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Crowe Horwath Reporting Insights

2016 - Issue 1

Director's Update

David ChittyWelcome to the first edition of Crowe Horwath Reporting Insights, Crowe Horwath International’s newsletter for clients and contacts about developments in financial reporting and audit.

Reporting Insights presents an overview of developments from international standard setters, as well as regional and national developments that will be of interest to a global audience.

Crowe Horwath International and its member firms are committed to engaging in debate and discussion about the development of standards and regulations. In our thought leadership activities, we seek to promote standards and regulations that serve the public interest but also, that are effective for businesses to apply. This Newsletter includes articles about improvements in audit reporting that serve the public interest and the Disclosure Initiative that both helps the preparers of IFRS financial statements as well as the readers of the statements.

This newsletter includes an article by Gregory Buteyn of Crowe GHP Horwath about BEPS and its implications for CFOs. BEPS is a matter of tax policy, but more importantly BEPS is a matter of macroeconomic policy that has significant strategic implications. CFOs and their executive management and audit committee colleagues should carefully consider the impact of BEPS upon their business and take tax-planning advice.

We welcome comments about our newsletter. I can be contacted at david.chitty@crowehorwath.net.

David Chitty
International Accounting & Audit Director

BEPS for CFOs… a briefing

By Gregory J Buteyn,
Partner, Crowe GHP Horwath
Denver, Colorado USA

It’s been six months now since the release of the widely acclaimed global base erosion and profit shifting study, called BEPS, and most of our affected multinational clients have just wrapped up another annual financial reporting cycle. Things are happening, and it’s a good time to update where we are on BEPS, and where we appear to be headed.

The Changing Environment Rolls On
In 2012, the G-20 governments commissioned the Organization for Economic Cooperation and Development (OECD), to provide an action plan targeting aggressive international tax strategies used by multinational companies. It was aimed primarily at intercompany transactions related to transfer pricing, treaty abuses, intercompany debt and use of harmful tax regimes, all generally referred to as tax base erosion and profit shifting strategies.

The OECD released its final report in October 2015, and the general feeling now is that BEPS will result in the biggest challenge for the corporate tax function since FIN 48, and the most significant changes to the taxation of multinational companies since 1986.

Over 90 countries have now committed to the BEPS recommendations, and we are continuing to see significant tax legislative changes, proposed changes to income tax treaties, and increased information sharing between the tax authorities around the world. Countries are eager to use the “BEPS Roadmap” to increase their chances of generating additional tax revenue.

The media attention on BEPS-related cross-border transactions and tax favorable regimes has also not subsided, evidenced by the continuing EU focus on deemed harmful tax rulings by certain European countries, US regulatory focus on outbound corporate inversions, and the recent release of the Panama Papers, which is raising questions of offshore tax evasion by prominent citizens and entities around the world. The International Consortium of Investigative Journalists (ICIJ) has been very busy lately.

These BEPS related initiatives should have C-Level executives and audit committees of multinational companies very concerned, as the financial, reputational and operational effects could be significant. It is abundantly clear now that BEPS is not just a tax issue.
Emerging Best Practice Responses to BEPS
As companies respond to the BEPS study and tax legislative changes over the last several months, we are seeing some best practices emerge:

  • Formation of Cross-Functional BEPS Team.  Companies are forming a cross functional BEPS team to meet regularly, with representatives from areas such as tax, financial reporting, operations, treasury and human resources.
  • Regular Dialogue with the CEO and Audit Committee. Progress on the BEPS initiative is a regular agenda item for periodic meetings with the CEO and the audit committee chairperson.
  • Evaluation of Existing Legal, Tax and Operational Structure. The BEPS provisions could require changes to the way a company is structured internationally, and even the way it operates. Some companies are already taking a fresh look at their current structure, which might already be outdated, as well as evaluating alternative legal and operating structures.
  • Getting Ahead of Country by Country Reporting. For companies with worldwide annual sales of over Euro 750 million, BEPS requires significant company information to be reported on a country-by-country basis, beginning for 2016, which will be shared among countries. Companies are already in the process of accumulating this information and evaluating the resources required to do so.
  • Adequacy of Technology and IT Infrastructure. Companies are realizing that compliance with the increased disclosures and information reporting requirements requires an advanced look at the company’s information systems’ ability to capture and produce that information. There is a usually a long lead time for changes here, so the sooner the better.
  • Deeper Dive into Company Transfer Pricing Policy. Transfer pricing is a key focus of the BEPS recommendations. Determination of where the company’s risks and exposures may lie will require additional investment of resources into transfer pricing expertise. Some companies have already begun the process of ramping up their transfer pricing studies.
BEPS Approach for the Financial Statement Audit
BEPS has an impact for the conduct of the audit of tax. Intercompany transactions concerning the tax provision may not eliminate in consolidation. This is especially true where significant transfer pricing issues can arise between the companies, such as those addressed in the BEPS study.

Evaluation of the company’s response to BEPS should be part of the audit of internal controls and tax reserves. This includes addressing the adequacy of internal tax resources to identify BEPS tax risks, internal systems to capture required information, transfer pricing structure and compliance, and the company’s ability to assess the adequacy of its worldwide tax structure. How the company is addressing the BEPS topic should be on the regular agenda of the auditor's conversations with the CFO and audit committee.
BEPS Tax Advisory Opportunities
Crowe Horwath International's tax practice can assist companies with respect to the BEPS initiative in the following ways:
  • Conducting an overall BEPS review which identifies risk and opportunities;
  • Evaluation and recommendations regarding tax and legal structure;
  • Assistance with Country by Country Reporting; and
  • Transfer pricing planning and documentation studies.

We maintain close contact with our clients to discuss BEPS compliance and reporting, as well as tax planning to reduce additional BEPS tax exposures.
As we look ahead, BEPS will very much be an important element of global change affecting the tax profiles of companies. BEPS will affect the way tax and audit services are provided in the future. Companies and their advisors have to work closely together to minimize risk and maximize opportunity. We are still in the first year following the BEPS study recommendations, but the BEPS game is already very much on.



AnchorBusiness in Europe - a UK and Ireland viewpoint

The Consultative Committee of Accountancy Bodies (CCAB), the forum for accountancy bodies in the UK and Ireland, has published a report which captures the opinions of business leaders in the UK and Ireland on the effectiveness of the European Union. The report, Business in Europe: Researching Reforms for Sustainable Growth highlights five key areas for potential reform. It  explores in-depth the attitudes, priorities and concerns among senior business figures, taking into account a range of economic, political, sociocultural, legal, technological and environmental considerations. David Chitty, International Accounting & Audit Director of Crowe Horwath International was interviewed for the report.

The five key areas for potential reform, which emerge as priorities for business leaders interviewed for the report include:

  1. Single statement of EU and national responsibilities: with calls for a charter, operating model, or single document that clearly sets out certain basic principles of the EU, as well as where responsibilities are shared by EU Members or retained by national administrations to help address some misinformation about the respective responsibilities of national governments and EU institutions;
  2. Greater accountability and transparency at EU level: a perceived lack of transparency, democratic deficit and a belief that unelected officials in Brussels may not make decisions in the EU’s best interests are key concerns within the business community;
  3. Closer harmonization of reporting regimes including taxation reporting regimes: hastened by the expansion of digital services, to facilitate strong demand across common markets for services and for capital, with the suggestion that the OECD’s Base Erosion profit Shifting (BEPS) protocols could be transposed into EU legislation;
  4. Portability of earned labor benefits: to facilitate free movement of labor with regards to qualifications, pension contributions, health insurance and other earned social benefits in an ageing Europe;
  5. Vision for business in the EU: to further harmonize EU economic structures, including companies being able to submit tax returns to an EU clearing house that would distribute these proportionally to the Member States in which the income was earned.

As the UK referendum on EU membership will take pace on June 23, the respondents to the report also touched on Brexit (British exit from the EU). They put forward both conflicting and common opinions on the question ahead of the UK’s referendum on EU membership. While some respondents opined that UK businesses might be better placed to drive change by being in Europe, rather than trying to influence change from outside, others cited the downsides of membership. There was, however, consensus that the role of the EU is not always widely understood among businesses, and there is work to do to communicate this in the interest of balanced and informed debate in advance of the UK’s forthcoming referendum.

Download the full report and a summary here and the press release here.


AnchorCrowe Horwath International Partner Profile

In each issue, we will introduce a Crowe Horwath International member firm partner who is engaged in a national or international professional leadership role.

Tapani Vuopala serves as the Managing Partner of DHS Oy Audit Partners in Finland. Tapani has more than 30 years' experience as an auditor and advisor. Tapani is a member of the Finnish Association of Auditors and has served the accounting profession as a board member and as President of the Finnish Association of Auditors. During his presidency of the national association of auditors, Tapani also acted as a President of the Nordic Federation of Accountants (NRF). Today Tapani has a role as a technical advisor on the International Federation of Accountants' (IFAC) Small- and Medium-sized Practices (SMP) Committee which is a strategic advisory body that supports IFAC's work.

Tapani has extensive experience in dealing with entrepreneurial businesses providing a comprehensive range of services. He has experience in manufacturing, mining, energy and retail, including automotive. His clientele has included listed companies and not-for-profit organizations.



AnchorChanging Audit Reports

The International Audit & Assurance Standards Board’s (IAASB) new standards on audit reporting will be effective for 31 December 2016 year ends. A significant change is the introduction of “Key Audit Matters” (KAMs), extended reporting about the most important issues arising from the audit. KAMs will be required for the audit reports of listed companies, and in some countries the requirement might be extended to some unlisted companies.
David Chitty, International Accounting & Audit Director, has recorded a presentation about implementing KAMs. The presentation is an introduction for audit committee members, CFOs, and other company financial officers about the new requirements and what they mean in practice. David’s presentation can be found here.
The IAASB has issued an article by Dan Montgomery, a former Board member who chairs the IAASB’s Audit Reporting Implementation Working Group, about what audit committees and finance executives need to know about the new approach to audit reporting. The article explains the new requirements and addresses questions and concerns that have been raised by stakeholders. Members of audit committees and the finance executives of companies that will be presenting KAMs will find this article to be a helpful introduction to the changes in reporting. The article can be found here.



Following the issuance of IFRS 16 Leases in January 2016, support resources and commentaries are being issued that will assist with the implementation of the Standard.

Matthew Stallabrass, partner in the United Kingdom firm of Crowe Horwath International, has prepared a short recording introducing IFRS 16. The recording can be found here
The International Accounting Standards Board has issued support resources that include:

  • Shining the Light on Leases, an article by Hans Hoogervorst, IASB Chairman;
  • The recording of a webcast given by the IASB at the launch of IFRS 16;
  • An introductory video presentation by Hans Hoogervoost;
  • A New Lease of Life a comprehensive article by Sue Lloyd, a member of the IASB. The article contains illustrations of the financial statement presentation required by IFRS 16 and the disclosures required in the notes.

The U.S. FASB has also released a video, Putting Leases on the Balance Sheet. You can view it here.


AnchorComment Letters

Thought leadership is important to Crowe Horwath International. We respond to proposals from international standards setters and regional leadership organizations. Our most recent comment letter was on Enhancing Audit Quality.


AnchorIASB Disclosure Initiative

The IASB has issued an article that discusses some of the actions that the IASB is taking to improve disclosure effectiveness.
The article is a useful review of the Disclosure Initiative, covering the pronouncements that the IASB has issued, proposals that will soon be issued for comment, and the remaining project initiatives.
The article reminds readers that the Disclosure Initiative is about making disclosures more meaningful by improving their communication value while simplifying the preparation process. The discussion about disclosure materiality is particularly relevant for both preparers and auditors.
The article can be found here.Anchor

EU Non-Financial Reporting Directive

The EU Directive on the disclosure of non-financial and diversity information will be effective as of 2017. The Directive will require at least 6,000 European companies to disclose information about environmental, social, and employee-related matters, as well as respect for human rights, anti-corruption, and bribery issues. These companies also have to disclose the diversity policy for their administrative, management and supervisory boards.
In practice, the Directive will impact a much wider audience because the companies that present the disclosures will have to create compliance and reporting systems. These companies will require their suppliers to introduce their own compliance and reporting systems. Potentially, all suppliers of companies reporting under the Directive, whether European or not, will be affected by supply chain compliance and reporting obligations. This Directive is an example of the legislation that will lead to more supply chain compliance and reporting, as discussed above.
FEE, the Federation of European Accountants, has published a position paper that highlights the requirements of the Directive. The position paper can be found here.


AnchorGoing Concern Basis

The FRC has published Guidance on the Going Concern Basis of Accounting and Reporting on Solvency and Liquidity Risks. It is a practical guide to applying the going concern basis of accounting and reporting on solvency and liquidity risks, and is intended for directors of non-public companies. It includes examples, and will be helpful to directors of companies, and their auditors and advisors, in all countries.


Technical Roundup

AnchorRevenue Amendments 

The IASB has issued amendments to IFRS 15 Revenue from Contracts with Customers, to clarify some requirements and provide transitional relief for companies that are implementing the new Standard. The amendments, which arose as a result of discussions of the Transition Resource Group (TRG), clarify how the standard should be applied. For more information and to view the amendments click here.

For additional recent technical developments, click here for the latest issue of Technical Roundup.

Contact Us
David Chitty - Audit
London, United Kingdom
+44 20.7842.7292

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