Solicitors Regulation Authority plans to abolish annual accountant’s report for law firms, amendments to IFRS 11 and slow uptake of capital reporting
The Solicitors Regulation Authority (SRA) has published a six-week consultation aimed at law firms and their accountants, entitled Reporting Accountant, proposing to abolish the requirement for law firms holding client funds to submit an annual accountant’s report.
The consultation proposes the removal of the mandatory requirement that firms holding client funds must submit an annual accountant’s report to the SRA. Instead a requirement for a declaration, at the annual Practising Certificates (PC) renewal stage, by the Compliance Officers for Finance and Administration (COFAs) of each firm that they are satisfied that the firm is managing client accounts in accordance with the SRA Account Rules.
Currently, every firm holding client money has to have its client account audited annually, regardless of whether the firm poses a high or low risk to client money. The proposals are aimed at reducing the unnecessary regulatory burden of a compulsory report and giving firms the flexibility to decide the best methods to satisfy themselves that the SRA requirements of good financial management and protection of client money are met.
Around 9,000 law firms hold client money and this triggers the need for them to comply with the reporting requirements. The removal of the reporting would reduce administration for firms.
With the removal of the requirement to submit annual accountant reports, the SRA considers that it is appropriate for the firm’s COFA to declare that the firm’s accounts are compliant with the SRA Accounts Rules with effect from the date of implementation of these proposals. This will serve as an added reassurance to the SRA that appropriate processes are in place.
Current requirements already put a clear responsibility on COFAs to ensure client accounts are managed and protected in accordance with the SRA Account Rules.
The SRA will, however, retain the power to require firms that pose a higher risk to client money to have their accounts audited as part of supervisory, investigative or enforcement activity.
Both proposals will be implemented in October 2014, subject to a positive outcome to the consultation.
The plan to remove the mandatory requirement to submit an annual accountant’s report applies to all SRA regulated firms operating in England and Wales, as well as overseas practices.
Peter Noyce, head of professional services at Menzies LLP said: ‘This announcement comes as no surprise. The accountant’s report is undoubtedly a burden on smaller law firms, and with an estimated 9,000 firms holding client funds, the SRA’s move could save the profession £30m a year. It cannot fail to be popular in the present climate.
‘A move towards self-regulation is always controversial and only time will tell if it works or not. Law firms are under huge financial pressure and many operate on a weak financial basis. Hopefully, management teams will see the removal of this compliance burden as an opportunity to invest in better practice management advice. It is something the profession clearly needs.’
The changes to the rules are expected to save the regulator £200,000 a year through reduced processing of accountant’s reports.
But there are financial issues with removing the requirement.
‘If the regulator has to resolve a greater number of client account problems it may ultimately incur additional costs,’ Noyce said.
The consultation closes for comment on 18 June 2014.
The consultation is available at http://bit.ly/1s2nGit
Boards still ignore capital reporting
Natural capital is largely ignored by investors as boardrooms continue to focus on short-term management decisions and priorities, a joint report by CIMA, EY, the International Federation of Accountants (IFAC) and the Natural Capital Coalition shows.
Finance professionals need to do more to highlight the issues around natural capital in their reporting to ensure that organisations are aware of and take action on the impact of their activities on over-stretched natural resources, the research says.
The report, Accounting for natural capital: the elephant in the boardroom, says that the true cost to society from the impact of business activity on natural resources is not reflected in corporate accounts, which the group says is a serious problem as there is a ‘fallacious assumption’ in financial accounting that natural resources are infinite rather than reducing as the result of demands from a growing and more prosperous global population.
Sandra Rapacioli, CIMA’s head of sustainability research and policy, said: ‘Accounting for natural capital issues isn’t easy. But just because it’s hard doesn’t mean it shouldn’t be done. We are calling on finance professionals to take action now and incorporate natural capital considerations into strategic planning and business decisions, before the regulatory axe falls.’
The report outlines the steps accountants and finance heads should take to help their companies to integrate natural capital considerations into decision making, resource allocation and reporting, and to adapt to growing competition for scarce natural resources.
It includes examples of organisations that are taking a proactive approach, including Dow Chemical, Kingfisher and Coca-Cola, and warns that organisations that do nothing will suffer from rising input costs, risks to their supply chain and reputational damage.
The report is available at www.cimaglobal.com/naturalcapital
IASB publishes amendments to joint arrangements’ rules
The International Accounting Standards Board (IASB) has published amendments to IFRS 11, Joint Arrangements, to add new guidance specifying the appropriate accounting treatment for the acquisition of an interest in a joint operation that constitutes a business.
IFRS 11 addresses the accounting for interests in joint ventures and joint operations. The amendments were made in response to a recommendation by the International Financial Reporting Standards (IRFS) Interpretations Committee (IFRIC), which had identified that, in practice, reporters were taking different approaches in this context; it was unclear whether the acquirer of such interests in joint operations should apply the principles in IFRS 3, Business Combinations, on initial recognition of the interest or whether the acquirer should instead account for it as the acquisition of a group of assets.
Accounting for Acquisitions of Interests in Joint Operations (amendments to IFRS 11) amends IFRS 11 so that the acquirer of an interest in a joint operation in which the activity constitutes a business, as defined in IFRS 3, is required to apply all of the principles on business combinations accounting in IFRS 3 and other IFRSs with the exception of those principles that conflict with the guidance in IFRS 11.
As a result a joint operator that is an acquirer of such an interest has to measure most identifiable assets and liabilities at fair value; expense acquisition-related costs (other than debt or equity issuance costs); recognise deferred taxes; recognising any goodwill or bargain purchase gain; perform impairment tests for the cash generating units to which goodwill has been allocated; and disclose information required relevant for business combinations.
The amendments apply to the acquisition of an interest in an existing joint operation and also to the acquisition of an interest in a joint operation on its formation, unless the formation of the joint operation coincides with the formation of the business.
IFRS 1, First-time Adoption of International Financial Reporting Standards, was also amended to extend the business combination exemptions, so that they include past acquisitions of interests in joint operations in which the activity of the joint operation constitutes a business.
The amendments are effective for annual periods beginning on or after 1 January 2016, with earlier application being permitted.
More details are available from IASB at http://bit.ly/1j688EX
New rules for cancelling listing of premium listers
The Financial Conduct Authority (FCA) board has formally approved a package of measures designed to protect minority shareholders in premium listed companies by giving them additional voting rights and greater influence over key decisions, in a bid to improve governance in this area.
The proposals were set out in the FCA’s consultation paper ‘CP13/15: Feedback on CP12/25 – Enhancing the effectiveness of the Listing Regime and further consultation’. The changes include new rules for cancelling a listing.
Under the revised requirements, if a premium listed company has a controlling shareholder and wishes to apply for a cancellation it must obtain a majority of at least 75% of the votes attaching to the shares of those voting on the resolution and also gain approval by a majority of the votes attaching to the shares of independent shareholders.
In takeover offer situations, an equivalent requirement based on acceptances will apply, except that when an offeror has acquired or agreed to acquire more than 80% of voting rights no further approval/acceptances by independent shareholders would be required to cancel the premium listing.
The new rules are effective from 16 May 2014.
IASB amends IAS 16 and IAS 38
The International Accounting Standards Board (IASB) has published amendments to IAS 16, Property, Plant and Equipment, and IAS 38, Intangible Assets, to clarify acceptable methods of depreciation and amortisation, following recommendations from the IFRS Interpretations Committee (IFRIC).
IAS 16 and IAS 38 both establish the principle for the basis of depreciation and amortisation as being the expected pattern of consumption of the future economic benefits of an asset.
The IASB has clarified that the use of revenue-based methods to calculate the depreciation of an asset is not appropriate because revenue generated by an activity that includes the use of an asset generally reflects factors other than the consumption of the economic benefits embodied in the asset.
It also clarified that revenue is generally presumed to be an inappropriate basis for measuring the consumption of the economic benefits embodied in an intangible asset. This presumption, however, can be rebutted in certain limited circumstances.
More details are available from http://bit.ly/1jRZCOF