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Co-operativesUKAccountants’ Forum 2010
2010 update
Nicola Quayle
© 2010 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.
3
What is worrying people in 2010?
Refinancings
Carbon Reduction
Commitment
Bribery and corruption
act
What? Why? When?
iXBRL
© 2010 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.
4
Refinancing graph
Maturing investment grade loans in EMEA
Source: Thomson Reuters LPC/DealScan
© 2010 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.
5
Our advice
Recognise there are less banks around!
Remaining banks are tight on liquidity
Go early – it takes longer
Robust model
Run sensitivities
Explain your business – 3 years historical / 3 year future
Expect more diligence
Work on new multiples
Covenants will be tighter
Treat bankers with respect!
Don’t be last in the queue!
© 2010 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.
6
iXBRL – What, Why, When
WHY?
HMRC will be able to electronically review accounts and automatically identify inconsistencies and inaccuracies through ratio analysis and electronic profiling. It will also facilitate the identification and closure of tax loopholes
The process will give HMRC paperless storage providing quick and easy access to significant volumes of information.
XBRL has already been adopted by regulatory bodies in the US, Japan, Australia, Belgium and the Netherlands
© 2010 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.
7
iXBRL – What, Why, When
WHEN?
All corporate tax returns filed after 31 March 2011 must be in iXBRL format along with supporting computations and accounts
All companies which are required to submit a tax return must comply
© 2010 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.
8
How does this affect my business?
COST
The move to electronic submission passes the cost of preparing the data to the tax payer
ONEROUS
In the majority of cases the only place where all of the required data is maintained in one place is the statutory accounts. These are typically in Word or Excel formats which do not facilitate direct conversion to iXBRL
The process of converting statutory accounts to iXBRL is onerous and manually intensive
NO EXEMPTIONS
The requirements apply to all companies which file a tax return regardless of size. There are no exemptions from the rule
LOOKING FORWARD
As disclosure requirements change, so does the format of statutory accounts
Technical update
© 2010 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.
10
IASB work programme until 2011
Discussion Paper
Exposure Draft
Final Standard
Guidance
Roundtable
* Indicates Practice Statement
FSP - Disc Ops
Liabilities
Annual Improv. IV
CF Phase B
CF Phase C
2010 Q4 2011 Q1
Hedging
FSP – IAS 1 and IAS 7
Leases
Consolidation disclosures
Joint Ventures
Leases
Consolidation
Mgmt Commentary*
FI w/equity
Revenue Recognition
Insurance
Annual Improv. IV
Narrow Scope Income Taxes
CF Phase C
CF Phase A
2011 Q2+
Emission Trading
InsuranceConsolidation
(Invest Co)
FI Asset & Liab Offsetting
FI Impairment
FI Hedge Accounting
FI C&M Liabilities
Consolidation (Invest Co)
FI Asset & Liab Offsetting
Revenue Recognition
CF Phase DFair Value
Measurement
FSP – Presentation of OCI
FSP - Disc Ops
FSP – IAS 1 and IAS 7
FI w/equity
Narrow Scope Income Taxes
Termination Benefits
Extractive Activities
Defined Benefit Plans
© 2010 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.
11
What’s driving this frantic pace?
Responding to financial crisis/G20
FASB-IASB MoU
SEC workplan leaves little room to manoeuvre
Chair and 5 other IASB members retire by June 2011
End of the 10-year Tweedie era
IASB actively recruiting
Practical implications
Push to publish by June 2011
Reconsideration of other projects in progress
Change in tone/priorities?
The future of UK GAAP
© 2010 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.
13
The end of UK GAAP
© 2010 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.
14
Exposure Draft – Future of financial reporting
Proposals for a three tier framework
Includes two draft FRSs:
Application of Financial Reporting Requirements
Financial Reporting Standard for Medium Sized Entities
Includes explanation of proposals, impact assessment and two new standards
Comment deadline is 30 April 2011
Effective for accounting periods beginning on or after 1 July 2013
Early adoption permitted
© 2010 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.
15
Proposed regime
Tier Accounting regime
Type of entity Example
Tier 1 EU-IFRS* EU-listed entities
AIM entities
Other publicly accountable entities
Parent company in a listed group
Tier 2 FRSME* Large and medium non-publicly accountable entities
Small publicly accountable entities that are prudentially regulated
Subsidiaries in a listed group (not publicly accountable)
Tier 3 FRSSE Small non-publicly accountable entities
Small private companies
*Certain disclosure exemptions proposed for non-publicly accountable subsidiaries
© 2010 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.
16
Key differences between IFRS for SMEs and the proposed FRSME
Conflicts with legal requirements
Consolidation
Income tax
Disclosures
Dormant companies
© 2010 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.
17
The real impact
Selected GAAP differences
Current UK GAAP Proposed FRSME EU-IFRS
Goodwill Amortised over rebuttable max life of 20 years
Intangibles generally subsumed within goodwill
Presumed life of 5 years or less unless goodwill has a longer UEL
Intangibles recognised separately
No amortisation; annual impairment test
Intangibles recognised separately
Derivatives Generally off balance sheet (non-FRS 26)
On balance sheet On balance sheet
Net investment hedging
SSAP 20 cover concept in individual accounts - can hedge with loans
On consolidation only – cannot hedge with loans unless IAS 39 fully applied
On consolidation only
Functional currency Level of autonomy not considered in determining functional currency
Determination of functional currency – consider if subsidiary is autonomous
Determination of functional currency – consider if subsidiary is autonomous
Deferred tax Timing difference basis Permanent differences
Temporary difference basis Initial recognition exemption applies
Temporary difference basis Initial recognition exemption applies
Borrowing costs May capitalise Must expense Must capitalise when criteria met
Development costs May capitalise Must expense Must capitalise when criteria met
Group defined benefit plans
Can all be off balance sheet (individual accounts)
Treatment unclear Must be in at least one individual company balance sheet
© 2010 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.
18
How will it affect you in practice?
Area Potential impact
Distributable profits Change in accounting policies may create dividend traps
Systems and internal control environment
Systems will need to be updated to calculate EU-IFRS/FRSME compliant data
© 2010 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.
19
How will it affect you in practice?
Area Potential impact
Training and resource Accounting staff will be required to be trained in EU-IFRS and/or the FRSME
Additional time will be required to effect the changes
Financial covenants Impact on interest cover ratios and other KPIs
Bonus scheme Potential implications for performance-related remuneration schemes
© 2010 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.
20
Will it affect the tax I pay?
Will not affect cash tax
Research and development
Pensions
Share-based payments
Assets taxed under capital gains
Borrowing costs whether expensed or capitalised in fixed assets
Will affect cash tax
Tax deductible goodwill – unless 4% election is made
Financial instruments – unless the disregard regulations apply
Some tax planning – UK to UK financing ideas that rely on specific accounting treatments
Rent free periods/upward only rent reviews
IASB Exposure DraftsLeases and Revenue
© 2010 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.
22
Leasing
© 2010 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.
23
Exposure Draft LeasesThe “right-of-use” model
Lessor Lessee
Recognise “right-of-use”
asset
Recognise liability to pay
rentals
Right to use leased asset
Consideration(lease rentals)
Performance obligation approach
Derecognition approach
Underlying asset Right-of-use asset
© 2010 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.
24
Key impacts
Leases “on balance sheet”
Increases in assets and liabilities
Impact on key ratios and covenants
Impact on income statement
Front-loading of expenses vs. increase in EBITDA
© 2010 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.
25
Example income statement impact
Company has an office lease that is 15 years with a tenant-only break clause at 10 years:
Rent £50,000 p.a.
No Retail Price Index reviews
6% discount factor
© 2010 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.
26
Key impacts
Leases “on balance sheet”
Increases in assets and liabilities
Impact on key ratios and covenants
Impact on income statement
Front-loading of expenses vs. increase in EBITA
New liability measurement basis
Reassessment → volatility
Likely effective date 2013 – 2014?
© 2010 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.
27
Initial measurement – lease liability
Lease liability
PV of lease paymentsIncludes expectations
aboutPurchase options
Lease termContingent
rentalsRV guarantees Term option penalties
Discount rate
© 2010 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.
28
What is the lease term?
Lessee has entered into a non-cancellable lease contract with Lessor to lease a building. The lease term is 4 years, and Lessee has the option to extend the lease either by another 2 years or by another 4 years
At inception of the lease, Lessee’s expectations about exercising the option to extend the lease term are as follows:
Lease term of 4 years i.e. option to extend not exercised: 40%
Exercise of option to extend by 2 years: 30%
Exercise of option to extend by 4 years: 30%
What lease term should be used to calculate the present value of the obligation to make lease payments?
© 2010 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.
29
Initial measurement – lease liability
Lease liability
PV of lease paymentsIncludes expectations
aboutPurchase options
Lease termContingent
rentalsRV guarantees Term option penalties
Discount rate
© 2010 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.
30
Discount rate
The rate of interest that, at the date of inception of the lease, the lessee would have to pay to borrow over a
similar term, and with a similar security, the funds necessary to
purchase a similar underlying asset.
Lessee’s incremental borrowing rate Rate the lessor charges the lessee
A discount rate that takes into account the nature of the
transaction as well as the specific terms of the lease such as
lease payments, lease term and contingent rentals
OR if readily
determinable
© 2010 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.
31
Initial measurement – right-of-use asset
Right of Use Asset = Initial lease liability + initial direct costs
Initial direct costs
Commissions
Legal fees
Costs in respect of evaluating and recording guarantees, collateral and other security arrangements
Costs associated with negotiating lease terms
Costs of preparing and processing lease documents
Costs of closing the transaction
Other costs that are incremental and directly attributable to negotiating and arranging the lease
General overheads
Advertising costs
Costs associated with soliciting potential leases
Costs of servicing existing leases
Costs related to other ancillary activities
© 2010 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.
32
Subsequent measurement
Lease liability
Amortised cost using the effective interest method
Re-assess lease payments if facts and circumstances indicate a significant change to amount of lease liability
Generally, do not revise discount rate used at initial recognition
Accounting for reassessment of liability
P&L, if relates to current period
Otherwise generally adjust ‘right-of-use’ asset
Right-of-use asset
Amortise over lease term (or underlying asset life if shorter)
Impairment test in accordance with IAS 36 Impairment of Assets
© 2010 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.
33
Lessor Accounting: Sub-leasing
Company has entered into sub-lease agreements for unutilised property space in the UK
Accounting for head lease
Dr ‘right of use’ asset
Cr lease liability (for future lease payments)
Accounting for sub-lease
Dr lease asset (lease payment receivable)
Cr lease liability for obligation to deliver use of asset (performance obligation approach)
or Cr lessee ‘right of use’ asset (de-recognition approach)
© 2010 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.
34
Exposure Draft Revenue from contracts with customers The Proposed Model
Step 2: Identify the separate
performance obligations in the contract
Performance obligation 1
Performance obligation 2
Step 4: Allocate the transaction price to the separate
performance obligations
Transaction price allocated to performance
obligation 1
Transaction price allocated to performance
obligation 2
Step 5: Recognise revenue as
each performance obligation is
satisfied
Recognise revenue
Recognise revenue
Step 1: Identify the
contract
Step 3: Determine the
transaction price
Contract Transaction price for the contract
© 2010 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.
35
Step 2: Identify the separate performance obligations in the contract
A promised good or service is distinct from others if
the entity or another entity sells an identical or similar good or service separately; or
the entity could sell the good or service separately, because it has
a distinct function; and
a distinct margin.
Is promised good or service distinct from other goods or services in the contract ?
Separate performance obligations
Yes No
Combine good or service with other goods or services
© 2010 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.
36
Step 5: Recognise revenue when a performance obligation is satisfied
A performance obligation is satisfied when the customer obtains control of a good or service. Control is transferred to the customer when:
Control also includes the ability to prevent other parties from directing the use of and receiving the benefit from the asset
and
The customer has the ability to receive the benefit from the asset
i.e. the present right to obtain substantially all of the potential cash flows from that asset (either cash inflow or reduction in cash outflow) through use, sale, exchange, etc.
The customer has the ability to direct the use of the asset
i.e. the present right to:
use the asset for its remaining economic life; or
to consume the asset in the customer’s activities
© 2010 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.
37
The customer has legal title
The customer has an unconditional
obligation to pay
The customer has physical possession
The design or function is customer-specific
Indicators that the customer has obtained
control of a good or service
Step 5: Recognise revenue – indicators that control is transferred
No single factor in isolation is decisive.
© 2010 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.
38
Specific application issues
Sale of product with a right of return
Product warranties
Customer incentives
Licensing and right of use
Bill-and-hold arrangements
Consignment arrangements
© 2010 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.
39
Key changes and their impact
Key change
Segmentation of contracts into performance obligations
Revenue recognition based on transfer of control
Withdrawal of percentage of completion method
Measure revenue using probability weighted outcome approach
Implication
May accelerate or defer revenue
Requires judgement. May accelerate or defer revenue
Deferral of revenue if control not passed continuously to customer
More judgement and estimates required
Reduction in revenue
May accelerate or defer revenue
The UK Bribery Act 2010
Louise Thompson
© 2010 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.
The UK Bribery Act – a brief overview
• UK Bribery Act 2010
• Consequences of violation
• The usual suspects and red flags
• Managing the risk
• Questions
© 2010 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.
Amec to pay out after SFO action
Mabey and Johnson agrees corruption plea bargain with Serious Fraud Office
Daimler charged for bribery
Innospec's $40 million global settlement
BAE pays out
£300million
Recent Enforcement Actions
© 2010 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.
UK Bribery Act 2010 - objective
"to provide a modern, single piece of legislation criminalising bribery, allowing the police,
prosecutors and the courts to tackle bribery effectively whether committed at home or abroad”.
Enacted on 8 April 2010 and Received Royal Assent – scheduled to be in force April 2011.
© 2010 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.
Replaces existing common law offence of bribery; creates new offences covering:
The offer, promise, and giving of an advantage
The request, agreeing to receive, or acceptance of an advantage
Public and private organisations
Creates a new “corporate offence” for failure of a commercial organisation to prevent bribery
Means an organisation would be criminally liable for bribery committed in connection with its business by those working for it or on its behalf
Penalties could include:
Unlimited fines and/or maximum of 10 years imprisonment
Immediate disqualification from any public sector work within the European Union
Defence provided if “adequate procedures” are in place
Ministry of Justice expected to issue guidance – however this will be “non-prescriptive” as a compliance framework model is not “one size fits all”
The Bribery Act received Royal Assent on 8 April 2010
Due to come in force April 2011
UK Bribery ActDraft - For Discussion and
Demonstrative Purposes Only
© 2010 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.
Consequences of Violation
Consequences of Violations
Investigations
Penalties
- Fines
- Jail terms
- Disgorgement of profits
- Independent Monitorships
Other significant costs
- Reputational loss
- Debarment
- Extradition, prosecution, and imprisonment
- Reduction of shareholder value
© 2010 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.
The “Usual” Suspects
Some of the usual suspects – things to watch out for…
- Commissions
- Gifts & entertainment
- Discounts, rebates, refunds and returns
- Travel and expenses
- Charitable and political contributions
- Fictitious employees, vendors or customers
- Any other method to conceal a kickback, embezzlement, fraudulent financial reporting or steering business
© 2010 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.
What are the Red Flags?
An industry with a history of violations
A poor business reputation
A country with greater propensity for corruption, bribes and kickbacks
Inadequate third party due diligence
Unusual bonuses, advances and / or special payments
Unusual payment terms
Inflated or inaccurate invoices
Extensive M&A activity
Joint ventures with government officials / parties
Parties refuse to agree to comply with policies & laws
Refusal to divulge identities of owners
Unusually high commissions paid versus the market (or
versus the contracts)Government customers and/or heavy reliance on governmentContracts lacking economic sense
© 2010 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.
What We Sometimes See…
© 2010 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.
“Red Flags mean stop…….not slalom around!”
Richard Alderman, SFO Director
© 2010 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.
An Effective Compliance Programme
Investigation
De te
c t io
n
Prevention
Re
sp
on
se
Enforcement
Measures for addressing
compliance breaches, including
sanctions, disciplinary etc
Monitoring & Auditing
In -house and third party reviews
monitoring for compliance using
data analytics and interviews
Channels for raising issues
and concerns
A confidential mechanism for
reporting unethical behaviour
Education & Training
Governance
KPMG Compliance Framework
Prevention
Response PlanMeasures for addressing compliance breaches including
sanctions and disciplinary actions
Monitoring for ComplianceIn-house and third party reviews monitoring for compliance using data analytics and interviews
Channels for raising Issues and Concerns
A confidential mechanism for reporting unethical behaviour
Risk Assessment
Risk profiling operations using input from policies, procedures, interviews and other sources
Policies and Procedures
Governance
Comprehensive A-B&C policies and procedures developed under direction of Legal and Compliance
Education & Training
Training and Education
Setting the direction in appropriate training; then tracking
Investigation Strategy
Response
Det
ectio
nTimely and appropriate response to investigate non-compliance
The role of the accountant in carbon
accounting
Ben Wielgus
© 2010 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.
Why is KPMG talking to me about carbon accounting?
© 2010 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.
Why are stakeholders concerned about carbon accounting?
New and evolving
May not have been audited
before
Don’t know what to expect
May know there are some issues
May be reliant on others’ data
May have this in their goals
Skills may not exist
Requires
cooperation
Data systems may not be
ready
© 2010 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.
Carbon footprint – Simple isn’t it?
No...
not reallyMethodology
Boundaries
Verification
Accuracy
Completeness
Relevance
Conversion
factors
Audit trail
Skillset
© 2010 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.
Who’s involved in the carbon accounting?
and others…
Carbon
accounting
Estates
Energy Legal
Finance
Procurement
BoardMarketing
© 2010 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.
Why might this be an issue for the Board?
• Cost?
• Cash flow?
• Reputation?
• Risk?
• Opportunity?
• License to operate?
• Penalties ….or prison?
© 2010 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.
Carbon Reduction Commitment (CRC) Scheme
Energy bills more than 6000MWh/pa = £1m pa in 2008
4000 UK organisations are full participants
Originally designed to be a cap and trade scheme
Originally designed to be revenue neutral- Now it functions as a retrospective levy on emissions
League tables on performance
April 2010 was the first month of measurement
Expense impact starts in April 2011
Annual evidence packs to regulators
20% of participants a year will be audited
© 2010 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.
CRC: The first 3 years (Phase 1)
For Phase 1
Sept
2010
Registration period
April
2010
April
2011
April
2012
April
2013
For Phase 2
Sept
2011
July
2011
July
2012
July
2013
Oct
2013
Oct
2012
Oct
2011
Energy use monitoring period
Purchase of allowances
Submission of evidence packs
League tables published
© 2010 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.
How much is the CRC going to add to costs?
£2million pa on electricity and gas = 15k tonnes carbon pa
Assumes an escalating carbon price of £2 / tonne pa
Year 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16
Outlay in April
£0
% of energy bills
0%
Minimum fine at 5% misstatement
= £30,000
£180k £180k £210k £240k £270k
Note this simplifies the impact and ignores fees and change in price of energy.
Possible Fines
Note: Numbers are illustrative only
9% 9% 11% 12% 14%
© 2010 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.
How do I account for CRC or other carbon allowances?
IASB IFRIC 3 was withdrawn 5 years ago
There is no other standard
Allowances are likely to be an intangible asset
CRC appears likely to be a levy, not a tax
- Therefore we suggest, in most cases, it is OpEx linked to energy
Other carbon offsets etc are entirely voluntary
- Therefore we suggest, in most cases, they are also OpEx
There is a need to accrue for the CRC liability during the year
© 2010 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.
Financial implications of carbon pricing
Footprinting
Forecasting for budgets
Cash flow and accounting
Modelling
Investment appraisal
Trading….?
© 2010 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.
CRC Readiness Reviews – Cause of data errors
Boundaries
3rd party data
Availability
Conversion factors
Technology
Estimates/restatements
Human error/typos
Primarily come from findings relating to recording/reporting issues. These can be broken down by cause:
© 2010 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.
What questions are we asking our clients?
Could finance, estates and energy teams talk more?
Should someone be checking carbon numbers?
Does the strategy consider carbon?
Are your systems ready to report for the CRC?
Do investment decisions factor in a cost of carbon?
What do you need to do to manage these risks and turn them into opportunities for your organisation?
Any questions?
You can read more about KPMG’s Carbon Advisory Group, including our guidance on various issues at:
www.kpmgcarbonadvisory.com
You can read more about KPMG’s Environmental Tax Group, including our free ETHiC tool at:
www.kpmg.co.uk/services/t/etig/index.cfm
Ben Wielgus
Climate Change and Sustainability Advisor
+44 7881 917 557