Seven things CAs should look out for in 2017

New Year
By Nick Huber, Robert Outram and Michelle Perry for The CA magazine

4 January 2017

The CA's Nick Huber, Robert Outram and Michelle Perry assess the opportunities and threats to businesses in the coming year.

After the serial shocks that have made 2016 a year to remember – or to forget, depending on how you feel about them – businesses might well be hoping for a relatively quiet year to come. If so, the bad news is that this seems unlikely; change and uncertainty look set to continue for some time.

1. The European conundrum

Brexit – the UK’s contribution to a year of surprises – cannot, of course, be ignored. After a few tumultuous months in the aftermath of the referendum, Prime Minister Theresa May promised to trigger Article 50 of the Lisbon Treaty by no later than the end of March 2017.

Though MPs voted overwhelmingly in support of this plan, they are likely still keen to influence what kind of Brexit the UK will be heading for: a 'hard Brexit' with some kind of free trade deal, or a 'soft Brexit' in which the EU may accept some degree of UK control over the freedom of movement of labour.

Of course, that latter binary division masks a far more complex array of choices, to be negotiated with all the EU’s other 27 member states, each of which will have their own priorities.

Political risk will remain a firm part of the investment landscape for the foreseeable future.

Martin Gilbert CAMeanwhile, the question of a potential second independence referendum for Scotland has not gone away.

Martin Gilbert CA, Chief Executive of Aberdeen Asset Management, commented: “There are elections in the Netherlands, France and Germany which may well have a bearing on Brexit negotiations and on the future shape of the EU. So political risk will remain a firm part of the investment landscape for the foreseeable future.”

The French presidential elections take place in April 2017, potentially stretching into May. The contest looks as if it will be between centre-right former Prime Minister Francois Fillon and the far-right National Front’s anti-EU leader, Marine Le Pen.

In September, Germans go to the polls in a general election that could see Chancellor Angela Merkel re-elected for a fourth term. Meanwhile, opposition parties in Italy are campaigning to ditch the Euro and return to a national currency.

2. The Trump effect

Alan Horn CA, Chairman of Rogers Communications in Canada, said: “A key issue will be how macro economic events and trends will affect the real economy. In North America, how will efforts to ‘normalise’ monetary policy affect behaviour at both the corporate and the individual level in terms of confidence and activity? Clearly, the policies of the new administration in the US will be a major factor.”

Alan Horn CATrump has mooted not only large-scale tax cuts for individuals and corporations, but also increased government spending on infrastructure. His apparent willingness to run a bigger fiscal deficit in order to boost the US economy has already had an impact on the US bond market.

Turning to fiscal stimulus, rather than a combination of monetary policy and quantitative easing, marks a break with the consensus that has dominated policy in the West since the global financial crisis. Whether Trump’s approach succeeds or not, some observers now believe we may see inflation and higher interest rates creeping back into the world.

A significant risk to the stability of global markets appears to be a recurring theme each year.

Gregor Alexander, Finance Director at SSE, said: “UK inflation will, in my view, be higher than many forecasts, and the Euro may weaken with events in Europe. There is also a significant risk to the stability of global markets but this appears to be a recurring theme each year.”

Elsewhere, concerns continue to percolate that if the slowdown in China’s economic growth continues it will infect the rest of the world, even though China’s economy is growing at a stronger rate than the US, UK or any EU economy.

Ken Morrison CA, Director at Mazars in Hong Kong, foresees challenges in 2017, including: “Challenges to trade given Donald Trump’s comments during the election; encroachment of more mainland firms into Hong Kong; confidence in the political system of Hong Kong and potential threats to the system of Rule of Law.”

He added: “The opportunity for Mazars in Hong Kong is still China: a big country with much development still to do which will need professional accounting assistance.”

3. Energy and climate change

In November, the climate change accord thrashed out in Paris came into force, with the aim of holding global warming back to well below 2˚C above pre-industrial levels. The signatories, who include the US, China, India and the EU, must now ensure they are putting their action plans into effect and this could take the form of new limits on emissions, increased carbon taxes and/or investment in clean energy.

Gregor AlexanderPresident-elect Trump is no fan of the Paris agreement, having claimed climate change is “a hoax”. Signatories looking to withdraw from its obligations must give notice in a procedure that could take four years, so the US might not be able to pull out during Trump’s first term.

Meanwhile, the energy industry will be looking anxiously for any signs of upward movement in the oil price. That could depend on the strength of worldwide demand, on whether producers can agree to restrict their output.

Gregor Alexander said: “The sector faces significant challenges, reflecting the so-called ‘trilemma’ – affordability, security of supply and decarbonisation. These issues will be affected by the recent political events and also by the current volatility in the commodity and electricity wholesale markets.

“For SSE the main challenge will be managing these risks to minimise the impact on our customers while dealing with economic and political developments from the Brexit vote and how the new UK Government takes forward energy policy.”

He added that SSE is investing significantly to address these challenges, with around 1,000MW of onshore and offshore wind projects under construction in Britain and Ireland.

Peter Rose CAEven if the oil price recovers, the industry will have its challenges, according to Peter Rose CA, Finance Director at international energy services business Hunting.

He said: “Assuming we see a recovery in the oil and gas industry, our main challenge will be in keeping up with demand for our products and services – the oil and gas industry has significantly reduced its capabilities with workforce reductions, company closures and bankruptcies.

“With the reduced exploration and production infrastructure investment across the industry over the past two years, the supply of hydrocarbons from existing fields may struggle to meet the global demand of 100 million barrels of oil the world will consume by 2020. Additional investment will be required to find new oil fields to replace depletion of existing ones.”

4. Financial services

The implementation date for the EU’s Markets in Financial Instruments Directive (MIFID) II has been delayed to January 2018, but Andrew Bailey, Chief Executive of the Financial Conduct Authority, confirmed last October that UK investment firms will still have to comply with MIFID post-Brexit.

The purpose of the new regulation is to inject transparency into the EU securities and derivatives markets and strengthen investor protection. The rules require banks to separate their research from other services with the aim of mitigating conflicts of interest.

“Regulators recognised that research is a benefit that is bundled up as part of advisory rates so it could potentially induce firms to buy research to the detriment of investors, so theywant to create a separate market for advisory research,” said Elliot Hand, Manager, Banking and Capital Markets at PwC.

Next year could also see blockchain embraced as mainstream, which would allow firms to give a product a digital identity and banks to verify transactions very quickly without human checks. Goldman Sachs, Morgan Stanley, Aviva, Schroders and others are all investing in the technology.

“That’s very exciting for banks. They are visualising a world that is much simpler. People are talking about this being bigger than the Internet,” commented Andrew Kail, UK Head of Financial Services at PwC.

The contribution that financial services make to the economy is huge, so it’s important to get this right.

Jim Pettigrew CA, Chairman of Clydesdale Bank, said: “It is important for the wider economy that banks operate effectively, because they have a vital role in ensuring that capital moves from those who have it to those who need it, but the macro environment is really challenging.”

The UK’s monetary policy committee kept interest rates at a historic low of 0.25% at its last meeting in November. As a result, the UK’s leading banks have said that their earnings will fall by between 2% and 3% for every 25 basis points cut, equating to between £170m and £250m.

The question for 2017 is whether we will see a move towards negative interest rates, as has already happened in some jurisdictions, or whether the trend will finally reverse.

Another key issue for UK banks is the impending deadline for the 'ring-fencing' reforms, designed to separate retail banking operations from 'riskier' investment banking. This is due to come into force from the end of 2018, which does not leave much time for restructuring.

The UK’s vote to leave the EU puts a question mark over whether assets and entities outside the UK but within the European Economic Area will still be allowed inside the 'ring-fenced' domestic bank.

5. Making tax digital

By 2020, HMRC wants to communicate with most taxpayers digitally. Individuals and small businesses will have digital tax accounts, update HMRC about their tax at least quarterly and won’t need to file an annual tax return. Next year will see a big push, on the part of HMRC and the software houses, to prepare the ground for this momentous change.

There is wide support among accountants for the principles of 'Making Tax Digital' (MTD), but experts doubt whether there is enough time to prepare for it, including making and testing tax and accounting software.

HMRC says that a digital tax system will be more efficient and easier to use for most businesses and that the transition to it will be “straightforward”. But, for some smaller businesses the move to a digital tax system may be trickier.

“People may have bespoke software that’s not MTD compliant,” said Philip McNeill, Head of Taxation (Tax Practice and Small Business Taxes) at ICAS. You could choose a cloud computing solution that’s 95% MTD compliant, but Philip argues that most SMEs he talks to aren’t close to compliance.

Will the technology work? Probably, but accountants should check that their client’s bookkeeping software and their own software can connect with HMRC’s digital tax accounts.

6. Cyber-war

Cyber-attacks are part of the darker side of international relations. In October, the US Government accused the Russian Government of stealing and disclosing emails with intent to “interfere with the US election process”.

State-sponsored hacking is becoming more important around the world, and the US Government itself has been accused of using malware to undermine Iran’s nuclear programme. In November, a cyber-attack took Liberia’s Internet offline. Hackers targeted the African country’s infrastructure using the same method that shut down hundreds of the world’s most popular websites (including Netflix and eBay) a month earlier.

If the risks to data integrity are growing every year, so is the regulatory response. New laws on data protection are due to start in May 2018 for all countries in the EU. The General Data Protection Regulation (GDPR) includes penalties of up to €20m or 4% of a business’s worldwide annual turnover.

Other proposed changes include requiring organisations to notify their country’s data-protection authority within three days after data is breached.

Kuan Hon, a Consultant Lawyer with Pinsent Masons, believes that the GDPR looks set to have direct application to the UK for a period of time while the arrangements for leaving the European Union are finalised.

7. Auditing and accounting

There are no major changes to accounting standards due next year, but in 2017 the International Accounting Standards Board is expected to issue its new standard on insurance accounting, which is expected to be effective from 2021.

This has been under development since 2004 and is intended to bring comparability and transparency to accounting for insurance contracts, as there is currently a wide diversity in practice.

The UK is also required to bring the EU’s Non-Financial Reporting Directive into law by 6 December 2016 to take effect for financial years beginning on or after 1 January 2017. The scope is roughly similar to the existing UK requirements, but will now also include some unquoted companies, and requires some additional disclosures, for example on anti-bribery and corruption measures.

The Financial Reporting Council’s new auditing and ethical standards, which have been revised following the EU audit reforms, become effective for the accounting period commencing on or after 17 June 2016, so it will be interesting to observe their impact during 2017.

During 2017, the International Auditing and Assurance Standards Board is expected to consult on an exposure draft of revised ISA 540 Auditing accounting estimates, including fair value accounting estimates, and related disclosures to ensure that this ISA is finalised to coincide with the implementation date of IFRS 9 Financial instruments, being accounting periods beginning on or after 1 January 2018.

The full version of this article is available in the December 2016/January 2017 edition of CA magazine.

What do you expect to see in 2017? Tell us in the comments below.


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