Co-operativesUK Accountants’ Forum 2010

1. Co-operativesUKAccountants’ Forum 2010

2. 2010 updateNicola Quayle

3. What is worrying people in 2010? What? Why? When? iXBRL Refinancings Bribery and corruption act Carbon Reduction Commitment

4. Refinancing graph • Maturing investment grade loans in EMEA Source: Thomson Reuters LPC/DealScan

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!

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

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

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

9. Technical update

10. FSP - Disc Ops FSP – IAS 1 and IAS 7 FI w/equity Liabilities Narrow Scope Income Taxes Leases Insurance Consolidation (Invest Co) Revenue Recognition Narrow Scope Income Taxes FSP – Presentation of OCI Revenue Recognition Annual Improv. IV Mgmt Commentary* FI Asset & Liab Offsetting CF Phase D Fair Value Measurement Leases Emission Trading CF Phase A Annual Improv. IV FSP - Disc Ops Defined Benefit Plans Hedging Consolidation CF Phase B Insurance FSP – IAS 1 and IAS 7 Termination Benefits Joint Ventures CF Phase C Consolidation disclosures CF Phase C FI w/equity Extractive Activities 2010 Q4 2011 Q1 2011 Q2+ IASB work programme until 2011 • Discussion Paper • Exposure Draft • Final Standard • Guidance • Roundtable • * Indicates Practice Statement Consolidation (Invest Co) FI C&M Liabilities FI Impairment FI Hedge Accounting FI Asset & Liab Offsetting

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?

12. The future of UK GAAP

13. The end of UK GAAP

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

15. Proposed regime *Certain disclosure exemptions proposed for non-publicly accountable subsidiaries

16. Key differences between IFRS for SMEs and the proposed FRSME

17. The real impact

18. How will it affect you in practice?

19. How will it affect you in practice?

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

21. IASB Exposure DraftsLeases and Revenue

22. Leasing

23. Exposure Draft LeasesThe “right-of-use” model Right to use leased asset Lessor Lessee Underlying asset Right-of-use asset Consideration (lease rentals) Performance obligation approach Derecognition approach Recognise “right-of-use” asset Recognise liability to pay rentals

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

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

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?

27. Lease liability û PV of lease payments Includes expectations about Purchase options ü ü ü ü Lease term Contingent rentals RV guarantees Term option penalties Discount rate Initial measurement – lease liability

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?

29. Lease liability û PV of lease payments Includes expectations about Purchase options ü ü ü ü Lease term Contingent rentals RV guarantees Term option penalties Discount rate Initial measurement – lease liability

30. Discount rate OR if readily determinable Lessee’s incremental borrowing rate Rate the lessor charges the lessee 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. 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

31. Initial measurement – right-of-use asset û ü

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

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)

34. Step 1: Identify the contract Contract Transaction price for the contract Step 3: Determine the transaction price Step 2: Identify the separate performance obligations in the contract Performance obligation 1 Performance obligation 2 Transaction price allocated to performance obligation 1 Transaction price allocated to performance obligation 2 Step 4: Allocate the transaction price to the separate performance obligations Recognise revenue Recognise revenue Step 5: Recognise revenue as each performance obligation is satisfied Exposure Draft Revenue from contracts with customersThe Proposed Model

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 ? Yes No Separate performance obligations Combine good or service with other goods or services

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 • 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 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. and

37. Step 5: Recognise revenue – indicators that control is transferred • No single factor in isolation is decisive. The customer has legal title The customer has physical possession Indicators that the customer has obtained control of a good or service The design or function is customer-specific The customer has an unconditional obligation to pay

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

39. 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 Key changes and their impact

40. The UK Bribery Act 2010 Louise Thompson

41. The UK Bribery Act – a brief overview • UK Bribery Act 2010 • Consequences of violation • The usual suspects and red flags • Managing the risk • Questions

42. Recent Enforcement Actions Amec to pay out after SFO action BAE pays out £300million Innospec's $40 million global settlement Mabey and Johnson agrees corruption plea bargain with Serious Fraud Office Daimler charged for bribery

43. 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.

44. Draft - For Discussion and Demonstrative Purposes Only UK Bribery Act • 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

45. 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

46. 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

47. What are the Red Flags? An industry with a history of violations Joint ventures with government officials / parties Unusual bonuses, advances and / or special payments A country with greater propensity for corruption, bribes and kickbacks Parties refuse to agree to comply with policies & laws Unusual payment terms Inflated or inaccurate invoices Refusal to divulge identities of owners A poor business reputation Extensive M&A activity Inadequate third party due diligence Unusually high commissions paid versus the market (or versus the contracts) Government customers and/or heavy reliance on government Contracts lacking economic sense

48. What We Sometimes See…

49. “Red Flags mean stop…….not slalom around!” • Richard Alderman, SFO Director

50. An Effective Compliance Programme KPMG Compliance Framework Governance Governance Policies and Procedures Risk Assessment Comprehensive A-B&C policies and procedures developed under direction of Legal and Compliance Risk profiling operations using input from policies, procedures, interviews and other sources Education & Training Training and Education Prevention Prevention Setting the direction in appropriate training; then tracking Education & Training Response Plan Enforcement Measures for addressing compliance breaches includingsanctions and disciplinary actions Measures for addressing R Channels for raising Issues and Concerns e compliance breaches, including Channels for raising issues s Response sanctions, disciplinary etc p and concerns n o o Detection i n t s c A confidential mechanism for reporting unethical behaviour A confidential mechanism for e e t e reporting unethical behaviour D Investigation Investigation Strategy Monitoring for Compliance Monitoring & Auditing Timely and appropriate response to investigate non-compliance In-house and third party reviews monitoring for compliance using data analytics and interviews In - house and third party reviews monitoring for compliance using data analytics and interviews