Ten Things for CFOs to Worry About in 2011
1. A rise in UK VAT
This is the first to hit the beach -- on 1 January. UK VAT rises to 20 percent, its highest level ever. CFOs should focus on two issues -- margins and cashflow. "Key customers may be particularly sensitive to pricing and we may see margins squeezed if it's difficult to pass on price increases," says Andy Tait, executive director at Bibby Financial Services.
Reclaiming input VAT quarterly could also tighten cashflow for highly geared companies already operating on tight margins. "Firms should ensure they build in the VAT rise to cashflow forecasting," adds Tait.
2. Banks that don't lend
It's still difficult to squeeze loan cash out of the banks, despite the protestations of the British Bankers Association to the contrary. The banks' priority is to rebuild their balance sheets rather than lend cash. "UK banks now have five times more capital and seven times more liquidity than in the pre-crisis period, so their financials are much stronger," points out Phil Molyneux, professor of banking and finance at Bangor Business School.
And with the Bank of England pressing banks to swap more debt for capital, don't look for a big improvement any time soon. Two alternatives to the traditional term loan: for larger companies, the bond market; for smaller -- asset-based financing, such as invoice discounting.
3. More posers on pensions
Defined benefit schemes are on the way out, but one unknown is EU legislation, currently being considered, which would force DB schemes to adopt a version of Solvency II and set aside reserves to fund their schemes. "The reserves would be particularly onerous for funds with indexed pay-outs - capital would have to account for potential increased pay-outs in the future, requiring insight into gilt yield trends and inflation," points out Penny Frohling, a partner at consultancy A T Kearney. "If this is enacted, it will be the final nail in the coffin of DB schemes for new members."
4. National insurance also on the rise
From 1 April 2011 -- and by one per cent of pay. "While this increased cost is unavoidable in the main, FDs who have not yet explored salary sacrifice in favour of pension contributions might want to seriously consider this arrangement," argues Clive Fortes, head of corporate consulting at Hymans Robertson, a firm of consultants and actuaries that provides services to pension schemes.
"Putting in place a salary sacrifice arrangement is becoming a commodity service with a payback typically measured in months rather than years."
5. Tax avoidance getting tougher
But while salary sacrifice is a tax avoidance strategy that's all above board, others aren't -- or fall into a grey area. And the bad news is that the grey area is set to get bigger in 2011. The coalition government has said that it will commit a further £900 million to tackle tax avoidance and tax evasion.
Rachel Murphy, a tax partner at the north-west accountancy firm Hurst, warns: "The risk is that the Treasury is increasingly merging the two premises of legitimate tax avoidance and illegal tax evasion, couching it in terms of what is 'acceptable' and 'unacceptable' avoidance."
6. Meeting the iXBRL deadline -- April Fool
And speaking of tax, another nasty looming by the end of the first quarter (31 March 2011) is the need to submit company tax to HMRC using iXBRL. All corporation tax filing after this date must use the inelegantly named eXtensible Business Reporting Language.
Most CFOs of larger companies have already installed the specialist software to do the job while many smaller firms have outsourced the iXBRL tagging of their accounts data to their auditors. But given HMRC's penchant for IT foul-ups, there is no guarantee that everything will run smoothly when the system goes live. And the date HMRC has chosen for the first day of mandatory iXBRL submissions is not encouraging: 1 April.
7. Handling high pay troubles
Who'd have thought being paid a huge salary could be a source of trouble? The High Pay Commission is due to report in November 2011 -- and it's bound to stoke up calls for rules constraining boardroom pay in large companies. They are calls that a coalition government already making big cuts affecting people on low pay may find hard to resist.
A recent survey by Income Data Services found that 61 percent believe a CEO shouldn't receive more than £500,000 a year. Which could leave many from the FTSE 100 (and elsewhere) facing a metaphorical ride in the tumbrils.
8. Finding there is (unfortunately) an alternative
Now for a couple of regulation nasties that will be on some CFOs agendas (but not all). Let's start with the Alternative Investment Fund Managers' Directive which was approved by the EU in November. The text of the Directive comes into force in 2011 and must be implemented within EU countries by 2013.
The nub of all this is that managers of alternative investment funds -- they include private equity and hedge funds -- must provide more information about their activities to investors and regulators. And guess who's going to be in the front-line pulling together much of the financial information when the rules finally come into force?
9. Registering with the SEC
And the AIFMD is not the only regulatory nasty in town. Under the US's Dodd-Frank legislation most fund managers will have to register with the Securities and Exchange Commission by 21 July 2011. There's a let-out if they have no place of business in the US, fewer than 15 US clients or investors, or less than $25 million under management.
"The SEC is likely to take serious action against those that haven't registered," warns David Bailey, managing director of fund management specialist Augentius. "This, given past track record, is likely to include financial penalties which will amount to a number of years' management fees."
10. Keeping an eye on accounting standards
As we enter 2011, the International Accounting Standards Board and the Financial Accounting Standards Board are continuing to converge standards. Their work, notes David Larsen, managing director at independent financial advisory firm Duff & Phelps, includes accounting for financial instruments, fair value measurements, leases and consolidation.
"The timetable may be overly aggressive, especially when combined with the fact that both the IASB and FASB will have new leaders in 2011, FASB will add two new board members, and a good deal of dissension exists concerning current proposals, especially related to financial instruments," says Larsen.