Calculating net present value Posted 05/09/2016 by Alan Gurney & filed under Accountancy resources, Excel tips. Ever wonder whether you should invest in a friend’s business idea? What is the mysterious formula against which businesses, from your local corner shop to Apple Inc. are evaluated? Today we bring you a simple lesson in financial valuation: net present value (NPV). Imagine your friend Emma told you she needs a £350 loan to start a lemonade stand, which will make £50 profit in the first month, £150 in the second month and £200 in the third month, before she has to close down for winter. She will give you her first three months’ profits to pay you back your loan. Should you make this investment? (Emma assures you that she will pay you those amounts no matter what.) What if she wanted £380? Well that depends on what else you would do with the money. You could, of course, spend it but let’s suppose you want to save up for a rainy day and invest it elsewhere, say in a stock portfolio. In that case, you would make the market interest rate: 5% per month (in this magical, hypothetical land!). Think of this market interest generated from the stock portfolio as a benchmark for comparison. When calculating whether Emma’s lemonade stand is a good idea, you should account for the money lost from not investing in the hypothetical stock portfolio instead. This is called “opportunity cost” and is worked out here by deducting the money you would have otherwise made from the future cash promised by your friend. But to do this exactly, we will have to turn to some maths. Let’s start simple: in a month’s time (the same time the second repayment is due) that £350 would be worth 150*(1 + 0.05)=£367.5, but we want the opposite of that to account for the opportunity cost. So we simply divide: 1/(1+ 0.05)*350 = £333.33 This is the value of your friend’s second repayment minus the hypothetical money earned from the stock portfolio interest. The general formula here is: NPV = C / (1 + r)^t Where C is cash in time t (where t=0 is the current month, t=1 is next month, and so on) and r is the interest rate (in our case 5%) of the alternative. If we go back and apply this to our friend’s business proposal where she asked for £350, we can draw up this table: So notice that supporting Emma’s lemonade ambitions is a good idea if she asked for £350, but not if she asked for £380, even though from pure addition it seems like that would be a good idea too. This is because we could have easily taken that £380 and either consumed straight away or we could have invested the money and got £418.95 (=380*(1.05)^2) in the third month, so that is almost an extra £20! Or £385.875 (=350*(1.05)^2) in the third month if you invested that £350 now. This is the basis for evaluation of future revenues, one-off payments or costs and would be applied in the same way, whether in a small business or a large corporation! AAT members have free access to this and many other Excel Tips through their MyAAT account. To continue exploring more Excel tips please click here.
The six finance and business podcasts you need to hear Posted 05/06/2016 by Mark Rowland & filed under Career. When we get into podcasts, we really get into podcasts. Podcast fans listen to an average of six a week, at an average total of 9.5 hours, according to specialist advertising agency PodcastOne. So, if you want to dip your toe into the podcast waters, which six should you listen to? Here are some of the best finance and business podcasts for accountants. The Economist: Money Talks One of many podcasts produced by the weekly business and current affairs magazine, Money Talks is a discussion show in which the publication’s business and money reporters ponder the week’s biggest finance stories and trends. It’s an excellent tool for keeping up to date with major changes in finance, and it also delves into the principles of accounting via real examples from the world of business. Recommended listening: ‘Accounting for profit’, 27 October 2015 The Smart Passive Income Podcast This American podcast, produced by serial entrepreneur Pat Flynn, offers lessons on how to develop your soft skills in the modern business world, from team building to email marketing. Flynn invites other business owners to share their stories and advice on how to progress your career and be more successful. It’s a great podcast for accountants running their own practice, but it also offers insight into the mindset of start-ups, which is handy for those with this kind of client. Recommended listening: ‘Michael Hyatt on the secrets of team building and leadership’, 27 May 2015 Grow My Accounting Practice This very new podcast offers advice on how to modernise your accounting practice. It’s stereotypically American – think guitar solos, loud voices and use of the word ‘dude’. But it does offer the most up-to-date thinking about the sort of services accountants should offer, how they should win new business, and how accountancy marketing models are changing. Recommended listening: ‘Joe Woodard explains how accountants can build and develop their brands’, 10 September 2015 Planet Money The most entertaining money show on the web at the moment, this podcast takes a look at economics and finance on all levels, from national reserves to smallbusiness stories. Subjects range from historical changes in finance to modern trends, and the podcast always finds the human angle, no matter how complex the issue. This makes difficult concepts very accessible. There are so many episodes that it’s easy for listeners to pick and choose the ones that are relevant to them. Recommended listening: ‘Spreadsheets! A brief history of the computerised spreadsheet, and how it transformed accounting’, 26 February 2015 TEDTalks Business The one video podcast on this list, TEDTalks Business offers seminars on all aspects of careers. Topics range from getting on the career ladder, and standing out in your workplace, to techniques to help you be happier and less stressed. All the seminars are delivered by compelling speakers from a variety of backgrounds: business leaders, creative thinkers and sporting heroes, among others, deliver lessons that anyone can apply to their career. Recommended viewing: ‘Emilie Wapnick: why some of us don’t have one true calling’, 2 October 2015 Monster.co.uk Career Advice This one-off series of podcasts was produced by online recruitment site Monster in 2009. When it comes to basic careers advice, there aren’t many podcasts on offer, but this series tackles CV writing, cover letters, job interviews and career progression in two-minute bursts, keeping its advice simple and clear. Recommended listening: ‘CVs for a career change’, 25 September 2009
The secret perks of working in finance Posted 05/05/2016 by Georgina Fuller & filed under Career. The days when working in finance was seen as a perfunctory, grey, back office job are long gone. A career in financial services can now be a gateway to a number of dynamic and diverse industry sectors and offer a challenging and fulfilling vocation for life. It can also include working with people from or across lots of different countries and cultures and often requires you to think creatively and constructively rather than just sit in a stuffy office and work through spreadsheets. Door opener Richard Trueman, managing partner of Mitchells Chartered Accountants and Business Advisers, says that accountancy is about much more than just number crunching. “Some of the key benefits of working in finance are gaining the skills that are needed across every single business, institution, authority and, just as importantly, personal and family life,” he notes. “Accountancy is certainly not just about figures and balance sheets. It’s also about communication, people interaction, persuasion, strategy and people management, which is why a career in the field is seen as a ‘door opener’”. Obviously you do need to have a good grasp of maths and figures but you also need to have an analytical mind and excellent communication skills, says Trueman. “Accountancy has such a wide breadth of career paths that I would recommend anyone looking to forge a career within the sector to keep an open mind,” he notes. Rather than trying to specialise too much in one area in the initial stages, you should try and develop your skills across a range of areas. “Try to ensure you receive as wide a breadth of training and experience as possible to gain a better idea of what you do and don’t like,” advises Trueman. Flexibility The flexibility of finance and the scope this gives accountancy professionals is also a big plus. Pretty much all companies have a finance department so accountants can, in theory, choose a company that fits their cultural values and interests. Andrea Popeau Thomas, career consultant at the University of East London, says there are a number of essential characteristics that a successful finance professional needs to possess. “They generally need to be well organised, diligent, methodical, calm and have the ability to brand themself as the go to person and someone that can develop early on an air of authority,” he notes. You will also need to research what options are available to you, get some expert advice and consider what sort of company you would ideally like to work for. Versatility Chris Morling, managing director of money.co.uk, advises getting some work experience. “Get as much work experience as you can before applying for your first job. This will really set you above the rest and if your degree isn’t directly related, you’ll need to prove that your skills are transferable,” he comments. It’s also important to research what options are available to you and the type of business you want to work for. “Working for a large bank is going to be very different experience to working for, say, an IFA which, in turn, is miles away from working for a comparison site such as money.co.uk. You don’t have to be a specific type of person to work in finance either, according to Morling. “You don’t need to be from a particular background and you don’t necessarily need a degree in economics. Our website, for example, looks for marketers, developers, researchers and writers.” There are a number of key traits which a successful finance professional should, however, possess. “These include good communication skills, great problem solving skills, curiosity and the ability to be proactive and keep up to date with industry and legislative changes. Having a good sense of humour isn’t essential, but it certainly helps!” says Morling. Morling says that working in accountancy often gets a bad press but that it’s actually completely unfounded. “Working in the finance sector might appear dry to outsiders, but money is central to all our lives and being able to make sense of it for people through our guidance is what drives our team,” he notes. “Seeing how the future of banking and money management tools are evolving is fascinating and can give you a true insight into how our habits as a nation are transforming over time.” There is also an altruistic aspect to working in finance which can often get somewhat overlooked. “Everybody is affected by money and therefore everything we do could help somebody. The number one benefit from working in this sector is the fact we help people to achieve their lifelong goals,” says Morling.
Choosing a mentor Posted 05/04/2016 by Jo Gifford & filed under Career. Learning from others is a time honoured way to fast track success and to enhance your career, whether as an entrepreneur or employee. There are a range of ways to include other people in your development and growth – from masterminds to meet ups, accountability partners to paid programmes and coaching to content consumption – all of which add tremendous value to your progress. One of the most effective ways to learn and gain valuable knowledge is to find a mentor. The mentor/mentee relationship is a key model in accelerating skills, enhancing knowledge, and building up confidence as part of personal development. According to Lourdes Martin-Rosa, American Express OPEN adviser, “mentors can be one of the most powerful weapons for an entrepreneur by providing guidance, wisdom and connections. Every entrepreneur should have a mentor for obtaining the best answers to his or her daily challenges during startup and management.” Mentoring can take place in a range of ways. Usually, there is a mutually agreed time period for the relationship, defined outcomes to work towards, and agreed parameters for feedback. Mentoring can occur in person or remotely using virtual meetings, email and social media platforms. So, what does a mentor do? Typically, mentors provide guidance, advice, practical tips, feedback and accountability; a combination which can be immensely valuable in personal and professional development. According to Diane Domeyer, Executive Director of staffing firm The Creative Group,”a mentor can serve as a sounding board at critical points throughout your career. They can provide guidance on career management you may not be able to get from other sources and an insider’s perspective on the business, as well as make introductions to key industry contacts.” Mentoring has a great deal of value for both parties. For the mentee, there is the obvious value of personal feedback and growth, as well as potential access to the mentor’s network, advocacy and personal recommendation where appropriate. For the mentor, there is the chance to develop leadership and coaching skills in order to become a better supervisor or team manager. Mentoring can also bring a great deal of personal satisfaction from aiding someone to be the best they can be, and by inspiring them to succeed. Mentoring can often be confused with coaching, and the two modalities are very similar in purpose. Typically, a mentorship arrangement is a voluntary relationship, although there are cases where a fee is agreed, and mentoring usually involves very industry specific knowledge. How to find a mentor When choosing a mentor there are some key factors to consider. – Does this person have the relevant experience to help you at this point in your career journey? – Do they share a similar value system as you? – Do you admire the person and their work? – Would they be able to speak honestly and openly with you and guide you with constructive criticism? What to look for in a mentor How can we find a mentor that has good credentials and an ability to teach? Some good rules of thumb are: – Ask for referrals and recommendations in your network for a potential mentor. – Research their track record in business. – Find out how they relate to people 1:1 and if this fits with what you need in order to be supported and challenged. – Meet with them at length prior to entering into any agreement, to make sure your dynamics together are viable. – Do your due diligence and ensure this person has the correct skill set and experience that you need. – Do you feel able to be your professional best with this person, or do you feel intimidated? Be as proactive as possible in your search for a mentor, and connect with as many experienced professionals in your field as you can. Be mindful of the charisma and influence of leaders, and find a mentor to help you progress to your next level with creativity, honesty and integrity. Photo: Mike Copping is a AAT Licenced Accountant and Yalda Nabi is currently studying AAT. They both work at Cyber Duck.
Illegal job interview questions Posted 05/03/2016 by Neil Johnson & filed under Interview tips. At job interviews, employers want to ascertain whether candidates are going to be a good fit for their company and more often than not they’ll do so using perfectly legal questions. But occasionally an interviewer will use illegal questions, which could end up discriminating against the interviewee, so it pays to know what these are, whichever side of the table you’re on. “Generally speaking any questions that reveal race, religion, national origin, gender, age, marital status and sexual orientation have the potential to be illegal,” says Simon Smith, a director at financial recruiters Marks Sattin. “The most common illegal questions are about age or marital/personal status.” Why do illegal interview questions crop-up? Normally, these types of questions are nothing more sinister than interviewer inexperience; however, they could be indicative of underlying issues with professionalism and culture at the company. “If the questions are deliberate, it would certainly reflect negatively on the employer and potentially deter you from considering an offer,” says Smith. “If it appears that the interviewer is deliberately asking illegal questions throughout the process, then it should raise concerns about the values and culture of the business.” It might seem there’s a hidden agenda to such personal questioning, but an employer will likely be trying to address a legitimate concern, albeit clumsily. “It’s highly unlikely that illegal questions are some bizarre test of your morals/legal knowledge,” says Smith. “Generally speaking, such questions are asked innocently without knowledge that they’re illegal. The motive behind these types of questions is normally an attempt to establish commitment to the role and company and that the candidate won’t be looking to ‘jump ship’ or to assess whether they’d be a cultural fit.” What to do if you’re being asked illegal interview questions Unfortunately, illegal questioning can set a bad tone in an interview, making it a tricky and uncomfortable situation to manage. Most interviewees are in a frame of mind whereby they’re eager to please and impress, and not wanting to jeopardise their chances of being offered the role. Candidates are well within their rights to refuse to answer illegal questions during the interview, and it may just be the interviewer didn’t realise the questions were illegal, but the situation needs to be handled delicately. “During the interview, try to determine why the interviewer is asking the question and whether they have a legitimate concern they’re trying to address,” says Smith. You could then adopt a number of the following approaches, continues Smith, depending on what you feel is appropriate and that you’re comfortable with: Tailor your answers to address the legitimate concern, while avoiding the illegal part of the question, and turn the conversation back to your job-related strengths. Ask why the question would be an important consideration for the job and turn it back to the interviewer. Try to politely remind them that the question is illegal e.g. I’m not sure it’s ok for you to ask me that question, is it?’ delivered genuinely and non-judgementally. Ultimately, you can politely refuse to answer the question as it is illegal. Examples of illegal interview questions and answers: Q: How old are you? Are you over 18? What year were you born? A: I’m old enough. I prefer not to say. I don’t understand the relevance of the question. Q: Are you married? A: I like to keep my personal and professional lives separate. Q: Are you pregnant? Do you have or plan to have children? How much longer do you plan to work before you have children? A: I like to keep my personal and professional lives separate. Q: How much longer do you plan to work before you retire? A: I’m keeping my options open. I haven’t decided. Q: What religion do you practice? What religious holidays do you observe? A: I prefer not to say. I like to keep my personal and professional lives separate. Q: How do you feel about managing men or women? A: Talk about your general management and leadership styles, without being specific. Q: Questions about your health or disabilities A: These could be considered discriminatory under the Equality Act 2010, but people can ask questions specific to you being able to perform the role, for example, being able to lift large heavy objects. Q: Have ever been criminally convicted? Have you ever been to prison? A: May I ask how this relates to the role?
Calculating Labour and Material Variances – Level 4 study tips Posted 04/29/2016 by Mathew Pickering & filed under Professional Diploma, Students, Study tips. When a budget is constructed, essentially an educated guess is being made as to what the actual production/labour, costs/material costs will be. In reality it is unlikely (not impossible) that the budgeted and actual figures will be exactly the same. As an Accounting Technician you will be expected to have the ability to compare the differences between budgeted and actual figures. Analysis takes place in the form of calculating variances. Here is a table showing some budgeted and actual figures for a business that produces Teddy Bears. The table shows output for one month, 1 unit of production is 1 teddy bear and the direct material is the fabric required to make the teddy bears. It would be easy to simply compare each row of data in terms of cost and assume this was the variance. This is not the case and it is imperative that you are well versed in analysing the data in a more detailed manner. Here is one way of systematically working through the data and calculating all the variances. A good approach to analysing data such as this is to start off by taking some time to calculate your standards. If you calculate your standards now, then it helps when it comes to calculating the variances. Calculation of standards using the budgeted data Labour: 200 hours / 1,000 units = 0.2 hours per unit £2,000 / 200 hours = £10 per hour 0.2 x £10 = £2 per unit of output in terms of labour Materials: 5000kg / 1,000 units = 5kg per unit £2,500 / 5,000kg = £0.50 per kg 5 x £0.5 = £2.50 per unit of output in terms of materials Total standard cost per unit: = £4.50 per unit (£2 + £2.50) The following guide will show how to calculate each individual variance and also how different variances can be reconciled with one another. Direct Labour Variances There are 3 questions which should be asked about labour in terms of variances: 1. How much more/less did the hours worked cost us than standard rate? 2. How efficient were the work force in making the actual output? 3. What is the total variance for direct labour? Calculations 1. Actual hours = 228 Standard rate per hour = £10 Standard cost for actual hours = 228 x £10 = £2,280 Actual cost = £2,850 Difference = £2,280 – £2,850 = £570 more than standard This variance is called the Labour Rate Variance. As the actual cost was more expensive than standard we call it an adverse variance (think of the connotations of the word adverse, more expensive = bad/adverse). The Labour Rate Variance = 570 ADVERSE 2. Actual output = 1,200 units Standard hours per unit = 0.2 hours Standard hours for actual output = 1,200 x 0.2 = 240 Actual hours = 228 Difference = 240 – 228 = 12 hours less than standard In monetary terms = 12 hours x £10 (standard rate per hour) = £120 This variance is called Labour Efficiency Variance. As the workforce took less time than standard to make the actual output, the variance will be favourable (think about this logically, a more efficient workforce is a good/favourable thing). The Labour Efficiency Variance = 120 FAVOURABLE 3. Actual output = 1,200 units Standard cost per unit = £2 Standard cost for actual output = £2,400 Actual cost for actual output = £2,850 Difference = 2,400 – 2,850 = £450 more than standard (therefore Adverse) Total labour variance = 450 ADVERSE Tip: The total variance for labour can be reconciled with the labour rate and labour efficiency variances; this is a good way of checking the calculations. Labour Rate Variance + Labour Efficiency Variance = Total Labour Variance 570 adverse + 120 favourable = 450 adverse (an indication our variance calculations are correct) Direct Material Variances There are 3 questions which should be asked about labour in terms of variances: 1. How much more/less did the materials used cost us compared to standard rate? 2. How much more/less material did we use producing the actual output than standard? 3. What is the total variance for direct material? Calculations 1. Actual usage = 6120kg Standard price per kg = £0.50 Standard cost for actual usage = 6120 x £0.50 = £3060 Actual cost = £2,754 Difference = £3,060 – £2,754 = £306 less than standard This variance is called the Material Price Variance. As the actual cost was less expensive than standard then it is a favourable variance. The Material Price Variance = 306 FAVOURABLE 2. Actual output = 1,200 units Standard usage per unit = 5kg Standard usage for actual output = 1,200 x 5 = 6000kg Actual usage = 6120kg Difference = 6000 – 6120 = 120 kg more than standard In monetary terms = 120 kg x £0.50 (standard rate per kg) = £60 This variance is called Material Usage Variance. We used more material than our standard, therefore this variance is adverse. The Material Usage Variance = 60 ADVERSE 3. Actual output = 1,200 units Standard cost per unit = £2.50 Standard cost for actual output = £3,000 Actual cost for actual output = £2,754 Difference = 3,000 – 2,754 = £246 less than standard (therefore Favourable) Total labour variance = 246 FAVOURABLE Tip: The total variance for materials can be reconciled with the material price variance and material usage variance; this is a good way of checking the calculations. Material Price Variance + Material Usage Variance = Total Material Variance 306 favourable + 60 adverse = 246 favourable (an indication our variance calculations are correct) Reconciliation of all variances (Standard cost + adverse variances – favourable variances) Total standard cost for actual production = £5400 (1200 x £4.50) Labour Rate Variance = 570 ADVERSE Labour Efficiency Variance = 120 FAVOURABLE Material Price Variance = 306 FAVOURABLE Material Usage Variance = 60 ADVERSE Total Variance = 204 ADVERSE Actual cost of actual production = £5604 The reconciliation is successful, the calculations are correct. Investigation into the variances can now commence. In a workplace this would be an important process because any significant variance would need to be investigated, causes would need to be established and where possible eradicated. If the cause of a variance is an internal issue, the company may look at revising how it derives its standards. 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Balancing the impact of leasing Posted 04/29/2016 by Paul Golden & filed under Accountancy resources. Listed companies using IFRS standards or US GAAP are estimated to have $3.3trn of lease commitments, of which more than 85% do not appear on their balance sheets according to the International Accounting Standards Board (IASB). From January 2019, IFRS 16 will require all leases to be reported on a company’s balance sheet as assets and liabilities. One of the more observable impacts is likely to be in relation to property leases, which were previously treated as operating leases and are most used by retailers and corporates. “The changes will also be noticeable for contracts for other long-lived assets in the airline, transportation, extractive and construction industries,” explains Veronica Poole, global IFRS leader and UK head of accounting at Deloitte. “In addition, some industries have leases that could be more difficult to classify, such as telecommunications where it can challenging to distinguish between a service contract (which is off-balance sheet) and a lease.” IFRS 16 does not directly affect any business that does not use IFRS and companies will have to wait to see whether the changes are extended to other accounting regimes such as UK GAAP, observes George Tonks, partner at Invigors EMEA. “Credit ratings/assessments for IFRS companies already in general reflect adjustments in respect of off-balance sheet finance, using information disclosed in the notes to the accounts,” he says. “Loan or banking covenants is another area that will need to be considered, but many include ‘frozen GAAP’ provisions. In the income statement, operating lease rental expense will be replaced by interest and depreciation expenses.” Gathering the necessary data for IFRS 16 is easy in theory, but complex and time consuming in practice suggests Innervision director, Martin Kennard. “Companies with devolved decision making, multiple divisions or subsidiaries in different countries will find the task particularly difficult. Gathering all the data could easily take 12 months.” Paul Fry, global consulting partner at Cushman & Wakefield agrees with this view, suggesting that perfect property data will become an absolute necessity. “In addition, occupiers will need a clear business strategy for each property in their portfolio – where leases include either break options or options to renew, they will need to make a judgment on whether they are likely to exercise a future break or renew a lease and be prepared to justify this to an auditor. These judgments will directly impact the liability calculated.” On the question of how multinational companies will be affected by the differences between IFRS 16 and the revised Financial Accounting Standards Board (FASB) standard issued in February 2016, Jeroen Van Doorsselaere, director business development for global finance and performance at Wolters Kluwer refers to a number of areas of divergence. “The way profit & loss is recognised means the carrying amount would be higher under the FASB model than under IFRS 16,” he explains. “For companies that have material off-balance sheet leases, the IASB expects IFRS 16 to result in higher profit before interest compared to the amount reported applying the FASB model, where the entire expense for former off-balance sheet leases is included as part of operating costs.” The difference in operating profit and finance costs depends on the significance of leasing to the company, the length of its leases and the discount rates applied. For the finance and accounting departments of multinational companies, the changes introduced by IFRS 16 will be manageable as change is a constant feature in accounting particularly in areas of tax and accounting and interpretation, suggests Maxxia CEO, Roger Skinner. “The real issue is how well the revised financial statements will be understood by the investment community and lending institutions, particularly as key ratios such as gearing may be affected and more transparent in the balance sheet,” he says. While the introduction of IFRS 16 does not change the accounting requirements for income taxes or tax laws, it may change how a company applies these requirements to its leases and therefore may result in changes to the timing and amounts of tax paid by the company and the timing of tax expense or benefit recognised in the financial statements, says Kimber Bascom, a partner in KPMG’s US member firm. The IASB notes that the specific impact will depend on the tax rates and treatment for leases in each jurisdiction. EY financial accounting advisory services partner, Rebecca Farmer, observes that the UK Government has already committed to issuing a discussion document before the summer with options for change to the tax treatment of leases of plant and machinery. From HMRC’s perspective, the leasing standard brings with it a number of challenges, she explains. “There is a potential duplication of assets, with a right of use asset sitting on the lessee’s balance sheet and a corresponding investment property or other fixed asset sitting on the lessor’s balance sheet. The new standard could have consequential impacts on taxation through capital allowances, interest deductibility and, potentially, transfer pricing arrangements.” From both a cash and deferred tax basis perspective, tax practitioners and businesses must wait for the outcome of HMRC’s deliberations, which will understandably take some time. In the meantime, businesses are faced with the need to maintain parallel ‘frozen GAAP’ lease accounting if a new tax treatment has not been introduced by the time the new standard is introduced. According to Farmer, this could be a significant additional reporting burden at a time of unprecedented accounting change following the introduction of new UK GAAP, IFRS 15, the new revenue recognition standard and IFRS 9 on financial instruments. “We would therefore urge companies and advisors to engage with HMRC in their discussions and to support them in reaching a conclusion on the new tax treatment as soon as possible,” she concludes.
HMRC puts ‘spotlights’ on SME tax avoidance Posted 04/28/2016 by Michael Steed & filed under News. Previously, I’ve written about tax planning by companies such as Amazon, Google and Starbucks, and the government’s response. That story is all about international transactions and offshore hubs, but now I want to bring the debate down to a level that AAT members might encounter more frequently in their professional lives, and will need to be able to comment on. Suppose one of your clients, an IT contractor, comes to you and says that one of her professional colleagues has been sold a scheme that reduces his tax to a small proportion of his gross income and that he can take home 90% of his pay. How would you react to that? Would you say “I don’t do such schemes but it’s your choice if you go and get one”? Where would you then stand if your client did go and purchase a scheme, but it was found not to work and she blamed you for not stopping her? I think you’d be examining your letter of engagement to see what your exposure was, and your professional indemnity insurance as well. Shining a light on tax avoidance In an attempt to nip this sort of problem in the bud, HMRC has developed ‘Spotlights’, a scheme highlighting various tax-planning arrangements that, despite their wide appeal among SMEs and contractors, don’t actually work. Here’s an example. In Spotlight 26, HMRC says in relation to contractor loan schemes: “Contractors and freelancers are bombarded by promoters who make claims that they can help individuals take home as much as 80% to 90% of their income. Sounds too good to be true. That’s because it is.” HMRC explains that a contractor would usually receive the contract income directly and pay tax on it. The arrangements in question artificially divert the income through a chain of companies, trusts or partnerships, which pay the contractor in the form of a ‘loan’. “These ‘loans’are claimed to be non-taxable because they don’t form part of a contractor’s income. However, in reality the ‘loans’ aren’t repaid and the money is used by the contractor as if it were his or her income,” says HMRC. The HMRC view is that such schemes don’t work. The Taxman strongly advises any contractor or freelancer who has used such a scheme to withdraw and settle their tax affairs, or face litigation and penalty charges. HMRC is quite stern when it comes to these schemes. It offers three tips on spotting them: – “If a promoter says that, if you join their scheme, you can take home between 80% to 90% of your income – it’s too good to be true. – “If a promoter claims that the schemes are HMRC-approved – it’s too good to be true. – “If a promoter tells you that you don’t have to declare the scheme – it’s too good to be true.” HMRC started the Contractor Loans Settlement Opportunity to encourage contractors to come forward and pay their missing tax. The original cut-off point was back in January, but it was extended so that contractors needed to make contact on 30 June and settle by the end of September. Now that time has passed, those who have chosen not to settle will have to take a case to the First-tier Tribunal (FTT). At the beginning of this year, the FTT dismissed the case of IT contractor Philip Boyle, and ruled that the money he received as a loan via a company based in the Isle of Man was “in substance and reality income from his employment” and, therefore, taxable. So it’s perhaps not the best idea to put your hopes in the FTT. No escape HMRC is clearly determined to shine a spotlight on such schemes, and others as well. A quick check on Gov.uk reveals that schemes such as those that manipulate the employment allowance are in its sights. We need to be aware of this and to counsel our clients accordingly. Now where’s that letter of engagement?
New UK GAAP: Deferred tax Posted 04/28/2016 by Steve Collings & filed under Accountancy resources, Financial accounting and reporting. This is the first in a series of articles which will examine some of the more technical aspects of the new UK GAAP which came into force for accounting periods starting on or after 1 January 2015 for companies which are not part of the small companies’ regime. Companies which are eligible to apply the small companies’ and micro-entities’ regime will report under new UK GAAP mandatorily for accounting periods starting on or after 1 January 2016 (although earlier adoption is permissible). This article explores the concept of deferred tax and how FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland deals with the issue. Micro-entities It is worth noting at the outset that micro-entities applying the provisions of FRS 105 The Financial Reporting Standard applicable to the Micro-entities Regime are prohibited from accounting for deferred tax. This is because the rigidity of the financial statements and the lack of disclosures means that it would not be possible to distinguish deferred tax and current tax and hence the Financial Reporting Council have prohibited micro-entities from providing for deferred tax under FRS 105. On transition to FRS 105, deferred tax balances will be reversed with the corresponding entry going to retained earnings (profit and loss reserves). The concept of deferred tax The vast majority of transactions which are recorded in the financial statements of a reporting entity will have some form of tax consequence, whether in the current accounting period or in succeeding accounting periods. Future tax consequences cannot be avoided and will mean that the company will pay more or less tax in future periods. The most common example which illustrates this well is when a company purchases a fixed asset; a lot of fixed assets purchased by companies can be deductible for tax purposes in both the current and subsequent accounting periods. In some situations, HM Revenue and Customs (HMRC) may grant up to 100% capital allowances in the year of acquisition as can be seen in the following example: Example – 100% capital allowances A company purchases a fixed asset for £50,000 which is eligible to 100% capital allowances from HMRC in the year of acquisition. The company’s depreciation policy for this fixed asset is to depreciate it over its useful economic life of five years with a full year’s depreciation charge in the year of acquisition and none in the year of disposal. At the end of the asset’s useful economic life, the residual value of the asset is expected to be nil. The finance director has claimed 100% capital allowances in the tax computation when calculating the company’s liability to tax at the year-end. In this example the financial statements will show a carrying amount of £40,000 (£50,000 less £10,000 depreciation). For tax purposes the machine will have a tax written down value of £nil as the company has claimed 100% capital allowances in the year of acquisition. This gives rise to a timing difference of £40,000 between the financial statements and the capital allowances computation and a deferred tax liability arises. If we assume the company will pay tax at 17% when they eventually dispose of the machine the deferred tax liability is £6,800 (£40,000 x 17%) and the entries in the books will be: Dr tax expense (profit and loss) £6, 800 Cr deferred tax provision (balance sheet) £6, 800 A deferred tax liability has arisen in the example above because the company has made a cash flow saving in the year that it acquired the fixed asset by taking advantage of enhanced capital allowances. This allowance will not be available in the next accounting period and therefore the tax liability will be higher. Recognising a deferred tax liability will mean the financial statements recognises this additional tax as the timing difference begins to unwind in years two to five. Deferred tax has long since been a topical issue and it is worth examining the objectives of deferred tax, which are two-fold: 1. To ensure that the future tax consequences of past transactions and events are recognised as assets or liabilities within a reporting entity’s financial statements. 2. To disclose any additional special circumstances which may have an effect on future tax charges. Timing difference ‘plus’ approach In the UK and Republic of Ireland, companies have always calculated deferred tax based on the timing difference approach. This is markedly different than what happens under IFRS because IAS 12 Income Taxes requires deferred tax to be calculated using the temporary difference approach and there are significant differences between the two approaches. Timing differences are differences between a company’s taxable profit and its results as stated in the financial statements which arise from the inclusion of gains and losses in tax assessments in periods different from those in which they are recognised in the accounts. Therefore the timing difference approach focuses on the profit and loss account. The temporary difference approach focuses on the balance sheet and hence a deferred tax liability would arise if the carrying value of an asset is greater than its tax base, or if the carrying value of a liability is less than its tax base. FRS 102 is based on the principles found in IFRS (specifically IFRS for SMEs) and it follows that the calculation of deferred tax under FRS 102 should not be too disparate from that which would be calculated under IFRS principles. Therefore, FRS 102 uses a timing difference ‘plus’ approach to the calculation of deferred tax. The plus part brings in three additional situations which will give rise to deferred tax under FRS 102 as follows: 1. revaluation of non-monetary assets; 2. fair values in business combinations; and 3. unremitted earnings in overseas subsidiaries and associates. Revaluation of non-monetary assets There was a specific exemption contained in previous UK GAAP from recognising deferred tax on non-monetary assets subject to revaluation, unless at the balance sheet date: 1. there was a binding agreement to sell the asset; and 2. the gain or loss expected to arise on the sale had been recognised. This exemption is no longer available and therefore where a company subjects non-monetary assets (such as an investment property) to revaluation then it must also recognise the associated deferred tax, which is calculated using the rate of tax expected to apply on the sale of the asset (in many cases this will be the latest rate of tax known (currently 17% for small companies)). Fair value gains and losses on investment property are taken to profit or loss rather than a revaluation reserve under FRS 102 and associated deferred tax must be provided for on the gain or loss arising. As the gain or loss is taken to profit or loss, it follows that the deferred tax implications must also be taken to profit or loss. On the other hand, if an item of property, plant and equipment (not investment property) increases in value then the gain will be taken to the revaluation reserve. The associated deferred tax implications will also be taken to the revaluation reserve because that is where the underlying transaction has been posted; hence the concept of ‘tax treatment follows accounting treatment’ applies in this respect. Fair values in business combinations Paragraph 29.11 says that when the tax base of an asset acquired in a business combination (not goodwill) is less than the value at which it is recognised in the acquirer’s financial statements, a deferred tax liability is recognised which represents the additional tax that will be paid in the future. Conversely, when the tax base of an asset is more than the amount recognised for the asset in the financial statements, a deferred tax asset is recognised to represent the additional tax that will be avoided in respect of that difference. A deferred tax asset or liability is recognised for the additional tax that the company will either avoid or pay due to the difference in value at which a liability is recognised and the amount that is assessed to be owed to HMRC. Amounts attributed to goodwill are adjusted by the amount of deferred tax. Example – Deferred tax in a business combination Company A acquires 100% of the net assets of Company B for £1.1 million. Company B has a valuable customer list which was not recognised on Company B’s balance sheet because it failed to meet the recognition criteria as it was internally generated. Tax relief has been obtained by Company B for the expenditure it incurred in creating the customer list. At the date of acquisition, the customer list was fair valued at £150,000 and the fair value of the other assets in the acquisition amount to £600,000. Company A pays tax at 20%. The difference between the tax base of the asset (which is £nil because tax relief has already been granted by HMRC in respect of the expenditure) and the fair value of the intangible asset of £150,000 gives rise to a deferred tax liability of £30,000 (£150,000 x 20%). The amount attributed to goodwill is adjusted by this deferred tax balance which is calculated as follows: Cost of business combination £1,100,000 Fair value of customer list (£150, 000) Fair value of other net assets (£600,000) Deferred tax £30, 000 Goodwill £380, 000 Unremitted earnings in overseas subsidiaries and associates The parent’s/investor’s financial statements will recognise its share of profits or losses from the overseas subsidiary or associate. Ordinarily when an overseas subsidiary or associate remits a dividend to its parent or investor it will suffer withholding tax. Deferred tax is recognised on unremitted earnings in overseas subsidiaries and associates to represent the additional withholding taxes payable in the future. Deferred tax assets Care must be taken where deferred tax assets are concerned because Section 29 of FRS 102 takes a pessimistic approach to deferred tax assets (as did FRS 19 Deferred tax and the FRSSE). In practice, the most common event that will (potentially) give rise to a deferred tax asset is when a company has a taxable loss to carry forward which may be offset against future profits that the company generates. Paragraph 29.7 of FRS 102 says: ‘Unrelieved tax losses and other deferred tax assets shall be recognised only to the extent that it is probable that they will be recovered against the reversal of deferred tax liabilities or other future taxable profits (the very existence of unrelieved tax losses is strong evidence that there may not be other future taxable profits against which the losses will be relieved).’ When a company makes a loss which turns into a taxable loss, the default presumption under FRS 102 is that the company will never return to profit and evidence to the contrary must be obtained before recognising any deferred tax assets. This underlying concept in Section 29 is because assets cannot be stated in the balance sheet in excess of recoverable amount and so the pessimistic approach is adopted so as to reduce the scope for reporting entities from inappropriately recognising deferred tax assets that may never be used. Example – Recognition of a deferred tax asset A company has been established for many years but during the last couple of years has seen a decline in turnover and profit. The financial statements for the year-ended 31 December 2015 have reported a significant loss (for both accounting purposes and tax purposes) of £100,000. This loss has arisen as a result of reduced gross profit margins due to supplier price rises which have not been passed on to customers and redundancy costs which have occurred during the year. The financial statements have been completed to draft stage but have not yet been approved. Company A pays corporation tax at a rate of 20%. On 2 January 2016 it was confirmed that the company was awarded a five-year contract for goods and services to a major blue-chip listed company. This contract was awarded following a rigorous tendering process because the contract will involve supplying goods and services on a ‘just-in-time’ basis. The contract will become operational in 2016. The awarding of the contract is evidence that the company will generate suitable taxable profits in the year for which a deferred tax asset can be utilised. On this basis, the company can recognise a deferred tax asset of £20,000 (£100,000 x 20%). Deferred tax has become more onerous for small companies and other unlisted entities reporting under FRS 102 due to the additional circumstances which now bring deferred tax into account. In addition, it is important to ensure that deferred tax is correctly posted into the financial statements (keeping in mind the concept of ‘tax treatment follows accounting treatment’), especially in light of the new accounting methodologies inherent in FRS 102.
5 common email mistakes to avoid at work Posted 04/28/2016 by AAT Comment & filed under Career. It’s hard to imagine a workplace that is not reliant on email. With recent studies revealing that the average British worker spends 36 days a year answering work emails, it’s no wonder that many of us are feeling overwhelmed. Emailing remains one of the most efficient, speedy and cost-effective ways to communicate in business. But as the number of emails you respond to increases, it can become very easy to adopt sloppy practices which can make the wrong impression, come across as unemotional or even discredit your professional image. In this article, we identify the five most common email mistakes to look out for and show you how to avoid making them. 1. Forgetting the attachment or sending the wrong one Forgetting to attach the document you are referring to throughout your long and intricate email can be embarrassing and unprofessional – especially when you have to send a follow-up email with the file attached. At the same time, sending the wrong file can lead to a very sticky situation. After all, not everyone in the office needs to know the bank details of a new supplier you have commissioned or how much you’re paying them. One way to overcome this common mishap is to attach the file before you compose your email and double check the preview file when it is attached. 2. Overlooking the tone Studies have repeatedly shown that communication is over 80% non-verbal. This is important when you consider that email is 100% text, making it easy for you to forget the tone of your message might appear differently to the recipient. Stop and consider how the text will be perceived by the person on the other side of your email – could anything be misconstrued and taken the wrong way? Re-read your message before hitting the send button. 3. Forgetting to update the subject line When you have been communicating in a lengthy email thread that has gone back and forth it’s natural for new discussions to arise. Most people forget to change the subject line when the discussion changes and it can become unclear what the email is about. Update the subject line of your email thread to ensure everyone is aware of the subject progression. Applying this tip will also make it easier to locate relevant information in the future. 4. Not encouraging a reply Projects can often hinge on a response from a colleague or supplier. In this case, it’s important to prompt a reply by including a question that demands a response. If you let the recipient know that things are waiting on them, it will encourage a quicker response keeping your project moving forward. Also CC others in the email to encourage accountability and transparency. When multiple people are expecting a reply, there is greater urgency for the recipient to respond. This will ensure your email is actioned right away and not flagged for later consideration. 5. Sending an email in the first place Consider if it would be more efficient to pick up the phone or, where possible, take a short walk to your colleagues’ desk and make the enquiry face to face. Opting for this action can result in open and creative discussions that could take you several hours to reach with emails. Emailing is a necessity but can be one of the most time-consuming tasks of your working day, so avoid it when possible.