FinancialReporting
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Impact of knowledge gaps
Steve Collings highlights the dangers of knowledge gaps and the risks presented by letting your CPD slip
AAT requires all members to undertake a sufficient level of continuing professional development (CPD) each year. This is to ensure that those who use the services of AAT members (whether clients or entities) are receiving the highest level of technical skill possible.
This article takes a look at why CPD is crucial for AAT members as well as the impact that knowledge gaps can have on a member if they are not addressed swiftly.
Tax
As we all know, the accountancy profession can move at a fast pace. Areas such as tax change on a frequent basis and it is crucial that accountants who are advising on it (whether on a client basis or within an entity) are up to speed with these developments.
Not every accountant deals with tax. For example, my interaction with it in my practice is fairly minimal as the tax department deals with the vast majority of tax issues.
However, I do still keep abreast of developments in this area because changes in tax rates, for example, can have an impact on deferred tax (which is, of course, an accounting concept).
Tax is a broad subject and not everyone will deal with every kind. For example, some accountants may specialise in VAT or corporate tax, but not inheritance tax or income tax and National Insurance and vice versa.
It is important that AAT members, whether working in industry, commerce or in practice, can understand developments in these areas as they will often be called upon to assess the impact of any recent changes, or even the impact of such taxes on a specific transaction the entity may be undertaking (for example, a share buyback or a group reconstruction).
In some cases, the member may work with another specialist to ensure the business or individual receives the correct advice.
A concern of all professional bodies is the lack of knowledge of accounting standards
Software GAAP
You can be forgiven for thinking ‘Software GAAP. What is that?’ This is a non-existent GAAP and I have coined it ‘software GAAP’ to reflect the situation when a preparer places too much reliance on the information produced automatically by accounts production software.
For example, consider the notes to the financial statements. Contemporary accounts production software systems are capable of producing various notes, such as accounting policies that are often driven by entries in the trial balance or chart of accounts. However, the fact that they have been generated by the software does not mean they are necessarily correct.
Accounting policies such as ‘Stock is valued at the lower of cost and estimated selling price less costs to complete and sell’ is invariably the ‘usual’ accounting policy that is produced by the software when a client has stock and work in progress in the balance sheet (statement of financial position). However, one would expect an accounting policy for stock and work in progress to be more concise, particularly where such items are material to the financial statements.
For example, a description of what constitutes ‘cost’ and ‘estimated selling price less costs to complete and sell’ as well as a description of any cost methodologies that have been used by the entity (such as first-in, first-out or weighted average cost) in valuing closing stock and work in progress.
Accounting policies are often criticised by reviewers for being ‘boilerplate’. A boilerplate accounting policy is one which just regurgitates the content of an accounting standard and adds nothing meaningful to the policy.
Consider the following accounting policy:
‘Turnover is stated net of VAT and trade discounts.’
Turnover is often the largest number in the financial statements. A policy such as this is virtually meaningless. The accounting policy should describe the point at which revenue is recognised (e.g. on dispatch of goods) and should also discuss other revenue-related points such as where revenue is deferred.
The key to high-quality disclosures is to ensure they are entity-specific and concise. Conversely, any irrelevant disclosures should be removed from the financial statements as they do not anything.
Maintaining and developing knowledge
There are a variety of ways in which AAT members can keep up to date with developments in areas that they deal with in their work and it need not just involve attending face-to-face lectures.
Online learning has become one of the most popular ways in which members can maintain and develop their knowledge. For example, AAT has a Financial Reporting Pathways course that preparers of financial statements can complete to maintain their knowledge of accounting standards. In addition, reading articles such as this often contributes to CPD points.
Webinars and on-demand courses have also proved popular because they can be listened to at the delegate’s leisure and can be an effective way of ensuring your knowledge is maintained.
Whatever your preference, as long as the learning activity is relevant to your work and you get something out of it, then you won’t be going far wrong. It is also important to remember that CPD should not be an arduous task – it should be regarded as an important aspect of your work to ensure your client or your organisation is receiving the highest level of technical skill and competence.
STANDARDS
Accountancy
Accounting standards are another area that is frequently subject to change. At the time of writing this article, the Financial Reporting Council (FRC) is in the process of finalising the periodic review amendments that are due to be published in the first half of 2024. These amendments are likely to give rise to significant changes in the areas of leasing, revenue recognition and additional disclosure requirements. It is important, therefore, that AAT members affected by these changes in whatever capacity are up to speed with how they will affect their clients or their organisation.
A concern of all professional bodies is the lack of knowledge of an accounting standard. This can, and often does, give rise to errors creeping into the financial statements as can be seen in the following real-life example.
Example
A company’s financial statements lodged at Companies House includes an unqualified auditor’s opinion on the financial statements that have been prepared under FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland. A review of the financial statements shows that an intangible asset has been revalued for the first time in the year to 31 October 2021. The revaluation gain amounts to £200,000 and has been recorded in profit or loss. FRS 102, para 18.18G states that if an asset’s carrying amount is increased as a result of a revaluation, the increase is recognised in other comprehensive income and accumulated in equity.
The accounting treatment for this revaluation is incorrect because it has been recorded in profit or loss and not within the revaluation reserve. This could have arisen because the preparer and the auditor are unaware of the technical provisions of FRS 102, para 18.18G. If the error is material, the auditor’s unqualified opinion was incorrect.
As you can see, a lack of technical knowledge of accounting standards can have repercussions on the financial statements. There is also a risk that an incorrect accounting treatment could have tax implications.
Conclusion
Maintaining a sound level of technical and theoretical knowledge is of the most important aspects of being an accountant (especially one in practice). Clients and businesses rely on the work of accountants for critical decision-making and if the knowledge is lacking, this decision-making process can be severely impacted.
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