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02/02/2012 11:05


Editor’s choice As Vietnam’s economy develops and aims for global integration, its accountancy profession has a vital role to play. Find out how in our exclusive interview with the country’s minister of finance, Professor Dr Vuong Dinh Hue. See page 16

MAKING THE CONNECTION One of the remarkable aspects of the Arab Spring last year was the way technology – the internet and social networking – galvanised the protesters in Egypt, Libya and Tunisia. It undoubtedly became a valuable weapon in the rebels’ armoury and made it much more difficult for the governments of those countries to resist the groundswell of opposition. This connectedness is revolutionising life across the African continent. This month (page 12) we look at the astonishing growth in mobile phone uptake and usage. In 2002, on the world’s poorest continent, fewer than 50 million mobile phones were active, rising to 620 million in September 2011 and predicted to reach more than 735 million by the end of this year. As we report, the implications of this affect all areas of African life, from the individual to national level, encompassing everything from personal relationships, work and education to justice, national security and development. The internet is also revolutionising Africa’s business communities. But at the same time what appears to be emerging is a new kind of African person who can be both traditional and modern. Going east, we look behind the headlines of the Olympus accounting scandal in Japan. It has thrown up many issues for corporate governance, and might never have seen the light of day had it not been for the actions of one of those rare creatures of the Japanese corporate world – the whistleblower. Read our analysis starting on page 24. I’m pleased to introduce a new regular feature in this month’s magazine – Accounting Solutions – in which authors from PwC will address topical technical questions on financial reporting. See page 51 for the first column. Meanwhile, for those interested in following the global career paths of ACCA members, Mohammed Chowdhury describes his journey from Bangladesh to Canada, via the UK, and how a mentoring partnership programme assisted his family when they were new immigrants (page 20). Lesley Bolton,

NORTHERN LITE While the opening up of the Arctic to shipping offers potential savings in freight costs and carbon, there are environmental concerns, too. Page 32

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MIND THE GAAP Debate is raging in the US about how proposed modifications to GAAP may reduce transparency and conflict with international standards. Page 40

VIRTUAL BRIEFING CENTRE Attend live and on-demand audio and video webinars in the virtual theatre, chat with fellow delegates in the networking centre, and access the digital library.

ACCA CAREERS Check out thousands of jobs and expert careers advice at www.

14/03/2012 12:30

AB INTERNATIONAL EDITION CONTENTS APRIL 2012 VOLUME 15 ISSUE 4 International editor Lesley Bolton +44 (0)20 7059 5965 Editor-in-chief Chris Quick +44 (0)20 7059 5966 Asia editor Colette Steckel +44 (0)20 7059 5896 Sub-editors Dean Gurden, Peter Kernan, Eva Peaty, Vivienne Riddoch Design manager Jackie Dollar +44 (0)20 7059 5620 Designers Robert Mills, Jane C Reid Production manager Anthony Kay Advertising Richard McEvoy +44 (0)20 7902 1221 Head of publishing Adam Williams +44 (0)20 7059 5601 Printing Wyndeham Group Pictures Corbis ACCA President Dean Westcott FCCA Deputy president Barry Cooper FCCA Vice president Martin Turner FCCA Chief executive Helen Brand OBE


ACCA Connect Tel +44 (0)141 582 2000 Fax +44 (0)141 582 2222 Accounting and Business is published by ACCA 10 times per year. All views expressed within the title are those of the contributors. The Council of ACCA and the publishers do not guarantee the accuracy of statements by contributors or advertisers, or accept responsibility for any statement that they may express in this publication. The publication of an advertisement does not imply endorsement by ACCA of a product or service. Copyright ACCA 2012 Accounting and Business. No part of this publication may be reproduced, stored or distributed without the express written permission of ACCA.

Accounting and Business is published by Certified Accountant (Publications) Ltd, a subsidiary of the Association of Chartered Certified Accountants. Accounting and Business ISSN: (1460-406X) is published monthly except July/August and November/December by Certified Accountant (Publications) Ltd, and distributed in the USA by DSW, 75 Aberdeen Road, Emigsville, PA 17318. Periodicals postage paid at Emigsville, PA. POSTMASTER: send address changes to Accounting and Business, PO Box 437, Emigsville PA 17318. 29 Lincoln’s Inn Fields London, WC2A 3EE, UK +44 (0) 20 7059 5000

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Audit period July 2009 to June 2010 138,255

12 Making the connection Mobile and internet technology is creating a new mindset in Africa 16 Vietnamese vision In an exclusive interview we meet Vietnam’s minister of finance, Professor Dr Vuong Dinh Hue 20 World view ACCA Canada board member Mohammed Chowdhury’s aspirations have taken him across the globe 24 Blowing the whistle After Olympus, Japan needs to rethink its corporate governance model

28 Diversity in difficult times What does increased diversity mean for the finance function? 32 Shipping news The Northern Sea Route is open for business... 34 Polar distress ...but it’s not all plain sailing

14/03/2012 11:03


There are six different versions of Accounting and Business: China, Ireland, International, Malaysia, Singapore and UK. See them all at

Regulars BRIEFING 06 News in pictures A different view of recent headlines 08 News in graphics We show a story as well as tell it using innovative graphs 10 News round-up A digest of all the latest news and developments

VIEWPOINT 36 Ramona Dzinkowski The US Securities and Exchange Commission continues to drag its heels over adopting IFRS 38 Dean Westcott Diversity should be embedded into everything we do, says the ACCA president

TECHNICAL 46 Impairment Key issues in calculating impairment of non-financial assets in tough times 48 CPD: Strategic thinking Our new series demystifies the art of strategy 51 Accounting solutions Introducing our new Q&A column from a team of problem solvers at PwC 52 A question of security Australia’s new Personal Property Securities Act has far-reaching implications 55 All change for VAT As China’s VAT reform programme is rolled out to Shanghai, what are the implications? 58 CPD: Understanding leases We take a look at the features of IAS 17 61 Update The latest from the standard-setters

Your sector 39 PRACTICE 39 The view from Wilson Cheng FCCA of Ernst & Young, plus news in brief 40 GAAP grumbles US plans to modify generally accepted accounting principles for private companies are raising eyebrows

43 CORPORATE 43 The view from Ivan Mitringa FCCA of Dell, plus news in brief 44 Outsourcing Ambitious finance professionals should consider moving into this land of opportunity


Accounting and Business is a rich source of CPD. If you read it to keep yourself up to date, it will contribute to your non-verifiable CPD. If you read an article, learn something new and apply that learning in some way, it will contribute to your verifiable CPD. Each month, we also publish an article or two with related questions to answer. If they are relevant to your development needs, they can also contribute to your verifiable CPD. One hour of learning equates to one unit of CPD. For more, go to

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ACCA NEWS 64 Cost-effective CPD There are many ways to access quality CPD on a budget

66 News Exam success for students

14/03/2012 11:04


News in pictures


Israeli soldiers used sound bombs, a water cannon and tear gas to break up an International Women’s Day march for justice, peace and equality in Qalandia


Mitt Romney laid claim to the Republican nomination for US president after winning six states on Super Tuesday. Newt Gingrich won his home state of Georgia


Pyramid schemer Allen Stanford was convicted of a $7bn fraud, in which he duped 30,000 investors. Sentencing is due in June

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13/03/2012 16:06



Apple struggled to keep up with demand for the new iPad 3. It sold out of initial supplies of the tablet, which has four times as many pixels as the iPad 2, an improved processor for better graphics performance and a fivemegapixel camera


Russian PM Vladimir Putin secured a third term in office with 64% of the vote, amid allegations of electoral fraud. Putin will be inaugurated as president in May


A version of Edvard Munch’s The Scream is set to fetch over US$80m at an auction by Sotheby’s in New York on 2 May, the highest pre-sale value the auctioneer has ever put on a work of art


Elections in Greece could be held at the end of this month. They were put back to give PM Lucas Papademos more time to complete a debt deal; associated austerity measures have sparked violent protests

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13/03/2012 16:06


News in graphics


Reputation is cited as the top issue for members of the International Federation of Accountants (IFAC) in its fifth annual survey of the global profession. Ranked close behind public perception were the needs of SMPs and SMEs, and the difficult global financial climate. Among the regional concerns was ‘attracting new talent to the profession’ in Latin America and the Caribbean.


Net losses suffered by Lloyd’s of London insurer Amlin as a result of last year’s natural disasters, including the New Zealand earthquake.


The latest figure for Chinese lending to Latin America, according to the Financial Times.











The rise in the number of financial institutions registered in Bahrain in 2011 compared with the previous year.


Month in figures






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World economy


Local economy


CFOs in Asia, with the exception of those in Japan, are much more positive about their regional economy than the world economy. On average, they rated the state of their region’s economy as 6.4 out of 10, but gave the global economy a substantially lower 4.7, according to the 2012 CFO Outlook Asia report released by Bank of America Merrill Lynch.


The world’s most expensive residential rents are to be found in Hong Kong, according to the latest ECA International survey of rental costs for a threebedroom apartment in 122 cities (top six shown here). The cheapest is in Karachi, Pakistan.

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21% UK











HAPPY DAYS The world is a happier place today than it was four years ago and Indonesians, Indians and Mexicans appear to be the most contented people, while Brazil and Turkey rounded out the top five happiest nations, according to Ipsos Global. Hungary, South Korea, Russia, Spain and Italy had the fewest number of happy people. …AND THIS YEAR’S CROSS-BORDER CHAMPIONS ARE 1 HONG KONG 2 IRELAND 3 SINGAPORE 4 BELGIUM 5 SWEDEN 6 DENMARK 7 NETHERLANDS 8 SWITZERLAND 9 FINLAND 10 HUNGARY 12 TAIWAN 13 UK 23 US 24 AUSTRALIA


Hong Kong tops Ernst & Young’s Globalisation Index 2011, which measures the world’s 60 largest economies according to their degree of globalisation relative to their GDP. The index’s five criteria are openness to trade, capital movements, exchange of technology and ideas, labour movements, and cultural integration. It does not measure a country’s impact on the global economy or trade. The index covers the period 1995 to 2014, and is released in cooperation with the Economist Intelligence Unit.





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CHI LE 3 2 UK 2 % 9% DUBAI 28% AUSTRALIA 23%


Britain leads the way in Europe in how staff view work/life priorities, according to a survey from Robert Half recruitment consultancy. Pay and work/life balance were cited as primary reasons why UK staff look for new jobs. It also shows that staff in Switzerland are less concerned about this balance, with just 4% seeing work/life balance as a priority.

09/03/2012 14:47


News round-up


Reviews of the IFRS Foundation’s governance and strategy have been completed by its monitoring board and trustees. The constitution of the bodies will now be amended in line with the reports’ conclusions. Masamichi Kono, acting chair of the IFRS Foundation monitoring board, said: ‘We hope that increased accountability will be reflected through stakeholders’ confidence in the standard-setter and hence IFRSs.’


Credit ratings agencies are to be substantially reformed, under proposals published by the European Commission. Financial institutions would be obliged to make their own assessments of investment risks and not over-rely on ratings provided by agencies. The agencies would need to provide detailed explanations for making assessments and would be required to update their ratings of EU member states at least twice a year, instead of the current annual requirement. European legislation will make ratings agencies subject to civil liability claims from investors, where an agency intentionally or negligently breaks EU rules.


Accountants must respond to increasing demands from investors for environmental, social and governance (ESG) disclosures, urges the International Federation of Accountants (IFAC). In a new report, Investor Demand for Environmental, Social and Governance Disclosures: Implications for Professional Accountants in Business, IFAC says that accountants need to be aware of the essential related metrics. According to Roger Tabor, chair of IFAC’s professional accountants in business committee, accountants ‘are well placed to apply accounting discipline and rigour to the collection, analysis and reporting of ESG data’.

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Ernst & Young has paid a US$2m civil money penalty to settle a disciplinary order imposed by the US Public Company Accounting Oversight Board (PCAOB). The firm was also censured, while four of its current and former partners were sanctioned for violating PCAOB rules and standards. The penalty is the largest imposed by PCAOB. The order related to three EY audits of Medicis Pharmaceutical Corporation. EY settled on the basis of neither admitting nor denying PCAOB’s findings. The firm did not respond to a request for comment.


CFO confidence in the Middle East has plummeted, according to a study by Deloitte. The firm connects the fall in confidence to the ‘continued social upheaval and conflict which the Middle East has witnessed since 2011, coupled with uncertainty and risk aversion in business dealings’. Only 47% of CFOs in the Middle East expect operating cashflows to increase, down from 82% a year earlier. James Babb, CFO programme leader at Deloitte in the Middle East, argued that the economic fundamentals remain strong. ‘It is the prospect of unexpected events or “black

swans” which weigh heavily on the minds of CFOs at the moment,’ he added.


Deloitte in the US has been named ‘Company of the Year’ at the Annual Latina Style 50 Awards and Diversity Leaders Conference. The firm was recognised as the top company for providing opportunities for professional Latinas in the workplace. Deloitte CEO Joe Echevarria said: ‘As a member of the Hispanic community, I am honoured by Latina Style’s recognition and I am proud to accept the award.’ He added that, at Deloitte, ‘empowering talented professionals, from diverse backgrounds is more than an initiative; it’s good business.’


The US Public Company Accounting Oversight Board (PCAOB) has published a proposed auditing standard regarding related parties. It is intended to improve audit evaluations of a public company’s disclosures of relationships and transactions with related parties. ‘The board is considering these changes because related-party transactions and significant unusual transactions have played a recurring role in financial failures, from those that led to the Sarbanes-Oxley Act to those recently alleged in companies in certain emerging markets,’ said PCAOB chairman James Doty.

FITCH WARNS OF MANIPULATION Fitch Ratings has advised analysts of how to spot accounting manipulation. It suggests that a clean audit is merely a starting point for analysis, not a substitute for it. ‘A principles-based IFRS framework gives management a great deal of flexibility in making accounting policy choices,’ warns the report, Accounting Manipulation. Techniques used include aggressive revenue recognition; minimising expenses; cashflow enhancement; and debt reduction, says Fitch. Analysts are advised to compare company performance with that of peers; to watch for sudden and unexplained

13/03/2012 14:50



In the economic new world order, diversity has gone beyond the recruitment tick-box to become a business requirement, essential for steering organisations through uncertain times. But what is the role of the finance function?


improvements in operating margins; and to read carefully notes to the accounts.

measures have an adverse effect on companies’ plans for growth.’



Eurostat is to conduct an assessment for the European Commission on the suitability of international public sector accounting standards (IPSAS) for adoption by EU member states. Eurostat is the European Union’s official statistical agency. The adoption of IPSAS is being considered as a means of strengthening EU member states’ economic governance. The assessment will include a public consultation process. IPSAS use accrual accounting principles and are based on International Financial Reporting Standards (IFRS), but are written specifically for public sector accounts.

The next phase of the Financial Accounting Foundation’s review of the implementation of revised US accounting standards will focus on business combinations, operating segments and government deposit and investment disclosures. The FAF


Corporate spinoff activity could nearly double this year, according to a report from Deloitte and specialist corporate break up investment adviser The Spinoff Report. The global value of corporate spinoffs is set to increase to £250bn in 2012, an increase of 92% from £130bn in 2011, says their joint study. Corporate spinoffs within Europe with a value of £131bn are already in the pipeline, they add. Ryan Mendy, chief operating officer at The Spinoff Report, said: ‘Investor appetite for spinoffs is growing, often because major austerity

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FORECLOSURE VIOLATIONS FOUND Widespread violations in the mortgage foreclosure procedure have been detected in an audit by San Francisco


The US Treasury Department and Internal Revenue Service have published proposals for the sharing of tax information with foreign governments and tax authorities, in the next phase of implementation of the Foreign Account Tax Compliance Act (FATCA). The aim is to identify accounts held by US nationals in other jurisdictions which evade US tax. ‘FATCA strengthens US efforts to combat offshore noncompliance,’ said IRS commissioner Doug Shulman, conceding that ‘it creates a significant undertaking’. Ali Kazimi, Deloitte Middle East’s regional managing director for international tax services, called it ‘one of the most critical commercial issues currently faced by banks and financial institutions’, and warned that institutions must act fast to comply with the implementation date of 1 January next year.


Corporate responsibility (CR) reporting nearly doubled in the last four years in the pharmaceutical, consumer products and construction sectors, according to the latest global survey from KPMG International. Nearly every Global Fortune 250 company now reports its corporate responsibility activity, with almost half claiming financial value from their CR initiatives. The Global Reporting Initiative Sustainability Reporting Guidelines are used by 80% of G250 companies. CR reporting in South Africa jumped from 45% of major companies in 2008 to 97% today. China was included in the survey for the first time and already has 60% of its largest companies using CR reporting.

I expect will be a challenging period for the organisation. I share the hope of many that the United States and Japan advance the incorporation of IFRS into their respective financial reporting requirements.’

is the oversight body of the Financial Accounting Standards Board and Governmental Accounting Standards Board. The post-implementation review process is intended to assist the evaluation of the effectiveness of the standard-setting process for both the FASB and the GASB.

county officials. The audit examined around 400 mortgage foreclosures, following rumours of abuse of procedure. Violations were found in 84% of cases examined and included failure to inform borrowers that they were in default of agreements and improper transfers of loan debt ownership.



Former Deloitte Touche Tohmatsu CEO James Quigley has joined the IFRS Foundation as a trustee. Quigley, who remains a senior partner with the firm in the US, said: ‘I look forward to working with [chairman] Michel Prada and my fellow trustees in what

India’s economic growth rate slowed to 6.1% in the final quarter of 2011, its slowest rate in three years. The fall in growth followed 13 increases in central bank base rates, which were intended to pull inflation back. Growth had been 6.9% in the previous quarter.

14/03/2012 13:32


AFRICA As Africans embrace mobile phone and internet technology, a new mindset that combines both the old and the new is emerging, reports Alnoor Amlani FCCA


ooking back just 10 years, it is astonishing to observe the growth in mobile phone uptake and usage. In 2002, on the world’s poorest continent, fewer than 50 million mobile phones were active, shooting up to 620 million by September 2011 and predicted to reach more than 735 million by the end of 2012, according to GSM Association. This is 50% of the population, which is incredible enough, but the implications of such connectivity go beyond the figures, with each mobile phone in Africa often serving more than one person. This means that in just 10 years Africa has gone from being a place where people could only use telecommunications after travelling great distances or spending a lot on a landline or radio-call to one where everyone is able to connect instantly and cheaply. The implications of this are enormous and affect all areas of African life, from the individual to national level, encompassing everything from personal relationships, work and education to justice, national security and development. It’s not just the proliferation of mobile phone uptake that’s changing Africa. Consider that there are already more than 100 million internet users scattered across the continent, connected to the rest of the world and

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each other (www.internetworldstats. com). Interestingly, almost half of the total are in Nigeria (45m), followed by Egypt (21.7m), Morocco (15.7m) and South Africa (6.8m). The internet is revolutionising Africa’s business communities, politics and societies thanks to the rapid expansion of cheap, crystal-clear connectivity through three undersea fibre-optic cables that are circling the continent and replacing radio waves. Already the price per megabyte of data in East Africa has dropped to less than 10% of what it was just a few years ago. That is why in 2010, according to Blackberry manufacturer RIM, more than 15 million smartphones were sold in Sub-Saharan Africa. With internet cost and mobility combination positively first world in these countries, this is creating all kinds of new opportunities. For example, this is now the most developer-friendly place in the world to create smartphone applications and test them on the market. Conversely, in the US and UK it is just too expensive to test applications properly because the cost to the internet user on the mobile network is too prohibitive.

New opportunities For the accountancy profession, telecommunications advances mean that the information feedback loop

between accountants and clients is tighter and faster. This means that management will have new opportunities to use more accurate and timely information to capture more income as well as save costs, enabling more growth and wealth creation for the companies that embrace the technology. Improved connectivity offers time and cost savings in real-time financial data capture, processing and reporting, key processes such as sales, field and worker monitoring, new ways of working in remote office management, centralised but accessible accounting systems and real-time stock control, to name a few.

Shifting power Every mobile phone carrier feels safer in Africa because the quick connection offers a way to get help if it is needed. This is a very real kind of empowerment that African people did not have not too long ago. I used to joke that if you saw someone at London’s Heathrow airport picking up the payphone and putting his ear on the headset before dialling, he was probably from Kenya where people still listened for a dialling tone before making a call. Sometimes you had to wait for over 15 minutes; if you missed it or the line was busy you had to start again. Today with a mobile phone there

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CONNECTED is no need. Stories of people waiting months for their telephone lines to be connected were common all over Africa less than a decade ago. The cost of a landline in today’s terms was almost US$500. Today, in almost every shopping centre you can buy a mobile phone and be talking in less than five minutes, and it will cost you as little as US$20. All this means that Africans are now much more tightly connected to each other and to the rest of the world, and the result of this is a shift in power relations. Unconnected people are vulnerable and easily divided, but those who are connected are a force to be reckoned with. North Africa’s Arab Spring is a prime example of this, with protestors in Egypt, Libya and Tunisia better able to organise themselves.

Challenges Growing reliance on new technology brings problems, too. During the political upheaval in Egypt the internet went down for weeks due to government interference. This affected the business process outsourcing (BPO) sector, with companies having to work hard to catch up and convince clients that the political issues would not affect connectivity

in future. While this is not the only challenge in maintaining connectivity, it is the most difficult factor to control. Other challenges in keeping the network up 24 hours a day, seven days a week throughout the year include power fluctuations, shortages in technical skilled staff, terrain challenges, weather and cultural challenges. Nevertheless, despite these challenges, simply having high-speed connectivity at cheap prices creates the need to have more. When the network in Egypt was down people used landlines and a traditional modem as well as satellite technology to transmit images of military attacks on civilians. This precipitated the tipping point for the rest of the world who added their moral weight to the Egyptian people’s cause. The network in Egypt was reinstated hours after the unrest ended because the people demanded it back.

Connectivity is crucial Some people have, however, been slow to embrace the new connectivity, preferring the romantic isolation that Old Africa was famous for. Some friends of mine resisted for years but then finally had to join the network. They realised that the danger of not getting


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on the bandwagon was becoming more serious and immediate. For example, in the tourism industry, as more hotel bookings are made online, travel agents who relied on their wide physical network are finding themselves quickly losing out to operators who maintain only a strong web presence (which is cheaper by design and due to better pricing and higher capacity). The trouble is that a phone or internet connection is no good if you are the only person who has it. It derives its value from connectivity and achieves this by using its viral nature to encourage, even demand, new connections, providing more value to each connected person whenever more connections join the network. It therefore cannot operate as an exclusive club – instead, the unconnected become the exclusive club, isolated from the rest.

A new African? What seems to be emerging is a new kind of African person who can be traditional and modern at the same time with no issues. The contradictions are everywhere and no longer abnormal. Priests use their laptops and smartphones to compose sermons and administer the activities of the church, while traditionally dressed Masai warriors routinely interrupt their long walks across the savannah to answer their cellphones. I’ve seen octogenarians using tablet computers to proudly show their

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‘Africa is a strong growth market in the information technology [IT] sector and this is expected to be so over the next five years,’ says Samuel Ndungu, CFO at WIOCC. ‘Industry analysts are predicting a more than 10% growth year on year in IT over the next three to five years across Africa.’ There has been significant growth in telecommunications as a result of the explosion of mobile technology and heavy investment in submarine fibre-optic networks around Africa, as well as major investments in the terrestrial fibre optic networks. Fibre-optic and high-speed wireless networks have continued to replace satellite and microwave throughout the continent. The mobile phone users have increased from less than 50 million users in 2002 to more than 700 million users by September 2011, with mobile phone penetration growing from under 10% to over 55% over the same period. Another interesting aspect is the growth in the number of internet users. It is estimated that by the end of 2011, there were more than 120 million internet users in Africa (13.5% penetration) up from less than 1.2% less than 10 years ago. More than 15 million smart phones were sold in Africa in 2010 alone. It is estimated that more than 50% of the internet users in Africa accessed the internet for the first time using a mobile phone. Internet usage has also grown tremendously as a result of increase in data usage. The amount of bandwidth consumed per user has also increased as we continue to use more and more data-hungry applications and as social media platforms such as Facebook (see box) proliferate. The increase in internet usage has also been aided by the increasing number of personal computers. The growth in internet usage in Africa has surpassed anyone’s expectations. It is shocking to see how the projections of 2007 for the bandwidth usage in 2011 were exceeded tenfold in actual levels in many African countries, says Ndungu. As can be seen from the statistics above, Africa is still a growth market and a lot needs to be done to catch up with the rest of the world. At 13.5%, the internet penetration rate is still low. The heavy investment in infrastructure by existing operators, interest shown by major international telecoms investors and continued funding by development banks in the IT sector will see the sector growing significantly over the next two to 10 years. It is expected that bandwidth usage in Africa will grow over 20 times in 10 years.

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friends and family photos of their grandchildren, as well as playing them recordings of old cultural songs. As they swipe their fingers across the screen to ‘oohs’ and ‘aahs’, I wonder what African society will be like in the next decade. With all its energy and resources and the presence of high technology, Africa could completely leapfrog the industrial revolution and go straight to the information revolution. The continent manufactures precious little, importing the vast majority of finished goods consumed by its people while it exports its crude oil, minerals and agricultural produce. With the power of telecommunications, the middlemen who used the lack of information to profit will find it harder to operate. Already, corruption is being exposed faster because evidence is being digitised and transmitted and can no longer be hidden easily. Perhaps all Africa will do is manage its exports of raw materials better using technology, forget about adding value and creating industrial machinery completely and, instead, buy from the Chinese using technology to maximise their purchase value by getting the best price and quality combination. Ultimately, the expansion of mobile phone and internet usage across the continent could serve as a tool to enable Africans to regain control of their resources. In this resource-challenged global environment, perhaps this will enable Africa to secure its future. Alnoor Amlani FCCA is an independent financial management consultant in East Africa, who writes regularly on social and business issues

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Power to the people: (previous pages) guests at a wedding ceremony in South Sudan capture the celebrations on mobile phones; at a protest gathering in Cairo, Egypt, last November, women film themselves singing patriotic songs. This page: in Durban, South Africa, a supporter of the Rural Women’s Assembly uses her phone during a protest outside the United Nations Durban Climate Change Conference in December.

5 ALGERIA 3,329,100



6 TUNISIA 2,956,480

MOROCCO 4,407,320

EGYPT 10,477,500



9 SENEGAL 693,960 11

8 GHANA 1,205,960 11 12 13 14 15 16 17 18 19 20

ETHIOPIA 509,940 CAMEROON 481,220 LIBYA 464,780 TANZANIA 437,220 UGANDA 387,080 ANGOLA 361,300 MAURITIUS 311,000 MADAGASCAR 218,880 ZAMBIA 206,660 BOTSWANA 199,380

12 15

4 NIGERIA 4,312,400


10 D R CONGO 643,160 16


7 KENYA 1,325,000

19 18



FACEBOOK USERS (Approx. March 2012)


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31,526,380 TURKEY

30,503,760 UK

27,718,720 PHILIPPINES

SOUTH AFRICA 4,954,480

2 14/03/2012 10:51




In an exclusive interview with Accounting and Business, Vietnam’s minister of finance, Professor Dr Vuong Dinh Hue, talks about accountancy’s role in the country’s growth Professor Dr Vuong Dinh Hue was appointed minister of finance in 2011 following a five-year tenure as auditor general of the State Audit of Vietnam. A respected and highly regarded figure within the accountancy profession, Professor Hue has been at the forefront of education in Vietnam, serving concurrently as dean of the accounting faculty and vice rector at the Hanoi University of Finance and Accounting over a number of years. Q What challenges do you face as Vietnam modernises its business infrastructure and develops its accountancy profession? A The weak infrastructure is a ‘bottleneck’ in Vietnam’s current development. Vietnam considers the synchronous and modern infrastructure development one of the strategic breakthroughs in socioeconomic development of the country by 2020. The biggest challenge for the Ministry of Finance and myself as the minister is how to mobilise and allocate resources in the economy – including the state budget, government bonds, official development assistance and capital from all economic components – in the best way to meet the huge demand today. Moreover, it is also challenging to use these resources most effectively, ensuring the balance between borrowing and paying capacity, financial security and public debt safety. To the accountancy and auditing sector in Vietnam today, the biggest challenge is to develop and complete the regulations of accounting (laws and norms) according to international practices and make them consistent with the specific conditions of Vietnam, especially the application of the

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principle of ‘market price’. In addition, the sector’s management organisation and operation supervision need to be reformed so as to be compliant with the law, effective and helpful, to promote the service development to ensure the transparency of economic and financial information, as well as to support sound economic decisions. In particular, it is critical to improve the quality of the sector’s human resources. They must be talented – shown in knowledge, experience, profession – and ethical enough to work in the state’s management bodies, career organisations and in every company. Q What do you seek to achieve as minister of finance? Why? A Vietnam’s finance sector, as well as myself, are always directed to a transparent, strong and sustainable finance industry for the sake of the prosperity of people and the strong nation of Vietnam. To the accountancy and auditing sector, I would like to promote the highest value of accounting tools to improve the financial transparency and accountability of all agencies and units, organisations and individuals, contributing to make the country’s finance industry healthy. Q What did your experiences at the State Audit of Vietnam teach you? A My 10-year experience at the State Audit of Vietnam, including five years in the position of auditor general, have helped me get a sufficient overview on the financial status, macro and micro economic management, including both strengths and weaknesses. This is very useful for me in my new position. More importantly, I understand the values and benefits of audit and I am

continuing to increase those values and benefits, together with my colleagues, the State Audit, audit firms and the auditing professional associations. Q How important is the relationship that ACCA has in Vietnam with the Ministry of Finance and the State Audit of Vietnam in the development of the accountancy profession? A ACCA is the first international professional body to place its office in Vietnam and has made a remarkable contribution in the development of our accountancy sector in recent years. With the aim to internationalise Vietnam’s accounting personnel, the Ministry of Finance signed a memorandum of understanding with ACCA in 2003 to organise examinations for ACCA certification and Vietnam’s accountant certification. This partnership programme truly brings the opportunity for local auditors to become international auditors. The programme has attracted over 5,000 students and about 500 people have received ACCA certificates. I appreciate the effective cooperation between ACCA, the Ministry of Finance and the State Audit in developing and completing the legal framework, professional standards and especially collaborating with Vietnam’s universities and professional organisations to train and update knowledge and broaden experiences for accountancy staff in Vietnam. Q How has the accountancy profession changed in Vietnam? And how do you envisage it developing over the next few years? A Vietnam’s accountancy industry has made remarkable progress. A new

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Over the past five years,Vietnam’s Ministry of Finance (MoF) has survived the global financial crisis without a crash and worked to tackle high inflation. But although Vietnam’s inflation has slowed for five consecutive months (to 17.17% in January 2012), it’s still high and the MoF has recognised that more needs to be done. The Independent Auditing Law, which came into effect on 1 January 2012, overcomes the limitations of previous decrees and will improve and develop services. Notably, it gives the MoF responsibility for managing independent auditing. The MoF has sought to control the state budget and work towards growth, entering into an agreement last month with the State Bank of Vietnam to tighten cooperation and spur information exchange. The two sides would jointly develop and supervise the financial market and manage taxation and customs affairs, in particular tax collection, import

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and export of precious metals, and money trafficking and laundering, as well as working together on the international stage. The MoF is set to develop the country’s banking and investment industry in accordance with a directive signed by prime minister Nguyen Tan Dung last month. The directive outlined steps to be implemented between now and 2020 to improve legal frameworks, boost the quality and number of listed companies, attract new investors, allow foreign investors greater access to the local market, and safeguard investors. The MoF will be responsible for restructuring stock market operations, securities firms and rules governing listed companies so that they meet international standards. In addition, it will shortly complete the revision of regulations aimed at boosting the domestic bond market, and allow the establishment of new investment institutions, including voluntary pension funds.

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PROFESSOR HUE Professor Dr Vuong Dinh Hue, pictured with ACCA chief executive Helen Brand, was made an honorary member of ACCA for contributions to the development of the accountancy profession in Vietnam, particularly for his role in supporting education. The award was given to Professor Hue by ACCA president Dean Westcott in October market-oriented legal framework on accounting – from the highest level of accounting law and the law on independent audit to the benchmark system, accounting mechanism and professional ethics standards – has been formed; the enterprise system providing accountancy services as well as human resources has been developed; the activities of accountancy professional organisations have been carried out and strengthened; and partnerships with international organisations such as the International Federation of Accountants, Confederation of Asian and Pacific Accountants, the ASEAN Federation of Accountants and ACCA have been reinforced. In the future, given the country’s progress and extensive integration into the global economy, Vietnam’s accountancy sector will have big potential to develop strongly. Accounting and auditing are not only the tools of economic and financial management; it continues to be a service sector and also a career recognised and highly appreciated. The Ministry of Finance is currently developing strategies for accounting development vision to 2020. Its targets are to complete and fully establish the legal framework and professional standard system, to expand the service market and to develop human resources, as well as to improve management and supervision capacity in this industry. The number of accountancy companies, accounts and auditors are expected to double by 2015 and triple by 2020 in order to meet the increasing demand of the

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economy. The development in terms of quantity, quality and professional capacity will, step by step, confirm Vietnam’s accountancy profession locally and internationally. Q You were awarded honorary membership to ACCA for your extraordinary contribution to the development of the accountancy profession in Vietnam. How did it feel to be acknowledged in this way? A I have and will continue to coordinate and work closely with ACCA, the accountancy professional organisations and the state authorities to promote the vigorous growth of the industry in Vietnam. The main priorities in the coming period include completing the guidance documents for implementing the Independent Audit Law; updating, amending and supplementing Vietnam’s accounting standards to be closer to international practices; studying the Accounting Law and submitting to the National Assembly amendments and supplements; and especially enhancing training and development activities for experts, both in terms of quantity and quality, with importance attached to professional ethics. Q You are a professor who has spent many years teaching. How much did you enjoy your career in education? A I have spent nearly 23 years teaching accounting at graduate, postgraduate and doctorate level, and I feel appropriate for this job. Teaching always gives me an exciting pressure; you are always required to broaden knowledge, enrich experiences

Born on 15 March 1957 in Nghe An province, Professor Hue has a degree from the Academy of Finance in Hanoi and a PhD from the University of Economics in Bratislava, Slovakia.


Minister of Finance.


Deputy auditor general, State Audit Office of Vietnam, going on to become auditor general.


Lecturer, Hanoi University of Finance and Accounting (HUFA), going on to become deputy dean, acting dean, dean and vice rector. and improve skills in the accounting and teaching professions. Teachers’ happiness is to see their students succeeding and growing, and to feel fresh in their life and works. Q What advice would you give today’s graduates in Vietnam who are thinking about embarking on a career in accountancy or finance? A Accountancy in particular and finance in general will be always an attractive and challenging career. You should always take advantage of every opportunity to improve your knowledge, experiences and skills and, more importantly, to learn to be careful and have good ethics. The development of Vietnam’s accountancy industry and its expansion into the regional and global market absolutely depend on the capacity of human resources, especially the level of professional, foreign language (English) and information technology skills. Professor Hue was interviewed by AB’s Asia editor, Colette Steckel

13/03/2012 14:44

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The CV 2011

Appointed member of the ACCA Canada Advisory Board, Toronto


Joins Institute of Public Administration Canada; and becomes business analyst in the Ministry of Community and Social Services, Government of Ontario


Masters degree in accounting, Anglia Ruskin University, UK. Joins the Certified General Accountants of Ontario; business analyst with the Ministry of Children and Youth Services, Government of Ontario


Becomes ACCA member and area decision support analyst, Royal Mail


Human resource analyst with Royal Mail, UK


Finance officer, Australian High Commission, and credit analyst, International Finance Investment and Commerce Bank, Bangladesh. Moves to London, UK


MBA, Institute of Business Administration, Dhaka University, Bangladesh


Honours degree in statistics, Jahangirnagar University, Bangladesh

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After travelling from Bangladesh to Canada by way of the UK, Mohammed Chowdhury ACCA is growing to love the North American life – and its formidable landscape


or Mohammed Chowdhury, his recent appointment to the ACCA Canada Advisory Board marks the end of a long journey from his native Bangladesh to a new home halfway across the world. At the same time, it heralds the beginning of what he hopes will be a long and prosperous career in North America. Chowdhury was born in the Rangpur Division of northern Bangladesh in 1976. An area rich in history, with magnificent palaces and remnants of the Raj still dotting the landscape, travellers through the centuries have paused on its well-travelled roads, and it wasn’t long before Chowdhury’s family would follow their tradition. Chowdhury senior was a government engineer, a profession that involved the family’s constant relocation throughout the country. Bangladesh was in the process of rebuilding following unimaginable disasters and intense political upheaval. The young Chowdhury children were able to witness the rebuilding of a nation, and to behold the incredible bravery and resilience of the Bengali people. Chowdhury remembers Bangladesh fondly. ‘It is an amazing country,’ he says. ‘We have the largest mangrove forest in the world, the Sundarbans. We also have Cox’s Bazar, the longest beach in the world.’ In the Chowdhury household education was paramount. Chowdhury’s parents were extremely intuitive when it came to recognising the intellectual strengths of their children, including young Mohammed’s mathematical ability. He followed his father’s guidance and explored this strength through accounting.

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‘The accounting profession was a natural choice for me, and was something my father always wanted me to pursue, simply because it makes sense,’ he says. ‘Number one, I am good with numbers. Number two, accounting is one of the few professions where you can put literature to numbers and make decisions based on that.’

This sporting life Away from studying, Chowdhury would dream of trekking faraway mountain peaks or spend endless hours on the cricket field: two passions that have remained. ‘I am not a mountaineer per se, although I trekked through the Annapurnas in the Himalayas,’ he says. ‘Mountains fascinate me and I will never grow bored of them.’ Schooldays hold many happy memories for Chowdhury, who enjoyed long evening chats with his friends in the many teahouses that dot the street corners of the bustling city. And, of course, they were always on the lookout for an available cricket field. ‘Cricket will always remain an important activity and interest in my life,’ he says. ‘It has taught me the value of leadership and ingenuity and the importance of unity.’ When he and his friends arrived at the Institute of Business Administration at the University of Dhaka, they had become masters of improvisation and would play cricket on the dormitory roof. If the ball went out of play – in other words, went off the roof – as punishment someone would have to find it. Following many trips up and down flights of stairs and some

intense searches of the surrounding countryside, great efforts were made to keep the ball on the roof. Sometimes during strikes classes would be held in the dormitories and on several occasions a furious lecturer would chastise the rooftop cricketers. ‘I remember one extremely irate professor who came running up the stairs, criticising us severely for disrupting classes with our rooftop cricket match,’ Chowdhury recalls. In 1998 he received an Honours degree in statistics and in 2000 earned his MBA. He took up a position as a credit analyst at the International Finance Investment and Commerce Bank, before going on to become an analyst with the Australian High Commission in Dhaka. Chowdhury enjoyed his life in Bangladesh but knew that he would pursue a degree in accounting and had yet to see the mountains of his boyhood dreams. This prompted him to go abroad to study. Careful research led him to consider travelling to Australia, Canada or the UK to further his education. He found the UK to be the most competitive and, in 2003, set off for London. Once settled into London life and study, Chowdhury joined Royal Mail part time. His computer and analytical skills quickly saw him promoted from postman to human resources administrator and, finally, area decision support analyst. ‘I applied for that job and there was a huge competition,’ he recalls. ‘It was cut down to 50 and finally 10 applicants remained and in the end there was myself and two other applicants.’

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Climb every mountain In 2007 Chowdhury became a member of ACCA and in 2009 received his Masters degree in accounting from the Anglia Ruskin University. Yet although growing successfully in his career in the UK he would still dream of those faraway mountains. In the end, it was Chowdhury’s curiosity about the Canadian Rocky Mountains that led him to Canada. ‘I find the Canadian terrain fantastic,’ he says. He was also intrigued by the level of volunteerism in Canada. One particular volunteer-based agency was integral in helping his young family adjust to their new home. The Toronto Region Immigrant Employment Council (TRIEC) is a mentoring partnership programme designed to assist newcomers approach potential employers in the Toronto area. Having found the programme so beneficial, Chowdhury went on to become a volunteer mentor himself. ‘The programme matches you with a mentor in your field, so if you are an accountant, it would find a mentor who is also an accountant,’ explains Chowdhury. ‘The mentor shares his professional network with the mentee. So it broadens his or her network and at the same time gives the individual a positive way to do something structured. ‘When a new immigrant comes to a new country, they are naturally a bit down, a bit depressed. The mentoring programme is a good remedy for that.’ Chowdhury is also a volunteer tax preparer for the Certified General Accountants of Ontario, working with seniors and low-income families, and he is a volunteer fundraiser for Big Brothers Big Sisters of Canada, an organisation that provides child and youth mentoring services. Thanks to his experience with the Australian High Commission and Royal Mail, Chowdhury quickly secured a position within the

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Ontarian government, first as a business analyst with the Ministry of Children and Youth Services and then at the Ministry of Community and Social Services. His latest achievement is joining the ACCA Canada Advisory Board. ‘Our aim is to project the value of the designation in the Canadian marketplace,’ he explains, stressing the distinctive characteristics of the ACCA qualification. ‘Where ACCA differentiates from traditional [Canadian] accounting disciplines, like CGAs [certified general accountant] or CAs [chartered accountant] is that it encompasses

management accounting and auditing, as well as accounting itself.’ Chowdhury has yet to explore the Rockies but has flown over them. His 2012 holiday plans feature a drive across the provinces of Alberta and British Columbia, one of the most beautiful and rugged mountain terrains in the world. All in all, the Chowdhury family is enjoying their new life in Canada and, as he points out, there is another advantage to working in Canada: ‘Plenty of parking!’ Nikko DeAngelis and Ramona Dzinkowski, journalists


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The refusal by the former president of Olympus to cover up the company’s wrongdoing is to be applauded. But what now for corporate governance and whistleblowing in Japan?


cross the board, revelations that Olympus Corporation had hidden losses from bad investments came as a surprise. However, the biggest surprise was not that one of the most famous and well-respected Japanese electronics companies had concealed its actions from auditors, shareholders and regulators, but that financial jiggery-pokery had been going on for at least 13 years and that it involved US$1.7bn. That Olympus got away with such a huge fraud for so long has raised new red flags over corporate governance in Japan, with prime minister Yoshihiko Noda weighing in on the debate, telling the Financial Times in an interview in late October that he feared the outcry over the scandal could lead to the

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assumption that such problems are rife throughout Japanese companies. ‘What worries me is that it will be a problem if people take the events at this one Japanese company and generalise from that to say Japan is a country that [does not follow] the rules of capitalism,’ he said. ‘Japanese society is not that kind of society.’ The problems at Olympus were first detailed in a story in the investigative journal Facta, issued on 20 July last year. The five-page story claimed that the company had used over-priced acquisitions and exorbitant consultancy fees to recover losses that it had made in investments in the years of Japan’s ‘bubble economy’ of the 1980s, but then went bad. The convoluted scheme included a number of questionable payments,

for the acquisition of three Japanese companies that were essentially worthless, and then US$687m to a little-known financial advisory company in the Cayman Islands when it purchased Gyrus ACMI, a British manufacturer of medical instruments, for US$2bn in 2008. Possibly because of the scale of alleged fraud, rumours have suggested the behind-the-scenes involvement of ‘anti-social forces’, a polite way of saying underworld gangs (yakuza), although this is something which the company denied at a meeting with its creditors in November. Michael Woodford, the English chief executive who had worked for the company for 30 years and had only been made president on 1 April 2011, said he was ‘incredulous’ when he read the story, but that sense of disbelief deepened when he went into his office on the Monday and no one mentioned it. Summoning a board meeting for the following day, he sensed an immediate change around the table when he got the magazine out and asked what was going on. The response from former president Tsuyoshi Kikukawa was that Woodford had not been told about the matter because he was ‘so busy’. Over the coming days, the board attempted to persuade Woodford to drop the matter. He responded by commissioning an external report by PwC into the fees paid to the company’s advisers that revealed ‘a shameful catalogue of errors’, he said. Presenting it to the board, he requested the resignation of Kikukawa and Hisashi Mori, the executive vice president.

09/03/2012 14:46


Olympus president Shuichi Takayama bows in apology at the start of a news conference in Tokyo on 7 December 2011

At the board meeting on 14 October, convened ostensibly to discuss ‘concerns over governance’, Kikukawa announced that the agenda had been altered and the only thing to discuss was the termination of Woodford’s contract. Woodford was not allowed to address the board, was ordered to hand over his mobile phones and computers and

Nevertheless, the company admitted on 8 November that its accounting practices had been ‘inappropriate’ and that funds had been used to cover its investment losses. Investigations have been launched by the UK’s Serious Fraud Office, The FBI in the US and in Japan, both the Financial Services Agency and the Tokyo Metropolitan Police.

‘NOW THE QUESTION IS WHETHER THE COMPANY CAN MAINTAIN THE CONFIDENCE OF THE PEOPLE THAT DEAL WITH IT; IN JAPAN THAT’S THE BANKS’ told to vacate his apartment over the weekend. To add insult to injury, he was told he could not use a company car to get to the airport so he would have to take the bus.

Out in the open Instead of going quietly, however, Woodford went public. The story appeared on the front page of the Financial Times on 15 October and, for the board of Olympus, the genie had escaped from the bottle. Kikukawa resigned 11 days later but the new president, Shuichi Takayama, attempted to defend the board’s actions by blaming Woodford for leaking secret information that damaged the company’s share price.

INT_AP_F_Olympus.indd 25

Olympus’s stock market valuation, valued at 673 billion yen on 13 October, had fallen to 422 billion yen by the close of trading three days later and shareholders in Japan and overseas are reportedly initiating investigations that will lead to legal action against the company. For its part, Olympus set up an initial investigation panel, made up of five independent lawyers and a Japanese certified public accountant. It issued The Third Party Committee’s Investigation Report, which ran to 259 pages and identified where the losses had occurred and the efforts to conceal them, concluding that the case was a ‘complete failure of corporate governance’ and that the entire event

‘has been very unfortunate for the credibility of corporate Japan’. The report also examined the responsibility of the auditors, and cleared KPMG Azsa LLC and Ernst & Young ShinNihon LLC of culpability for the fiasco, although it has concluded that five current and former corporate statutory auditors are culpable.

Future implications While the investigations continue and the legal cases are prepared, the key questions are, what will become of the company and what are the implications for corporate governance in Japan? For Olympus, the prognosis appears reasonably good. ‘Their losses have now been realised and sorted out, meaning that the black hole in their accounts has been dealt with,’ says a Tokyo-based lawyer. ‘So now the question becomes whether the company can maintain the confidence of the people that deal with it, and in Japan that means the banks. ‘They have to be concerned about their banks as their debts are very high and, if they lose the confidence of Sumitomo Mitsui Banking Corporation then they are in trouble,’ he says. ‘But I don’t think that has happened and I don’t think it will.’ And as far as consumers are concerned, Olympus makes good products and there would only be an

09/03/2012 14:46


Unless after-sales service is affected, consumers are still likely to buy Olympus products

impact on retail sales if there was a fear that the company was going under and after-sales service would be affected. At present, that is an unlikely scenario. So with Olympus likely to survive, perhaps with a capital injection and a potential team-up with another firm, the focus will inevitably turn to how Japan can prevent another failure of corporate governance on such a massive scale. ‘There were two main causes of the scandal,’ says Nicholas Benes, representative director of The Board Director Training Institute of Japan, a not-for-profit public interest organisation certified by the Japanese government. ‘Firstly, the lack of at least three truly independent directors, and a more effective audit committee structure manned solely by them. To say the same thing in reverse, the “statutory auditor” system has some strong points, but overall it is obsolete. The presence of statutory auditors allows Japanese directors to think they do not have to worry much about the financial statements. ‘And secondly, Japan is one of the few countries in the world that has absolutely no rules or accepted practices about director training, either

INT_AP_F_Olympus.indd 26

requiring it or requiring disclosure of company policy about it,’ he adds. Japanese companies promote experienced managers and engineers to their board, but without effective training these people do not really understand their role and are not fully aware of the huge personal liability they are taking on if they are not appropriately inquisitive and sceptical about the actions of the board, Benes explains. ‘They essentially view being a director as just another promotion, that the president and chairman are still their bosses, and it is better to not say much if they want to be promoted,’ he says. ‘Japanese corporate governance has been far too trusting of Japanese managers in an increasingly complex and risky world,’ Benes adds. ‘On

their auditors do not realise that the combination of long-term employment with hierarchical management bureaucracies can easily create dangerous “group-think” patterns, and countervail this with effective external training programmes, new legal rules and structures will continue to have limited positive impact,’ he says.

Government intervention Meanwhile, Naomi Fink, Japan equity strategist for Jefferies (Japan), says that a proposal by the Ministry of Justice to revise the Companies Act to require large companies to have at least one outside director ‘is not enough’. ‘If made legally mandatory, appointing outside directors would be of symbolic importance, but practically of limited impact,’ she adds. ‘Without a stricter definition of independence,

‘NO ONE IN JAPAN WANTS TO GO INTO A COMPANY AND BE THE BAD GUY BECAUSE THAT’S A VERY UN-JAPANESE THING TO DO, TO UPSET THE GROUP’ average, individual managers in Japan can be trusted at a high level and, unlike some other countries, they are far less led by monetary motives. ‘However, as long as companies and

application of the amended law might be watered down.’ And such a change would not have had an impact in the Olympus case anyway, she points out, as the

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*BLOWING THE WHISTLE: THE THEORY AND THE PRACTICE The Olympus story might never have seen the light of day had it not been for the actions of one of those rare creatures of the Japanese corporate world, the whistleblower. The source of the information that served as the basis for two stories that appeared in the Facta journal, first published on 20 July, remains unknown. Yet Michael Woodford, the former chief executive of Olympus, has paid tribute to the man or woman who provided the damning details of the firm’s operations, describing the original whistleblower as ‘brave’. ‘That person is a hero’, he said in a press conference on 26 November. New legislation designed to protect whistleblowers went into effect in April 2006, and the question today is whether the attention this case has attracted will encourage more employees of Japanese firms to reveal the wrongdoings of their management, or whether would-be whistleblowers sense it is better to keep quiet. Corporate governance specialists have expressed concern that, while firms in Japan are paying lip service to the requirement that they enable whistleblowing and protect those who do reveal illegal activities, it seems their employees are not in as strong a position as they are in other jurisdictions. Britain safeguards ‘protected disclosures’ through the Public Interest Disclosure Act 1998, while the US has the Dodd-Frank Wall Street Reform and Consumer Protection Act, but both have differences to the rules in Japan. The US act, for example, makes it possible for a whistleblower to receive as much as 30% of the fines levied on a company over US$1m by Department of Justice, after it is found guilty of wrongdoing. ‘There are no incentives for whistleblowers in Japan, so the reason they come forward is because they want the right thing to happen, they are ethical and they don’t want

company had no fewer than four outside directors. Another option that is being considered, according to a source involved in the investigation, is rotation of auditing firms at companies. Japan’s auditing regulators and the industry are ‘still gathering their wits’ about the most effective steps that might be taken to rebuild the trust of the public and investors, according to Benes, who would like to see ways for his organisation to work more closely with accountancy firms in Japan and

INT_AP_F_Olympus.indd 27

their company to be in the wrong,’ says Nicholas Benes, representative director of The Board Director Training Institute of Japan. ‘Japanese people have a great deal of loyalty to their organisation and hierarchy, but if a person fails to act out of a sense of loyalty and that leads to years of malfeasance, how is that helping the company?’ he asks. There is, he points out, no way of sugar-coating serious wrongdoing, whether that is a firm’s falsification of accounting records or links to organised crime groups or rigging bids. Despite the lack of incentives, Stuart Witchell, senior managing director of FTI Consulting’s Global Risk and Investigations practice in Asia Pacific, says there has been a gradual increase in the number of whistleblowing cases in the last five years. ‘I would say that the strongest single reason for the gradual increase has been the ‘demonstration effect’ of other individuals taking cases against major companies over mistreatment after whistleblowing and winning their cases in court, although the compensatory amounts tend to be relatively paltry,’ he says. Yet reports of whistleblowers being ostracised by colleagues will inevitably discourage others, he points out, while the ‘relatively narrow breadth of the current legislation’ – which only applies to private sector employees while business partners, suppliers and customers cannot act as whistleblowers – is another drawback. But fear remains the single biggest obstacle. In a survey by the Consumer Affairs Agency in October 2010, the most common reason given by employees for not stepping forward was the fear of being on the receiving end of unfair treatment in the workplace. Some 44% of the 3,000 workers replying to the survey said they would not think of reporting illegal actions within their companies.

groups, such as the Association of Certified Fraud Examiners, to improve training and identify practices that can be improved. ‘In Japan, business is so much about connections,’ says a legal expert. ‘And no one in Japan is going to want to go into a company and be the bad guy because that’s a very un-Japanese thing to do, to upset the group. ‘Looking at Japanese financial statements, they’re immeasurably better compared to 20 years ago,’ he adds. ‘Big companies that list in the

US or Europe have moved to tighten stuff up. It’s the smaller, family run companies where I suspect change will take time to come through. ‘There is one school of thought that all this will be forgotten about in six months and people will continue in the same old way,’ he adds. ‘My take is that something will get done. It may not be immediately perfect, but it will be a step in the right direction.’ Julian Ryall, journalist

09/03/2012 14:46


DIVERSITY IN Businesses increasingly see harnessing diversity as a way of dealing with globalisation and economic challenges, but what does that mean for the finance function?


n today’s unpredictable economic climate, diversity has become more than a recruitment requirement. Once represented by a tick-box survey completed with every job application, diversity today is increasingly seen as critical to success in global business. More than just a consideration of gender, ethnic background and sexual orientation, diversity now encompasses not only visible differences, but the things that make people unique: life and work experiences, views and beliefs. Diversity in this wider sense is about harnessing different perspectives and inputs, encouraging productive collaboration, innovation and creativity. Companies grappling with the challenges of a changing global economy are increasingly seeing it as something they need to embrace. In a new ACCA report, Building a Better Business through Finance Diversity, 12 international diversity, HR and finance experts give their views on the importance of diversity in finance. And, they say, the bottom line is that the global business environment not only demands that diversity be taken into account, but also that success depends on it. In a scary time for business, the finance function has a pivotal role in steering companies away from

INT_F_diversity.indd 28

turbulent waters. More than ever before, the onus is on CFOs to make sure the ship stays afloat. Companies are re-evaluating their investment strategies and many of the assumptions on which they once based their business – it’s an exercise where dexterity and diversity of thinking will pay dividends. Companies need creative finance professionals who can devise new solutions to new problems. This changes the way finance professionals are recruited, but also the

job of the CFO. ‘The role of CFO is becoming more of a trusted adviser, providing insight into the business, driving a lot of the strategy and with a very important seat at the table,’ says Carlos Passi, assistant controller of business transformation at IBM. ‘And with that change, the skills required are also different.’ The logistics of extending business into a global market are forcing CFOs to adapt. Professor Mansour Javidan of Thunderbird School of Global Management explains: ‘Move the company into one extra market and the CFO has the same role to perform but now has to ensure there is capital market access beyond the domestic market. The CFO’s job now is not just to follow domestic rules and regulations but also rules and regulations in the second country.’ An impressive finance background is no longer enough for tomorrow’s CFO. ‘When we look for finance leaders, we try to play down their functional

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N ADVERSITY strengths once they reach a certain level and get them more rounded in term of business experience,’ says Datin Badrunnisa Mohd Yasin Khan, group chief talent officer at Axiata. ‘Of course, we’re looking for people who have grown up with the finance discipline but that alone is not enough.’

The juggler Professor Javidan agrees – CFOs require a more varied CV than ever before. ‘As a company globalises and the CFO gets more globally exposed, hard technical skills are still necessary but no longer sufficient,’ he says. ‘You have to become an expert in balancing the contradictory forces coming at you – and particularly in positions like finance and accounting.’ Finance leaders must develop broad experience in developed and emerging markets and while CFOs are expected to adapt to disruptive innovations and new business models, their teams also need to keep pace. This is where diversity of thought and experience can be a vital tool for staying ahead of the competition. Recruiters should be looking to bring individuals with fresh ideas into the finance function. Roberto Mello, CFO of GE Healthcare China, welcomes the challenge. ‘The opportunity to tap into talent from different cultures and backgrounds is a powerful tool because it gives us the chance to have different points of view,’ he says. ‘There is incredible opportunity and strength for the business to be found in the differences between people.’ Of course, harnessing these differences can be challenging. ‘If you don’t understand the depth of the differences you may violate people’s

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strongly held views without realising it,’ warns Peter Reilly, director of HR research and consultancy at the UK’s Institute for Empowerment Studies. Each new market has its own customs, culture, regulatory, environment and governance strategies to consider. These must be understood and incorporated into the existing corporate model. ‘Once you have respect for and an appreciation of differences, not necessarily thinking of one as better than the other, then you can really start working on getting the best out of people,’ Mello adds. A potential pitfall of diversity,

warns Kathryn Komsa, chief diversity officer at Marsh & McLennan, is the patience and time required to consider numerous opinions during decisionmaking. ‘When people with diverse backgrounds, experiences, ways of interpreting things come together, it may take longer to get a solution,’ she says. ‘But you will inevitably get to a better solution.’ Komsa’s colleague, CFO Vanessa Wittman, says debate in decisionmaking may shake the traditional hierarchy of the finance team, but can deliver immeasurable benefits. ‘The understanding that debate leads to

** FINANCE DIVERSITY: WHY AND HOW * * * * * * * * *

External changes are demanding greater diversity in the finance function. Changing the roles and responsibilities of the finance function requires CFOs to think more broadly about the skills and background of their team. The demands on the finance function are growing as companies expand further overseas. In a global economy, the ability to understand differences in cultures and perspectives is a prerequisite for the finance function. Diversity of thinking encourages innovation. In order to derive benefits from diversity, business leaders must be comfortable with being challenged. There can be a tension between diversity and the need to develop standard processes across geographies. A broader perspective on recruitment can play a valuable role in creating a more diverse finance function. Finance executives should be encouraged to develop experience outside the finance function. Finance leaders must develop broad geographical experience in both developed and emerging markets.


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better answers aligns with the ultimate finance goal of challenging the business,’ she says. ‘Any CFO who is searching for views that only echo their own shouldn’t be a CFO.’ As many companies consolidate their finance teams into regional hubs or outsource processes to cut costs, diversity may seem a pipe dream. Globalisation swells the financial information companies need to manage, forcing them to shrink in-country finance teams and migrate commoditised activities to shared service centres. This boosts productivity and saves costs by standardising processes for routine transactions. At the same time, companies must comply with local financial and governance regulations in the jurisdictions where they operate. This encourages a shift to a process-driven approach that assures compliance and improves accountability. ‘More than any other function, finance demands sticking to the rules and doing the same thing in a very standardised business model,’ says Reilly. ‘There’s an argument that the greater the standardisation applied, the harder it is to benefit from diversity.’ But not everyone agrees. Stevan Rolls, head of HR at Deloitte, believes that standardisation and diversity can work together. ‘Some activities in the finance function need to be robust and repeatable and so are good candidates for standardisation regardless of where you are,’ he says. ‘Others require local treatment or are more complex and so require on-the-ground expertise. Finance is a function in which there are places where you want innovation and places you don’t want innovation. The key is deciding which is which.’ Even if it overcomes these potential pitfalls, a company can end up with diversity without the benefits. Businesses can benefit only if the workforce is empowered to express its diversity – otherwise, companies end up with teams who look different, but think the same. ‘It’s diversity of thought that brings the real business advantage,’ Rolls explains. So simply hiring a team of people

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from different backgrounds with varied experience is not enough. Employees need to feel free to express their creativity and difference in thought and opinion – and their seniors must allow themselves to be challenged. The shift from the consensus-driven management style to one that embraces differences is critical.

Harnessing the power Finance leaders and HR professionals need to tap the potential of diversity, strive to foster diverse thinking across the organisation and encourage the open discussion of views and ideas. Companies need to be open to recruiting staff from different sectors,

regions or professional backgrounds. Finance executives must be encouraged to develop greater experience through secondment or job rotation and leaders should resist the urge to retain good staff members in one position for too long. ‘It’s never easy, because if you have a great person in the team you don’t necessarily want them going off to do something else,’ says Rolls. ‘But in the long term, they’ll come back with different skills and a wider view on their role. Ultimately, you get a lot more out of them by letting them go.’ Kate Jenkinson, ACCA journalist


‘Equal opportunity is important to ensure that talent gets the opportunity to fulfil its potential regardless of background. But you can still have a workforce with representatives from a wide range of backgrounds and not have diversity. It’s diversity of thought that brings the real business advantage.’ Stevan Rolls, head of human resources at Deloitte ‘When people with diverse backgrounds, experiences, ways of interpreting things and tools come together, it may take longer to get a solution, but you will inevitably get to a better solution.’ Kathryn Komsa, chief diversity officer at Marsh & McLennan ‘As a company globalises and the CFO gets more globally exposed, hard technical skills are still necessary but no longer sufficient. You have to become an expert in balancing the contradictory forces coming at you.’ Mansour Javidan, professor at Thunderbird School of Global Management ‘Once you have respect for and an appreciation of differences, not necessarily thinking of one as better than the other, then you can really start working on getting the best out of people and situations wherever you are based.’ Roberto Mello, CFO at GE Healthcare China ‘When we look for finance leaders, we try to play down their functional strengths once they reach a certain level and get them more rounded in term of business experience. Of course, we’re looking for people who have grown up with the finance discipline but that alone is not enough. We really want someone with a more developed business sense.’ Datin Badrunnisa Mohd Yasin Khan, group chief talent officer at Axiata ‘The understanding that debate leads to better answers aligns with the ultimate finance goal of challenging the business. Any CFO who is searching for views that only echo their own shouldn’t be a CFO.’ Vanessa Wittman, CFO at Marsh & McLennan

12/03/2012 16:59

Global support at times convenient for you Contact us by phone or email 24 hours a day 7 days a week 365 days of the year

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The opening up of the Arctic to shipping will bring big savings on the freight and carbon costs of transporting goods between Europe and Asia Pacific. Colin Manson reports


espite the still contested debate about the extent to which greenhouse gas emissions from humans contribute to climate change, global warming is a reality. Nowhere is this more obvious than the Arctic Basin, where the melting of the ice sheets is viewed with increasing concern. In 2011 the retreating ice reached its second lowest ever recorded level, some 310,000 square kilometres off the 2007 record low. The 10-year running average reduction went from 10.2% in 2007 to a new high of 12% in 2011, according to the Canadian National Snow and Ice Data Center. In addition, the Northern Sea Route (along the top of Russia) was open throughout last August and well into September. The ‘Amundsen Route’ of the northwest passage (along the top of Canada) was also open for the fifth year running. The opening up of the Arctic routes brings opportunities for ships trading between Europe and China, with a much faster transit time and so savings in both costs and emissions and the avoidance of piracy-prone areas off Somalia and the Straits of Malacca. The debate over the speed at which the ice will disappear from the Northern Sea Route is strongly contested, with more conservative opinion putting the commercial reality out to the 2030–2040 timeframe. However, recent classified studies within the UK’s Ministry of Defence

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leaked to the Daily Telegraph last August place greater emphasis on an earlier opening up of the route, with a 2015–2020 timeframe seen as a more likely scenario. On a more basic level, there is currently little research into the extent to which shipping will use the Arctic Basin. The Arctic Council’s 2009 Arctic Marine Shipping Assessment (AMSA) is the most recent globally accepted detailed assessment. However, the report was based on a 2004 survey of shipping through the Northern Sea Route and the Arctic Climate Impact Assessment’s 2008 median ice extent. Of course, the Antarctic Ocean also lies at a pole but conditions there are significantly different from the Arctic. The way in which the Polar Code is being developed treats the environment at both poles in a similar way despite the very real differences in the way in which it behaves. For example, Antarctica is an ice-covered land mass with ice shelves extending outwards

*OVER THE TOP Japan South Korea China

via Suez Canal Miles Days 11,000 34 10,700 33 10,500 32

whereas the North Pole is covered by an iced over central sea with land around the edges only. This makes for very different climate impacts yet little is done to differentiate the way in which the Polar Code is applied in each area. The International Maritime Organisation (IMO) is developing the Polar Code regulatory framework with the various member nations and with participation from a number of NGOs including the Institute of Marine Engineering, Science & Technology (IMarEST). At present, it is focusing mainly on the requirements of ships that operate in or near ice conditions and the requirements of an ice navigator. Even though sea ice is retreating further and faster than ever, other considerations such as sea-air temperature differences, extreme wind speeds and visibility are being sidelined or even ignored. The Polar Code also fails to address the training requirements inherent in the current STWC mariner certification as well as

via Northern Sea Route Miles Days 7,400 26 7,500 27 7,900 28

Savings (days) 8 6 4

Distances and times from Asia Pacific to Rotterdam in the Netherlands, based on 2011 transit times with some ice present. The likely increase in speed to 14 knots in the next five years would cut a further five days or so from transit times

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Barren beauty: multiple exposure of midnight sun in Alaska, 175 miles north of the Arctic Circle the additional maritime pollution and safety of life at sea issues associated with such remote and difficult to police regions. How will the changes to the Arctic affect the rest of the industrial world? With its opening up to sea freight, transit times between Europe and the expanding markets of Asia Pacific (notably China) will reduce significantly, albeit only during the summer months. At a recent conference on polar shipping held at IMarEST, there was much debate about the reduction in emissions, operating costs and transit times. The transit times between the port of Rotterdam in Europe and Japan, China and South Korea have been calculated (see panel opposite) based on an average speed of just six knots along the north of Russia – a speed consistent with some ice being present throughout the voyage. Over the next five years or so, the extent of ice is expected to reduce, enabling the average transit speed to increase to perhaps 14 knots, which reduces the overall time considerably. The savings gained will include more than just the cost in operating costs, though – they will also include the carbon cost per tonne of cargo. At an average of, say, £50k per day, the Northern Sea Route confers a freight saving of around £400k from Japan, which could rise to perhaps £750k in the near future. The Arctic sea routes also remove

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the need for vessels to pass through the Malacca Straits and the northwest Indian Ocean – both areas of endemic piracy. Without this risk, insurance premiums can be reduced significantly although this is partly balanced by the increased premiums associated with the risk of ice damage. Suez Canal transit charges are also likely to go on rising, although the Arctic routes may incur the cost of an ice breaker escort.

A widening window At the same time, stocks of components or finished goods can be reduced during the summer months although here again the weather in an individual year may affect that holding. However, as the ice melts ever faster in the near future, the open water season will increase from the current eight to 10 weeks up to perhaps four months. This would reduce operating costs significantly but require more detailed overview of the stock control process. The IMO’s initiative in producing the Polar Code is a welcome step towards providing a regulatory framework for safe use of the Arctic Basin. However, to determine the true extent of the requirements and provide a robust yet flexible code, more research is desperately needed to generate better forecasts of the speed at which the ice will retreat, and hence the increasing availability of the Arctic routes as well as the volume of shipping expected to take advantage of that availability.

View of Arctic Basin showing Northern Sea Route in blue and Suez route in red Overall, the opening up of the Arctic Ocean and the Northern Sea Route represents potential savings in cargo costs, insurance premiums and stock holdings as well as a reduction in the carbon cost of goods both imported from and exported to markets in Asia Pacific. However, it needs the customer to be aware of these potential savings in order to ensure that freighting companies take proper note of the reduction in costs – they will be reluctant to do so as it will eat into their own operating model. Only by a straightforward application of market forces will savvy customers ensure that their operating costs are reduced by insisting that carriers use the Northern Sea Route. This will also improve their green credentials and raise their sustainability rating. Colin Manson is director, Manson Oceanographic Consultancy

09/03/2012 14:48


NOT SO PLAIN SAILING Opening up the Arctic to commercial shipping is fraught with business as well as ecological risk, argue environmental campaigning organisations


he opening of the Northern Sea Route to shipping may mean big savings on the freight and carbon costs of transporting goods between Europe and Asia Pacific, but will a price be paid by the Arctic and its largely unstudied ecosystem? Greenpeace International polar activist Ben Ayliffe believes that price is currently too high. ‘This is the planet’s last wild ocean and any accident would have incalculable consequences and be very difficult to mitigate,’ he warns. ‘With more shipping we’re going to have greater risk of accidents in the last great wilderness left on the planet.’ But potential oil spills are not the only dangers increased marine traffic poses to the icy north. ‘There are also problems of increased black carbon [soot] to consider,’ says Ayliffe. ‘Increased shipping will trap more and more heat in the local environment, which will only add to the already severe effects of climate change. The Arctic is melting faster than any other region in the world. Having more black carbon there will add to that.’ There are also huge business risks. ‘It is an extremely risky business to try anything up there at the moment,’ says Dr Simon Walmsley, WWF International marine manager. ‘One of the greatest

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problems in the Arctic is the lack of hydrogeographic information. These areas have never really been surveyed. That’s a large risk for companies putting money into these ventures.’ There is also the human factor. With remoteness, harsh conditions and lack of search and rescue, Walmsley argues that accidents and loss of life could be a reality if industry starts rushing in prematurely to capitalise on cost savings. ‘For many years we have seen Arctic nations operating pretty good intra-port shipping in these conditions to supply remote settlements and developments,’ he says. ‘Problems are going to arise with transit in the Arctic when we get non-fit-for-purpose vessels up there with crews that are not used to operating in these conditions.’ Walmsley is involved in International Maritime Organisation (IMO) discussions for the development of a Polar Code for shipping in the Arctic and Antarctic. ‘The Polar Code is an environmental and safety mechanism for ships in polar waters that are extreme,’ he says. In February, it was decided to delay the environmental section of the code by one year. ‘We’re not very happy about that,’ Walmsley adds. ‘The Arctic is one of the most sensitive ecosystems in the world, and experiencing the greatest rate

of climate change – any sort of delay is not good. That’s a cost in itself.’ ‘It’s not all doom and gloom,’ says Ayliffe, but he warns that continuing industrialisation in the Arctic will firmly hammer the nail in the coffin of this vast frozen frontier. ‘Scientists are saying the Arctic sea ice is going into a death spiral,’ he says. ‘Greenpeace is calling for better governance to draw a line in the ice and say enough is enough. We really have to look at the future of this pristine region.’ Walmsley hopes the Polar Code will be developed sooner rather than later. ‘As climate change endures, conditions are going to change even more. Coupled with a lack of hydrographic information, that means you are quite blind out there. That’s why we need this code to be developed asap.’ To companies considering joining the Arctic shipping rush, he offers this advice: ‘Consider the risk, and whether it is worth it. Secondly, only fit-for-purpose vessels and operations – with crew that are specifically trained and experienced – should be allowed into these areas and, where the risk/ sensitivity is too great, then industry should consider not operating at all.’ Kate Jenkinson, ACCA journalist

14/03/2012 11:11


WE’RE BIG IN FINANCE YOU COULD BE TOO With over 3,500 live accountancy jobs, now is the right time to talk about your next career move. All our consultants have expert market knowledge, strong relationships across the industry and the support of our extensive global network. That’s why organisations of all types and sizes – from international blue chips to SMEs – trust us to find the people who can help transform their business. So, whether you want something local or international, permanent or interim, we have the breadth of coverage and the depth of understanding to help you find it. For further information, visit or call 0800 716 026 to locate your nearest office. HUK-J5034_AB_Mag_Feb_2012.indd 1

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Reluctant giant [

As yet another year passes without the US indicating with any clarity where it is going on International Financial Reporting Standards, Ramona Dzinkowski looks at 2012’s prospects for a decision from the SEC

Many people expected the US Securities and Exchange Commission (SEC) to make an official statement in 2011 on if, how and when the US would adopt International Financial Reporting Standards (IFRS). The airwaves, though, remained silent, no press release came, and all those holding their breath may have to continue to do so until well into this year. James Kroeker, SEC chief accountant, has indicated that any decision on IFRS will ‘take a few more months’, or to be precise: ‘more than a couple, and less than many’. A few more months may not seem long. Yet the US has been considering adopting IFRS since 2000. So 12 years later, has the SEC moved any further ahead in its thinking – as over 100 countries have – or is all the analysis getting in the way of a final decision? At some point a decision has to be made that recognises that nothing is perfect and you can’t please all the people all the time. After all, if the Canadians, who take pride in analysing everything from the fiscal federal implications of mating moose to the price elasticity of demand for hockey helmets, could just get on with it, then the US should certainly be able to. But with most of the fieldwork complete and one more ‘final comprehensive report’ to come, it is still unclear whether the US will be any closer by mid-2012 to an IFRS adoption agenda that meets all the SEC’s requirements – in particular, a framework that, according to Kroeker: demonstrates a high level of support for US commitment to


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* *

continued development and use of globally consistent high-quality accounting standards; provides clear US authority over standards in the US capital markets; facilitates a strong US voice in the

process of establishing global accounting standards; is responsive to the economic and other impacts of change; considers whether to retain US GAAP as the basis for US financial reporting to mitigate the costs and complexity of introducing a new set of standards. It’s a tall order. Also, during this election year, you have to wonder if the US will have the appetite to make any bold movements one way or another. So what are the implications of further delay on IFRS in the US? While we might hear a collective sigh of relief from those like Gaylen Hansen, director-at-large of the US National Association of State Boards of Accountancy, who think the US should pass on IFRS altogether, the uncertainty is causing concern. Many smaller companies are glad of a reprieve from the resources and expense required, but others, particularly large multinationals, would rather have certainty so they can allocate budget to the project. Many in fact have already started down the IFRS road in the US, despite the lack of firm direction from the SEC. Twelve years ago I commented that the gigantic gravitational pull of the US capital markets might drag world GAAP towards US standards. Although this has certainly had an influence on IFRS evolution, significant differences remain. How far these will be the sticking point in the US appetite for adopting the standards as written by the International Accounting Standards Board (IASB) remains to be seen. Stay tuned.

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Ramona Dzinkowski is a Canadian economist and award-winning journalist

14/03/2012 13:32

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More than a PR exercise


Diversity isn’t about buffing up the corporate image, says ACCA president Dean Westcott, it’s about building a better business

ACCA is an organisation that has long campaigned on the importance of diversity in the workplace, so I was delighted to see our new report on the issue. Its key finding is that adopting an effective diversity policy doesn’t just make a company look good, it actually improves its performance. For too long too many organisations have treated diversity as a PR exercise. Finding the number of women in senior positions or the breakdown of ethnic backgrounds in the workforce is a reasonable starting point in the drive for greater diversity, but it isn’t enough. The term ‘diversity’ is overused and its real purpose underconsidered. All too often a business’s chief consideration is how diversity or corporate social responsibility can help to make it look good. Diversity should not purely be a presentational device. Our report, Building a Better Business through Finance Diversity, shows that leading companies such as IBM, GE China and Shell see diversity as less about how they look and much more about how they think, how their processes work and how they manage their most precious asset – their human capital. And that’s the key: diversity is about a company ensuring it does not miss out on the talent it has. The report recommends that finance leaders work to understand cultural differences for each market in which they operate and how to integrate working practices into a corporate model, and encourage teams around the world to express differing views. They should also look outside the finance function when recruiting and be open to candidates from non-traditional backgrounds. By bringing in individuals from different sectors, regions or professional backgrounds, finance teams will be better able to execute their expanding and increasingly complex roles and responsibilities. In the same way, job rotation should be used to help develop the finance leaders of the future. Managers need the opportunity to spend time in different markets or departments, where possible. Given the increasingly globalised nature of finance professionals’ work, embedding diversity into everything we do is much more than good PR – it’s about being truly effective. Dean Westcott is finance lead at West Essex Clinical Commissioning Group

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09/03/2012 14:56



Jack Weisbaum will retire as BDO USA chief executive when his current, second, term of office is completed in October. He notified the board at its January meeting. In a statement the firm said that Weisbaum will complete his current term on 31 October. Weisbaum was elected CEO in 2004 and reelected in 2008; the partnership was due to choose his successor in a vote in late March. An accountant for over 40 years, Weisbaum has been national leader for BDO’s specialised services business line. He also served as chairman of BDO Seidman. Weisbaum is a member of the governing board of the Centre for Audit Quality and has been honoured by the American Jewish Congress, B’nai Brith and Brandeis University for his contribution to business development. He is a graduate of Hofstra University.


The view from: Hong Kong: Wilson Cheng FCCA, partner, tax & business advisory, Ernst & Young Q What’s currently in your inbox? A A number of things but I see all of them as opportunities. I’ve even received some requests from our website from people who need help. Q What are your expectations for 2012? A With the elections in Hong Kong and a change of leadership in China this year, I expect a lot of changes in terms of policies and tax revenues. I hope the new Hong Kong government will propose some new measures to help the economy. Q What is the most challenging tax problem you have tackled lately? A Section 39E [of the Inland Revenue Ordinance]. The drafting of the law was so broad that it accidently caught certain transactions [involving lease arrangements by Hong Kong companies for machinery sent to their factories in China].

39 Practice The view from Wilson Cheng FCCA of Ernst & Young; storm brewing over modifications to US GAAP 43 Corporate The view from Ivan Mitringa FCCA of Dell; outsourcing’s career opportunities

Q If there was to be a comprehensive review of Hong Kong’s tax system, what would be the first thing you would reform? A At the top of my list would be the incorporation of some incentive schemes. The tax system does not point to how we want the Hong Kong economy to be, such as encouraging innovation, research and development.


Georgia’s Capto Group has been admitted as a member of the RSM International network. Based in the country’s capital, Tbilisi, the firm specialises in tax, audit, legal valuation and outsourcing services. RSM said the expansion into Georgia was part of a strategy to strengthen its position in the Caucasus and surrounding regions. Jean Stephens, CEO of RSM International, said: ‘This is an exciting time for business in Georgia, particularly as the relationship between Europe and Asia strengthens, creating strong economic growth prospects for the country.’

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Q How does being an ACCA member help in your work? A The technical updates I receive are very important. ACCA also provides a way to serve the community, such as when I joined the assistance programme to help people complete their tax returns.


Number of staff (Hong Kong): 2,000 Typical clients: Multinational companies Currently reading: The Leader Who Had No Title, by Robin Sharma

14/03/2012 10:53



Big storm over little GAAP The US plan to restructure its GAAP modification procedures in the interest of private companies has triggered furious debate. Ramona Dzinkowski listens to both sides Last October, the Financial Accounting Foundation (FAF) released its plan for modifying generally accepted accounting principles (GAAP) in the US for private companies. The FAF is an independent body that oversees and administers the Financial Accounting Standards Board (FASB) in the US. Its plan would create a new organisation, the Private Company Standards Improvement Council (PCSIC), to identify US GAAP standards that need modifying. The PCSIC would then propose changes that would be subject to ratification by the FASB. The rationale here is that the FASB is not responsive to private company needs, and a new entity with more muscle than the existing Private Company Financial Reporting Committee (PCFRC) should be created to represent private companies. More specifically, the new council would: jointly develop with the FASB a set of criteria to determine whether and when exceptions or modifications to


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* * *

* *

US GAAP are warranted for private companies identify aspects of existing US GAAP that members of the council believe require exceptions or modifications for private companies obtain input from a broad array of constituents, and deliberate and vote on specific changes to ensure they meet the needs of users of private company financial instruments publicly discuss its proposed exceptions or modifications at meetings attended by the FASB members and then vote on final changes. Changes approved by at least two-thirds of council members would be forwarded to the FASB for final ratification. serve as the primary source of advice on appropriate treatment for private companies for items under active consideration on the FASB’s technical agenda have the ability to take a position on the appropriate treatment for private companies related to issues

under active consideration by the FASB, including all joint projects with the International Accounting Standards Board (IASB). Although the proposal seems innocuous enough, mainly addressing improvements in the process for modifying US GAAP to offer better support to private companies, many have not seen it in this light. There is concern that the proposal dilutes the power and relevance of the FASB in modifying US GAAP for private companies. Some fear that it will result in the creation of a ‘big GAAP/little GAAP’ system in the US. Ultimately, the worry is that the evolution of a second private company GAAP would not only diminish comparability between the financial statements of private and public companies in the US but also internationally. On the other side of the spectrum, the concern is that the proposal hasn’t gone far enough, and that the FASB will have too much control over the new council, essentially leaving the process

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for implementing any changes to GAAP for private companies unchanged, and therefore, according to private company proponents, unsatisfactory.

The debate The proposal served to raise the ire of the US Senate Committee on Homeland Security and Governmental Affairs – a group not often thought of in conjunction with the setting of accounting standards. At the

out that, once approved, any special exceptions and rules would apply to the 22 million private companies in the US, ‘inherently undermining the justification for the tougher GAAP standards applicable to publicly traded corporations’. In time, it says, ‘the exceptions could swallow the rules which, by then, would apply to a minority of US corporations’. Others calling for minimal divergence between the reporting standards

IT ‘REPRESENTS AN UNPRECEDENTED APPROACH TO US ACCOUNTING STANDARDS THAT WOULD WEAKEN GAAP AND REDUCE TRANSPARENCY’ heart of the matter, according to the committee, is that the creation of the new council with distinct voting rights ‘represents an unprecedented approach to US accounting standards that would weaken GAAP, reduce transparency, and conflict with international accounting standards while producing few benefits for financial statement users’. Essentially, the committee feels that although the FAF denies that its intention is to encourage the creation of two different versions of GAAP, ‘that is the inevitable consequence of the proposal’. Furthermore, it points

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of private and public companies include the Association for Financial Professionals, which represents 16,000 finance and treasury professionals in the US. The AFP maintains that the FASB should have firm control over the council. ‘The authority of the PCSIC should be subordinate to the FASB,’ the AFP declares. Similarly, in a joint letter to the FAF, staff of the Board of Governors of the Federal Reserve, the Federal Deposit Insurance Corporation, the National Credit Union Administration and the Office of the Comptroller of the Currency all offer their support

to the FAF as long as ‘any changes to the standard-setting process do not impinge on the independence of the FASB and its authority to issue accounting standards’. They say that they would ‘not support a process in which the PCSIC recommends or the FASB promulgates modifications to or exceptions from US GAAP that would result in divergent accounting frameworks based on an entity’s status as private or public’. In contrast, many large US-based public companies support the FAF’s proposal. For example, Metlife, a global provider of insurance, annuities and employee benefits programmes, takes the view that ‘in certain instances, the financial information needs of private company investors may differ from the financial information needs of interest holders in public companies’. Moreover, says Peter Carlson, executive vice president and CFO of Metlife, ‘disclosure requirements for private companies should be based on a costbenefit analysis’.

Two-tier GAAP Similarly, accountancy firm Grant Thornton offers a rationale for the evolution of a two-GAAP system. ‘It is not evident that private companies and listed companies always face the same issues,’ it says.

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‘THE FINANCIAL INFORMATION NEEDS OF PRIVATE COMPANY INVESTORS MAY DIFFER FROM THOSE OF INTEREST HOLDERS IN PUBLIC COMPANIES’ It goes on to note: ‘While all companies are concerned about reporting economic resources, obligations and performance, the recent focus of the conceptual framework for financial reporting on information for resource allocation decisions and future cashflows may lead to demands for different standards for private companies. ‘The nature and frequency of resource allocation decisions are different for private companies, and therefore it would seem reasonable that the information needs of their users can differ from the information needs of the users of the financial statements of listed companies who make equity capital resource allocation decisions on a continuous basis. ‘Therefore, we believe that one cannot preclude the possibility that different information needs could lead to different standards.’ Others have called for the council to be given more autonomy. Deloitte & Touche, for example, proposes that the FASB-PCSIC relationship be monitored

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to ensure that the FASB ‘doesn’t exert too much control’. The firm believes that the PCSIC would be effective only ‘if the FAF maintains active direct oversight of the council. This oversight would mitigate any potential for the FASB to have too much influence over the PCSIC agenda and to misuse its ultimate authority to ratify proposed changes to accounting standards.’

Complete independence Deloitte adds that in order to maintain the PCSIC’s autonomy from the FASB ‘we do not believe that the FASB should have the ultimate authority over the PCSIC’s agenda’. In identifying agenda items that should take priority, the firm suggests the council should address disclosure requirements for variable interest entities, share-based payments, income taxes and revenue recognition. At the same time, Deloitte alludes to the potential for diversity in reporting between private and public companies, by pointing to the added complexity of first defining a private company in

the US. Private companies in the US are currently defined in a variety of ways throughout the FASB accounting standards codification. Deloitte therefore calls for the first task of the council to be the identification of which private companies would be subject to the modifications and exceptions developed by it. Further questioning the oversight and governance process of the new group, Richard Dinkel, controller and CFO of Koch Industries, one of the largest private companies in the US, has called for increased autonomy for the council, and wants the FAF to further examine the independence issue between the two bodies prior to finalising any decisions. ‘We don’t believe the plan goes far enough to establish a separate group with enough autonomy over the FASB,’ Dinkel says. ‘We do not believe the FASB should have the authority to direct the council’s agenda or determine the framework.’ Dinkel also suggests that given the potential scope of work of the new council, the current timeframe will prove ineffectual. ‘As it relates to the agenda,’ he says, ‘and the number of meetings required for the council, we doubt that significant progress could be made under the proposed meeting dates of four to six times per year. ‘While we agree the immediate focus should be on a relatively few number of accounting standards, you should not underestimate the amount of time it will likely take to develop a framework and then evaluate even a relatively small number of standards for exceptions.’ The FAF is currently reviewing the comment letters submitted in response to its October proposal, as well as conducting roundtables on the topic across the country. It is expected to make a decision on the process for modifying/improving US GAAP for private companies, including the creation of the PCSIC, once deliberations have been completed, probably later this Spring. Ramona Dzinkowski is a Canadian economist and award-winning journalist

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Diamond Foods has replaced its chief executive and CFO, following an audit committee investigation into the company’s accounting practices. The audit committee has concluded that the financial statements for 2010 and 2011 must be restated. The investigation focused on the accounting for payments to walnut growers. In a statement the company said: ‘The audit committee has concluded that a “continuity” payment made to growers in August 2010 of approximately US$20m and a “momentum” payment made to growers in September 2011 of approximately US$60 million were not accounted for in the correct periods.’ Former Del Monte Foods CEO and existing Diamond Foods director Rick Wolford has been appointed acting president and CEO, while Michael Murphy, a managing director of financial consulting firm Alix Partners, becomes acting CFO.


The view from: United States: Ivan Mitringa FCCA, Corporate Planning, Dell, Austin, Texas Q What are your top priorities when you start work each day? A I start by scanning IT-related finance and business news – anything from the impact of natural disasters overseas on technology and communications, to acquisitions or developments within the industry itself. Q What will be the best talent attraction and retention strategies when the jobs market takes off? A People need to know their employer cares about their career. Where I work, people get to enjoy rotations, giving them exposure to different areas, providing fresh challenges and opportunities. Q What advice would you give new accountants? A Keep building your experience. It’s one thing to have a certificate but another to continue applying knowledge, delivering the goods and adding value.

43 Corporate The view from Ivan Mitringa FCCA of Dell; outsourcing’s career opportunities 39 Practice The view from Wilson Cheng FCCA of Ernst & Young; storm brewing over modifications to US GAAP

Q How do you achieve a healthy work/life balance? A We recently had a daughter and most of my non-work time is devoted to her. I also play soccer to stimulate the endorphins! Q What involvement do you have in corporate social responsibility? A We’ve given hands-on help to various community projects, and donated time to Austin’s ‘LiveStrong’ cancer support run.


Former KPMG partner Wade Loo has been appointed chair of the audit committee of Kofax, an IT provider. Loo has been a member of the Kofax board since February last year. He was with KPMG from 1980 to 2010, latterly heading the firm’s Northern California audit practice, and has worked in KPMG’s Tokyo, Beijing and Singapore offices. A past treasurer of the American Chamber of Commerce in Beijing, Loo is also a director of JobTrain, co-president of Ascend, a programme promoting Pan-Asian leadership, and a guest lecturer at the University of Denver.

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Educated: MSc, financial management and accounting, University of Economics, Bratislava, Slovakia ACCA membership: 2006 (fellowship 2011). Career: Trained with Deloitte & Touche and United PanEurope Communications. Joined Dell 2003; worked in analysis, reporting, planning and financial control. Relocated to Texas 2010; senior roles in global finance, IT and competitive market analytics.

14/03/2012 10:53



Land of opportunity Outsourcing isn’t just about benefits for business. For career-driven professionals, the fastdeveloping sector can offer a big break, says Outsource magazine editor Jamie Liddell That the global business environment is in a state of transition, and that outsourcing is a major contributing factor to that transition, should not be a surprise to anyone. What may be less obvious is that outsourcing itself is undergoing enormous change. A perfect storm is brewing for organisations and professionals in every corner of a sector which is swiftly expanding and changing, due to the confluence of accelerating trends. Those trends encompass the proliferation of new technologies, the evolution of disaggregated organisations and the emergence of new sourcing destinations. They also include the development of unexpected capabilities in verticals and processes, better understanding among practitioners, greater sophistication on the part of providers, the rapid rise of new and potentially disruptive pricing models, and a snowballing quantity of data and quality of analysis.

Blistering progress The rate at which outsourcing’s complexity and sophistication is advancing is phenomenal, as is the pace with which outsourcing is breaking new ground in terms of functions. The drivers are numerous but at the fore stand increased technological capability and suppliers’ need for differentiation, competitive advantage and continued growth in an evermore crowded market. Having proved itself in the fields of IT and finance and accounting (F&A), a mature and sophisticated outsourcing model is now being applied to almost every aspect of business. Key to this expansion is a growing understanding of what outsourcing is, and the benefits it can bring. Outsourcing has established itself as a viable model and been embraced by

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some of the world’s largest and most successful companies. It now has a seat at the table at the great organisational feast, and those in charge of organisational strategy can consider implementing it in almost every corner of their fiefdoms, from customer service and legal, through facilities and fleet, to recruitment, procurement and marketing. Whether or not they do so, of course, depends on a welter of factors including each organisation’s core business – its ‘what we do’ – but the

comparatively short space of time. An understanding has developed that it needs to be populated and driven as such by professionals dedicated to their tasks rather than dilettantes, however capable. This requirement for specific knowledge and skills has given rise to the evolution of outsourcing provision as a genuine profession. The extremely valuable career opportunities now on offer in the sector have been one of the most noteworthy developments in the space over the last few years. There

THE OUTSOURCING INDUSTRY IS EATING INTO THE TALENT POOLS AVAILABLE TO A HOST OF OTHER ACTIVITIES AND INDUSTRIES opportunity is undoubtedly there. It may be a case of horses for courses, but organisations considering the outsourcing route can at least be reassured that the horses in question are tried and tested – and in many cases thoroughbred champions. Ensuring that the right jockeys are in the saddle is clearly crucial. The increasing complexity of the outsourcing model, the rapid change visible across the space, means that the role of the dedicated outsourcing professional has ever greater prominence. The basics of outsourcing may be simple, but the intricacies of, for example, carrying out a transformation, understanding the challenges involved, appreciating the relative strengths of the different solutions (and providers) available are unlikely to be grasped immediately by the layperson – or indeed by a seasoned professional with years of experience in their function of choice. Outsourcing has grown into a multibillion-dollar industry in a

has also been a proliferation of roles on the periphery of outsourcing, or dealing with specific aspects of it, which require significant expertise and may be considered to sit within the category of outsourcing professional. A further development has been the emergence of a vast cohort of sourcing advisory organisations – from oneperson-bands to some of the world’s largest consultancies – providing guidance on all aspects of the outsourcing process.

Greedy for talent These developments have contributed to one of outsourcing’s biggest impacts on the business world at large (and the finance community in particular, given that finance has been at the forefront of the outsourcing revolution): an intensification of the war for talent, as the various participants struggle to recruit key enabling professionals. As a result of my relatively privileged perspective I interview figures from right across the outsourcing space.

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Despite the ostensible and often very marked differences in their roles, what many of my interviewees – from group chief procurement officers to heads of shared services to IT directors – have in common, is that they consider the battle for talent one of their primary challenges now and going forward. The compensation, incentives and career progression on offer within the industry are increasingly attractive, and the effort going into attracting the best people is becoming more intense. The outsourcing industry is eating into the talent pools available to a host of other activities and industries – and so ramping up the ongoing talent wars in those industries too. Potential hires can see a dynamic, rapidly expanding space and the potential for rapid advancement which simply might not exist in more traditional areas of business. This is particularly the case for areas more recently coming into the outsourcing field of play, such as the legal industry, where long-standing career progression paths are being seriously disrupted (frequently to the great benefit of more proactive legal professionals) by the rise of legal process outsourcing. And, of course, thanks to the maelstrom of disruptive forces

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highlighted at the beginning of this article, once within the outsourcing space, the opportunities for rapid advancement (and entrepreneurial success outside the confines of organisations in the space) abound more than ever.

Personal advancement What this all means is that the evolution and proliferation of the outsourcing model isn’t just exciting for organisations – it’s a potentially thrilling development for individuals too. Professionals with the right skills and the appropriate mindset now have

a whole new arena in which they can ply their trade and flourish. For finance professionals in particular, the huge array of F&Afocused outsourcing suppliers and advisers provide career opportunities aplenty, in fields which simply didn’t exist just a few years ago. It might require taking a step into the comparative unknown, especially when set against what can often be viewed as relatively conservative professions and organisations, but the outsourcing space can now genuinely be a land of opportunity for those professionals willing to take that step.


This is the first of a quarterly series of articles from Outsource magazine, a leading channel for strategy and thought leadership. ACCA has formed a relationship with the publication with the aim of promoting its outsourcing, shared services and finance transformation research. Editorial content will be shared and marketing support provided. ‘I’m delighted to be able to bring ACCA’s insights and research findings to the Outsource audience,’ says editor Jamie Liddell.

09/03/2012 14:52



Accounting in a crisis Philippe Förster and Olivier Scherer of PwC France consider some of the key issues in calculating the impairment of non-financial assets in tough economic conditions

Concerns over the impairment of sovereign debt, sharp cuts in economic growth forecasts, highly volatile market conditions, lack of financing and the effect of government austerity measures raise many questions about the recoverability and valuation of assets. The poor economic conditions increase the likelihood that assetcarrying amounts are greater than the expected cashflows from the assets. As a result, impairment charges may well be required. Because IAS 36, Impairment of Assets, is one of the more complicated standards, getting the accounting and disclosures right can be a challenge.

Is the economic crisis an impairment indicator? An economic downturn is not in itself always a trigger event for impairment testing. However, the economic phenomena that make up the crisis may well be indicators for many entities. Almost all will be affected by one or more of the economic factors, even those entities that are expecting to survive the downturn or take advantage of the crisis. The following impairment indicators might be particularly relevant in the current economic climate: 2011 financial year actual figures are significantly lower than the original 2011 budget; cashflow is significantly lower than earlier forecasts;

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have been material decreases * there in mid-term or long-term growth rates compared with previous estimates; there has been a significant or prolonged decrease in the entity’s stock price; market capitalisation is less than the book value of net assets; there has been a change in the business model, a restructuring, discontinued operations, etc; there has been an increase in the entity’s cost of capital; market interest rates or other market rates of return have changed; there are fluctuations in the foreign exchange rates or commodity prices that impact the entity’s cashflows; investment projects have been deferred. This list is by no means comprehensive. The indicators given above and in IAS 36 are examples only.

differences between the * Any business plan’s underlying


assumptions and market evidence should be analysed and understood. Management may find it helpful to explain these differences in disclosures or other material accompanying the financial statements. Management should analyse any differences between FVLCTS (fair value less costs to sell) and VIU (value in use) and ensure that they are supportable.

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Integrating country risk in the calculation of the weighted average cost of capital


Are the assumptions underlying the business plans relevant? The assumptions used in the business plan should be reasonable and supportable. In the current uncertainty: Management assumptions should be consistent with market evidence, such as independent macroeconomic forecasts, and the analysis of industry commentators, analysts, brokers and other third-party experts. Greater weight should be given to any external evidence that is available.


During the past months, sovereign yields have increased dramatically in several European countries. Some entities (in Spain and Italy, for example) can now raise debt at yields lower than their own government. At the same time, German yields have dropped to all-time lows. Bond and stock markets are highly volatile, and strong swings can be triggered by political or economical events. The traditional approach, which uses the sovereign bond yield as a risk-free rate, can therefore no longer be used for all countries, and using spot rates seems more than ever inappropriate. There are no easy, one-size-fits-all solutions. Depending on the entity’s exposure to the economy of a given country, the impact of country risk on company value can be very different.

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No laughing matter: the economic crisis has raised challenging questions about the valuation and recoverability of a business’s non-financial assets

DEPENDING ON THE ENTITY’S EXPOSURE TO THE ECONOMY OF A COUNTRY, THE IMPACT OF COUNTRY RISK ON COMPANY VALUE CAN BE VERY DIFFERENT Various possible solutions to that issue might be considered. One is to use the German bond rates as the risk-free rate, considered by the market as reflecting the lowest country-risk level. However, as German spot rates are currently exceptionally low, probably because investors are moving their capital away from riskier investments, the use of longer-term historical averages and forward rates is recommended. It might be necessary to add a country-risk premium on top of this base rate, depending on where the entity is active and its exposure to country risk. This premium could be derived from corporate bond spreads or, in the absence of a liquid corporate bond market, country CDS (credit default swaps) spreads (compared to Germany). Given the current environment, these spreads should be analysed carefully. Given the level of judgment involved and the possibility of there being more than one acceptable way to determine the discount rate, companies could consider disclosing the methodology and the inputs to arrive at the discount rate used when a possible change in such inputs could result in a significant change in the recoverable amount.

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Disclosures of particular interest to financial analysts and regulators this year Financial analysts and regulators are focusing on getting detailed and current information in this period of market turbulence. IAS 36, IAS 1, Presentation of Financial Statements, and IAS 10, Events After the Balance Sheet Date, all prescribe relevant disclosures. In addition, there are often specific regulatory requirements that should be incorporated in the financial statements to the extent they provide meaningful information to the readers of those statements and reflect management’s views and judgments when assessing recoverable amounts. The critical disclosures often looked for by analysts and regulators in the past years relate to sensitivity analyses (that is, key assumptions that have a significant risk of causing a material adjustment to the carrying amount of assets, including goodwill). These key assumptions should not be restricted to discount rates or growth rates; they might also include expected profit margins and other highly sensitive assumptions that may have a significant impact on future cashflows. Some regulators are also expecting preparers to ‘stretch’ the assumptions

to reflect what the impact of one particular government decision would be on the recoverable amount of a cash-generating unit (CGU) – for example, an increase in tax rates. Other disclosures where there is heightened risk of impairment include: a description of the asset/CGU being tested; the amount by which the recoverable amount exceeds the carrying value; the values assigned to the key assumptions used in the sensitivity analysis; the amount by which the key assumptions would have to change for the recoverable amount to equal the carrying amount. For example, an entity might disclose that a 1% increase in the pre-tax discount rate would cut its recoverable amount to the same as its carrying amount; the aggregate carrying amount of goodwill allocated to the CGUs and the aggregate carrying amount of intangible assets with indefinite useful lives allocated to the CGUs.

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Philippe Förster is manager, IFRS technical department and Olivier Scherer is IFRS technical leader, PwC France

More guidance on impairment and the application of International Financial Reporting Standards is available in PwC’s Manual of Accounting suite. Go to www.

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Answer questions about this article online Studying this article and answering the questions can count towards your verifiable CPD if you are following the unit route and the content is relevant to your development needs. One hour of learning equates to one unit of CPD

Strategy without the guff In the first of a series of five articles, Dr Tony Grundy sets out to make strategy a practical tool for accountants rather than a bluffer’s paradise

The aim of this series of articles is to lay bare the essence of strategy and show how it can be used by accountants in a very practical way. Along the way it will be demystified as much as possible. Strategy is often over-conceptualised and clouded in unnecessary jargon. Strategy – such a simple term – has become entangled with confusion. As a result, people who deploy strategy terms end up saying things in real life that don’t have much real meaning at all. You may recognise this is what is happening when someone says something about strategy, and you simply don’t get it. If you don’t get it, it doesn’t mean that you are stupid. It may well be that the speaker is either using ‘strategy’ as an excuse to be vague or using terms that they don’t really understand. They may simply be trying to be clever or use the reference to strategy to get you to think in a particular way. The complex and abstract language so often used in strategy is another problem. There are possibly 100 terms or more that get talked about in discussions about strategy; some, like ‘competitive advantage’, are useful and generally clear, but others such as ‘mission’ and ‘vision’ can carry connotations that are simply too general and vague. The number and ambiguity of these terms can make strategy hard to follow, so let’s make a start by defining just what is meant by ‘strategy’.

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The road from here to there Many of the possible definitions of strategy are abstract, such as ‘matching the environment’, or are concepts, such as ‘having an inimitable competitive advantage’. This kind of abstraction can quickly put people to sleep, so the first of my three complementary definitions is: strategy is how you get from where you are now to where you want to be – and with real and sustainable competitive advantage. This definition has five ingredients: knowing where you are now knowing where you want to be knowing how you will get there basing the ‘how’ on competitive advantage making this competitive advantage genuine and durable. For this, you need to have a very clear idea as to where you are right now – in other words, your strategic position. This means asking some key questions, such as: What is going on in the environment around your industry/market – the economy, the technology, and so on? How competitive is your market and what are its dynamics? How do your customers see your business and the value that it adds relative to your key competitors? The other aspect here is that ‘where you want to be’ takes you into the future. Strategy encourages people to think future a great deal more than they usually do. Much of what goes on in everyday management is focused on

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the immediate: this meeting, today’s tasks, this week. But as is often observed, the future is so important because we are going to spend the rest of our lives in it. Strategy serves a very real purpose by getting us to think about the future environment, future options, future competitive advantage and so on. Strategic thinking therefore means being able to travel imaginatively through time into the future. In this definition the strategy itself is not just the strategic goals and is very much to be found in the ‘how’ itself. At this point you might be thinking that what is being described here is implementation, which you have always thought of as operational and tactical. But it would be very odd if it were possible to say how a strategy would be implemented without explaining something about its tangible, operational action. Strategy must be specific and tangible; otherwise, how will you achieve it and how will you know if it has actually happened?

What you really, really want My second definition pays homage to British girlband the Spice Girls: strategy is what you really, really want. This definition gets us to imagine a future world with strategic possibilities and where we can realise an exciting dream, but through realistic actions and activities. This definition comes into its own when managers have got entrenched in

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their existing position and the mindset that goes with that. It encourages people to stand back and reflect (sometimes referred to as ‘helicopter thinking’) on what they wanted in the first place, rather than get too bogged down in the problems and issues of their current strategic position. This definition lifts expectations about what can be credibly achieved. A strategy of the Spice Girls form still needs to be rooted in ideas that are grounded in real competitive advantage and are fully aligned – all the things external or internal to the business that are prerequisites of success (the so-called ‘alignment factors’) must be in place.

premium price positioned it as * its having a high value-add. Subsequently many of these alignment factors were eroded and profits fell by 50% by the 2000s (although they have now recovered), highlighting the need to preserve the sources of real competitive advantage.

The cunning plan My final definition of strategy is the ‘cunning plan’ popularised in British TV comedy Blackadder. The cunning plan: works backwards from the result is fundamentally simple achieves its goals by a combination of obvious, and not so obvious, ideas isn’t particularly easy to imitate.

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THE SPICE GIRLS DEFINITION OF STRATEGY COMES INTO ITS OWN WHEN MANAGERS HAVE GOT ENTRENCHED IN THEIR EXISTING POSITION An example of a strategy based on alignment is that of James Dyson’s entry into the carpet cleaning market in the mid-1990s. His alignment factors were: the product had technology which made the vacuum bag obsolescent it had more suck it was designed to be a status item rather than be hidden in a cupboard – it was iconic it was patented for some years competitors tried to come up with a better bag

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The idea of the cunning plan is relevant as many managers seem content with more or less any kind of strategic plan at all, whether it is a cunning one or not. But it is important to stress that average plans, or even plans that are slightly above average, simply will not do. Over the years I have shown hundreds of accountants Back and Forth, the short film based on the Blackadder TV series. In it, Blackadder and Baldrick invent a time machine so that they can go back into the past and

steal things that can subsequently be sold as expensive items. Unfortunately Baldrick falls on the time controls and they zoom back in time before they know where the present (their ‘current position’) is. They go backwards and forwards through history but can’t find their way back, getting more and more frustrated in the process. Eventually Baldrick comes up with a cunning plan: that they try to drown Blackadder to bring on a near-death experience so that he will recall every moment of his life including the original settings on the time machine. Blackadder, though, has an even better idea and tries drowning Baldrick instead (the ‘stunning plan’); Baldrick does indeed remember the settings and they return. What is memorable about this plan is that it is not obvious. It is very clever, working back from the future desired state (memory recall) rather than planning towards it to try to get somewhere. That is truly cunning.

Strategic thinking Strategic thinking can be defined as: the thinking processes that consider any complex situation from a variety of angles, seeking out options and evaluating them and their implications from differing perspectives in a novel way. Let’s first unpack the key ingredients in this definition: ‘thinking’ – this a structured and creative process which takes into account causality, the degrees of


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freedom and the constraints, and weighs up the pros and cons of alternative decisions ‘complexity’ ‘looking at things from different angles’ – this can be from external and internal perspectives, over short, medium and longer term time horizons, with different sets of assumptions, etc ‘options’ – distils possible choices into discrete and specific options ‘evaluating’ – assesses the options on the basis of multiple criteria ‘implications’ – looks at things like the investment required, the implementation needs, and how to influence stakeholders ‘novelty’ – the end goal is to come up with some cunning (if not stunning) ideas If strategic thinking is contrasted with more operational thinking, the differences can be listed as shown in the panel below. What becomes clear from this is that strategic thinking is qualitatively very different to operational thinking. It is far more ambiguous and can be challenging emotionally as well as politically.

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units on the web

MANY MANAGERS SEEM CONTENT WITH MORE OR LESS ANY KIND OF STRATEGIC PLAN AT ALL, WHETHER IT IS A CUNNING ONE OR NOT Strategic concepts Some of the most important strategic concepts include the following: Mission. The mission is the overarching purpose of the organisation – the kind of organisation it wants to be, what businesses it wants to be in, and its guiding philosophy. If a mission is to be of any use it is vital that it has some grounding in robust assumptions about the present and potential strategic position and is distinctive in some way. Vision. The vision is a picture of either the environment (and our fit within it) or just of ourselves at some stage in the future. Objective. A strategic objective is one of the goals of the strategy. The objective should not be confused with the strategy itself; it is an output – and a very specific one at that. Strategic objectives can and should be broken down – for example, into compound sales growth, changes in relative


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Operational thinking

Strategic thinking

linear deductive preprogrammed clear boundaries safe

iterative and unpredictable inductive and intuitive creative ambiguous and fuzzy boundaries anxiety-provoking

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market share or other measures of relative competitive position, development of key capabilities and successful strategic breakthroughs. Strategic option. A strategic option is a way in which a strategy can be formulated so that it can actually be implemented. This means that the strategy needs to be sufficiently specific not only in terms that allow it to be evaluated, but also in terms that allow it to be executed. While I have presented these strategic concepts in the order in which they might appear in a plan, in practice they are more likely to be generated by looking briefly at objectives, evaluating options to arrive at strategies and only then setting final objectives, vision and mission so that the latter are grounded and realistic. In summary, strategy can and should be demystified, its terms defined and explained, and strategies themselves based on a number of elements, especially the cunning plan. The next instalment will take you further on a much more detailed journey in the demystification of strategy.


Dr Tony Grundy is an independent consultant and trainer and lectures at Henley Business School in the UK

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Accounting solutions In their new regular column, PwC authors answer technical questions, this month on put and call over minority interest, and impairment testing for a listed associate



ABC plc acquired a controlling 75% holding in DEF Ltd. At the acquisition date, ABC and the non-controlling interest (NCI) shareholder (‘the NCI shareholder’) entered into an agreement whereby the NCI shareholder could require ABC to purchase and ABC could require the NCI shareholder to sell – a put and call option – the NCI. Both options are exercisable three years after the acquisition date, with the price, payable in cash, being the NCI’s fair value at exercise date. How should ABC account for the put and call option? The put and call options here are symmetrical, so the contract is in substance a forward contract – that is, ABC will be required to purchase the NCI shareholder’s 25% interest at the determined date. In accordance with paragraph 23 of IAS 32, Financial Instruments: Presentation, an entity that enters into a contract that contains an obligation for the entity to deliver cash for its own equity shares is a financial liability. The 25% of DEF held by the NCI shareholder is classified as equity in ABC’s consolidated financial statements, and it is ‘own equity’. The put option meets the definition of a financial liability, as ABC does not have an unconditional right to avoid delivering cash. This is the case even though the payment is conditional on the option actually being exercised by the holder. A financial liability is recorded on the balance sheet at the date of the acquisition and is recognised at the



present value of the amount payable. The discount is subsequently unwound as a finance charge through ABC’s income statement over the contract period, up to the final amount payable. Any adjustment to the liability for the changes in estimated cashflows for the amount payable (that is, changes in the eventual exercise price), in accordance with IAS 39, Financial Instruments: Recognition and Measurement, paragraph AG8, is recognised in the income statement. ABC also needs to consider the treatment of the NCI, including its recognition and allocation of profits and dividends.

This month’s solutions were compiled by Michelle Amjad, Harivadan Patel and Peter Holgate of PwC’s Accounting Consulting Services. Keep up to date on International Financial Reporting Standards (IFRS) developments with PwC’s twice-monthly email update, with a summary of the latest issues and links to further guidance. Email requesting ‘subscription to IFRS mailshot’ or visit to sign up to the RSS feed.

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ABC has an investment in a listed associate whose market value has significantly declined in the economic downturn. Management is performing its annual impairment review: how should it test the associate for impairment? ABC should apply IAS 39 to identify potential impairment indicators in its associate accounted for under IAS 28, Investments in Associates. If any indicators exist, the investment is subject to an impairment test under IAS 36, comparing the asset’s carrying amount to its recoverable amount. These requirements are applied to the investor’s equity interest in the associate and other long-term interests that form part of the investor’s net investment in the associate, all of which are financial interests in the associate. The carrying amount is not automatically written down to the current share price. The price decline is an indicator and establishes the fair value less costs to sell (FVLCTS) of the associate. However, IAS 36 requires the recoverable amount to be established; this is the higher of value in use (VIU) or the FVLCTS. VIU is estimated with assumptions of cashflows, taking into account the economic environment. The associate might be unwilling to provide a cashflow forecast to a single investor or might be prohibited from doing so by legislation. ABC may therefore need to create its own estimated cashflows using publicly available data or possibly analysts’ forecasts. The future expected dividend streams from the investment in the associate could also be used in measuring the associate’s VIU. Both cashflow sources should in principle produce a similar result.

12/03/2012 17:05



Your assets on the line The Personal Property Securities Act raises serious risks for Australian businesses and those global businesses that transact with them, as Gayle Dickerson explains

In 2009, Australia’s Personal Property Securities Act (PPSA or the act) was passed. It came into force on 30 January 2012 and will impact almost every individual and business in the country (and those that do business there) that: sells goods on credit is a borrower provides goods on consignment leases plant and equipment, motor vehicles or other assets. The act triggers profound changes in the way security is taken over personal property. Financiers along with businesses in all industries – but

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Australian Securities and Investments Commission Register of Charges (ASIC), and the Register of Encumbered Vehicles (REVs), which is based on legal form and the holding of title, and moves to a single regime based on the substance of the transaction. The PPSA will apply to debentures, chattel mortgages, retention of title, hire purchase, leases exceeding one year, consignments, assignments of debt, and security trust deeds. However, the practical applications of the act have wider implications that affect more than insolvent companies and insolvency practitioners. This is

FAILURE TO REGISTER AN INTEREST IN AN ASSET MAY RESULT IN YOUR BUSINESS HAVING NO CLAIM OVER THE ASSET IN AN INSOLVENCY SCENARIO particularly in manufacturing, wholesale and retail – will be affected. Under the act all forms of security interests in personal property must be registered on the Personal Property Securities Register (PPSR). Failure to register an interest may result in loss of that interest through a subsequent transaction involving that personal property. It is based on similar legislation enacted in both Canada and New Zealand. A number of Asian countries are also reviewing the need for such legislation. The PPSR replaces a number of existing registers, including the

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particularly the case if you or your business leases out equipment or supplies goods to other businesses on delayed settlement terms.

What is personal property? The act applies to almost all tangible and intangible property owned by any type of legal entity. Such property includes money, goods, motor vehicles, hire purchase agreements, accounts receivable, long-term leases, investment securities and documents of title. Exclusions include land, water rights and certain rights or entitlements created by statute.

Title is irrelevant The fundamental change under the act is that the concept of title has been made irrelevant. The act attempts to resolve the confusion of previous regimes by referring to ‘security interests’ instead of ‘title’. A security interest is defined in the legislation as a transaction which ‘in substance secures the payment or performance of an obligation’. Most of us are familiar with title as ownership. If I own a car and lease it to you, it remains mine: I retain the title, while you have rights of use of the car. Previously this could cause difficulty in formal administrations, liquidations and receiverships, when appointees were under pressure to realise assets for the benefit of secured creditors. It was not always immediately clear which goods and assets (stock, machinery, fit-out, etc) were the property of the insolvent party (and thus available to be sold to reimburse secured creditors) and which were subject to the title of another party (such as a leasing company or supplier that hadn’t been paid). Essentially, the PPSA assumes assets are generally available for realisation by an insolvency practitioner and reimbursement of secured creditors (regardless of title), unless security over them is ‘perfected’ (chapter 2, part 2, section 21 of the PPSA) by the true owner or holder of the title. Title itself does not equate to rights over one’s own property in such

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circumstances. Failure to register an interest in an asset on the PPSR may result in you or your business having no claim over the asset in an insolvency scenario. Security over assets should be registered on the PPSR. If you don’t, you may lose out, even if it is your asset.

PMSIs A new concept under the PPSA is a purchase money security interest (PMSI), which is a special type of security interest and includes: a security interest taken in collateral that secures all or part of its purchase price (including sales under retention of title terms) a security interest taken in collateral by a financier who has financed the purchase of that collateral – for example, a fixed charge given to a financier over a particular asset to secure the loan that funds the purchase of that asset (although a general security agreement over all present and future assets is not capable of being a PMSI) an interest of a lessor under a personal property securities lease an interest of a consignor of goods under a commercial consignment. PMSIs are in a special position as they are one of the two main

* *

* *

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exceptions to the rule that where there are two perfected security interests, the first to be perfected will have priority. The PPSA provides for a perfected PMSI to have priority over a perfected non-PMSI security interest, regardless of the order in which they were perfected. One reason why the act gives super-priority to PMSIs is to facilitate finance for particular business purchases. Without this super-priority, a financier might be reluctant to provide finance because a prior all-assets charge would take priority. The other main reason is to put operating lessors, consignors and sellers under retention of title arrangements in a position closer to that which existed under the law prior to the PPSA (where they were the legal owners of the property supplied until it was paid for and did not have to compete with general chargeholders). Registration of a PMSI or superpriority must be done within strict timeframes. In the case of inventory it must be registered at the time the grantor (the recipient) obtains the goods; for other collateral, it must be registered within 15 business days. A couple of examples will illustrate the changes. You will find these in the box on the following page.

So what do you need to do? The PPSA raises serious risks for many Australian businesses and those global businesses that transact with Australian companies. If the collateral is based in Australia, then you can, and should, register. Business owners and directors should understand that the usual asset protection and separation vehicles and structures such as trusts and separation of entities may not protect a business’s assets from the reaches of the PPSA. However, based on the introduction of similar legislation in Canada and New Zealand, there is potential for conflict and litigation, so you should be proactive in your approach. You should seek appropriate advice and put steps in place to mitigate risk to ensure that the interests of your business are protected. A properly structured plan should: review group structures and the arrangements between group entities check the business’s standard terms of supply, as well as its financing arrangements and other potentially affected contracts identify the assets affected identify the transactions that will need to be registered – consider the cost versus the benefit

* * * *

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check the migrated information from other registers are correct on the PPSR redraft standard terms if necessary, prepare new policies concerning the requirements for registering transactions and associated documentation educate and inform staff of the new procedures: your business should compile inventories of existing security interests in order to register them, and ensure that appropriate systems are in place to record and manage future security interests. One of the most difficult and time-consuming issues facing businesses will be to work out what PPSA means for that business. Company directors and management may also find that in the early stages of the new legislation, financial institutions review their security margins and reduce the availability of credit, which means additional equity or working capital may be required. There will be a two-year grace period to allow businesses and financiers to register their existing security interests correctly. However, these transitional provisions do not apply to any new arrangements that are struck between suppliers and customers – action needs to be taken now.

* * *

Gayle Dickerson is a partner, recovery and reorganisation, at Grant Thornton in Australia

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Suppose your business manufactures and leases out jukeboxes to entertainment venues. One of your lessees is a pub, which subsequently goes into administration. In theory, your jukebox which is on the pub’s premises could be sold by the administrator and its value realised for the benefit of creditors if you did not register security over it. This scenario is overly simplified, but it nonetheless illustrates the effect of the PPSA.

Example 2 You (the supplier) sell shoes to a company, Shoes Pty Limited (the customer). Under the new PPSA legislation, in order to have a valid priority security interest (or PMSI) in the stock sold (a retention of title claim under the old legislation), you must have an agreement with Shoes which grants rights of retention of title until the goods are paid for ensure that the agreement is in writing and is signed by a person with appropriate authority register your interest in the stock on the Personal Property Security Register via a financing statement ensure that the written agreement is entered into and registration occurs prior to supply of the stock to Shoes. If these steps are not taken and a liquidator, administrator or receiver is subsequently appointed to take charge of Shoes, you risk losing any claim to the stock or the proceeds from the sale of the stock, among which, of course, are pairs of shoes that you have supplied. Importantly, the ‘course of dealing’ argument (where there is no written agreement but the parties have operated under implied terms of trade for an extended period) will not be sufficient to ensure a valid priority security interest against third parties under the PPSA.

* * * *

Complexity In reality, the application of the PPSA will be more complex than the above examples. The act also provides for the determination of priority between multiple security interests in the same personal property as well as the determination of priority between a security interest and another type of interest in the same personal property. It also allows various exceptions. There are also complex rules on how security interests apply when supplied goods are affixed to other goods or mixed with, or blended into, other goods.

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China’s tax reform takes off As the first phase of China’s VAT reform is rolled out in Shanghai, Ulrike Glueck and Charlie Sun examine what the changes mean and who will be affected

In China, there are two major kinds of turnover taxes – VAT and business tax (BT) – which cover different scopes of transactions in a mutually exclusive manner. Specifically, importation and sales of movable/tangible goods are covered by the VAT regime, while provision of services, transfer of intangibles and immovable properties are covered by the BT regime, with the exception that processing, repairing and maintenance services are covered by the VAT regime.

various administrative problems for both taxpayers and tax authorities. Considering the above disadvantages of the BT system, the PRC Government has planned for a long time to gradually replace BT with VAT. Recently, a milestone step has been taken to launch a pilot VAT reform in Shanghai starting from 1 January 2012, which will ultimately be extended across China. On 16 November 2011, the PRC State Administration of Taxation (SAT) and the Ministry of Finance (MoF)

THE SIMULTANEOUS OPERATION OF BOTH VAT AND BT SYSTEMS HAS CAUSED PROBLEMS FOR BOTH TAXPAYERS AND TAX AUTHORITIES In general, under the output-input credit system, VAT is normally neutral and can be shifted to and recovered by the customer (unless the customer is not a VAT payer). However, no such system is generally available in the BT regime, which means that BT costs are normally not recoverable by either party. Further, double BT payment will often occur in the case of subcontracting of services, because the portion of the subcontracted service value will be taxed twice for BT purposes: once at the main contractor and once at the subcontractor. The simultaneous operation of both VAT and BT systems has also caused

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jointly issued a notice to announce their general plan of replacing the BT regime with the VAT regime (the Plan). Accompanying the Plan, details of the Shanghai Pilot Programme are provided under the Tax Circular Caishui [2011] No. 111. Further detailed tax circulars have also been issued to address specific issues in this respect. 1 Who is affected? Starting from 1 January 2012, the following taxable services provided by taxpayers registered in Shanghai or provided by foreign entities to their Shanghai customers shall be subject to VAT instead of BT:

services (including * transportation road, water, air and pipeline

* * * * * *

transportation); research and development (R&D), technology transfer, technology consulting, energy management contract and reconnaissance and prospecting; IT technology services including software services, circuit design and testing, IT system services and business process management; design services; transfer of trademarks, goodwill and copyrights; intellectual propertyrelated services; advertisement; conference and exhibition services; logistics-related services such as warehousing, freight forwarding and customs agency services; lease of movable tangible assets (including finance leases and operation leases); certification services, authentication services (including in the areas of accountancy, tax, asset appraisal, law, real estate evaluation and project cost estimation) and consulting services (including in the areas of finance, tax, law, internal management, business operation and process management).

In case foreign entities are subject to VAT for the above taxable services, the Shanghai service recipients shall withhold such VAT payable from the

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gross amount and remit it to the competent tax authority in Shanghai 2 VAT rates and tax calculation A General VAT payers and small-scale VAT payers VAT payers are either general VAT payers or small-scale VAT payers with different tax rates and calculation methods. A taxpayer is required to apply for the general VAT payer status if its annual turnover from providing the taxable services is above 5 million yuan. Small-scale VAT payers with an annual turnover of below the threshold can also become general VAT payers on application if they keep proper accounting records. B Tax rates for general VAT payers A general VAT payer can issue VAT invoices and credit its input VAT against its output VAT. The applicable VAT rates for calculating output VAT are as follows: 17% for lease of movable tangible assets 11% for transportation services 6% for other taxable services. C Small-scale taxpayers A small-scale VAT payer shall pay VAT at 3% on the gross amount for its taxable services and is not able to credit any input VAT. A smallscale VAT payer cannot issue VAT invoices by itself but can ask the tax authority to issue VAT invoices for it.

* * *

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D Exportation of services On 29 December 2011, the SAT and MoF jointly issued the Tax Circular Caishui [2011] No. 131 concerning VAT treatments for exportation of taxable services in the context of the pilot programme. Circular 131 clarifies that for exportation of international transportation

Shanghai general VAT payers to general VAT payers (whether located in Shanghai or not) The tax burden for such services will be decreased significantly. The service provider does not need to pay BT any more. It can charge the output VAT to its customers, which can be recovered by the latter and is therefore not a real cost. In addition,

THE TAX REFORM IS IN GENERAL A TAX REDUCTION PROGRAMME. HOWEVER, IN SOME CASES THE ACTUAL BURDEN COULD INCREASE services, R&D services and design services, zero VAT rate applies. For exportation of other taxation services, VAT exemption applies. 3 Impact of the reform The tax reform is in general a tax reduction programme. However, the exact impacts are complex and in some cases, the actual tax burden could also increase. To better understand the real changes in the tax burden, it is necessary to take into consideration various factors such as the VAT rate, the tax status of the customers (general VAT payer or not), the amount of input VAT available to the service provider, etc. A Taxable services provided by

the service provider can now credit its input VAT against its output VAT. B Taxable services provided by Shanghai general VAT payers to small-scale VAT payers or BT payers Since the Chinese customer is not a general VAT payer, it cannot credit any input VAT. Therefore, the VAT costs cannot be recovered and are real costs of the Chinese customer. On the other hand, the input VAT of the service provider now becomes creditable. The VAT burden change could be either positive (increase) or negative (decrease) as the case may be. Therefore, the reform is not necessarily benefiting those companies that mainly provide

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taxable services to non-general VAT payers. C Taxable services provided by Shanghai general VAT payers to overseas customers The tax burden for such services is significantly reduced because either VAT exemption or a zero VAT rate applies to exportation of taxable services. D Taxable services provided by a foreign party to a Shanghai general VAT payer Under the VAT system, the Chinese customer shall withhold the VAT payable by the foreign party and remit it to the Chinese tax authority. However, such VAT can be recovered by the Chinese customer by crediting the same amount as input VAT against its output VAT. As such, the decrease in the tax burden equals the Chinese BT amount otherwise payable by the foreign party under the previous BT regime. Considering the above, the foreign party may wish to shift the VAT costs to the Shanghai customer. E Taxable services provided by a foreign party to a Shanghai small-scale VAT payer or BT payer. The Chinese customer shall also withhold the VAT amount from the gross payment. These are real costs because the customer is unable to make a credit. The change in the tax burden is the difference between the

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VAT and the BT otherwise payable in the past. This means that the tax burden is slightly higher since the VAT rate is higher than the standard BT rate of 5% (applicable to the vast majority of services). The above (a–e) represents a simplified analysis of the changes in the tax burden. The real world is more complex and the actual results for a specific industry or transaction may differ from the general conclusion of the above analysis.

services, conditions for creditable input VAT, non-creditable input VAT, consequence of not applying for the general VAT payer status, exchange rate, timing of VAT liability, tax declaration deadline, tax payment location, value threshold for individuals, issuance of VAT invoices, and a detailed explanation of the scope of taxable services.

4 BT exemption In general, VAT exemption is also granted to transactions which previously enjoyed BT exemption treatment, eg, technology transfer, technology development and related technical services.


5 Old contracts The Plan does not provide any transitional arrangements for old contracts concluded before 1 January 2012. However, as an exception, outstanding contracts for lease of movable tangible assets concluded before 1 January 2012 continue to be covered by the BT system until the termination of such contracts. 6 Circular 111 Circular 111 also covers other details such as mixed sales, consolidated VAT declaration, deemed sales of taxable

Ulrike Glueck is managing partner and Charlie Sun CPA is senior associate at CMS, China

located in Shanghai * Taxpayers providing taxable services are advised to start applying for the general VAT payer status (where applicable) and prepare themselves for the new regime. companies with entities in * Group Shanghai may need to make an in-depth analysis of the changes in the tax burden, adjust their pricing where necessary and restructure business models where possible. companies providing * Foreign taxable services to customers in Shanghai shall also take the BT/ VAT issue into consideration when concluding the relevant contracts.

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Leases: operating or finance? Complex lease terms mean that it is often difficult to determine how they should be classified. Graham Holt examines IAS 17 and sheds some light on the matter

Leases are classified currently under IAS 17, Leases, as finance or operating leases at inception, depending on whether substantially all the risks and rewards of ownership transfer to the lessee. Under a finance lease, the lessee has substantially all of the risks and reward of ownership. Situations that would normally lead to a lease being classified as a finance one include the following: A the lease transfers ownership of the asset to the lessee by the end of the lease term B the lease term is for the major part of the economic life of the asset, even if the title is not transferred C at the inception of the lease, the present value of the minimum payments amounts to at least substantially all of the fair value of the leased asset D the leased assets are of a specialised nature such that only the lessee can use them without major modifications being made E if the lessee is entitled to cancel the lease, the lessor’s losses associated with the cancellation are borne by the lessee F gains or losses from fluctuations in the fair value of the residual fall to the lessee G the lessee has the ability to continue to lease for a secondary period at a

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rent that is substantially lower than market rent. All other leases are operating leases. The lease classification is made at the inception of the lease but a lessee and lessor may agree to change the provisions. However, changes in estimates – for example, in the residual value of a leased property or in circumstances such as default by the lessee – do not give rise to a new classification. If the changes would have resulted in a different classification had they been applied originally, then the revised agreement is treated as a new lease over the remaining term. The original accounting entries are not retrospectively amended. Often, lease indicators may not always point in the same direction causing classification to be difficult. Leases of specialised assets will usually be structured as finance leases. If an asset is specialised, then this implies that no other entity has a use for it. Consequently, the lessor will only achieve its return on investment through the lease payments and it will structure the lease as a finance lease accordingly. If a lessor can sell or lease nonspecialised assets to other parties at the end of the lease and is willing to accept the financial risk on this then this could be an indicator of an operating lease.

Assets of a non-specialised nature may become specialised. For example, leased plant and equipment may be permanently installed in a building and its removal at the end of the lease may be impractical or too expensive for the lessor. Often, specialised assets may have a significant remaining life at the end of the lease; sometimes this may be the major part of the economic life of the asset and therefore this will point to it being an operating lease. However, it may be appropriate to disregard this indicator. Normally, for there to be an operating lease with a significant part of the asset’s life remaining, there needs to be some realisation of funds through sale or further rentals. In the case of a specialised asset, however, this will not normally occur because it is of value only to the lessee. In these cases, the asset will normally transfer to the lessee at the end of the lease for a nil or nominal payment and be treated as a finance lease. Where an asset has been leased several times during its economic life, and the lease is the last one to take the asset to the end of its life, then many of the indicators may point towards a finance lease. For example, the present value of the minimum lease payments may approximate to the fair value of the asset at the inception of the final

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lease, and there is unlikely to be an option to purchase the asset at fair value or to extend the lease at a market rent because the asset has reached the end of its life. However, the asset will obviously be non-specialised and the final lease will not be for the major part of the economic life of the asset. The lease

substantially all of the fair value of the asset. In this case, the lease is probably a finance one. Where rents are very low and no premium has been paid, the lease does not have a commercial basis and it would appear that the lessor is indifferent to the risks and rewards of ownership. In this case, classification is better judged by looking at the

OFTEN, LEASE INDICATORS MAY NOT ALWAYS POINT IN THE SAME DIRECTION, CAUSING LEASE CLASSIFICATION TO BE DIFFICULT will be for the entire remaining useful life of the asset but IAS 17 focuses on economic life as an indicator of a finance lease. The lessor is recovering the investment through a number of leases and the substance of each of those will normally be an operating lease. Thus, if the final lease were to be classified as a finance lease simply because of its position in the chain, this would normally be unacceptable. Where an asset is leased and rents are nominal, the agreement is still a lease under IAS 17. The total value of the rents will fall short of the fair value of the asset, thus indicating an operating lease. Often, the rents are low because a premium will have been paid upfront which may be equivalent to

INT_T_HoltCPD.indd 59

substance of the arrangement and the intentions of the lessor in granting a lease on such terms. The presence of an option to extend the lease at substantially less than a market rent implies that the lessor expects to achieve its return on investment solely through the lease payments and therefore is content to continue the lease for a secondary period at a nominal rental. This is an indicator of a finance lease. It is reasonable to assume that the lessee will extend the lease in these circumstances. However, an option to extend it at a market rental may indicate that the lessor has not achieved its return on investment through the lease rentals


and is therefore relying on a subsequent lease or sale to do so. This is an indicator of an operating lease as there will be no compelling commercial reason why the lessee should extend the agreement. The absence of any option to extend does not provide evidence either way as to an operating or a finance lease, and other factors will need to be considered to determine the classification. In some cases, fluctuations in the fair value of the residual interest in the leased asset are passed back to the lessee. This indicates that the lessee is bearing the residual value risk, and the lessor’s return on investment is effectively fixed. These indicators provide evidence of a finance lease. If the lease also requires the lessee to make good to the lessor any shortfall between the sale proceeds and a fixed ‘residual’ amount, then again this is evidence of the lessor’s return being fixed. Where the lessor retains the proceeds of the eventual sale of the asset, the lessor is bearing the residual value risk and where the sale proceeds are significant, then this could be evidence of an operating lease. Issues sometimes arise in lease contracts where an asset is held on a finance lease and then it is all or partially sub-let to another party on

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identical terms and conditions. This can occur where several entities intend to share leased accommodation and arrange for one entity to lease the whole asset and sub-let the relevant parts to the others. The issue that arises here is whether the lead entity

the inception of the lease; rather, the amount to be paid is dependent on some future event. However, it is not an interest payment as it is not connected with the passage of time, therefore time value of money is not an issue. Contingent rent is commonly

ISSUES SOMETIMES ARISE WHERE AN ASSET IS HELD ON A FINANCE LEASE AND IT IS SUB-LET ON IDENTICAL TERMS AND CONDITIONS should recognise the finance leases on a gross basis in its accounts or whether it should net off the transactions. In this case the entity should look at the derecognition requirements of IAS 39, Financial Instruments: Recognition and Measurement. The treatment will depend on the terms of the individual transaction. If the two transactions are separate to the extent that the lead entity is liable to pay its rentals under the head-lease regardless of whether it actually receives its sub-lease rentals, then the derecognition requirements will not be met and it will need to account for the two leases on a gross basis. A contingent rent is such amount that is paid as part of lease payments but is not fixed or agreed in advance at

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connected with an increase or decrease in future sales by the lessee, increase or decrease in the use of the asset, or inflation or deflation. Under IAS 17, contingent rents are excluded from minimum lease payments and are accounted as expense/income in the period in which they are incurred/earned. If a lease contains a clean break clause, where the lessee is free to walk away from the agreement after a certain time without penalty, then the lease term for accounting purposes will normally be the period between the commencement of the lease and the earliest point at which the break option is exercisable by the lessee. If a lease contains an early termination clause that requires the lessee to make a termination payment to compensate

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the lessor such that the recovery of the lessor’s remaining investment in the lease was assured, then the termination clause would normally be disregarded in determining the lease term. Similarly, the same principle applies if the lease agreement states that the lease can only be terminated in remote circumstances, with the permission of the lessor or on entering a new lease agreement for the same or equivalent asset. The International Accounting Standards Board is preparing a standard that may clarify and change some of the above aspects of lease accounting. The current models lead to a lack of comparability and undue complexity because of the distinction between finance and operating leases. As a result, many users of financial statements adjust the amounts presented in the statement of financial position to reflect the assets and liabilities arising from operating leases, which makes the deliberations of companies regarding classification of leases a somewhat futile exercise! Graham Holt is an examiner for ACCA, and associate dean and head of the accounting, finance and economics department at Manchester Metropolitan University Business School

09/03/2012 14:50

Technical update


A monthly round-up of the latest developments in financial reporting, audit, tax and law FINANCIAL REPORTING IFRS FOR SMES The International Accounting Standards Board (IASB) intends to undertake a post-implementation review of the IFRS for SMEs in the second half of 2012. In the period since it was first issued, the SME Implementation Group (SMEIG) has issued a number of clarification Q&As. Three have been finalised and a further seven are in the process of being completed. As part of the IASB’s post-implementation review, it will consider whether the Q&As should be incorporated into the next version of the IFRS for SMEs. The SMEIG does not expect to issue many, if any, further Q&As before the review is complete.

AUDIT PROFESSIONAL SCEPTICISM Following the financial crisis of 2008–09, audit inspection reports in a number of jurisdictions have highlighted the need for auditors to better demonstrate professional scepticism. The International Auditing and Assurance Standards Board (IAASB) has therefore decided that it would be in the public interest to remind auditors and others of its importance and has issued a staff Q&A publication. This focuses on the considerations in International Standards on Auditing (ISAs) and the

INT_T_update.indd 61

IAASB’s quality control standard (ISQC1) that are particularly relevant and address the following: What is professional scepticism? Why is it important in audits of financial statements? What can be done by audit firms and auditors to enhance awareness? At what stage in the audit process is it necessary? How does it relate to the auditor’s responsibilities with respect to fraud? Are there other aspects of an audit where it may be important? How can its application be evidenced? Do regulators, oversight bodies and those charged with governance have a role to play?

* * * * * * * *

Yvonne Lang, director, Smith & Williamson

EUROPEAN UNION EXTRACTIVE INDUSTRY European Union (EU) ministers have expressed broad support for tightening rules insisting that EU companies extracting raw materials declare payments made to governments who regulate their mines and processing facilities. EU officials are now confident that these rules will be agreed by June. For competitiveness, the EU Council of Ministers has informally agreed that EU accounting directives should be reformed to ensure EU extractive

industry companies (including mining, timber, oil and gas businesses) behave openly and transparently in developing countries, heading off bribery and corruption accusations. Speaking for the EU’s current presidency, Denmark’s minister for business and growth Ole Sohn said that a proposed ‘new requirement about country-by-country reporting is an important step’. EU rules would apply to

large private companies as well as those listed on stock exchanges. EU member states also agreed clear rules were needed on the size of reportable payments; a Danish government paper noted that some extractive companies suggest a minimum of €1m, while some non-governmental organisations suggest €10,000. For more information, visit http://tiny. cc/12Yf2b

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Technical update LOOKING FOR A NEW JOB?

SHORT SELLING A European Union (EU) regulation mandating common transparency requirements for short selling and certain credit default swaps has now been formally approved by the EU Council of Ministers. The aim is to harmonise controls over such trades in times of crisis to ensure that deals cannot be channelled through the member state with the weakest rules on disclosure. For instance, significant net short positions regarding sovereign debt issued in the EU would have to be revealed privately to regulators. The regulation was negotiated between ministers and the European Parliament before Christmas – see CROSS-BORDER BANK CHARGES The European Parliament has approved a new European Union (EU) regulation that will ban international bank charges on euro payments between member states. The new law, which establishes a single European payments area (SEPA), also establishes common rules and standards for euro credit and direct debit transactions among banks. ‘Businesses could set up cross-border direct debits in euros between any two bank accounts anywhere in the EU, enabling them to bill customers regularly across borders,’ said a parliament communiqué. It added: ‘Businesses could also organise all cross-border

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euro payments from a single euro account in a country of their choice…to improve money management and speed up cashflows at lower cost.’ The changes must be introduced by February 2014 and apply to eurodenominated bank accounts across the EU, including in Britain. More at http://tiny. cc/q6Yf2b SMALL COMPANIES The European Commission welcomed the final and formal approval by the European Union (EU) Council of Ministers to proposed amendments to the EU’s fourth accounting directive 78/660/EEC that will ease accounting requirements for Europe’s smallest companies. It enables EU governments to allow ‘micro-enterprises’ to file simplified balance sheet and profit-and-loss accounts – see http://tiny. cc/D8Yf2b DERIVATIVE TRADING RULES An informal deal has been struck between the European Commission, the EU Council of Ministers and the European Parliament over a longdebated draft EU regulation on over-the-counter derivative transactions, central counterparties and trade repositories. Drafted as a response to the 2008 financial crisis, the legislation tries to implement rules on trading transparency, following the advice of G20 meetings staged

during the recession that followed. Formal votes at the council and parliament will need to be taken before the legislation is approved. For more information, visit

EASTERN EUROPE TAX SIMPLIFIED IN GEORGIA The International Finance Corporation (IFC) of the World Bank has hailed as a success an initiative to simplify the taxation

system of the Caucasus republic of Georgia. It is coordinating a Georgia Tax Simplification Project, which recently staged a workshop in the Black Sea town of Batumi to help import-export companies, consulting firms and brokers exploit reforms in cross-border trade regulations and custom clearance zones. http://tiny. cc/RCYf2b Keith Nuthall, journalist

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13/03/2012 14:38



Quality, low-cost CPD We look at how reasonably priced CPD can help to give you the edge in your current role – and beyond We’re all familiar with training and development budgets being trimmed down so this month we’ll show you how to gain the most from professional development at little or no cost. Here, we look at how continuing professional development (CPD) can help you keep your edge in your present role, and it can help you to move on.

ACCA’s CPD requirements ACCA’s leading-edge CPD programme offers a policy that is flexible, allowing you to develop through a variety of means such as structured courses, qualifications, e-learning, reading, research, coaching and mentoring and learning from undertaking new tasks in the workplace. The CPD requirement has been designed to: help you plan and identify relevant professional development help demonstrate to your employer that you keep yourself up to date and employ an ethical approach offer a measurable and transparent approach to CPD; and provide you with an accessible range of services.

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What counts? It’s a common misconception that CPD can only be obtained through structured courses and seminars. But there are many ways to obtain CPD, often where you least expect – for example, through your everyday work. There are three very simple questions to ask yourself when undertaking any CPD activity: 1) Is the learning relevant to your role? 2) Are you able to apply the learning? 3) Can you provide evidence of that learning? If you can answer yes to all three, then the learning is verifiable CPD.

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Sourcing cost-effective CPD Cost-effective CPD can come in different forms; we’ve highlighted a small number of them below. These are examples to get you started: don’t feel limited to this list.

Planning is key A little advance planning is one way to ensure that your CPD is focused, tailored and cost-effective. Following a plan will make certain you derive the maximum benefit for your time and money, while developing those areas that are likely to have the biggest impact. In these demanding times more is expected of finance professionals. In order to keep up with those demands it’s vital to keep up to date and continue to build on the capabilities that make you attractive and highly valuable to employers. And, as you will have seen above, this needn’t be expensive.




Explore discussion boards and forums at work and on the web. Download podcasts


Visit ACCA’s e-learning gateway for technical updates.

Coaching and mentoring

Run staff inductions, introduce knowledge sharing or be an ACCA Workplace Mentor

Research and reading

Experience new learning through team projects – or present on a topic that is new to you


Join work committees or steering groups; or attend ACCA networking events

Seminars and courses

Put yourself forward for free courses and seminars

In-house training

In-house training can be worthwhile not just for the delegates but also for the trainer

09/03/2012 14:45


ACCA news


Clare Minchington

Inside Exam success ACCA 64 Cost-effective CPD There are many ways to access quality CPD on a budget

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Results from the ACCA examinations in December 2011 show there continues to be strong demand for a professional accountancy qualification in times of economic uncertainty. More than 190,000 students sat papers, with over 6,000 taking a major step towards membership. Candidates around the world took more than 363,000 papers, with 6,313 students successfully completing their final ACCA exams. At the Fundamental level, pass rates were particularly good. The pass rate for paper F7, Financial Reporting, at 56%, was significantly higher than in recent times. All other pass rates at the Fundamental level remained close to their historic averages. At the Professional level, the results for the Essential papers remained strong while results for the Options papers were not as positive. The result for paper P5, Advanced Performance Management, was very disappointing at 29%. In response to a number of sessions of poor performance in the Options papers, ACCA has carried out work to offer a range of support for students taking these papers to help improve the pass rates. This will be available shortly. Clare Minchington, ACCA executive director – learning, said: ‘We congratulate those who have succeeded in their exams – and we are delighted to see that more than 6,000 have completed their examinations, having been able to demonstrate the financial knowledge and professional skills which are needed by organisations in challenging economic conditions. ‘We look forward to welcoming them to ACCA membership on completion of their practical experience requirements.’ In December 2011, ACCA’s new Foundations in Accountancy suite of awards was first examined as paper-based and computer-based exams (CBEs). This is an exciting and significant milestone. Almost 13,000 paper-based Foundation in Accountancy exams were sat in December 2011 in addition to more than 34,000 exams sat as CBEs that month.

Accounting and Business has published a special edition looking at the challenges and opportunities for small and medium-sized enterprises (SMEs) around the world. Written by SME specialists at ACCA and other experts, the 20-page publication tackles regulation, access to finance and the future for small accountancy practices. It also looks at microfinance, innovation and the development of finance functions in SMEs. Rosana Mirkovic, head of SME policy at ACCA, says: ‘SMEs have a critical role to play in global economic recovery and it is vital that their needs, and the challenges they face, are fully explored and understood.’ Find the publication at For ACCA’s small business research, go to smallbusiness

Rosana Mirkovic

14/03/2012 10:50

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14/03/2012 10:50

AB INT – International edition – April 2012  

AB INT – Accounting and Business – International edition – April 2012

AB INT – International edition – April 2012  

AB INT – Accounting and Business – International edition – April 2012