of key trends

40 Draft specimen wording "Each of the persons who is a director at the date of approval of this report confirms that: (1) so far as the director is aware, there is no relevant audit information of which the company's auditors are unaware; and (2) the director has taken all the steps that he/she ought to have taken as a director in order to make himself/herself aware of any relevant audit information and to establish that the company's auditors are aware of that information. This confirmation is given and should be interpreted in accordance with the provisions of s234za of the Companies Act An overview of key trends

41 Sector Specific issues 41 Presentation Name (View / Header and Footer) 2003 Firm Name/Legal Entity

42 HEFCE - regulation issues round up The single conversation Regulation efficiency Financial statements and management letter by 30 November Forecasts, monitoring statements, corporate planning statement, HESES form, CVC statement - all to be received by 30 November HEFCE risk letter out by end of January Likely first year 2007 (same year as new Charity regulator role) Added pressure to your year end timetable! A new Audit Code?? The Financial Memorandum to change as a result of FRS 17 (around 20 HEIs will go into deficit as a result of FRS An overview of key trends

43 06/07 Accounts Direction 06/07 accounts direction to: Remove reference to inherited liabilities Recommend corporate governance to follow CUC guidance HEFCE will look favourably on those that comply Reporting deadline to be brought forward to 30 November probably. More disclosure of audit and non audit fees 43 An overview of key trends

44 Difficult areas for the sector under discussion 44 Presentation Name (View / Header and Footer) 2003 Firm Name/Legal Entity

45 FRS 5 Revenue Recognition Application Note G to FRS 5 lays down rules for revenue recognition. Care is needed with the key concept of 'right to consideration', which may be easily misinterpreted. Potential problem areas: HEFCE specific initiative funding Some charitable research monies HEI electing to allocate a donation as an endowment or crediting it to creditors 45 An overview of key trends

46 UITF 40 Abstract Revenue recognition and service contracts Published 10 March 2005 Where there are distinguishable phases of a single contract it may be appropriate to account for the contract as 2 or more separate transactions provided that the value of each phase can be reliably estimated. Contracts for services should not be accounted for as long term contracts unless they involve the provision of a single service or a number of services that constitute a single project Under a contract for services that is accounted for as a long term contract, a seller should recognise revenue as contract activity progresses, in accordance with the stage of completion of its contractual obligations The amount of revenue recognised should reflect uncertainties as to the amount the customer will accept and pay A contract to provide repetitive services (such as maintenance or cleaning) should not be accounted for as a long term contract 46 An overview of key trends

47 Donations Current SORP can be unclear on what is a donation, what s an endowment and when it should be recognised Donations specifically for acquisition of fixed assets taken to deferred grants when asset is acquired Donations with condition that income from investment can be used for specific or general activities Donations with no specific terms attached taken to income and expenditure But be careful if the terms are general e.g. to be used for the Pharmacy department, then take to Income and Expenditure. If specific to be used for Dr Smith s work on the effects of global warning on North Devon, then may be restricted and unspent monies may need to be kept on balance sheet 47 An overview of key trends

48 Inalienable assets / Heritage assets Common approach is to not record these assets e.g. University is bequeathed large collection or new property or it purchases a collection for its museum. Frequent approach is to write the cost off directly to Income and expenditure FRS 15 rules require such assets to be recognised at cost or fair value on balance sheet Some exemptions: Assets acquired prior to introduction of FRS 15 (pre 31 July 2000) Assets where the costs of obtaining a valuation (if a reliable valuation is available) outweigh benefits, but must be disclosed 48 An overview of key trends

49 Heritage assets discussion paper ASB has issued discussion paper responses were needed by end of last month Wants to avoid the inconsistency in accounting for pre and post FRS 15 acquired heritage assets Wants to put a current value on all heritage assets Exemptions where it is not practical to obtain valuations at a reasonable cost of the majority by value of assets Where non capitalisation is followed, related transactions and sales to be accounted for through Statement of change in recognised net assets Historic assets used by the HEI and corporate art are not heritage assets Detailed disclosures including 5 year history of heritage asset transactions 49 An overview of key trends

50 Consolidation to consolidate or not? Many Universities have relationships with Trusts, companies and charities whose principle objectives are to support the University Must follow the FRS 2 and FRS 5 principles Does the University control the entity e.g. appointing and removing trustees Do the Trusts give rise to benefits to the University that are in substance as though from a subsidiary? 50 An overview of key trends

51 Private Finance Initiatives Have been around for a while now but still seem to cause problems on the accounting The more difficult types: Property held by a charity with service level agreement with University to provide accommodation. Borrowings of charity secured on property with no recourse to University. Charity contracts with Housing Association to develop and manage the property who really controls the charity?? Property is sold at a premium to Housing association but reverts back to University at end of 30 years how is premium accounted for? Does the transaction transfer substantially the risks and rewards of holding the asset? 51 An overview of key trends

52 Intellectual property deals Broker provides up front payment in return for 50% of all share capital on new spin offs for the next 15 years how do you treat it? Broker agrees to fund new building in return for 50% of all share capital and licence income over next 15 years funding to be paid at various milestones during development of building is the accounting treatment any different? 52 An overview of key trends

53 Mergers Acquisition or merger accounting? Fair value considerations Loans Pension schemes Properties Treatment of goodwill / negative goodwill 53 An overview of key trends

54 Accounting for patent costs / investments in spin out companies Patent costs - capitalise or expense? Revaluation of spin out investments? Treatment of additional investment in spin out companies? 54 An overview of key trends

55 Deloitte e-room 55 Presentation Name (View / Header and Footer) 2003 Firm Name/Legal Entity

56 Deloitte e-room Passwords have been sent round Access to Deloitte publications such as tax bulletins Sheet to hand out 56 An overview of key trends

57 Questions? 57 An overview of key trends

58 A member firm of Deloitte 58 An & overview Touche LLP of key is authorised trends and regulated by the Financial Services Authority.