Experts from PwC delivered a detailed briefing on recent updates to corporate governance, new accounting and common reporting standards, and the ongoing Louis Group investigation at a special breakfast briefing organised by PwC.
Part of PwC’s ongoing commitment to keeping non-executive board members up to date on developments crucial to Island businesses, the briefing heard presentations from Paul Jones, Assurance Director, Nick Halsall, Assurance Partner, Phil Morris, Tax Senior Manager, and Gordon Wilson, Advisory Director.
Paul gave an update on corporate reporting and assurance matters, expanding on points raised during an earlier breakfast briefing, including changes to audit reporting and the latest developments covering risk management. With regard to changes to listed company audit reports due to come into force from December 2016, he noted that there would be more visibility on how judgements are made and risks assessed. Paul advised that there had been ‘mixed responses’ from the Financial Reporting Council (FRC) on how well the principles of FBU (ensuring that all reports are fair, balanced and understandable) have been carried out to date, with assessment of external auditors also proving a struggle for audit committees.
He also touched on new rules by the EU and Competition and Markets Authority, coming into force in 2015 and 2016, making 10 year tendering and 20 year rotation mandatory for certain listed companies. Paul discussed the 2014 UK Corporate Governance Code and the changes and challenges that will accompany its introduction, including more robust assessments of principal risks, monitoring and reviewing risk management, viability statements and going concern confirmations. He concluded that the updated Code is ‘all about risk – how you mitigate it, and its role in determining the future viability of the company’.
Nick gave an overview of the new IFRS revenue recognition accounting standard, effective from 1st January 2017. The new model puts in place a single joint revenue standard to be applied across all industries and capital markets.
He explained: ‘This may affect contracts and agreements that you are negotiating or entering into today, as you will need to look back at the types of contracts entered into and determine how you are accounting for revenue.’
The single model standard is designed to improve consistency and provide a robust framework, but Nick advised that the changes involved in implementing the new standard in place of existing accounting standards will require a change in mindset. He noted that changes would include extensive reviews of existing contracts, IT systems and internal processes to ensure compliance with the new revenue standard, but that it will also offer more guidance on separating elements, allocating transaction prices, licences and other areas.
Nick also highlighted a five step approach for revenue recognition and outlined indicators of control transfer, advising that ‘no one indicator is definitive’. Summarising the industries most likely to be impacted by the introduction of IFRS 15, Nick listed asset management, software, BioMed and life sciences, communications, engineering and construction, automotive, entertainment and media, aerospace, and the retail and consumer industries as those that should expect to make changes to accommodate this new accounting standard.
Phil presented an insight into the new Common Reporting Standard (CRS) and its evolution from FATCA. When CRS was announced in October 2014, 47% of respondents to a conference registration survey felt that understanding and co-ordinating local law implications would be the biggest difficulty in implementing a response to CRS.
He noted: ‘This is predominantly due to ‘the sheer scale of CRS, which incorporates over 50 countries, and so entities need to be aware of the differences between countries and how this impacts them.’
With CRS coming into effect in less than a year, he discussed selected changes that will come about as a result and advised that the next steps the 51 early CRS adopters – including the Isle of Man – should take include: considering the developments on entities; making sure all stakeholders are aware of the developments; developing an action plan and ensuring that sufficient resource is available to deal with the changes.
Gordon closed the briefing with a presentation on the Louis Group liquidation, including demonstrating a structure chart and highlighting some of the issues that have been uncovered in the two years since PwC first became involved.
Gordon observed that the Louis Group matter is widely regarded as being as serious as it gets for the reputation of our Island as a financial centre.
He explained that after the financial crisis in 2008, subscriptions to the Louis Group actually increased as some people thought it offered a safer investment than banks at the time. However, it transpired that all was not as it should have been. Due to a combination of factors including that no one financial institution had overall insight into the group's affairs and that there were multiple regulators and auditors involved, there were resulting gaps which were exploited. This was exacerbated by a culture of fear among staff which our investigations have uncovered and by investors often feeling intimidated when they asked for their money back.
Gordon explained: ‘Trying to work out who is due money has been nearly impossible…but, following a recent court order, we will be paying between 13p and 16p in the pound to the majority. However for many investors, the abuse of their trust has hit them equally as hard as the financial loss and there are some tragic stories surrounding this situation.’
Our work to date has resulted in roughly ?50 million in property sales and other asset recoveries, most of which went to the banks, leaving around ?7 million for investors. Gordon discussed how it has been decided that the solution is to create a new Louis Group company – LG Resolution Limited – which will receive and distribute the recovered funds, removing all current cross claims, duplicate claims and circularity. LG Resolution Limited will take the 200 existing claims, totalling ?180 million, and reduce these to just 10 claims, totalling ?37 million.
Gordon advised: ‘We hope that the new company will make its first distribution to investors in the first half of the year, although we are trying hard to do that within this first quarter. It would be premature for me to comment further on other actions now, but maybe in a year’s time we will be able to say more on what has been achieved.’
There will be a further briefing for Isle of Man non-executive directors in the summer. Anyone interested in attending future events in the series should contact Linda Jackson on 689689 or email l.jackson@iom.pwc.com.
Photo - Nick Halsall.
