What CAs need to know in 2016
The ICAS Technical Team takes a look ahead to 2016 and the key things CAs need to know.
The introduction of the new accounting framework in 2016 is likely to create some challenges for the audit profession. The new rules may require the auditor to exercise his/her professional judgement under the new regime when assessing some of the measurement issues arising from the new accounting framework and when determining the need for sufficient appropriate audit evidence.
EU Audit Regulation and Directive
Updated legislation, auditing standards and a new one-stop Ethical Standard, implementing the requirements of the EU Audit Regulation and Directive, will come into force for accounting periods commencing on or after 17 June, 2016. With tougher rules on the provision of non-audit services to audited entities, and a maximum audit tenure of 20 years, subject to a retender process after 10 years, we expect to see even more high profile changes in auditor appointment as the firms get to grips with the new rules.
Challenges faced by charities
This year the ICAS Charities Committee surveyed ICAS members involved in the charity sector for their views on the challenges faced by charities and on relationships between charities and their funders.
The initial survey results were published in July with the detailed results being published this month. Charities and their advisors continue to be concerned about the strength of charity finances but most charities have been able to identify measures to ameliorate these.
Charity plans focus more on income diversification than on cost cutting and retrenchment which is very positive. Financial pressures also appear to have been less damaging to relationships with charity funders than perhaps has been the perception.
This is a another positive finding given that funding negotiations are viewed as being tougher than in the past. The Committee plans to draw on the findings from this survey in its work programme for 2016.
The Smith Agreement and the parliamentary inquires which emerged as a result were a great opportunity for the Charities Committee to call for revenue borrowing powers for preventative spending initiatives to be devolved to Scotland.
Preventative spending initiatives have the potential to improve lives and reduce public spending in the long-term and charities, as major providers of public services, have an important role to play in this space.
John Swinney, Scotland’s Deputy First Minister and Finance Minister, in his December Budget Statement, indicated that moving towards a more preventative approach to public spending was high on the Scottish Government’s agenda for 2016. Additional borrowing powers are dependent on an agreement between the Scottish and UK Governments on a new Fiscal Framework, which is now expected early next year.
Charities Statements of Recommended Practice (SORPs)
For the techies out there, two new Charities Statements of Recommended Practice (SORPs) came into force on 1 January, 2015: one based on FRS 102 and the other based on the FRSSE.
Accounts preparers, independent examiners and auditors will become even more familiar with these during the first few months of 2016 as the first charity accounts produced under the new SORPs will start to emerge.
2016 will bring further changes to charity accounts with the withdrawal of the FRSSE SORP and changes to the FRS 102 SORP as a consequence of wider changes to UK GAAP driven by the implementation of the new EU Accounting Directive. All may not be well as scant attention has been paid to the needs of charities during this process. The ICAS Charities Committee has been in the forefront of highlighting where problems lie.
The Charities SORP-making body has announced this month that all charities preparing ‘true and fair’ accounts will be required to comply with the FRS 102 SORP from 1 January, 2016. This is a welcome announcement but details of how the legal aspects of the accounting framework will dovetail with this are still to emerge.
Corporate and Financial Reporting
UK Financial Reporting
2016 will see the first sets of accounts published under the new financial reporting standards which will replace existing UK GAAP. The new standards are mandatory for financial years ending on or after 31 December, 2015, so from January onwards, private companies and charities, amongst others, will be producing their accounts under the new standards. There are also new size thresholds for small companies which can be adopted for December 2015 year ends.
Further information on the new regime is available on ICAS.com:
In January the IASB (International Accounting Standards Board) is expected to publish its long-awaited new leasing standard. How to account for leases is one of the most contentious areas of financial reporting and has been under discussion for the past 10 years.
Currently, many leases do not need to be shown on a company’s balance sheet – for example, an airline may not show the aircraft it leases – meaning that the accounts do not show a complete picture of its assets and liabilities under leasing arrangements.
The new standard will have the effect of bringing almost all leases on balance sheet, which it is hoped will contribute to more transparent financial information and therefore ultimately to the efficient functioning of the capital markets.
Single-tier State Pension
Pensions reform will continue apace in 2016 and beyond. A major development in 2016 is the introduction of the new single-tier State Pension for those reaching State Pension age on or after 6 April, 2016. Small and micro-employers reaching their auto-enrolment staging date in 2016 will need to identify a suitable pension scheme, if they haven’t done so already, and may turn to their accountants for business to business advice. ICAS will continue to provide monthly auto-enrolment updates next year.
The new pensions freedoms introduced in April 2015 will continue to drive innovation in the pensions industry and clarification about UK Government plans to reform pensions tax relief, due to be announced by the Chancellor in next year’s Budget, will be a major influencing factor.
A key objective of pensions policy is to encourage people to save more towards retirement: this is a double-edged sword as more saving means a greater take up of tax reliefs resulting in lost revenue to Treasury coffers. It is possible that the Government will seek to divert tax relief away from higher earners through the introduction of a flat rate of tax relief. The ICAS Pensions Committee commented on Treasury plans for pensions tax reform earlier this year.
Pensions Statement of Recommended Practice (SORP)
For pension accountants and auditors dealing with trust-based schemes, the New Year will bring the joy of preparing and auditing accounts in accordance with the new Pensions Statement of Recommended Practice (SORP) which has been updated for FRS 102.
The new investment risk disclosures in FRS 102 are a major headache for those involved in pension scheme accounts due to differences between the fair value hierarchy used in IFRS. During 2015, the Pensions Committee brought pensions auditors together with pension professionals to discuss the practical challenges of implementation the Pensions SORP].
Amendments to FRS 102
The FRC is seeking to make amendments to FRS 102, in the first quarter of 2016, to align the fair value hierarchy with IFRS for application for pension schemes. Early adoption will be possible and schemes will have to hedge their bets as to whether to follow FRS 102 as it currently stands or await the changes to be agreed.
In 2016, the governments who signed up to the historic agreement at the Conference of the Parties in Paris (COP 21) will start to consider how they can deliver on their ambitious targets. So a low carbon strategy will need to be at the heart of any fiscal policies.
Launched in September 2015, the Sustainable Development Goals (Global Goals) are likely to receive even greater coverage in 2016 as companies are encouraged to embed them within their organisations. The 17 goals, ranging from the eradication of poverty to achieving gender equality and empowerment of women, are aimed at creating a more resilient and sustainable world.
More information is available on the IFRS website.
The Scottish Rate of income Tax (SRIT)
The impending arrival of SRIT and the way it will work are still mysteries to most Scots. The rates of income tax paid by Scottish taxpayers on their non-savings non-dividend income will be 10 percentage points below the rates in the rest of the UK, but SRIT will be added on top.
The UK basic, higher and additional rates of income tax for 2016/17 have already been announced as 20 per cent, 40 per cent and 45 per cent respectively, and the same rates will now apply to all income of Scottish taxpayers.
Individuals who are Scottish taxpayers will be affected by SRIT. HMRC will regard any UK resident taxpayer with a Scottish postal address as a Scottish taxpayer, but this may not always be the case - for example, for those with more than one home in different parts of the UK, with no UK home or with complex affairs. HMRC has already written to individuals whom they believe to be Scottish taxpayers, giving them an opportunity to challenge the position if HMRC’s assumption is wrong.
More information is available on ICAS.com:
Further reduction in the pension lifetime allowance
Since 2006, pension scheme members have had a tax rollercoaster ride. The major changes brought in on ‘A’ Day 2006 were supposed to establish a new and lasting tax framework for pension saving. However in the last few years there have been numerous changes to both the lifetime allowance and the annual allowance.
The lifetime allowance has already been reduced in 2012 and 2014. From April 2016 it will reduce again to £1m. In the 2015 Budget, the Chancellor announced that from 2018 the allowance would be indexed, using the Consumer Price Index, so it may start to increase again.
It is important that all pension scheme members monitor their pension savings and consider how the imminent reduction in the lifetime allowance may affect them.
More information can be found on ICAS.com