Author: Mohammed Haque

  • The FRC’s Professional Judgement Guidance

    In the auditing profession, technical competence is merely the entry requirement. The true hallmark of a high-quality auditand the primary defense against material misstatement is the effective exercise of professional judgement. Recognizing that poor judgement is a recurring theme in quality failures, the Financial Reporting Council (FRC) issued comprehensive guidance in June 2022 to provide auditors with a structured, rigorous approach to decision-making.

    While this guidance is non authoritative, it encapsulates “good practice” that the FRC expects firms to analyze and integrate into their own internal frameworks. We have summarised some of their key points, however please refer to the document in the link above to read their full guidance.

    Understanding the Framework

    The FRC defines professional judgement as the application of relevant training, knowledge, and experience within the context of auditing, accounting, and ethical standards to make informed decisions. This isn’t just about “big” decisions like going concern; it permeates every level of an audit, including resourcing, task allocation, and firm-level quality management.

    The FRC’s framework is built upon four pillars designed to ensure consistency and quality:

    1) The Auditor’s Mindset

    A robust judgement begins with the right mental posture. The framework identifies five critical mindset aspects:
    Public Interest Benefits: Understanding that the audit acts for the benefit of intended users helps motivate objectivity and a commitment to quality.

    Professional Scepticism: Maintaining a questioning mind and critically assessing evidence is vital, especially when challenging management assertions.

    Psychological Factors and Bias Awareness: Auditors must actively guard against “judgement traps” and bias:


    Sensitivity to Uncertainty: Acknowledging that information sources vary in reliability and that some outcomes are inherently uncertain allows for better risk management.

    Commitment to Quality: Prioritizing a robust process over time or budget pressures is essential for reaching reasonable conclusions.

    The Professional Judgement Process

    While judgement is rarely linear, the FRC suggests a structured process for complex issues:

    Trigger: Remaining alert to situations that require more than an intuitive evaluation.

    The Right Person: Ensuring the individual making the decision has the necessary skills and resources, and escalating issues when they exceed one’s experience.

    Framing the Issue: Defining the problem, articulating objectives, and identifying all viable alternatives to avoid narrow thinking.

    Marshalling Information: Seeking out diverse data sources, including “external signals” outside the entity’s finance function.

    Analysis and Evaluation: Evaluating the relevance and reliability of the gathered information in the context of the judgement.

    Stand Back and Conclude: Pausing to view the preliminary conclusion in the round to ensure it hasn’t been unduly affected by bias or time pressure.

    Document, Communicate, and Reflect: Recording the rationale for the decision, explaining it to stakeholders, and reflecting on the process to improve future judgements.

    3) Consultation

    Quality is significantly enhanced by discussion. Engaging with technical panels, experts, or engagement quality reviewers helps mitigate individual biases and fosters a culture of healthy debate within the firm.

    4) Environmental Factors

    Auditors do not work in a vacuum. The framework acknowledges that firm culture, time constraints, and the integrity of management at the audited entity all significantly impact how challenging it is to exercise quality judgement.

    Illustrative Examples in Practice


    To show how these principles apply in the real world, the FRC provides three fictional scenarios.

    Example 1: The “Window Dressing” Disclosure

    Scenario: A manufacturing company significantly increases its cash balance just before year-end by delaying supplier payments and offering customer discounts, resulting in a deceptively low “net debt” figure in the notes.

    The Judgement: The auditor must decide if the disclosure is materially misstated because it obscures the entity’s true financial position throughout the year.

    The Application: The auditor demonstrates scepticism by questioning management’s “commercial reasons” and researches industry peers to see how they disclose average net debt. This highlights the need to “frame” the issue around user needs and fair presentation rather than just technical accuracy.

    Example 2: The “Close-Call” Going Concern

    Scenario: A group recovers from the pandemic but faces debt refinancing risks. Management claims there is no material uncertainty, pointing to informal bank support and shareholder letters of intent.

    The Judgement: The engagement partner must determine if a “material uncertainty” exists regarding going concern.

    The Application: Despite intense pressure from management to sign off quickly, the partner consults with her firm’s ethics and technical teams. This illustrates how environmental factors (time pressure) can threaten quality and the importance of using safeguards like consultation to mitigate threats to objectivity.

    Example 3: The Hostile Audit Committee

    Scenario: Following a delay in an audit caused by late and incomplete management papers on goodwill impairment, a hostile Audit Committee threatens to put the audit out to tender.

    The Judgement: The audit firm must decide whether to continue the relationship for the next year.

    The Application: An internal panel assesses the integrity of the client’s governance and the appropriateness of the team’s challenge. This example warns against “motivated reasoning”—the firm must ensure that financial priorities (profitability of the audit) do not lead to an inappropriate decision to continue if the client lacks integrity or ethical values.

  • Changes to safeguarding for payments and e-money firms and CASS 15 audits

    New CASS 15 Safeguarding Rules: A Guide for EMIs and Payment Firms

    The Financial Conduct Authority (FCA) has recently finalized its overhaul of the safeguarding regime for payments and e-money firms. Introduced under Policy Statement PS25/12, the new rules represent the most significant shift in the sector’s regulatory landscape in years, moving firms toward a rigorous framework under CASS.

    For many firms, the transition to the new CASS 15 chapter will require a major rethink of their internal controls, governance, and audit arrangements.

    Why the change?

    The FCA’s primary goal is to address long standing weaknesses in how firms safeguard client funds. By strengthening these rules, the regulator aims to ensure that if a firm fails, customer money can be returned more quickly and in full. The new regime is designed with failure in mind, meaning firms must prove they can identify and segregate client funds at any given moment.

    Key Milestones: The Roadmap to Compliance

    The transition is split into two distinct stages:

    The Supplementary Regime (Interim Rules):
    Taking effect from 7 May 2026, these rules strengthen existing requirements around record keeping, monitoring, and reporting.

    The Post-Repeal Regime (CASS 15):
    This is the end state where the current Electronic Money Regulations (EMRs) and Payment Services Regulations (PSRs) are replaced by the prescriptive CASS 15 rules in the FCA Handbook.

    What is Changing for Audit and Assurance?

    Perhaps the most critical change for senior management is the shift in how safeguarding is audited.

    Statutory Auditor Requirement:
    Under the new rules, safeguarding audits can no longer be conducted by general regulatory consultants. They must be performed by statutory auditors where EMIs and payment firms hold more than £100k. This brings safeguarding assurance in line with other regulated client asset regimes (like MiFID firms).

    Reporting Breaches:
    Auditors will likely be required to report all safeguarding breaches to the FCA, regardless of materiality. This removes management discretion over what is escalated to the regulator.

    Strict Reconciliation:
    The new rules mandate daily internal and external reconciliations. Auditors will look for robust, automated processes rather than manual, error-prone spreadsheets.

    Statutory Trust:
    CASS 15 introduces a statutory trust over relevant funds. This creates a more robust legal protection for customers but requires precise accounting and legal documentation to be in place.

    Who is affected?

    The rules apply to:

    • Authorised Payment Institutions (APIs)
    • Authorised E-Money Institutions (EMIs)
    • Small EMIs (SEMIs)
    • Credit Unions issuing e-money

    Small Payment Institutions (SPIs) are not mandated to follow the full regime but can choose to “opt-in” to bolster their credibility and consumer protection.

    How to Prepare: A Checklist for Firms

    With the May 2026 deadline approaching, firms should begin their gap analysis immediately:

    Review Governance:
    Ensure there is clear senior management accountability for safeguarding (specifically under the SM&CR framework).

    Audit Your Tech:
    Evaluate whether your current reconciliation engines and sub-ledgers can handle the requirement for daily, granular reporting.

    Document the ‘Flow of Funds’:
    Create a detailed map of how money enters and leaves your business, identifying every point where funds are “relevant” and must be protected.

    Engage Your Auditors Early:
    Because the new rules require a specialist statutory audit, you should speak with your auditors now to ensure they have the capacity and expertise to meet the new FRC CASS assurance standards.

    How MAH Can Help

    At MAH, we specialise in helping FinTech and financial services firms navigate complex regulatory audits. As the FCA increases its scrutiny of the payments sector, having a robust, compliant safeguarding framework is no longer optional, it is a prerequisite for survival.

    We can assist your firm with:

    • Pre-audit readiness reviews to identify gaps before the May 2026 deadline.
    • Statutory safeguarding audits compliant with the new CASS 15 standards.
    • Internal control advisory to help automate and secure your reconciliation processes.

    Contact us today for a consultation on how the CASS 15 changes will impact your business and to ensure you are ready for the new regime.

  • Increase in minimum wage from 1 April 2026

    In the UK, the National Living Wage (NLW) and National Minimum Wage (NMW) are set for a significant uplift on 1 April 2026.

    This follows a pattern of “ambitious” wage setting by the Low Pay Commission (LPC) aimed at maintaining the wage floor at two-thirds of median hourly earnings.

    The planned rates for April 2026 are:

    National Living Wage (21+): £12.71 (a 4.1% increase). This is around £24,000 per year for a full time worker.

    18–20 Year Old Rate: £10.85 (an 8.5% increase, reflecting a policy drive to close the “youth gap”).

    16–17 and Apprentice Rate: £8.00 (a 6.0% increase).

    The Economic Research Lens: Pros and Cons

    Economists traditionally view the minimum wage through two competing frameworks: the Neoclassical Model (where higher wages lead to lower demand for labor) and the Monopsony Model (where firms have “buyer power” over workers, and a minimum wage can actually increase employment by drawing more people into the labor market).

    1. Impact on Employees
      – Pros: The primary benefit is the compression of earnings inequality. Academic studies (e.g., Dustmann et al., 2021) show that the UK’s minimum wage has been highly effective at raising the floor for the bottom 10% of earners without causing mass displacement.

      – Cons: Hours-reduction leakage. Some research suggests that while hourly pay rises, employers may respond by reducing total hours worked (the “intensive margin”), potentially leaving weekly take-home pay stagnant for some.
    2. Impact on Businesses
      – Pros: Efficiency Wage Theory suggests that higher pay can reduce “labour churn” (turnover). Firms save on recruitment and training costs as employees stay longer, and higher morale can boost marginal productivity.

      – Cons: Profit Margin Compression. In labor-intensive sectors like hospitality and social care, wage floors are often “binding” (affecting a large percentage of the workforce). For these firms, the 2026 increase—compounded by changes to Employer National Insurance (NICs)—represents a significant rise in the Total Cost of Employment (TCE).
    3. Impact on Consumers
      – Pros: Increased Marginal Propensity to Consume (MPC). Lower-income workers tend to spend a higher proportion of every extra pound earned compared to high earners. This can stimulate local demand.

      – Cons: Cost-Push Inflation. In sectors with low profit margins, businesses often utilize “pass-through pricing.” Research from Frontier Economics (2025) commissioned by the LPC indicates that while the aggregate effect on CPI is modest, specific service-sector prices (like restaurant meals) often rise in direct correlation with NMW hikes.

    Historical Evidence: What happened before?
    Critics of the minimum wage often predict “disemployment” (job losses), but the UK’s historical data tells a more nuanced story:

    The “Card and Krueger” Paradigm
    The landmark 1994 study by David Card and Alan Krueger shifted economic thinking by showing that a minimum wage increase in New Jersey didn’t hurt fast-food employment. UK research by Machin and Manning similarly found that when the UK introduced the NMW in 1999, the predicted “employment catastrophe” never arrived.

    The Tipping Point Hypothesis
    Recent UK data from the Low Pay Commission (2024–2025) suggests we may be approaching a “tipping point.”

    2024/2025 Context: The 6.7% increase in 2025 was absorbed, but business groups reported a shift toward capital-labour substitution (e.g., more self-service kiosks in retail and tablet ordering in restaurants) as a direct response to the rising cost of human labor.

    Youth Employment: Research from London Economics (2025) found that narrowing the gap between the 18–20 rate and the adult rate (as seen in the 8.5% jump for 2026) makes older, more experienced workers relatively “cheaper” to hire, potentially cooling the labor market for entry-level youth.

  • Urgent statutory audits to avoid prosecution by Companies House

    Summary about an urgent statutory audit

    Several companies have reached out to us because they were very late in filing their accounts and Companies House threatened to prosecute the directors unless the accounts were filed within 28 days. This is especially worrying for companies who need to file audited accounts, as an audit cannot be done overnight and takes time. However, we had capacity and we were able to complete the urgent statutory audit in time and the directors successfully avoided prosecution.

    Have you received a letter from Companies House threatening prosecution for late accounts?

    In recent years, a noticeable shift in posture from Companies House has signaled a departure from what many directors previously perceived as a relatively permissive enforcement regime. While the automatic imposition of late filing penalties under the Companies (Late Filing Penalties) Regulations 2008 remains the primary administrative deterrent, there is an increasing trend toward the deployment of more severe enforcement mechanisms. Specifically, many non-compliant entities are now receiving formal warnings regarding the potential for criminal prosecution of directors under the Companies Act 2006.

    For directors of companies that have fallen significantly behind their filing obligations, these notices are not merely administrative formalities. They represent a significant escalation in risk, one where the consequences extend beyond financial levies and into the realm of criminal records and professional disqualification.

    The Statutory Framework: Section 441 and Section 451

    The duty to file annual accounts is a strict liability obligation. Under Section 441 of the Companies Act 2006, the directors of a company must deliver a copy of the company’s annual accounts and reports to the Registrar for each financial year.

    Failure to comply with this obligation constitutes a criminal offence under Section 451. The statute dictates that if the requirements of Section 441 are not complied with before the end of the relevant filing period, every person who immediately before the end of that period was a director of the company commits an offence. It is critical to note that the law places the onus on the individual director; it is not a corporate liability alone. Upon conviction, a director may face an unlimited fine in England and Wales, and perhaps more importantly, the resulting criminal record can have devastating implications for their ability to hold future office or satisfy ‘fit and proper’ person tests in regulated sectors.

    From Penalties to Prosecution: The Current Climate

    Historically, the Registrar has largely been content to collect civil penalties, which double if accounts are filed late in two successive financial years. However, as highlighted by recent industry insights and the broader Economic Crime and Corporate Transparency Act 2023, there is a clear mandate to improve the integrity of the UK register.

    The receipt of a “28-day warning letter” from Companies House is a precursor to legal proceedings. While it is true that the Registrar has historically been selective in the cases it chooses to prosecute, the current climate suggests a reduced appetite for persistent non-compliance. For companies requiring a statutory audit, the timeline is particularly precarious. An audit often introduces complexities that cannot be resolved within a 28-day window if the accounting records are not in a state of readiness.

    The Audit Imperative and Reputational Risk

    For many directors, the primary concern is no longer the quantum of the late filing penalty, but the existential threat to their professional reputation. In the modern commercial environment, transparency is a currency. Lenders, credit rating agencies, and trade suppliers utilize automated monitoring of Companies House filings; a “notice of overdue accounts” or the commencement of strike-off action can lead to an immediate withdrawal of credit facilities or a downgrade in risk rating.

    Where a company is late due to the requirement for a statutory audit, the pressure on both the directors and the auditors is immense. An audit is a rigorous exercise in evidence gathering and professional skepticism; it cannot be bypassed or “fast-tracked” in a manner that compromises the requirements of International Standards on Auditing (UK). Consequently, when the threat of prosecution arises, directors find themselves in a pincer movement between the Registrar’s deadline and the auditor’s necessity for a true and fair view.

    Mitigation and Professional Responsibility

    If a company finds itself in receipt of a notice threatening prosecution, directors must act with immediate effect. Silence is often interpreted by the Registrar as a lack of intent to comply. While the 28-day period is stringent, demonstrating that an auditor has been formally engaged and that the audit process is underway can, in some instances, provide a basis for dialogue with Companies House, though it provides no statutory guarantee of immunity from prosecution.

    Directors must also be mindful of their general duties under Section 172 of the Companies Act 2006, which requires them to act in a way that promotes the success of the company for the benefit of its members. Allowing a company to drift into a position where its officers face criminal charges is a fundamental failure of governance that could, in extreme cases, lead to claims of breach of duty.

    How we can help

    We have built in extra capacity so that we can deal with an urgent statutory audit. As we regularly work with clients who have urgent short and tight deadlines anyway such as AIM listed plcs and FCA authorised firms, we have a lot of experience of managing audits to complete them in time.

    First we would need to discuss the general background of your business and how available and well organised your records are and we can estimate how long it would take us to complete the audit. If we can meet the 28 day deadline we’ll be happy to mention this in our engagement letter and get started (once we complete the usual onboarding procedures). However, we’d need to pay our staff overtime so there’d be an additional fee for this.

    We would also need management to be very responsive and provide us with the information that we need as soon as possible.

    Please contact us if you need a quote.

    Contact us for a free, no obligation consultation to discuss your requirements: 0207 100 3610

  • Exploring AQSE

    We act as auditors to small cap plcs listed on AQSE, AIM and Euronext and also as reporting accountants on IPOs. In this post we explore the Aquis Stock Exchange (“AQSE”) in more detail.

    What is AQSE?

    AQSE is a fast growing stock exchange which targets growth companies which are small to medium in size. Its a Registered Investment Exchange in the UK and is regulated by the FCA. Companies listed on AQSE are eligible investments for the full range of unlisted company tax reliefs, including EIS, capital gains, stamp duty and inheritance tax.

    Market overview

    As at February 2023 there were 105 companies listed on AQSE with an average market cap of £16m.

    1 or 2 new companies tend to list every month and they typically raise £1m-£3m upon listing. There were 22 new issues in 2022, raising a total of £31m.

    Existing companies often need to raise further money, for example to help with expansion, finance acquisitions or to fund working capital and there were £32m further issues in 2022. In Feb’23 Invinity Energy Systems Plc raised £21.5m in a very successful share issue.

    Trading activity

    The chart below shows that there are typically 2,000 to 3,000 trades per month with a total value ranging from £10m to £20m. However, we note that AQSE is generally seen as less liquid than larger stock markets.

    Why list on AQSE?

    Simply put, its far cheaper and faster to list on AQSE compared to AIM or LSE.

    After the FCA’s rule changes its also become much more difficult for companies to raise money on LSE as there is a minimum market cap of £30m.

    Whereas companies listing on AQSE only need a minimum market cap of £700,000.

    We also note that AQSE is gradually growing whereas AIM is in danger of declining. AIM used to have 3,600 companies listed at one time, but its less than 900 currently.

    Is it worth listing?

    Historically our tech startup clients have raised money from VCs and angels, ranging from £100k upto £70m. AQSE probably wouldn’t be the first option for a tech startup, but it may be worth exploring, especially if a company is starting to generate revenue but might not be able to achieve the typical hockey stick growth that VCs expect.

    Established companies from other sectors have tended to rely on bank loans, bonds or convertible loans, but they have generally needed significant assets or personal guarantees in order to raise finance. So if a company doesn’t have significant assets then AQSE would definitely be worth exploring.

    But if loan finance is available, the loan interest costs and related covenants are likely to be cheaper and less complex than listing on AQSE.

    The downsides of listing

    The listing process requires a lot of time and effort from management and all the advisory fees and listing expenses typically start from around £80k-£100k. Most of the listing costs would be deducted from the IPO but some of the initial costs would need to be prepaid before the IPO can get fully underway. Although founders may be able to seek pre-IPO fundraising from investors to help with the initial listing costs.

    Once listed, a company has to comply with strict AQSE rules and has to make regular announcements about its activities and certain events. There are also very tight deadlines for publishing interims and annual accounts.

  • Demergers

    What is a demerger?

    Demergers or spin outs involve a company being separated from the rest of the group/business so that it can receive investment, list on a stock market or be sold.

    This is a very wide and complex topic so we’ll mainly focus on the scenarios which we normally come across and this is a short summary only, there are many other factors and rules to consider.

    There are 3 main ways to effect a demerger: dividend in specie (a dividend not involving cash), reduction of capital or liquidation.

    Its possible to plan a demerger to take advantage of various tax reliefs and exemptions:

    Demerger relief exemptions apply: use dividend in specie so that the shareholders don’t pay any tax on the shares they receive in the demerged company

    Demerger reliefs not available or insufficient distributable reserves to pay a dividend: use reduction of capital so that the shareholders don’t pay any tax on the shares they receive in the demerged company

    Parent company can’t claim substantial shareholder exemption: use a group reconstruction first and then a reduction of capital

    Demerger relief

    A statutory demerger is one which meets the criteria under the Corporation Tax Act 2010 sections 1073 to 1099 and so is classed as an “exempt distribution”.

    The key benefits of qualifying are that the shareholders don’t have to pay tax on the shares they receive in the demerged company. They will receive the shares as a dividend in specie, so this doesn’t require a reduction of share capital, but it requires sufficient distributable reserves/profits being available.

    In order for a demerger to qualify, the main criteria are:

    • The demerged company must be at least a 75 per cent subsidiary.
    • Condition A: The companies must all be EU Member State resident.
    • Condition B: The companies must trading companies or members of a trading group (the company being demerged has to be trading or be a parent of a trading group).
    • Condition C: The distribution must be for the benefit of the trade.
    • Condition D: The distribution must not be made for the purposes of:
      • the avoidance of tax or stamp duty
      • the acquisition by persons who are not members of control of the company;
      • the cessation of a trade or its sale;
    • Condition E: the shares must not be redeemable and must be the whole of the share capital and voting rights of the demerged company

    Capital reduction

    Refer to Reduction of capital for an explanation of what is involved in a capital reduction.

    There will be no tax for the shareholders receiving the shares in the demerged company if TCGA92/S136 reconstruction relief is available.

    What value should be used for the shares in the demerged company?

    Book value can potentially be used for an exempt demerger by dividend in specie. However, there could be income tax payable by the shareholders if book value is used in a capital reduction as the shareholders would be receiving shares worth more than the reduction in capital.

    Advance clearance

    Its essential to obtain clearance from HMRC prior to commencing the transaction or demerger to ensure that they agree with the exempt treatment. It can take quite a while to obtain the clearance, you should normally allow for at least 1 to 2 months.

    Other areas to consider

    There are many other factors and rules that should be considered before a demerger is executed. Here are some examples:

    SDLT: there could be stamp duty payable on the transfer of shares, although it may be possible to claim tax exemptions

    VAT: if the demerged business is transferred as a going concern this will generally be outside the scope of VAT

    EIS: if there are any EIS shareholders in the demerged business it may be possible to use share for share exchanges/re-organisations to avoid EIS reliefs being withdrawn or clawed back.

    Intragroup: its worth checking if there will be any tax issues arising from splitting a company from the rest of the group. For example if there are intercompany loans these could be subject to a tax if written off after the demerger or there could be assets subject to degrouping charge under capital gains tax.

  • Reduction of capital

    Companies may need to reduce their capital, for example to:

    • repay excess cash to shareholders
    • create distributable reserves to be able to pay dividends
    • help with a demerger or spin out of a subsidiary

    In this article we consider the following key issues:

    1. legal process
    2. accounting treatment
    3. tax treatment

    (this article is a summary only, there’s alot of rules and regulations around this that would need to be carefully considered, as well as the specific circumstances affecting a company and the intentions behind the transaction)

    1) Legal process

    Under the Companies Act 2006 s.641 a private limited company can reduce its share capital without a court order or auditors statement, but it will need a special resolution supported by a solvency statement. A plc would usually need to get a court order and auditors statement.

    Special resolution

    The special resolution will require at least 75% of shareholders to agree to the capital reduction and they must be able to see the solvency statement at the general meeting, or if voting on a written resolution it should have been sent along with the proposed resolution (s.283 & 642).

    Solvency statement

    The solvency statement needs to be made by the directors of the company and it basically confirms that the company will be able to repay its current debts and also those falling due within the next 12 months.

    To be able to make it, the directors would need to carefully review all of the company’s existing liabilities as well as contingent and prospective liabilities.

    The solvency statement should not be taken lightly as its a criminal offence to issue it without having reasonable grounds. Directors should also consider if they have adequate insurance.

    The solvency statement has to be made a maximum of 15 days before the date on which the special resolution is to be passed (s.642). So for example, if the directors make the solvency statement on 1 January 2023, holding a shareholders meeting on 31 January 2023 would be too late.

    Filing at Companies House

    The special resolution, solvency statement and also a statement of capital (form SH19) have to be registered at Companies House within 15 days of the resolution passing (s.644).

    2) Accounting treatment

    The share capital can be reduced in any way and s.641 mentions:

    Share capital includes the nominal value of the shares issued, as well as share premium and capital redemption reserve. Revaluation and merger reserves are not usually included, but it may sometimes be possible to do other transactions/adjustments first to try and use these.

    If share capital is directly reduced rather than share premium or capital redemption reserve then the shares would need to be cancelled at Companies House.

    A key issue is that if excess capital is to be repaid using a reserve, then it can only repaid if there are sufficient distributable reserves. So if a company has accumulated losses then these need to be cleared first. But if the capital is reduced and there is a payment to shareholders at the same time, then accumulated losses don’t need ot be considered.

    Paying dividends

    If the purpose of the reduction of capital is to pay dividends in future then the share capital would be reduced and profit and loss reserves would be increased.

    For example, a company has £500k share capital and £200k accumulated deficits and so cannot pay and dividends. It could reduce share capital by £300k to result in £100k profit and loss reserves which are distributable as dividends. The accounting entry would be:

    Dr share capital £300k

    Cr P&L reserves £300k

    Surplus cash

    Using the same example as above, rather than paying £100k dividends in future, the shares could be cancelled and the £300k cash could be repaid immediately, without having to create a reserve and pay dividends:

    Dr share capital £300k

    Cr cash £300k

    Demerger/spin out

    For example, a subsidiary is being spun out to raise investment on its own and the existing shareholders of the parent will be the new shareholders of the subsidiary (ie removing the parent company) and the subsidiary has a book value of £500k. A share capital reduction could be accounted for:

    Dr share capital £500k

    Cr Investment in subsidiary £500k

    3) Tax treatment

    Generally, if dividends are paid via a reserve to shareholders then they would be taxed as income. Generally, if share capital is directly repaid without a P&L reserve being created then its taxed as capital. If the amount repaid is the same as the original cost for the shareholders, then there is no capital gains tax.

    The tax treatment can get REALLY complicated! So we’ve only put a short summary here which is very generalised as there are many possible scenarios.

    See CTM15440 and CG57810 in HMRC’s manuals as a starting point.

    Example

    For example, as described in the accounting treatment section above, share capital is reduced and there is an immediate payment to the shareholders without a reserve being created.

    The reduction does not form part of the company’s realised profits and so isn’t a distribution that has been subject to corporation tax.

    The payment will normally be treated by HMRC as a repayment of share capital under TCGA92/S122 (unless its part of a demerger in which it case it may fall under TCGA92/S126 to S130 or S136)

  • The main requirements of a strategic report

    The main strategic report must contain the following sections as per the Companies Act 2006 s414C:


    (a) a fair review of the company’s business;

    (b) a description of the principal risks and uncertainties facing the company;

    (c) the review required is a balanced and comprehensive analysis, consistent with the size and complexity of the business, of:
    (i) the development and performance of the business of the company during the financial year; and
    (ii) the position of the company’s business at the end of that year;

    (d) the review must, to the extent necessary for an understanding of the development, performance or position of the company’s business, include:
    (i) analysis using financial key performance indicators; and
    (ii) where appropriate, analysis using other key performance indicators, including information relating to environmental matters and employee matters;

    (e) the report may also contain such of the matters otherwise required to be disclosed in the directors’ report as the directors consider are of strategic importance to the company;
    (f) the report must, where appropriate, include references to, and additional explanations of, amounts included in the company’s annual accounts;

    S172 statement

    The strategic report of large companies must include a statement which describes how the directors have had regard to the considerations set out in s172 Companies Act 2006 when fulfilling their duty to promote the success of the company, these being;

    (a) the likely consequences of any decision in the long term;
    (b) the interests of the company’s employees;
    (c) the need to foster the company’s business relationships with suppliers, customers and others;
    (d) the impact of the company’s operations on the community and the environment;
    (e) the desirability of the company maintaining a reputation for high standards of business conduct; and
    (f) the need to act fairly as between members of the company.

    The FRC issued guidance that companies who are below the limits for a large company but are not eligible for small and medium company exemptions, such as FCA authorised investment firms involved in MiFID securities, have to include a s172 statement.

    Companies are large if they meet at least 2 of the following critieria:

    • Turnover of more than £36m
    • Balance sheet total of more than £18m
    • More than 250 employees

  • How to audit going concern under ISA 570

    To audit going concern under ISA 570, the auditor should follow the principles and procedures of auditing going concern, which are the principles and procedures that govern the assessment of an entity’s ability to continue as a going concern.

    The key steps in auditing going concern under ISA 570 are as follows:

    1. Understand the entity and its environment: The first step in auditing going concern under ISA 570 is to understand the entity and its environment. The auditor should obtain an understanding of the entity’s business, its industry, and its economic environment. The auditor should also obtain an understanding of the entity’s financial position, its liquidity, and its capital structure.
    2. Identify and assess the risks of going concern: The second step in auditing going concern under ISA 570 is to identify and assess the risks of going concern. The auditor should identify the risks that may impact the entity’s ability to continue as a going concern, such as financial difficulties, operational challenges, and regulatory changes. The auditor should assess the likelihood and the impact of the risks on the entity’s ability to continue as a going concern.
    3. Obtain management’s assessment of going concern: The third step in auditing going concern under ISA 570 is to obtain management’s assessment of going concern. Management is responsible for preparing the financial statements and assessing the entity’s ability to continue as a going concern. The auditor should obtain management’s assessment of going concern, including the assumptions, judgments, and estimates used in the assessment.
    4. Evaluate the adequacy of management’s assessment of going concern: The fourth step in auditing going concern under ISA 570 is to evaluate the adequacy of management’s assessment of going concern. The auditor should evaluate whether management’s assessment is reasonable and appropriate in the circumstances. The auditor should consider whether the assumptions, judgments, and estimates used in the assessment are reasonable and supported by the facts and circumstances.
    5. Conclude on the going concern assumption: The fifth step in auditing going concern under ISA 570 is to conclude on the going concern assumption. Based on the auditor’s assessment of the risks of going concern and the adequacy of management’s assessment, the auditor should conclude on the appropriateness of the going concern assumption. If the auditor has concerns about the entity’s ability to continue as a going concern, the auditor should evaluate the implications for the financial statements and the audit.

  • Provisions & contingent liabilities and assets

    IAS 37 and FRS 102 s21 apply to provisions, contingent liabilities, and contingent assets. They establishe the principles and rules for the recognition, measurement, and disclosure of provisions, contingent liabilities, and contingent assets in the financial statements.

    Provisions

    Provisions are liabilities that are recognized in the financial statements when it is probable that an outflow of economic resources will be required to settle the liability, and the amount of the liability can be estimated with sufficient reliability. Examples of provisions include warranty claims, restructuring costs, and legal claims.

    An entity shall recognise a provision only when:
    (a) the entity has an obligation at the reporting date as a result of a past event;
    (b) it is probable (ie more likely than not) that the entity will be required to transfer economic benefits in settlement; and
    (c) the amount of the obligation can be estimated reliably.

    The recognized provision is recorded as a liability in the balance sheet, and the expense is recognized in the income statement.

    Contingent liabilities

    Contingent liabilities are potential liabilities that are not recognized in the financial statements unless it is probable that an outflow of economic resources will be required to settle the liability, and the amount of the liability can be estimated with sufficient reliability. Examples of contingent liabilities include legal claims, environmental liabilities, and guarantees.

    Contingent liabilities are not recognized in the financial statements unless it is probable that an outflow of economic resources will be required to settle the liability, and the amount of the liability can be estimated with sufficient reliability (ie its a provision). If the contingency is not probable or the amount cannot be estimated with sufficient reliability, the contingent liability is disclosed in the notes to the financial statements.

    Contingent assets

    Contingent assets are potential assets that are not recognized in the financial statements unless it is probable that an inflow of economic resources will be received, and the amount of the asset can be estimated with sufficient reliability. Examples of contingent assets include litigation recoveries, insurance claims, and tax refunds.

    Contingent assets are not recognized in the financial statements as assets can only be reocgnised if the flow of future economic benefits is virtually certain.

    Disclosure of a contingent asset is required when an inflow of economic benefits is probable.

    Disclosures

    The standards also require disclosures in the financial statements to provide information about the nature, timing, and amount of the provisions, contingent liabilities, and contingent assets. The entity should disclose the carrying amount of the provisions, the changes in the carrying amount of the provisions, and any significant assumptions used in estimating the provisions. The entity should also disclose the nature, timing, and amount of the contingent liabilities and contingent assets, and any changes in the likelihood or the amount of the contingent liabilities and contingent assets.

    If there is an ongoing court case the full disclosure about contingent liabilities may be seriously prejudicial, so it may be possible to make limited disclosures.