Focus on Research - Spring 2014

1Focus onResearchThe research newsletter of The Institute of Chartered Accountants of Scotland

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NEW ICAS APPROACH TO RESEARCH FUNDINGFOOTBALL, FINANCIAL SERVICES & MORE - FIND OUT ABOUT OUR FORTHCOMING PUBLICATIONSICAS INFORMS CONCEPTUAL FRAMEWORK DEBATE NEW PUBLICATIONS ON SCOTTISH INDEPENDENCE, BUSINESS START UPS & ASSURANCEWIN A NEXUS TABLET AT BAFA & EAA

editorial

CONTENTS

EdITorIAl ThE TEAm

New ICAS research funding 1

New grants awarded 3

New ICAS research 4

Coming soon 8

ICAS news 10

New ICAS insight publications 15

research results - Small projects 21

research results - Seedcorn projects 24

Save the date 25

Welcome to our latest research newsletter. We hope you enjoy reading this jam packed edition!

ICAS is committed to promoting evidence-based policy making and therefore commissions research in key areas to support the development of policy. We have just published our new research funding brochure. This gives details of our new research funding approach and how we aim to maximise research impact from our projects. For more information please see pages 1 and 2 of this newsletter. To ensure that you are made aware of new calls for research as they arise, we would encourage you to subscribe to our e-news service. To subscribe either email [email protected] or if you are attending either the BAFA or EAA conference visit our exhibition stand to subscribe and enter our prize draw to win a Nexus Tablet.

As usual time seems to be flying by at ICAS and we have some great new research and technical publications for you to look at. All of our publications can be downloaded free of charge from our website but if you would like a hard copy please do get in touch.

We know that the ongoing revision to the IASB Conceptual Framework has generated a lot of interest in the academic community and in some cases a lot of work! here at ICAS, we have published a literature review with the European Financial Advisory Group (EFrAG) on the use of information by capital providers and a technical paper with the International Federation of Accountants (IFAC) to contribute to this crucial debate. These reports are profiled on pages 6 and 15, respectively.

In the UK, and particularly Scotland, the debate on whether Scotland should be an independent nation continues, with the vote on independence due to take place on 18 September 2014. ICAS continues to contribute to the debate, asking the important questions from our field of expertise and raising the issues, whilst maintaining an apolitical stance. New research and technical papers published in this area are outlined on pages 4, 17 and 20.

We have a number of research publications in the pipeline, covering topics as diverse as football club financial reporting, assurance and supervision in financial services, information needs of charity trustees and SmE funding issues. Find out more on pages 8 and 9.

As usual ICAS will be exhibiting at the BAFA and EAA conferences this spring and look forward to seeing as many of you as possible at these conferences. Please drop by our stand for a chat and to pick up a copy of our new research funding brochure and take a look at our new research and technical publications. You can also enter our free prize draw to win a Nexus Tablet by dropping your business card or e-news subscription form into our prize draw box good luck!

We would like to end this editorial with a special thank you to Professor Angus duff, our Academic research Adviser, who will step down from this role and the research Committee at the end of April 2014. We wish Angus all the best for the future and are grateful for his contribution over the years.

The ICAS research Team

Michelle Crickettdirector of research

Ange Wilkieresearch Coordinator

NeW reSearCH FUNdiNG

1www.icas.org.uk/research

ICAS is committed to promoting evidence-based policy making and therefore commissions research in key areas to support the development of policy. We believe that focusing on a number of specific topics of interest will maximise the impact of the resultant research and be beneficial to our researchers, ICAS and policy makers.

THE NEW APPROACHour new research funding brochure has just been published; this outlines our new approach. Whilst we continue to focus on policy relevant research, we have adopted two new streams for research, these are outlined below.

Calls for researchThe Technical Policy Board (TPB) of ICAS will work in conjunction with the ICAS research Committee, to identify topics where research is considered crucial to take forward an important issue affecting the profession or business in an international or UK context. In such circumstances a call for research will be issued and advertised on our website. The calls for research may be specific or identify a broader theme or programme of work. Each call for research will specify the application requirements, including the deadline by which applications must be received. Generic guidance is also available in the Guidance notes for applicants, which are available from the ICAS website or by contacting the ICAS research Centre.

We do expect to issue some new calls for research over the next few months, so please keep an eye on our website or if you are a subscriber to our e-news service, watch out for news of these opportunities arriving in your inbox. You can subscribe to our e-news service by emailing: [email protected]

Pro-active applicationsPro-active applications for research funding are also invited to be submitted where they are in the public interest and are consistent with the TPBs policy themes and the policy positions of one of the ICAS technical committees. These themes and policy positions are available from the ICAS website. Applications are welcome at any point in time.

Please do get in touch with us if you have any ideas for undertaking policy relevant research which meet the above criteria. We have detailed guidance notes and have an informal proposal form to make the process quick and easy.

Interested applicants should, in the first instance, complete our short informal proposal form, specifying how the proposed project will contribute to the ICAS policy themes and policy positions and its relevance to one of our technical committees. There are no deadlines for submissions and the research Centre will provide informal and constructive feedback on the project, prior to asking selected applicants to proceed to the formal application stage. The formal application will then be considered by the research Committee and the TPB.

MAKE AN IMPACT WITH ICASOUR NEW APPROACH TO RESEARCH FUNDING

ICAS remains firmly committed to funding world class academic research that has the potential of having a real impact on important issues that affect the profession or business, either in the UK or internationally.

Allister Wilson Convener, ICAS Research Committee

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2 www.icas.org.uk/research

WHy WORK WITH ICAS?We provide a helpful, friendly and approachable service to our researchers. The research Centre can offer assistance with projects whilst allowing researchers to maintain their independence.

We provide financial as well as in-kind support to our researchers to maximise the impact and influence of the research, by providing:

collaboration with an influential professional body with close links to policy makers;

establishment of an expert steering group for major research projects;

access to our technical staff and members with expertise in the specific area;

access to our worldwide membership for questionnaires and interviews; and

assistance with maximising the impact and influence of your research.

The resultant research will normally be used by ICAS in order to pursue policy change and in some circumstances the research will also feed into larger ICAS thought leadership projects. The research

will be disseminated widely to ensure greater engagement with the profession and business.

researchers are also encouraged to publish their results in academic journals and professional magazines.

In order to maximise impact, ICAS will on occasion partner with other high profile bodies to ensure the maximum reach of research and the involvement of experts in that topic. Examples of recent collaborations with other bodies include the UK Financial reporting Council and the European Financial reporting Advisory Group.

Each call for research will detail the maximum grant available for a particular project. There is no upper or lower limit for grant applications under the pro-active route, however each application will be assessed individually to consider if it represents value for money.

Applications for funding are welcome from researchers and institutions anywhere in the world and are not restricted to the academic community.

For further details on the application and review process please see the Funding Brochure, Guidance notes for applicants and Grant application forms which are available from the ICAS website at: www.icas.org.uk/researchfunding

If you have any queries please contact the ICAS Research Centre (email [email protected] or phone +44(0)131 347 0237) or if you are attending the BAFA or EAA conferences come along to our exhibition stand for a chat and pick up a copy of the new brochure.

ICAS has a reputation for applied research and policy-based studies that contribute to national and international debates. The friendly and professional support we received from ICAS was exemplary throughout the project.

Dr Jill Collis, Brunel University, London Previous ICAS grant holder

The ICAS research experience was excellent. We benefited a lot from the feedback and the "drive" from ICAS. Their insights and suggestions helped us to bridge the gap between academic research and practitioners interests, in other words to generate highly relevant research.

Professor Thomas Jeanjean, ESSEC Business School, ParisPrevious ICAS grant holder

3GraNtS aWarded

www.icas.org.uk/research

NEW GRANTS AWARDEDBalancing the board: Directors' skills and diversity

Chris Mallin, University of East Anglia and Hisham Farag, University of Birmingham

one of the key requirements for best practice corporate governance is a balanced board. It has long been recognised that companies should be headed by an effective board which can both lead and control the business, para 4.1, Cadbury (1992). over the years there has been an increasing focus on the diversity of corporate boards. In this project, diversity is seen as encompassing both the directors skills and the board composition in terms of gender, age, nationality, etc. Thus building effective corporate boards is about the set of skills and qualifications of directors and is not solely reliant on gender diversity. The current UK Corporate Governance Code (2012) recognises the importance of diversity and states that, when making appointments to the board, 'the search for board candidates should be conducted, and appointments made, on merit, against objective criteria and with due regard for the benefits of diversity on the board, including gender' (para B.2).

This project will investigate the individual directors skills across the UK FTSE All Share companies and industries by constructing a measure of a broader concept of diversity. directors skill is defined as a function of education/qualifications, board experience, professional experience, and age. The project will also measure gender, age and national diversity for each individual board, and also analyse by company size and industry.

The skill set for each board will be calculated and then compared with the skill set of the entire sample. The research will quantify the UK board heterogeneity, and hence describe the bigger picture for the main skills of the directors and board diversity for UK FTSE All Share companies.

The final phase of the project will be to investigate the impact on company financial performance.

Are valuation and stewardship complementary or competing objectives of financial accounting?

Stefano Cascino, London School of Economics, Mark Clatworthy, University of Bristol, Beatriz Garca Osma, Universidad Autnoma de Madrid, Joachim Gassen, Humbolt-Universitt zu Berlin, Shahed Imam, Warwick Business School and Thomas Jeanjean, ESSEC Business School, Paris

The current development of the Conceptual Framework by the International Accounting Standards Board (IASB) is generating renewed interest in the objectives of financial accounting and their impact on recognition and measurement rules. Conceptually, valuation-based objectives can be separated from objectives that directly interact with managerial decision-making by designing and/or governing contracts. The latter class of objectives is also referred to as the stewardship role of accounting. While many constituents stress the importance of stewardship for the development of financial accounting standards, the IASB seems to hold the view that different objectives can, at least to a reasonable extent, be addressed by a common set of financial reporting rules.

The question of the objectives of accounting information is of fundamental policy relevance. The relative priorities of the valuation and stewardship objectives can affect financial reporting in profound ways, including establishing priorities for particular measurement and valuation bases and promoting or relegating key properties of accounting information, such as conservatism.

The academic literature on the importance and consequences of the objectives of financial reporting is inconclusive. This project aims to address this important gap by producing evidence for the demand from capital providers for accounting information, depending on their information objectives. The project will involve a major survey of around 120 institutional investors across Europe. The results of the research will inform one of the most controversial debates ever faced by accounting standard setters.

This project is a follow on project to the joint ICAS/EFrAG published research which is profiled on page 6 of this newsletter.

ICAS research grants have been funded by The Scottish Accountancy Trust for Education and research (SATEr)

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NEW ICASRESEARCH

Jane Frecknall-Hughes and Rosemarie McIlwhan, The Open University and Simon James, the University of Exeter

on 18 September 2014, voters in Scotland will decide whether Scotland should become an independent nation. This report addresses a series of questions regarding the tax implications of Scottish independence or further devolution on the basis of an extensive interdisciplinary literature review covering both academic and professional publications and interviews with 19 experts. The tax implications relating to the wide range of possibilities associated with Scottish independence or further devolution are far reaching. This report takes no view

on the desirability of the various options, but rather sets out to help establish the factors that should be taken into account if change is to be successfully achieved. This investigation suggests that the tax implications of independence or further devolution may be more complex than might be widely thought.

The concept of full independence, with Scotland becoming a sovereign state, is relatively straightforward. however, further devolution presents a substantial number of options which might involve different taxes and possibly the introduction of one or more new taxes in Scotland.

In the event of independence, the Scottish Government (2013) has stated that it intends to develop a new tax system for Scotland. however, even with an independent Scotland, such an outcome is uncertain because a new Scottish Parliament would be elected and a new Scottish Government formed. In practice the outcome might be something between an entirely new system and the current tax system. There is a considerable overlap of the tax implications of the different possibilities involving either independence or further devolution, although some issues, for example, the design of a new tax system and the status of double taxation agreements, would only be relevant in the case of Scottish independence. other matters, such as those relating to education, risks and practical implications are broadly

similar for either independence or further devolution.

The particular questions addressed in the study and a summary of the findings are set out below.

(i) Is the current UK tax system fit for purpose for modern Scotland?

In general the evidence suggests the UK tax system works reasonably well in a complex and changing environment, but there is scope for improvement. The Scottish Government (2013) suggests that the UK tax system is complex and inefficient (p. 118) and that it intends to develop a new tax system for Scotland based on the design principles of a modern and efficient system (p. 122). This is a laudable aim but there are many reasons why modern tax systems are not closely aligned with such principles in practice and tend to become complex. devising a new tax system that is workable and acceptable to Scottish taxpayers would involve many serious challenges.

(ii) What practical issues arise in developing and administering a new or supplementary tax system, what capacities are key, and how might capacity requirements be met?

There would be numerous practical issues involved in developing and administering a new or supplementary tax system. These include establishing a skilled tax administration in Scotland

INFORMING THE DECISION - THE TAX IMPLICATIONS OF SCOTTISH INDEPENDENCE OR FURTHER DEVOLUTION

The Tax implicaTions of scoTTish independence or furTher devoluTion

Jane frecknall-hughesrosemarie mcilwhansimon James

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to replace hm revenue and Customs, ensuring that double taxation and effective information exchange agreements were in place, clarifying the standing of UK case law, agreeing the definition of Scottish resident or taxpayer as well as ensuring an effective IT system including online filing.

(iii) What are the determining factors for a new country designing a tax system? For example, should there be a legacy approach, a new start, with a simpler approach or an approach to fulfil other political or economic objectives?

In deciding whether to base change on the existing system (a legacy approach) or to design a new one, the former has the advantage of starting with a functioning tax system which can then be developed over the course of time. however, this approach risks the creation of an overly complex system which lacks coherence and may miss the big picture. on the other hand, whilst developing a new tax system offers the opportunity to create a coherent system, it also risks generating unintended consequences and would raise issues about the acceptance of, and compliance with, the new system. The risks involved in tax reform are likely to be much lower where change is incremental rather than associated with a new start.

(iv) What trade-offs or compromises arise and on what basis?

There are many trade-offs and compromises involved in modern tax design. one example is simplicity versus fairness. A simple tax system has many attractions but may not take sufficient account of different circumstances to be acceptable to taxpayers. Another example is the trade-offs and compromises required in terms of the policy objectives of taxation versus the levels of taxes set. There may be a fine balance between ensuring sufficient revenue to fund the desired levels of public expenditure and creating a system that does not excessively distort economic behaviour or arouse serious taxpayer resistance. Achieving such a balance can take time and experience.

(v) How long would it take to implement a new tax system and what would happen in any transitional period?

The length of time required to develop and implement new taxes or a new system depends, of course, on the features of

the tax or system, the extent to which it is acceptable to taxpayers and the capacity of the revenue authorities to support such changes. A process of developing a new tax system, including taxpayer consultation, producing a new tax code, recruiting and training tax officials, developing IT systems and preparing taxpayers could take a period of years. Further devolution of existing taxes to Scotland would not require the same level of change and support.

(vi) What are the most significant implementation issues? and

(vii) What are the key risks and what can be done to mitigate those risks?

The responses to these two questions are closely linked. The biggest risk associated with a new tax system is whether it will deliver the desired revenue. Tax compliance is an important issue and the report describes a system of compliance risk management. Another is the international dimension which raises considerations of tax competition and tax harmonisation. A national tax system that deviates significantly from those in other countries may generate economic effects that include undesirable movements of capital and labour. In recognition of the risks involved the report offers a strategic approach to the development of tax policy. There would also be risks involved in the further devolution of taxes but they would not be on the same scale. however, the further devolution of taxation might also benefit from a strategic rather than an ad hoc approach to tax reform.

(viii) What are the insights, processes and learning points from other new countries or regions which have gone through similar developments?

In examining the tax experiences of other new countries or regions there are few specific lessons that would be immediately applicable to the tax implications of Scottish independence or further devolution without qualification. For example, former UK colonies of substantial size gained independence well before tax administrations took on many of their modern characteristics. The transition economies in Central and Eastern Europe and the former USSr had experienced very different economic and political circumstances which meant some had no choice but to adopt the big bang approach (introducing a new system

all at once). A lack of administrative infrastructure, distrust of government and public institutions, corruption and a need for swift, practical solutions drove tax developments in ways which would not necessarily be applicable to the Scottish situation. There is no one model for adopting or developing a new tax system: each country is unique.

(ix) What are the insights, processes and learning points from federal systems, for example, the US or Switzerland?

The experiences from federal systems, such as those in the USA and Switzerland, are not readily applicable to the situation of an independent Scotland and the remainder of the UK (rUK). In theory, however, a federal system would be possible in this context and would address other concerns, such as currency union. however the creation of a federation raises wider issues for Scotland and rUK than just tax.

(x) What are the educational (professional and public) needs to support a new system?

Clearly the extent of such needs depends on the nature and the scope of the changes proposed, but the view expressed in the interviews especially is that they would be considerable. Taxpayers commitment to and acceptance of changes will be significant to their successful implementation. A new tax system for an independent Scotland or the introduction of new taxes under further devolution would require considerable professional and public education.

(xi) What would a new system of incentives or penalties to support compliance look like?

A new tax system and further devolution could raise a range of issues relating to tax avoidance, and while Scotland would be subject to the same pressures in this context as any other developed country, there might be particular issues raised by any transfer of information between systems, especially under independence.

For more detailed analysis, please see the full report, available to download from May at: www.icas.org.uk/frecknall-hughes

Scottish Government (2013), Scotlands Future: Your Guide to an Independent Scotland, Edinburgh: Scottish Government.

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Stefano Cascino, London School of Economics, Mark Clatworthy, University of Bristol, Beatriz Garca Osma, Autonoma University of Madrid, Joachim Gassen, Humboldt-Universitt zu Berlin, Shahed Imam, University of Warwick and Thomas Jeanjean, ESSEC Business School, Paris

The changes to the IASBs Conceptual Framework have generated substantial debate about important issues, including whether prudence should be maintained and whether the stewardship objective of accounting truly deserved its effective relegation. It is generally agreed that financial reporting aims to inform capital providers investment decisions. But beyond this, and in order to fully inform the debates surrounding the Framework, more specific questions may be asked:

Who are the main capital providers and what decisions are they making?

What information do they use in their decision making and how do they use it?

how important is accounting information to capital providers?

The answers to these questions have important implications for standard setters and for the accounting community as a whole. In short, capital providers are highly varied in their information usage and while accounting information is important to equity and debt investors, it is used in different ways and for different purposes. Even the same capital providers use

financial statement information differently, depending on the nature of the decisions they are making.

To address the above questions in detail ICAS and the European Financial reporting Advisory Group (EFrAG) commissioned this comprehensive review of the international academic literature. The aim of the review was to inform future standard setting and highlight any gaps in the existing research. The review focuses where possible on evidence obtained directly from users themselves.

The main capital providers for large public companies can be broadly categorised as equity investors, debt providers and trade creditors. They can be further sub-classified into professional equity investors, private retail investors, inside (usually family) equity investors, public and private debt investors and trade creditors. Importantly, there is significant international variation in the importance of capital providers. For example, equity represents less than 30% of total capital employed for the average public company in Portugal, but almost 60% of total assets are financed by equity in the average UK listed firm. Furthermore, inside family equity investors are major providers of capital to large European companies.

In general, capital providers aim to receive an appropriate level of return on their investment, for a given level of risk. In accordance with the "valuation" view, information is therefore deemed useful if it assists with estimating the amount, timing and riskiness of future cash flows. But there are important differences between capital providers and these can strongly influence information preferences. To see this, take the fundamental distinction between debt and equity securities. While both have limited liability, debt securities returns are limited on both the downside and upside, whereas equity returns are only limited on the downside. lenders and bondholders are therefore more sensitive to downside risk and as a result, debt contracts regularly contain covenants that pass control to lenders when the value of the firm falls, but not when it increases. hence, there is a stronger preference for conservative accounting in debt contracting because slow recognition of bad news

can result in deferred creditor control and potentially to higher losses.

In some cases, the interests of shareholders and debt providers may diverge. For instance, shareholders may use the proceeds of a loan to fund excessive dividend payments, or may issue more senior debt, thus diluting the claim of the original lender. In addition, it is well known that the interests of managers and shareholders often conflict because of "agency problems", where managers act in ways that suit their own interests, rather than those of shareholders. Information will therefore also be judged on its ability to mitigate the problems associated with these conflicts. moreover, the characteristics that lead to useful information for equity valuation decisions do not necessarily correspond with those for reducing conflicts between shareholders, debt providers and managers. In particular, for the latter purpose, which corresponds to a "stewardship" role, information is often used in contracting (such as lending agreements and executive compensation contracts), so conservatism and verifiability are more desirable than for valuation purposes. It is clear from the literature therefore that in some areas, the valuation and stewardship roles do not coincide.

Because of the different roles for information, it should be no surprise that when making decisions, capital providers make use of various information sources and do so in different ways. For professional equity investors (including fund managers, buy-side and sell-side analysts), direct contact with company management and financial statements are most important. These investors rely on such information for both financial and for stewardship decisions, in the former case for estimating future cash flows and profits, and in the latter case for accountability and executive compensation purposes.

Valuation models, such as the price/earnings ratio or discounted cash flow require information on future cash flows and/or earnings have financial statement data as inputs. however, equity investors prefer "persistent" or recurring earnings, so transitory or non-recurring items

THE USE OF INFORMATION BY CAPITAL PROVIDERS

The use of information by capital providersAcademic literature review

2013DECEMBER

AUTHORS:

Stefano CascinoMark Clatworthy

Beatriz Garca OsmaJoachim Gassen

Shahed ImamThomas Jeanjean

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are often removed from "bottom line" GAAP numbers. Also, because of the stewardship role of financial statements, information in the financial statements on past and present performance is also important to professional investors. When it comes to valuation bases, fair value is sometimes preferred to historic cost for certain asset classes, but this is not the case where fair value is arrived at using unobservable inputs as part of "mark to model" valuations. moreover, while notes to the accounts are important to professional equity investors, information disclosed in the notes receives less attention than the main financial statements.

Importantly, financial statements are not used mechanistically by professional equity investors, nor are they used in isolation. For example, meetings with management often rely on accounting information to form the agenda, and while managers or equity analysts forecasts of future profits may be highly relevant, their usefulness also depends on the availability of an eventual outcome against which the forecast can be judged. Audited financial statements therefore occupy a unique position in the information environment.

Accounting information is also highly important to debt investors, as evidenced by the fact that contracts between lenders and corporate borrowers usually contain numerous covenants based on financial ratios taken from the audited financial statements. Such covenants may restrict dividend payments, limit companies ability to issue more debt or even constrain capital expenditure, though these are often based on "non-GAAP" figures. debt providers are thus relatively sophisticated users of accounting information and because of the nature of their claims, they typically prefer conservative accounting to unbiased accounting. This is reflected in the adjustments they make to financial statement data. For instance, intangible assets are often excluded from financial statement data used in loan contracts. moreover, companies recognising losses in a timely way can benefit from more favourable lending terms.

When it comes to private retail investors and trade creditors, information is not usually accessed directly. rather, intermediaries process the information used in investment decisions and it is these intermediaries who may also rely

on accounting information. For example, even though trade creditors may rely on credit bureaus for a decision on whether to provide credit to a new customer, these credit bureaus themselves rely on financial statement data (along with other non-financial information) for estimating payment default risk.

The principal conclusion arising from the academic literature is therefore that financial statements are used in different ways by various capital providers with different needs and different objectives. A major challenge for accounting standard setters is the need to balance these differences either by focusing on a subset of users, or by balancing different needs on a standard-by-standard basis. In so doing, focusing on the comparative advantages of the accounting process when developing standards will help. Although it may not be the most timely source, financial reporting provides recurring, standardised, regulated, audited data and these features set it apart from other information sources. Under this approach, financial reporting information should be designed to coexist with other information sources with different weaknesses by providing reliable, verifiable data.

Standard setters also need to consider the role of information intermediaries when developing new standards. Even though private investors and trade creditors do not use accounting information directly, they rely on others, such as analysts, the media and credit bureaus, who do. This may affect who the standard setters target user is. Finally, certain capital providers regularly require financial accounting data for contracting purposes. Although these users can amend contracts when standards change, significant renegotiation costs may be incurred. Standard setters should therefore consider the use of financial accounting information in contracting when making standard setting decisions.

In some important areas, the academic literature yields few insights. Examples include the factors that influence the use of various information sources and the impact of different institutional and national environments. In other areas, such as what information capital providers would like, we know barely anything at all. As ever, therefore, there remains considerable scope for further research.

ICAS has awarded a new research grant to this team to undertake further work in this important area. For more information see page 3 of this newsletter.

Download the report at: www.icas.org.uk/clatworthy

RESEARCH IMPACT: IASB PRESENTATION

The publication of the report comes at a crucial time as the IASB considers revisions to its Conceptual Framework. As a result the research team was invited to present their research to the IASB Board Members at the meeting on the 21 January 2014. A full two hour session was allocated to the research - illustrating the importance attached to this report and the topic in general. Hans Hoogervorst, Chairman of the IASB, commenting on the research, stated that it was a very interesting study adding that it gave the IASB a lot to think about and information that we can use in our work on the Conceptual Framework.

The research has also been presented to the UK Financial Reporting Council (FRC) and has been referenced in a number of responses to the IASB Conceptual Framework discussion paper, including those of ICAS, EFRAG and the FRC.

The IASB presentation is available at: www.ifrs.org/Meetings/Pages/IASB-Edu-Jan-2014.aspx

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COMING SOON Audit, supervisors and risk in financial services

Ian Dewing and Peter Russell, University of East Anglia

The recent financial crisis has called into question the role of auditors, supervisors and the nature of financial risk. Auditors have been criticised for giving no warning of the financial crisis and for failing to communicate with supervisors. Auditors have been further accused of failing to exercise a sufficient degree of professional scepticism. Similarly, supervisors have been criticised for a failure to communicate with auditors and, more fundamentally, for a failure of supervision. The role of fair value accounting and, in particular, the apparent downgrading of the accounting concept of prudence, has also been blamed for contributing to the crisis. Concerns have also been raised about auditors' and supervisors' assessments of risk, especially of systemic risk, and about the risk governance of financial institutions.

This report investigates the role of auditors and supervisors in the system of UK and EU financial services supervision post-financial crisis. In particular, it focuses on four areas: liaison between auditors and supervisors; accounting and auditing judgements in financial services audit; monitoring and reporting of risk; and implications of European and international regulations for auditors of financial services firms.

The objective of the report is to understand the evolution of these complex roles following the financial crisis and to provide policy recommendations.

Funding issues confronting high growth SMEs in the UK

Ross Brown, University of St Andrews and Neil Lee, University of Lancaster

In the wake of the financial crisis, there has been increased concern about the availability of external finance for small and medium sized enterprises (SmEs). A lack of external finance has been seen as a significant factor in the UK economys slow recovery. At the same time, there is a growing awareness that relatively few firms have a significant impact on economic growth. A small group of "high growth firms" appear to be responsible for the majority of new job creation. This research report helps address a gap in the literature by investigating the use of external finance amongst rapidly growing SmEs in the UK.

This reports overriding aim is to investigate the funding constraints faced by high growth SmEs in the UK, it investigates:

the extent to which high growth SmEs in the UK apply for external finance;

the sources and types of finance sought by high growth SmEs; the reasons for applying for external finance; whether high growth SmEs were more likely than other firms

to face funding constraints; and

the implications of these findings for policy in this area.

The research findings have significant implications for policy and practice.

Keep an eye out for our forthcoming publications

ICAS research publications can be downloaded free of charge

from the ICAS website:

www.icas.org.uk/researchpublications

To keep up to date with new funding opportunities and new publications subscribe to our e-news service email: [email protected]

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Financial fair play: Implications for football club financial reporting

Stephen Morrow, University of Stirling

While economies, industries and companies throughout Europe have struggled in recent years, major European football leagues and clubs have continued to see remarkable revenue growth; fuelled by domestic and overseas media rights. Too often, however, that revenue growth has not led to profit, with many clubs reporting substantial losses and escalating debts and several high profile clubs suffering insolvency events. The seemingly paradoxical situation in European football finance - increasing revenues but declining financial performance and position - has now directly influenced football policy; most visibly in the introduction by Union of European Football Associations (UEFA) of Financial Fair Play (FFP) regulations designed to encourage clubs to adopt a more economically rational and sustainable approach to their activities.

This study involved interviews with football clubs, football club auditors, football finance experts working in the profession and representatives of governing bodies and leagues. The report considers views on the following issues:

the requirements set out in UEFAs FFP regulations;

the usefulness of conventional financial reporting for professional football clubs; and

the implications of FFP for football club financial reporting and as to whether alternative forms of reporting may better communicate the value and role of contemporary football clubs.

Although focused on the football sector, the report also contributes to the wider debate about the nature of financial reporting.

Charity trustee information needs: Can enterprise performance management systems help?

Diana Limburg, Cathy Knowles, Maureen McCulloch and Laura Spira, Oxford Brookes University

There are approximately 187,000 charities in the UK covering most areas of societys activities. Charities are governed by a board of trustees who volunteer for the role and are responsible for the strategic direction and the legal, financial and operational health of their charity.

Charities are confronted with increasing demands and complexities, partly due to more short-term competitive contracting of services, increasing demand and falling income. Against this background charities need to address the challenge of providing trustees with accurate, relevant and timely information in a user-friendly format, so that trustees can perform their roles. This study explores how charities might benefit from Information Technology (IT), in particular enterprise performance management (EPm) systems, to address this challenge. It is particularly concerned with trustees ability to interpret and use financial and non-financial information. The research has the following objectives:

to identify the core information needs for charity trustees, with a focus on issues surrounding the interpretation and use of both financial and non-financial information;

to gain insight into the IT capabilities of charities and their current use of IT for providing such information to trustees; and

to consider how charities can employ EPm systems so that they meet the identified information needs and match their typical IT capabilities (including trustees skills).

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The 2014 ICAS Aileen Beattie memorial lecture will be given by lord Green of hurstpierpoint, former minister of State for Trade and Investment. lord Greens talk is entitled Values versus Value: does ethics drive business success?.

The event is being held at Stationers Hall, Ave Maria Lane, London EC4M 7DD and will commence at 4:30 pm and finish at 7.30pm. For further details contact: [email protected]

UPCOMING ICAS EVENTAileen Beattie was Technical director and the Executive director, Technical Policy at ICAS over a period of almost twenty years. After a long battle with cancer, borne with characteristic bravery and good humour, Aileen died on Thursday 6th october 2005. over her time at ICAS, she co-ordinated and contributed to a number of major landmark projects and publications including Making Corporate Reports Valuable, Auditing into the Twenty-First Century, Taking Ethics to Heart and the Principles not Rules project.

The Consultative Committee of Accountancy Bodies (CCAB) has published a research study into international financial reporting standards for not for profit organisations (NPos).

The study, conducted for CCAB by academics from four prominent universities, was led by Professor Gareth morgan of Sheffield hallam University and dr louise Crawford CA of the University of dundee.

The aim of the study, launched on 25 February 2014 at the house of Commons, was to assess the need and demand for tailored international financial reporting standards for NPos.

The research was based on a literature review and survey which received over 600 responses from 179 countries across the world.

While 72% of respondents agreed that an international financial reporting standard for NPos would be useful, there were mixed responses to this idea with variation by country and some strong opposition in the narrative responses.

The research calls for more study of the area to assess the extent to which NPos would welcome a formal international standard and be willing to use it. Therefore, more study of the area would be required to determine need, as well as

to consider what an international financial reporting standard for NPos could look like.

ICAS along with ACCA, CIPFA, Chartered Accountants Ireland and ICAEW form the membership of the CCAB.

The Executive Summary and the Full Report are available on the ICAS website at: www.icas.org.uk/CCAB-NPO-research

NEW CCAB rESEArCh PUBlIShEd oN NoT For ProFIT orGANISATIoNS

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The research team at ICAS would like to congratulate The British Accounting & Finance Association (BAFA) on the occasion of its 50th Annual Conference - a real achievement!

ICAS looks forward to celebrating with you at the April 2014 Conference at the london School of Economics. ICAS is proud to be associated with BAFA and we look forward to continuing to support the conference and maintaining a close relationship with academia in future years.

BAFA is the working name of the British Accounting Association which was established in 1947, and brings together those interested in teaching and research in accounting and finance.

CONGRATULATIONS TO BAFA ON ITS 50th ANNUAl CoNFErENCE

NEXUS PRIZE DRAWmake sure you drop by our exhibition stand at the BAFA and EAA conferences and enter our 2014 prize draws to win a Nexus Tablet!

The lucky 2013 winners were:

BAFA 2013 - hannu ojala, Aalto University, Finland EAA 2013 - Alan Kilgore, macquarie University, Australia

Terms and conditions available on request from [email protected]

The Association of Business recovery Professionals (r3) will shortly publish a research report by Professor Peter Walton entitled The Likely Effect of the Jackson Reforms on Insolvency Litigation an Empirical Investigation. The report was commissioned by r3 (with the support of ACCA, ICAEW, ICAS, IPA, JlT Speciality ltd, moon Beaver and moore Stephens llP).

In 2010 lord Justice Jackson completed his review into civil litigation costs and funding. one of the key recommendations was that changes should be made to Conditional Fee Arrangements (CFAs) and After the Event (ATE) insurance so that CFA uplifts (or success fees) and ATE insurance premiums should no longer be recoverable from a losing defendant.

A temporary carve out was provided for insolvency litigation until April 2015.

The purpose of this report has been to attempt to consider the nature of insolvency litigation and to discover how CFAs (and ATE insurance) operate in practice in this context. It attempts to quantify the value to creditors of CFA-backed insolvency litigation and to assess the likely effect that the Jackson recommendations will have on insolvency litigation if the temporary carve-out is not made permanent.

The report will be available to download from the ICAS website at: www.icas.org.uk/Current_Insolvency_Issues.aspx

NEW INSolVENCY rESEArCh PUBlIShEd BY r3

The Likely Effect of the Jackson Reforms on Insolvency Litigation an Empirical InvestigationA report commissioned by R3 (with the support of ACCA, ICAEW, ICAS, IPA, JLT Specialty Ltd, Moon Beever and Moore Stephens LLP)

By Professor Peter WaltonUniversity of Wolverhampton

April 2014

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ICAS RESEARCH COMMITTEEProfessor Angus duff will step down from his role as ICAS research Adviser on 30 April 2014. Angus joined the ICAS research Committee in 2007 and was appointed to the role of part time research Adviser in 2009. The ICAS research team and the rest of the Committee would like to thank Angus for the important role he has played in the development of ICAS research and wish him all the best for the future.

Angus is Professor of Accounting and Finance at the University of the West of Scotland. he has published numerous articles in academic and professional journals. he is a member of the Chartered Institute of management Accountants and the Association of Corporate Treasurers.

We are pleased to announce that Professor mark Clatworthy, the University of Bristol, joined the ICAS research Committee in march 2014.

mark Clatworthy is Professor of Accounting at the School of Economics, Finance and management at the University of Bristol. he obtained his Phd from Cardiff University, where he worked for 17 years. he has research interests in the links between financial reporting and capital markets and in corporate audit markets. mark is involved in undergraduate and postgraduate teaching in financial reporting and is also Associate Editor of Accounting and Business research.

We are pleased to announce that liz murrall, the Investment management Association (ImA), joined the ICAS research Committee in march 2014.

A chartered accountant, liz is director Corporate Governance and reporting at ImA. She is responsible for representing ImA members interests as institutional investors on corporate governance and company reporting and assurance issues. She sits on a number of committees, including the FrC's Accounting Council, the FTSE Policy Committee, the International Corporate Governance Network's Accounting & Auditing Practices Committee, the European Fund and Asset managers Association's Corporate Governance Committee and the CBIs Companies Committee.

Mark and Liz join our existing Research Committee members, who are:

Allister Wilson (Convener) - Partner, Ernst & Young LLP

Michelle Crickett (Secretary) - Director of Research, ICAS

Riona Bell - Director of Finance and Corporate Resources, Scottish Further and Higher Education Funding Council

Andrew Cotton - Company Secretary and Director of Corporate Development, Macfarlane Group plc

Louise Crawford - Associate Dean for Research, School of Business, University of Dundee

Lisa Evans - Professor of Accounting in the Division of Accounting and Finance, University of Stirling

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The leading UK professional bodies1 involved in taxation, including ICAS, have issued updated guidance on how tax advisers should act. These guidelines should be read in the context of the ICAS Code of Ethics and the principles that should apply to all dealings by members with hmrC they address specific areas of legal and practical difficulty, whether dealing with client situations or hmrC.

The guidance appears in the publication Professional Conduct in Relation to Taxation (PCrT). PCrT sets out the high expected standards which should govern the tripartite relationship between tax adviser, client and hmrC. It supports the key role accountants play in helping clients comply with their tax obligations. This guidance is followed by members of the listed professional bodies, but many other bodies and professional firms also adopt it as best practice.

It is based on five fundamental principles:

integrity

objectivity

professional competence and due care

confidentiality

professional behaviour

and provides guidance on applying these principles to practical situations, for example, if there is an irregularity in a clients tax affairs and the client is reluctant to correct it.

The document makes clear the obligation of tax advisers to advise their clients accurately and thoroughly of the risks and implications of their actions including reputational and practical aspects.

PCrT has been reviewed by Counsel and hmrC has been consulted and acknowledges that this guidance is an acceptable basis for dealings between members and hmrC. It added hmrC welcomes the publication of the new edition of this guidance for tax agents as a positive step. We recognise the role they play and the responsibilities they bear in ensuring taxpayers understand and comply with their tax obligations.'

The key changes in this update include:

an enhanced chapter on Tax planning, tax avoidance and tax evasion which includes guidance on the new General Anti-Abuse rule;

points to consider when hmrC wants to visit the member to discuss practice matters eg as part of Agent and Client Statistics;

professional standards relating to participating in consultations or secondments with hmrC;

advising clients who wish to rectify past irregularities; and

a brief section on electronic filing.

the guidance is available at: www.icas.org.uk/PCrt.pdf

1 The professional bodies who were members of the working party and who have endorsed the guidance are: ICAS; ICAEW; ACCA; CIoT; ATT; and STEP.

PROFESSIONAL BODIES UPDATE GUIDANCE FOR TAX ADVISERS

A GUIDE FOR PHD STUDENTS 2014ACCoUNTANCY ANd FINANCE rESEArChSTUdY IN SCoTTISh UNIVErSITIES

The 2014 edition of this guide can now be downloaded from the website - icas.org.uk/researchguidance. The guide is produced by ICAS to assist potential Phd students to identify a supervisor in a Scottish university whose research interests are closest to the students intended field of study.

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JOIN US ON FACEBOOKFACEBOOK.COM/ICASACCOUNTING

CONNECT WITH US ON LINKEDINSEARCH FOR ICAS THE PROFESSIONAL BODy OF CAS

FOLLOW US ON TWITTER@ICASACCOUNTING

ICAS is on various social networks if you would like to communicate with us or just keep up to date with ICAS news.

Connect with the professional community online

To ensure that ICAS continues to attract the highest calibre of candidates to study towards the CA qualification, ICAS is introducing new avenues to training, widening access to the profession to ambitious accounting and finance professionals.

The new professional entry route enables graduates working in an accountancy or finance role, or individuals with five years experience in a financial environment, to study towards becoming a CA without having to leave their current role and secure a training contract with an ICAS authorised employer.

Students receive the same world class training programme, the same industry-

leading syllabus, the same comprehensive support and must meet exactly the same examination standards and practical experience as other CA students to obtain the world renowned CA qualification. however, they have the flexibility to undertake education and examinations at different times and have up to eight years to complete their studies.

For more information, and to register for an information pack, visit: www.icas.org.uk/professional-entry

ThE NEW WAY To BECOME A CA

The great thing about the Chartered Accountancy qualification is that it transcends industries.

Martin Murray CA Finance Director Cathay Pacific Airways

CONGRATULATIONSThe ICAS research team would like to pass their congratulations on to the recipients of the following awards by the British Accounting & Finance Association:

Distinguished Academic Award - Jan BebbingtonLifetime Achievement Awards - Mahmoud Ezzamel, Stella Fearnley, David Gwilliam, Prem Sikka

The awards are made to individuals who have made a substantial and direct contribution to the academic accounting and finance community. The awards will be presented at this years Annual British Accounting & Finance Association Conference in london in April 2014.


iNSiGHt PUBliCatioNS

NEW ICAS INSIGHT PUBLICATIONS

how many accountants can say that they have read the IASBs existing Conceptual Framework or have referred to it in their jobs? Probably not too many - it can seem quite remote to many accountants - whether they are working in practice, in business or possibly as a user of financial statements. Yet the importance of the Conceptual Framework should not be underestimated as it has the potential to shape the future of financial reporting across the globe.

The IASB is currently undertaking a project to revise and update the existing Conceptual Framework and it is important that all those with a stake in financial reporting engage with this process. To assist the IASB with their project, and to encourage debate, ICAS and the International Federation of Accountants (IFAC) set up a working group and collaborated to produce a paper, Do we need a roadmap for financial reporting? Developing the IASBs Conceptual Framework. This paper highlights the challenges facing the IASB and, whilst not pretending to contain answers to all the difficult questions, the paper aims to stimulate the debate.

The IASB issued a discussion Paper exploring possible changes to the IASBs Conceptual Framework for Financial reporting in July 2013. The comment period ended in January 2014 and an Exposure draft is expected to be published later this year. The IFAC/ICAS paper has been prepared to complement the individual comment letters that both IFAC and ICAS submitted to the IASB.

The IASB has received over 200 responses to its discussion Paper and

taking forward revisions to the Framework will be a very challenging task. many of us will have heard some of the public calls for the IASB to bring back "stewardship", "prudence", "reliability" and "substance over form" but what else needs to be considered? In this paper with IFAC, we raise some fundamental questions and issues for consideration by the IASB, including:

Who are financial statements for?

What is the purpose of financial statements?

What role should the Conceptual Framework serve?

What items should be included as assets and liabilities and how we should measure them?

What does "financial performance" mean?

referring to the report, Fayez Choudhury, CEo of IFAC, commented, 'These questions get right to the heart of how companies communicate with the financial markets. The basic building blocks of financial statements have existed for decades and it is important to undertake a serious assessment of whether they remain fit for purpose.'

Anton Colella, CEo of ICAS, added, 'The Conceptual Framework sets the direction of travel for financial reporting globally. The IASB has stated that it will focus on "updating, improving and filling in gaps" of the current Framework. our overarching question is: is this sufficient or do we need a more fundamental re-think?'

So what is the Conceptual Framework and why is it important? The Framework

is intended to set out the concepts and principles that the IASB uses in developing standards but what is its wider role? In updating the Framework a decision needs to be taken on its role in practice - is it there to assist people in interpreting accounting standards and to help in situations where the accounting standards do not cover a particular situation or transaction. If the answer is yes, then the Framework needs to be written in a way which is understandable to the wider financial reporting community and can be translated for different jurisdictions.

Whilst the Conceptual Framework sits at the top of the hierarchy of international accounting standard-setting the IASB discussion Paper, somewhat surprisingly, states that the IASB will not necessarily change existing Standards for any of the areas discussed in this Conceptual Framework. Yet this may mean that a

Do we neeD a roaDmap for financial reporting?Developing the IASBs Conceptual Framework

do WE NEEd A roAdmAP For FINANCIAl rEPorTING?dEVEloPING ThE IASB'S CoNCEPTUAl FrAmEWorK

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number of accounting standards will be at odds with the fundamental principles from which they are intended to be derived. how will these conflicts and inconsistencies be reconciled?

The world around us, how we communicate with the markets, and business itself, have changed but the current Framework is derived from the US Financial Accounting Standards Board (FASB) Framework of the 1970s. The scope of the Framework and its role therefore needs careful consideration and, as a profession, we need to consider if developing the existing Framework is enough or if a more fundamental re-think is required.

The paper considers what should be included in the Conceptual Framework and identifies some core building blocks, which both IFAC and ICAS believe are currently absent from the Framework. The core building blocks which we argue should be considered by the IASB in the Conceptual Framework are:

The scope of financial reporting

Stewardship

The business model

Entity versus proprietary perspectives

Prudence

Unit of account

Concept of capital

The paper also discusses the qualitative characteristics of financial statements and the need for the IASB to reconsider the concepts of "substance over form" and "reliability".

At the heart of the Conceptual Framework are the definitions of, and recognition criteria for, assets and liabilities. The IASB discussion Paper signals a significant

change in the definition of assets and liabilities, with proposals to recognise the capacity to generate inflows (outflows), not the probability of generating inflows (outflows). This appears to shift the debate from the existence of assets and liabilities to their measurement and may have significant implications for financial reporting.

on measurement the ICAS/IFAC paper recommends that the IASB reconsider the objective of measurement and what factors should be taken into account in determining the most appropriate base and what role reliability should play in determining measurement bases.

Ultimately financial statements are there to communicate with the end user and the IASB is importantly seeking to address both presentation and disclosure in its Conceptual Framework project. The fundamental issues of who financial reporting is for, and what the purpose of financial reporting is, need to be addressed before the issues around presentation and disclosure can be resolved. Users typically want to know what the "profit" is, and it would, therefore, be useful if the IASB could develop a concept of financial performance and profit, from which presentation would then logically flow. disclosure appears to have become the residual consideration in the standard-setting process and as a consequence financial statements are getting longer and longer. It would be helpful if disclosure in future was based on clear principles, which could be outlined in the new Conceptual Framework.

The development of the Conceptual Framework for financial reporting has a long and troubled history, but if the new Framework is to guide future standard-setting and ultimately impact on what and how we report to the financial markets then a number of difficult issues identified in both the IASB discussion Paper and the ICAS/IFAC paper need to be resolved. The future viability of financial reporting depends upon it.

The paper will be presented at the following academic conferences:

EAA, Tallinn - Accounting in Europe & FArS/EAA symposium - 23 may, 9-10.30 am

Financial reporting & Business Communication Conference, Bristol - 3-4 July

Download the ICAS/IFAC paper at: www.icas.org.uk/icas-ifac-roadmap

Find out more about the IASB project at: www.ifrs.org/Current-Projects/IASB-Projects/Conceptual-Framework

KEy DATES FOR THE IASB PROJECT

14 January 2014 - Comment period on discussion Paper closed

Quarters 1 & 2, 2014 - IASB redeliberations

Before the end of 2014 - Exposure draft to be issued for comment

Before the end of 2015 - revised Conceptual Framework to be published

WORKING GROUP MEMBERS

Mario Abela -Senior Policy Advisor, Public Policy and Regulation, IFAC

Andrew Buchanan - Global Head of IFRS, BDO and Member of ICAS Accounting Standards Committee

Michelle Crickett - Director of Research, ICAS

Amy Hutchinson - Assistant Director, Technical Policy, ICAS

Allister Wilson - Partner, Ernst & Young LLP and Convener of ICAS Research Committee



SCoTlANdS PENSIoNS FUTUrE Have our questions been answered?Towards the end of last year the Scottish Government set out its plans for pensions in an independent Scotland in a detailed paper on the topic and in its blueprint for an independent Scotland, Scotlands Future Your Guide to an Independent Scotland.

ICAS has been a leader in the debate on the potential impact on pensions following a Yes vote on 18 September 2014. We have prepared two papers on this topic under the banner Scotlands pensions future. our second report, subtitled Have our questions been answered? (February 2014), considered the extent to which the Scottish Government has addressed the key questions raised in our first report, subtitled What pensions arrangements would Scotland need? (April 2013). many of our questions have been answered, although we expect pensions to remain a key issue in the lead up to the referendum. A recent BBC poll identified pensions as the second most important issue to voters taking part in the referendum, with only the economy being more important.

The Scottish Government proposes to adopt the pensions system in place in the UK at the date of independence with some proposed differentiation at the margins. An independent commission would be established to examine whether or not an independent Scotland should adopt the UKs plans to raise the state pension age to 67 between 2024 and 2026. The commission would also consider any increases in the normal retirement age for members of public service schemes at the same time. The Scottish Government has also pledged to introduce the single-tier pension at the level of the UK single-tier

pension or 160 per week, whichever is higher. The rationale for reviewing the timing of the rise in the state pension age to 67 relates to the lower average life expectancy of Scots compared to the UK average.

replicating existing arrangements in an independent Scotland will not be without its challenges from a policy as well as practical perspective. The UK Government is driving through a pension reform agenda aimed at improving individual retirement incomes during the accumulation phase including the establishment of the single-tier pension as a simple foundation for saving and encouraging more individual retirement saving, for example, through the implementation of auto-enrolment into a workplace pension arrangement. Further reforms, announced in the 2014 Budget, focus on the decumulation phase and will remove the requirement to use a pension pot to purchase an annuity. The Scottish Government needs to keep a watching brief on this on-going reform agenda so it could replicate any changes for an independent Scotland. New systems for the state pension and some public sector pensions would need to be implemented and pensioner data would need to be migrated across, not to mention the establishment of a regulatory system for private pensions, such as the creation of a new pensions regulator. The Scottish Governments intention to share the UK Pension Protection Fund was ruled out by danny Alexander, Chief Secretary to the Treasury, in his speech to the National Association of Pension Funds investment conference in Edinburgh on 7 march this year. Therefore, the Scottish Government should now consider how this statement impacts on its stated policy on pension protection.

one of the most significant issues to arise is the funding of defined benefit pension schemes which would become cross-border schemes in the event of independence. As UK-wide pensions

law stands at the moment, cross-border schemes need to be fully funded at all times and would not be able to operate a recovery plan. A recent survey by PWC indicates that the average recovery plan period is currently 11 years. Therefore, paying down deficits immediately will impact heavily on the finances of employers. The law in this regard is driven by the solvency rules set out in EU Pensions (IorP) directive 2003 and therefore it is not within the gift of the UK Government to amend.

Quantifying the likely extent of cross-border deficits between an independent Scotland and the rest of the UK is a challenge, as information on which schemes would become cross-border in the event of independence is neither required nor held for the operation of existing regulatory arrangements. Even the current level of UK-wide pensions deficits calculated on a technical provisions basis, which is a prudent basis used for this purpose, are difficult to pin down. however, these are likely to be in the region of 300 billion or more.

While many of our questions have been answered, the Scottish Governments scope to implement its policy agenda post-independence would depend on the outcome of any post-referendum negotiations with the UK Government and the European Union. With that in mind, there are limitations on the degree of assurance the Scottish Government can provide on what could eventually be delivered. however, the Scottish Governments papers move the debate on pensions and independence forward and provide an opportunity to tease out some more detailed but nevertheless important aspects of delivering a separate pensions system.

Download the papers at: www.icas.org.uk/Scottishindependence

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The consultation period for the ICAS discussion paper proposing a "Balanced and reasonable" opinion over the front-half of the annual report, closed on 31 october 2013 and the responses have now been summarised.

SUMMARy OF RESPONSESSome of the feedback to our key questions is summarised below:

There was support for our proposal and many see this type of additional assurance as inevitable over time.

There may be some confusion amongst users over the extent of assurance they believe they are currently receiving.

We need to demonstrate user demand for this type of assurance.

The concept of a third, or medium level of assurance is confusing.

Concern was expressed over how a clean opinion could be expressed which relied on professional judgement in the absence of any appropriate evidence.

There was interest in the development of an assurance spectrum describing different percentages of assurance levels.

There is uncertainty as to how much and what type of assurance is currently

provided by auditors under the FrCs "fair, balanced and understandable", requirement.

many respondents would prefer to monitor how the FrCs fair, balanced and understandable requirement in the UK develops before proposing any further changes.

many disagreed with the substitution of the term "material" with the term "significant", but some acknowledged that the use of the word "material" might not be appropriate for the front-half of the annual report.

The importance of being able to demonstrate, and perhaps quantify, the costs versus the benefits of such assurance was raised.

A number expressed concern over the use of the terms "balanced" and "reasonable" as potentially confusing with:

(i) "reasonable assurance" as defined in the IAASB assurance framework; and

(ii) reference to the term "balanced" in the Financial reporting Councils (FrC) "fair, balanced and understandable" requirement in the UK.

Some respondents questioned whether auditors had the necessary skills and ability to undertake this type of work.

many saw the auditor liability regime as an obstacle to be negotiated in order for auditors to be able to conduct this type of work.

A possible compromise was the identification of discrete elements of the content over which positive assurance might be provided.

OUR PROPOSED NEXT STEPSThe feedback we obtained has enabled us to prioritise our next steps as detailed in our paper Assurance on management commentary: Where next? We are keen to promote a framework for corporate reporting and assurance which meets the needs of users, primarily the investment community, at an acceptable cost.

Therefore, our proposed first step is a research project into the impact that the "fair, balanced and understandable" requirement has had on reporting in the UK. The project will consider the anticipated additional costs and work involved if a positive audit opinion was to be provided on the management commentary and will highlight those areas and content over which the auditors do not believe that the provision of a positive opinion would be possible.

The results of the above research will inform discussions with users to assess the extent to which they have received, or are currently receiving, the level of assurance they desire on the front-half of the Annual report, and whether they would prefer to receive a positive expression of opinion on the front-half.

other proposed projects that may be considered include:

The development of a straw man of a new assurance framework which permits a variety of assurance engagements to be provided by the auditing/assurance profession;

The continued monitoring of developments in Integrated reporting;

The feasibility of the provision of assurance over discrete areas in the front-half of the annual report;

Engagement with representatives from other jurisdictions and professional bodies;

Use of the findings from the joint ICAS/FrC research project into the skill and competency requirements of auditors in todays complex business environment.

It is our intention to reconsider the original proposals in the original "Balanced and Reasonable" discussion paper at a later date to determine which, if any, will be taken forward.

Download the paper at: www.icas.org.uk/auditing/publications

ASSUrANCE oN mANAGEmENT CommENTArY Where next?

I

ASSURANCE ON MANAGEMENT COMMENTARY WHERE NEXT?



This short and simple guide to starting a business has been developed by ICAS. It is a visual and user-friendly publication designed to help aspiring business people on the way to setting up and running a successful company.

The guide has been prepared by ICAS members with a breadth of entrepreneurial and business experience, including business angels who provide funding support to start-ups.

It aims to help those committed to starting their own enterprise with tips on:

sourcing advice, support and mentoring

preparing a business plan

identifying appropriate funding and increasing your chances of getting it

accessing further business start-up resources and guidance

The guide spans the range of resources and help available from both the private and public sector.

It flags key things to consider when preparing a robust business plan - like knowing your market, working out how much cash you are likely to need, reducing your risk - and how to avoid the perils and pitfalls, such as hidden costs.

The guide includes a series of "pre-flight" checks for small enterprises seeking to

get off the ground, in areas such as tax relief entitlement, cashflow, raising investment, contingency planning and business structures.

It also focuses on new funding models by explaining recent developments in investment opportunities, such as crowdfunding and the use of social media.

The guide has been prepared by the Business Policy Committee of ICAS a group of CAs with a wealth of business experience who contribute their time on a voluntary basis to support ICAS.

The guide is available at: www.icas.org.uk/guide-to-starting-a-business

STArTING A BUSINESS: a step by step guide to starting and financing a new business

Anyone wanting to start a business for the first time will find the ICAS guide full of useful, practical tips.

Becky Woodhouse CA, founder and MD of Pure Spa

The ICAS guide to starting up a business provides a sound platform to help identify sources of finance for different business situations.

Robert Pattullo CA, business angel investor

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ICAS has much to contribute to a debate on tax devolution. Tax devolution means any form of control of taxes passing from Westminster to holyrood, whether under the Scotland Act 2012, the current campaign for full independence, or anywhere in between.

The ICAS contribution to the Scottish independence referendum debate has included publication of a number of tax papers. Six questions were asked in the first tax paper Scotlands Tax Future; What tax system would Scotland want? on design principles and approaches. The practicalities that both the Scottish and UK Governments and people of Scotland would have to embrace to see tax devolution happen were the subject of the second paper Scotlands Tax Future; The practicalities of tax devolution.

At the start of 2014, it seemed appropriate to reflect on the development of the debate so far and consider what progress has been made in addressing the topics in the first two ICAS tax papers. But the single biggest issue emerging over recent months is that many individuals, CAs or not, struggle to access the explanations they need to understand the place of our tax system in our economy the big picture tax debate - even before the issues of independence or further devolution are factored in. The lack of simple numbers in the independence referendum debate so far has seemingly not been helpful. In this third tax paper, Scotlands Tax Future; Taxes explained, the aim is also therefore to go back to some basics, address the information gap, and suggest an approach to understanding the role of tax in the referendum debate.

It is nearly two years since ICAS issued its first tax paper, asking questions on what tax system would Scotland want. Some answers are emerging, and the importance of the economic and political context in shaping the answers is becoming clearer. In particular, notable progress has been made by way of some credible and informative

expert analysis, and the Scottish Governments response is included in Scotlands Future: Your Guide to an Independent Scotland (the Guide). From the questions still being put to the ICAS technical team, it seems that the volume of detail sometimes overwhelms and the presentation of the few numbers in the Guide leaves a gap, particularly about the impact of oil and gas tax revenues on Scotlands spending capacity. The need for independent and unbiased analysis remains; and the desire for numbers is growing. Further insights are offered in this new paper, consistent with the ICAS aim of informing the debate without taking sides.

Firstly on tax system design, the Guide indicates the way forward after a Yes vote in the referendum is, in practice, to replicate the UK tax system for a transitional period (the number of years are not specified) with the potential for change in future. minor amendments, exactly the same as Westminster might propose in the annual Budget adjustments were included, principles were proposed, but the Guide is virtually silent on further detail. What would happen next? The competitive strategy on corporate tax rates is aspirational, perhaps because of concerns that the cost of tax competition with the rest of the UK might outweigh the benefits; that is not a criticism if the eventual outcome of this debate is simply that better informed decisions can be made.

many have suggested that the Guide focussed more on the emotional drivers to a decision on independence than the financial analysis. A lot of the economic commentary provided about the financial position in the Guide is based on the past, yet the vote is not to change the past the numbers for the future are the ones that logic should say matters and these may be very different.

And as for the practicalities, it appears that the transition costs the one-off costs to set up a new tax system in Scotland to take over all of the operations currently carried out by hmrC, as well as taking over administration in all other non-devolved areas have yet to be fully explored or explained. They apparently have been accepted as being in many hundreds of millions of pounds; what if transition costs were at a lot higher? With the dependency on hmrC to operate an independent Scotlands tax system in that transition phase, there is a likelihood that the timescale for adoption of new policy changes and benefits might be some years away. At what cost and timescale does it affect voters decisions, if at all, and are voters satisfied with the information they have been given? Whilst that really may be a question of whether an intellectual justification is being sought for an emotional decision, perhaps it is time for an honest cost-benefit analysis on public finances at a UK level as well as for Scotland - as well as consideration of alternative constitutional options for Scotland and the rest of the UK.

The paper will be available to download at: www.icas.org.uk/Scottishindependence/

Scotland's Tax Future - Taxes explained

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RESEARCH RESULTS SMALL PROJECTSAccounting for carbon and reinforcing disclosure

Colin Haslam and John Malamatenios, Queen Mary University of London and Glen Lehman, University of South Australia report

reducing carbon emissions is a major global challenge and one that must be taken seriously if we are to alleviate the risks associated with climate change. It is a legal obligation of governments and a major challenge to the corporate sector and so the measurement and disclosure of carbon emissions takes on added urgency. Think-tanks including the World resources Institute (WrI), World Business Council for Sustainable development (WBCSd) and International organization for Standardization (ISo), have established rules and tools for measuring and reporting carbon emissions. The Greenhouse Gas Protocol (GhG-Protocol) has become the de facto standard for corporate carbon footprint reporting.

From october 2013, the Companies Act 2006 (Strategic and directors reports: regulations 2013) requires that UK companies listed on the london Stock Exchange make carbon disclosures in their directors reports.These include the annual quantity of greenhouse gas (GhG) emissions stated in tonnes of carbon dioxide equivalent (Co2e) from activities for which the company is responsible, and at least one carbon intensity ratio.

mandatory carbon reporting is necessary if we are to determine whether companies are changing the intensity and trajectory of carbon emissions. measuring and reporting corporate GhG emissions will increase the visibility of targets and will also force innovative carbon reducing investment initiatives. The accounting professional bodies and academic researchers in field of accounting have a

significant role to play not only in terms of initiating new forms of disclosure but how these will translate into active dialogues between stakeholders to promote a reduction in carbon intensity.

There are significant challenges and these relate to the gap between measurement and change. on measurement, the GhG Protocol classifies emissions into three "scopes":

Scope 1: emissions that are direct emissions from owned or controlled sources;

Scope 2: indirect emissions incurred in the supply of purchased electricity; and

Scope 3: comprising all other indirect emissions occurring in the reporting companys value chain, including both upstream and downstream activities.

Whilst the science associated with translating different types of GhG emissions into carbon equivalents is now relatively stable. The accounting boundaries that are used to capture carbon are not so stable because they are affected by ongoing assumptions about which carbon generating activities are located inside or outside the responsibility

and control of the reporting entity. Firms are often restructuring, outsourcing and off-shoring business processes and carving up asset ownership and this modifies operational responsibilities and reported carbon emissions.

There are considerable difficulties associated with obtaining consistent and stable disclosures of carbon emissions within scopes 1 to 3. We argue that these weaknesses are offset by other potential benefits. These relate to how information disclosed about carbon emissions can be translated into metrics and incentives that would help to modify behaviour. For example, we have aggregated the key financial metrics of FTSE 100 companies and matched this information with their scope 1 and 2 carbon emissions data. our analysis is based on sixty-two firms that are listed continuously in the FTSE 100 during the period 2006-2012. For this group, carbon emissions, although cyclical in the recent recession, have now returned to the relatively stable pre 2008 figures in the range 450 to 460 million tonnes Co2e. Carbon emissions per employee in the FTSE 62 benchmark group also remain relatively stable recently in the range 120-130 tonnes Co2e.

This section reports the results from recently completed ICAS small projects

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In terms of carbon used to generate financial outputs, this FTSE 62 group of firms have consistently increased revenue earned from 2.5k to just over 3.5k per tonne of carbon used but collectively did not structurally transform their bottom line pre-tax profit per tonne of carbon emissions over the seven year period.

The United Nationals Environment Programme and Greenhouse Gas Protocol (UNEP/GhG-Protocol) have combined with other key stakeholders to establish a global project that has set itself the objective of widening carbon disclosure and the design of practical toolkits. These toolkits will help inform finance industry analysts. The UNEP/GhG-Protocol technical working group projects are motivated by a general observation that:

...the worlds financial institutions are there to finance a growing, sustainable economy, but the evidence suggests that, today, the industry performs that task poorly.1

In our project we combined the financial results and physical carbon emissions data for the FTSE 62 into a carbon-financial risk evaluation software tool. This reveals the trade-off between a reporting entitys financial performance/stockholder returns and carbon risk. It is this type of information that investors and pension funds will require as they progressively seek to reduce carbon risk exposure i

Documents

Focus on Research - Spring 2014