As year end now looms, if you are anything like me you will be having a bit of a bad case of déjà vu from last year. There’s still a pandemic, you’re still working from your kitchen table and staying at home all weekend, while financial year end is fast approaching.
The good news is that there are no big accounting changes to have to deal with this year as IFRS 16 has been delayed. Perennial difficult spots will however still be bothering many hard working accountants and particularly in cases where the pandemic has blown your previous values/estimates/assumptions out of the water. In the world of financial instruments, what may be especially troublesome are the investments local authorities have made not for traditional everyday cash management but for service reasons such as improving the local area, providing housing and supporting local businesses.
Valuing equity in subsidiary companies is one difficult area where Arlingclose can provide specialist expertise. A bit like selling your house, the value of a company would be defined as ‘what someone would be willing to pay for it’. Unlike houses however local authority owned subsidiaries are not bought and sold frequently. They are also often structured in a way that would be unusual for a more run of the mill private sector company, or be doing things that the private sector does not commonly do, making working out a realistic market price even more difficult. In the absence of an actual market price, whole chapters in textbooks are dedicated to different methods of working out what you think someone might be willing to pay for a company. Valuations are generally linked to the future cash flows the company will generate. Modelling this involves making prudent assumptions about the future, understanding what cash flows to include and also how to discount them appropriately.
As well as creating subsidiaries it is common for local authorities to invest in their local area by making loans to local charities and businesses. These loans will require an annual calculation for Expected Credit Loss (an ECL) under IFRS 9. Calculating this will involve the need to make a judgement as to how likely the borrower is to default on a loan and by how much (the ‘loss given default’). Covid-19 will clearly have driven both of these factors upwards. Loan renegotiations due to the pandemic (for example agreeing that a loan can be repaid later than planned) also need to be accounted for.
More generally Arlingclose can offer a review of the whole financial instruments note, Capital Financing Requirement (CFR) calculation and the associated working papers to provide assurance that everything has been done correctly and the disclosure requirements have all been met. We can also offer in depth accounting assistance as required: for example, in soft loan accounting, restructured debt or for general closedown support.
For more information on this or any other Arlingclose services please contact Laura Fallon at lfallon@arlingclose.com or on 07702 788303.
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