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ab accounting and businesS 03/2012


accounting and business international 03/2012

russia’s new dawn full ifrs implementation begins

Spreading excellence MichĂˆle Cartier Le GuÉrinel on leading francophone accountants inflation tips for strategic planning auditor rotation and the us technical accounting for liabilities

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10/02/2012 12:57

When forming a new company, how do you choose the best start? … Ask an member. ACRA, the Association of Company Registration Agents, was established to encourage high standards and to help you find an agent which will form your company to the best legal standard.

Benefits for you: You can trust that your company will be formed using robust Articles, and you will get sound advice on the inclusion of any extraordinary provisions. It is free for you to find a company registration service through ACRA. You are guaranteed that the agent you use will act professionally and employ trusted experts. ACRA members have unique access to valuable information covering new thinking, current legislation and industry specific guidance on Anti-Money Laundering Regulations. You will be working with only the best.

Did you know that forming your company directly through the Business Link website means you would automatically adopt Model Articles?

Business Link use only the Model Articles when incorporating new companies. However there are serious shortfalls in the Model Articles. They make no provision for: Pre-emption rights on the transfer and sale of shares. This means that a company could be sold or transferred without existing shareholders being aware. Multiple classes of shares. Alternate directors, which may be useful where directors are absent for extended periods. Members’ rights, proxies, meeting regimes, or director conflicts. They also unreasonably assume that directors will have sufficient knowledge of these matters as outlined in the Act. The appointment of a company secretary.

ACRA fosters best practice. Shouldn’t you? -AB UK ads.indd 1

09/02/2012 16:50


Editor’s choice

Delegate general of the International Federation of Francophone Accountants, Michèle Cartier Le Guérinel, talks to Accounting and Business about how its African Plan is progressing and why 2012 is going to be a key year for the organisation. See page 16

LONG AND WINDING ROAD It was an optimistic message delivered by Hans Hoogervorst, chairman of the International Accounting Standards Board, on his first visit to Russia at the end of January. He welcomed Russia’s commitment to adopt International Financial Reporting Standards (IFRS) in full from 2012. Russia’s accounting system has entered a new international era that aims to encourage investment in Russian companies (see this month’s cover feature, page 12). There are now more than 100 countries that either require or permit the use of IFRS. Hoogervorst is right to observe that remarkable progress has been made in the 10 years since the IASB was established. He is also upbeat about the prospect of the US coming on board. ‘They need us and we need them,’ he told the Russian audience. Emerging economies benefit from a blanker canvas when it comes to adopting IFRS and this often eases the process, although it still remains challenging. And the IASB has recently expanded its outreach to these nations. Among other things, it has established an Emerging Economies Group (EEG), of which Russia is a founding member. Meanwhile things are much muddier in the developed nations. As our commentator Ramona Dzinkowski notes on page 38, a proposal to modify US GAAP in the interests of private companies has people worried that the country will be saddled with a whole stable of reporting standards frameworks. There are a few other little spanners in the works. According to a recent Grant Thornton survey, only 53% of businesses in India are aware of changes to revenue recognition reporting, as part of IFRS implementation (news, page 11). Elsewhere in this issue, Nigeria’s migration to IFRS also raises difficult financial reporting issues that companies will need to address (see page 52). In his concluding remarks in Russia, Hoogervorst said: ‘We are closer than ever to moving from “international” financial reporting standards to “global” financial reporting standards.’ But to some, the road remains a long and winding one. Lesley Bolton,

BE PREPARED With the eurozone in the grip of potentially seismic changes, the implications for business systems and software could be severe. Page 24

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ESSENTIAL READ With 50% of investors naming it as their primary source of information about a company, simplifying annual reports is crucial. Page 36

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.

13/02/2012 10:26

AB INTERNATIONAL EDITION CONTENTS MARCH 2012 VOLUME 15 ISSUE 3 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

12 Russia rising Russia is shedding its old-era accountancy practices

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

16 French connection We talk to Michèle Cartier Le Guérinel, FIDEF’s delegate general 20 Euro storm How did the euro go from being the next big thing to all washed up? 24 All systems go A revamped eurozone could have major consequences for finance software and systems

26 Changing times Vietnam has embarked on a major VAT overhaul 30 On guard With the threat of inflation looming large, preparation is everything 34 Going soft on micro The EU is to relax disclosure rules for micro companies 36 Report card The annual report could do better, an ACCA study finds

10/02/2012 16:46


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



06 News in pictures A different view of recent headlines

52 Nigeria migrates As Nigeria adopts IFRS, accountants grapple with tricky reporting issues

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 38 Ramona Dzinkowski Plans to modify US GAAP could prove difficult for businesses to swallow

54 Transfer pricing Considerations on indirect equity transfers of China tax resident enterprises by non-China tax resident enterprises 57 Update The latest from the standard-setters 59 CPD: current or non-current liability? Understanding the impact of apparently simple rules is vital

Your sector 41 PRACTICE

40 Dean Westcott The annual report has reached a crossroads, says the ACCA president

41 The view from Chilala Banda of Grant Thornton, plus news in brief 42 A rotating debate Mandatory auditor rotation in the US may be a solution in search of a problem

45 CORPORATE 45 The view from Susana Jardim of Woodside, plus news in brief 46 Outsourcing Ambition and capability are vital if change is to be driven through 48 Inside Shell We take a look inside Royal Dutch Shell’s HQ in The Hague


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 62 CPD: coaching and mentoring How you support your colleagues can count towards your continuing professional development requirements

63 Council Nominations open for the election to Council to be held at the 2012 AGM 64 Global concern What ACCA members think about economic conditions 66 News Launch of new virtual briefing centre

10/02/2012 16:48


News in pictures


A colourful Guinea fan during the Orange Africa Cup of Nations Group D match between Botswana and Guinea in Gabon


Prince William’s RAF mission to the Falkland Islands provoked protests in Buenos Aires, as the 30th anniversary of the Falklands conflict between the UK and Argentina approaches


Bodyguards and riot police pull Australian PM Julia Gillard away from a mob of indigenous rights protesters at a Canberra awards ceremony

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10/02/2012 13:04



Facebook unveiled plans for a US$5bn stock market flotation. This is half the amount many analysts expected, but the initial public offering, set for May, is still due to be the biggest sale of shares by an internet company


Eastman Kodak, the 133-yearold company that invented the handheld camera, filed for bankruptcy protection after struggling to keep up with rival companies which were quicker to adapt to the digital era


Dynamic growth in emerging markets and ambitious 2018 targets mean that Germany’s Porsche is taking on new staff and premises to keep up with demand for its new 911 sports coupe


Demonstrators took to the streets of Dhaka after Bangladesh’s main stock index, the DGEN, plunged 6%, deepening a crash that has seen the bourse’s value tumble 31% this year

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10/02/2012 13:04

News in graphics














There is an ‘unhealthy correlation’ between skyscraper construction and financial crashes, according to Barclays Capital. Investors should pay special attention to China, which is building 53% of all skyscrapers planned in the world over the next six years.




Number of Asian executives making plans to invest in European businesses in 2012, despite the eurozone crisis.

US$50.8BN US$53.0BN US$216.4BN China

The amount proposed to be raised by Facebook’s float.

34.6% 101.3% 23.4% 46.7% 12.0% -25.9% 269.2%

Growth of global FDI since 2010



Despite turmoil in the global economy, foreign direct investment (FDI) inflows rose by 17% in 2011 to US$1.5 trillion, according to the United Nations Conference on Trade and Development, surpassing their precrisis average. FDI inflows increased in all major economic groupings. Developing and transition economies continued to account for half of global FDI in 2011 as their inflows reached a new high, at an estimated US$755bn, driven mainly by greenfield investments. FDI flows to developed countries also rose by 18%, with the growth largely due to cross-border merger and acquisitions.

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Caribbean Ireland Russia Poland Nigeria Czech Republic South Africa






Month in figures




The number of CEOs in Africa and the Middle East expecting to complete a crossborder transaction in the next 12 months. They are the most bullish, according to PwC’s global CEO survey.




The public’s faith in government has dropped sharply around the world throughout the past year, according to the Edelman Trust Barometer. In Europe, trust in government dropped by more than 10 points in France, Spain and Italy.

09/02/2012 15:00


MN 3 2 2 $29, 1

0MN 0 8 , $28


Despite continued widespread fee pressure and intense competition, global accounting firms are reporting growth across the industry and are planning to recruit in 2012. According to the latest global survey of global accounting firms by International Accounting Bulletin, PwC takes back the top spot as the largest global network from Deloitte, which had pipped PwC to the post for the first time in 2010.



Combined revenue of leading global accountancy firms in 2011.


0MN 8 8 , $22



































Combined revenue of global accountancy firms in 2010.


10MN 7 , 2 $2

Global workforce of PwC, the firm with biggest fee income.

2MN 7 6 , $5

Proportion of firms posting revenue growth in 2011.




99MN 8 , 3 $ 6

88MN $3,7

21MN $2,6 10

95MN $2,8 9

22MN $3,2


8 The survey shows that 22 out of the 23 global accounting networks surveyed grew their revenue in 2011, a complete turnaround from 2010. Growth was reported by 86% of the participating networks and associations, while accounting associations grew by 8% – a strong performance compared with last year’s 2% drop. In the survey’s first regional ranking, firms in India (24%), Brazil (16%), Turkey (14%) and China (10%) enjoyed the

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strongest average growth in the past year as the networks invest heavily in these key emerging economies. Firms in the Netherlands (-6%), Germany (-4%) and the US (-2%) found it difficult to generate growth in the market. The top 10 networks grew their audit revenues by an average of 5% and their advisory services by 14%. Tax services also performed strongly, with an increase in demand for internal tax and transfer pricing.

07/02/2012 15:34


News round-up


The US will eventually accept convergence with International Financial Reporting Standards (IFRS), Hans Hoogervorst, International Accounting Standards Board chairman, believes. ‘I do believe that the US will ultimately come on board,’ said Hoogervorst. ‘Quite simply, they need us and we need them.’ Speaking in Moscow, Hoogervorst congratulated Russia for its full adoption of IFRS and indicated that he wished other countries would also use IFRS without amendment or opt-outs. Despite the problems, Hoogervorst insisted: ‘We have made remarkable progress in 10 years... The majority of G20 members now require the use of IFRSs’, with China and India making ‘real progress’ towards their adoption.


African Union leaders have agreed to the creation of a single, Pan-African free trade area by 2017, merging the three existing regional African free trade areas. In his opening address to the African Union Assembly, retiring chair of the AU Commission, Jean Ping, said that Africa must be stronger. ‘But in order to do so, it needs substantial and predictable resources…


Vodafone has won its case against the Indian tax authorities, which claimed US$2.2bn in tax. The alleged liability arose from Vodafone’s US$11.2bn acquisition of Hutchison Telecom’s majority stake in Hutchison Essar, an Indian telecoms provider, through the purchase of a Hutchison subsidiary company based in the Cayman Islands that owned the Hutchison Essar shares. Vodafone argued that as the shares did not change ownership, capital gains tax did not apply. The Supreme Court overturned an Indian High Court decision ordering Vodafone to pay US$500m tax plus interest. Kevin Phillips, corporate tax partner at Baker Tilly, said that the outcome was ‘a huge relief, not just for Vodafone’.

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there is need to speed up economic integration of the continent,’ he said.


Governments’ main long-term financial challenge is to manage ageing populations, not decline in economic activity, according to the latest issue of Deloitte Research’s Global Economic Outlook. ‘If current trends continue, government debts are likely to escalate to unsustainable levels with serious ramifications, such as rating downgrades as well as the decline of investor confidence in government bonds, all leading to volatility and uncertainty in bond markets,’ said Ira Kalish, director of global economics at Deloitte Research.


Auditors’ reports are frequently misunderstood, according to a research paper based on discussions with CFOs, analysts, bankers, investors and auditors. Reports are often only looked at to determine if accounts have been qualified and whether the audit was conducted by a Big Four firm. Terms ‘level of assurance’, ‘reasonable assurance’ and ‘high level of assurance’ are not

widely understood, added the study. The paper was written by leading accountancy academics and published in Accounting Horizons.


The International Accounting Standards Board (IASB) and the US Financial Accounting Standards Board (FASB) have agreed to work together to reduce differences in their classification and measurement models for financial instruments. The cooperation is part of the FASB’s project to produce a new update on its accounting standard for financial instruments and the IASB’s consideration of amendments to IFRS 9.


Globalisation is increasing across most of the world’s 60 leading economies, despite the economic crisis, according to a report from Ernst & Young. The report draws on analysis of globalisation relative to national gross domestic product (GDP), supported by a global survey of 1,000 senior business executives. Increased global trading is most discernible among medium-sized emerging markets including Vietnam, Malaysia, Mexico and Colombia, and smaller European countries such as Belgium, Denmark, Slovakia and Austria. Emerging market GDP could overtake that of developed economies by 2014, says EY, with 70% of economic growth coming from emerging markets.

NEW IFRS FOUNDATION DIRECTOR Yael Almog has been appointed executive director of the IFRS Foundation. She becomes responsible for the Foundation’s day-to-day management and provides executive leadership for the trustees. A lawyer by profession, Almog joins from the Israel Securities Authority, the Israeli market regulator, where she was director of the Department of International Affairs and was closely involved in the implementation of IFRS in Israel. Tom Seidenstein, the Foundation’s chief operating officer, has left to return to the US.

10/02/2012 10:52



In the wake of financial market crises, the PCAOB is keen to press ahead with plans for mandatory auditor rotation in the US. But this could be, say critics, a costly exercise that erodes valuable institutional knowledge.



Banks have adopted different approaches to their reporting of sovereign debt exposure, according to Fitch Ratings’ 2012 Global Accounting Outlook. The six largest US banks’ net exposure to eurozone sovereign debt totalled about US$50bn at the end of the third quarter last year, with US$22bn in hedges associated with that exposure. But Fitch warns that exposures – including deposits, central bank balances, securities, loans, participations, acceptances, fair value of derivatives and reverse repos – were not consistently and fully disclosed.

AZSA and, from June 2010, Ernst & Young ShinNihon – were unaware of the falsifications and could not have been expected to detect it. However, the company’s statutory auditors – individuals sitting on the board in a non-voting capacity – should have detected the misreporting, said the panel of lawyers, set up by Olympus. Shuichi Takayama, the company’s president and CEO, promised that the


Syria’s economy has been hit by sanctions, rampant inflation and growing unemployment, as the Arab Spring continues to hit old and new regimes in the Middle East. A report by Geopolicity late last year found that the first few months of the uprisings cost Arab economies US$55bn, including a US$21bn reduction in economic output. Even countries such as Tunisia and Egypt that had authoritarian governments overthrown are still suffering economic repercussions. But countries not directly affected by the uprisings are seeing an increase in economic activity, with several increasing spending on government employees and infrastructure. This is feeding into higher demand for consumer products, with demand for new cars in the region expected to rise by 6.6% this year and Volkswagen hoping to increase sales by 40%.


Mark Weinberger is to become Ernst & Young’s global chairman and CEO from July next year, when Jim Turley retires. Turley has led EY since 2001. Fifty-yearold Weinberger is global head of tax and already sits on the firm’s global executive; he previously served on EY’s Americas Executive and US Operating Committee and has been the Americas’ head of tax. In addition Weinberger was assistant secretary of the US Treasury (tax policy) under president George W Bush and was appointed to the US Social Security Advisory Board by president Bill Clinton.


Grant Thornton has completed three deals to expand its international network. Grant Thornton Netherlands is merging with ESJ, a leading Dutch accountancy and tax consulting firm. The merger is part of Grant Thornton’s attempts to become a sector leader in the country where it now has 70 partners, 700 staff and 14 offices. Grant Thornton has also appointed a new member firm in Belarus: Silar LLC becomes Grant Thornton Silar. VKM Kenya joins the network, operating as Grant Thornton, replacing the former Kenya member firm, which ceased membership in December 2011.


An unofficial expert panel investigating falsified financial reporting by Olympus has concluded that its auditors – KPMG

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had to restate accounts because of revenue recognition issues following the change in accounting standards there. Sai Venkateshwaran, Grant Thornton India’s IFRS practice leader, said: ‘The changes could be more significant for Indian companies considering that they are moving from a state where there is diversity in practice due to the limited guidance available under Indian GAAP.’

company ‘will continue in our efforts to improve our internal management controls’. He apologised to shareholders, customers and business partners for the scandal.


Only 53% of Indian businesses are aware of changes to revenue recognition reporting as part of International Financial Reporting Standards (IFRS) implementation, a survey from Grant Thornton reveals. However, India also recorded the highest level of support for the changes in the global survey. Grant Thornton warned that 10% of US companies


There is little support for the adoption of a financial transaction tax in the European Union, according to a report by KPMG. It assesses only three of the 27 member states as being clearly in favour of a financial transaction tax. Another three member states are strongly against the proposal, while the rest are in what KPMG describes as ‘varying degrees of support, opposition or indecision’. Despite this, president Sarkozy of France has announced that he is unilaterally moving ahead with planning for implementation from July this year.

10/02/2012 10:52



Russia’s accounting system has entered a new international era that aims to encourage investment – both domestic and foreign – into Russian companies


f truth be told, the international image of Russia could do with some burnishing. The Georgia conflict did not help, and the Western view is often one of a backward country kept afloat by a sea of oil and whose sails are filled by plentiful natural gas. But this is not a fair assessment. Quietly, Russia is changing. In December last year, the World Trade Organisation (WTO) approved Russia’s membership after 18 years of negotiations. This was secured after Moscow made promises including a guarantee of the legal right of foreign accountants to work in Russia. Furthermore, Russia is slowly and steadily moving towards an adoption of International Financial Reporting Standards (IFRS). The need for reform of Russia’s accountancy system was first addressed back in 1998, with legislators aiming to increase the transparency of companies’ accountancy practices and bring them into line with international standards. The end result, hoped the then government of president Boris Yeltsin, would have Russia attracting new, foreign investments in many sectors. Reform was, however, implemented at an extremely slow pace, with the long-awaited federal law on Consolidated Financial Statements being signed by Russian president Dmitry Medvedev in July 2010. The new law allows for the final introduction of IFRS in Russia, which took place on 25 November 2011, under an order from the Russian Ministry of Finance. The introduction of IFRS has been welcomed by the world’s leading public

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accountancy firms working in Russia, according to Anton Efremov, a senior partner at audit and consulting firm BDO Russia. ‘This is a long-awaited document,’ says Efremov. ‘Accounting requirements that correspond to IFRS have been steadily introduced in Russia since 1998.’ The main difference between the previous Russian standards and IFRS is, he says, that the former are more focused on the requirements of regulators, while IFRS are more geared towards investors and creditors. ‘If the

huge changes that have occurred in Russia since the fall of communism from 1991. For decades, the development of accountancy had little in common with international practices. During Soviet times, for instance, it was used as a tool for the protection of socialist property and the implementation of state plans. These goals were once achieved through strict government control and auditing of the financial results of all enterprises – 99% of which were state-owned. The collapse of the USSR, however, along with a

FOR DECADES, THE DEVELOPMENT OF ACCOUNTANCY WAS USED AS A TOOL FOR THE PROTECTION OF SOCIALIST PROPERTY Russian government is interested in the attraction of foreign investments, the introduction of IFRS on a mandatory basis is the right step,’ says Efremov. Ever since its introduction into Russia, the adoption of IFRS has become an objective necessity for the country’s entire financial system. The transition of the economy to the market model of development – including the growth of previously uncommon small businesses and the privatisation of state-owned enterprises – has specified the need for restructuring the accounting system, according to analysts at Vertex, one of Russia’s leading consulting companies in the field of accountancy.

Changing times And while IFRS is indeed commonplace these days, it is worth considering the

series of economic and political crises that followed, did not support a quick restructuring of the old Soviet system of accountancy. But now – finally – international standards are on their way. Leonid Schneidman, head of the Department of State Financial Control, Auditing and Accountancy Regulation at Russia’s finance ministry, comments: ‘The IFRS were approved in Russia in the form in which they are used all over the world. There will not be any adaptations of these standards to Russian realities. It is very important because any noncompliance would adversely affect the domestic business environment. The transition to the new system will make Russian business more transparent and open.’ Moving forward, Russia will begin applying 37 IFRS standards in 2012, with companies being able to make

09/02/2012 11:32


financial reporting cases both in Russian and English. The new standards will apply to all publicly traded companies – especially those that are significant to the national economy, as defined by a list, yet to be released, set out by special law. All leading Russian banks and insurance companies are expected to be listed. Meanwhile, Russia’s transition towards international standards is expected to be fully completed by 2015. The key significance of the reform is that foreign investors and shareholders will be able to get more information on the financial condition of Russian companies – no mean feat in a country where transparency is hardly a watchword. The hope is that this will encourage investment – both domestic and foreign – into Russian companies, and boost the amount of business they undertake – with partners having more confidence. The transition to these new accounting standards will also accelerate the

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planned transformation of the Moscow Stock Exchange into a truly international financial centre, able to compete with London, New York and Tokyo. This could, according to Vertex analysts, lead to a significant influx of investments into the Russian audit, consulting and IT markets.

Rest assured The increased assurance to foreign companies will surely make a big impact: until recently, many major foreign investors found it too risky to invest or participate in joint projects with Russian companies, due to the lack of transparency in financial reporting that previously existed. ‘The transition to IFRS is very important – not only for large Russian companies but also for small and medium-sized businesses,’ says Dmitry Weinstein, a partner at Ernst & Young Russia and member of the Institute of Professional Accountants of Russia. ‘The use of IFRS significantly facilitates the attraction of investments, and more and

more Russian companies are becoming aware of this. Amid the current volatile environment, many companies have started to realise that transparency and timeliness of information transfer to proper parties are among the major recipes of their success.’ So far, so good. But implementing IFRS is not a walk in the park. And while it should boost Russia’s international financial reputation, there is currently a lack of skilled personnel able to make financial statements in accordance with IFRS. According to Boris Sokolov, former president of the Audit Chamber of Russia, there are approximately 40,000 certified auditors in the country, able to work with IFRS. He believes that in order to ensure quality financial reporting, each company should have such experts within its staff – especially ones with a good knowledge of English. However, says Sokolov, most Russian banks and companies do not usually employ certified auditors since their services are expensive.

09/02/2012 11:32


Figures in agreement: Russian president Dmitry Medvedev meets his US counterpart Barack Obama as Russia starts a project to implement IFRS in full by 2015

Another potential problem is the conservative or traditional ideals of many Russian company heads, and their unwillingness to make a shift away from old financial accounting systems. In addition, many fear that the use of a transparent system may attract an increased interest of tax authorities, according to analysts at the Russian Business Online agency. Finally, some large public companies in Russia are still not interested in bringing their accounting systems in line with international standards, due to certain principles contrary to international standards, such as double-entry bookkeeping and tax evasion, says an analyst at the agency. Despite some hesitation, analysts at Russia’s Institute for Enterprise Issues are confident that Russia’s transition to IFRS will not significantly affect the Russia business of the world’s largest international accountancy firms – especially the Big Four with their combined share of 35.2% of Russia’s auditing services. The Big Four are already used by some of the major Russian organisations, firms and corporations

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– most of which have already switched to IFRS – while for smaller companies using their services remains too expensive. ‘Currently only the wealthiest clients can afford the services of KPMG, Deloitte, PwC and Ernst & Young,’ says Vitaly Avdeev, a well-known Russian auditor and editorin-chief of Audit-it paper, noting that costs are 17.5 times more expensive than a standard Moscow auditing firm. According to former Russian Finance Minister Alexei Kudrin, 40% of the 400 leading companies in Russia already use IFRS, adding that there are certain large companies that still use US GAAP (generally accepted accounting principles). However, by 2015, all should be switching to IFRS – and this can only help the Big Four, says Avdeev. ‘Although at present only 1.3% of Russian companies are customers of the Big Four, their profits, generated from each of its clients, are 14.5 times higher than the average Moscow auditing firm, and 28 times more than the average regional accounting firm.’ Eugene Vorotnikov, journalist based in St Petersburg, Russia

CONCERN *A GROWING 4% Gross domestic product (GDP) real growth rate


GDP per capita


GDP (purchasing power parity)


Labour force

21.9% (GDP)

Investment (gross fixed)


Budget revenues


Budget expenditures

18.7% (GDP)

Taxes and other revenues

Source: CIA World Factbook

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2/6/12 4:18 PM



SPREADING EXCELLENCE As delegate general of FIDEF, the 30-year-old International Federation of Francophone Accountants, Michèle Cartier Le Guérinel reflects on its achievements


hen talking to Accounting and Business in her Paris office, Michèle Cartier Le Guérinel often struggles to make herself heard over the noise of the renovations shaking the walls on either side of her. In an anachronistically new and large building on an otherwise quiet street in the French capital’s most elegant seventh arrondissement (a stone’s throw from the Eiffel Tower), several floors of the headquarters of her international accountancy organisation FIDEF are undergoing a thoroughgoing makeover. But perseverance and adaptability have long been at the heart of the FIDEF delegate general’s modus operandi, whether working alongside her husband and colleague Dominique in helping African interns in Paris qualify for French diplomas, or during her five years helping to train local accountants in Rabat, Morocco. Now representing 45 organisations in 34 countries on four continents, she is quick to stress FIDEF’s core objectives (the acronym stands for the Fédération Internationale des Experts-comptables et commissaires aux comptes Francophones or, in English, the International Federation of Francophone Accountants). Those objectives are first the promotion of better comprehension, then the eventual adoption and implementation of the standards and norms of IFAC (International Federation of Accountants) and IFRS (International Financial Reporting Standards). Those aims simply cannot be realised using a top-down, one-sizefits-all approach.

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This maxim was stressed at FIDEF’s October 2011 conference, which marked the organisation’s 30th anniversary. ‘The message passed on was to concentrate on the economic reality of a given country while considering the complexities and costs of implementation of international standards before saying adopt or not,’ the delegate general says. ‘The goal is not to blindly implement a framework. Before implementation we must ask, what is the key interest? How can we be involved in the best ways possible concerning the overall goals of the profession? A project is only finished when internationally accepted norms and practices become natural for each concerned professional.’ It is so easy, despite the best of intentions, to get this wrong. She reflects on her long observation,

diplomatically but firmly, “Let’s be realistic.” In the case of some African FIDEF members eager to join IFAC, for example, we have had countries say, “We have a plan, and want to realise it in three months.” This is absolutely unrealistic.’

Plan Afrique In 2009, FIDEF launched its ambitious five-year ‘Plan Afrique’. Its primary objective is to see all FIDEF members spread across the vast continent from Morocco to Madagascar qualify for IFAC membership. So what lessons have been learned at this half-way stage? She feels that one of the most useful lessons has been the degree of efficacy that belonging to supranational organisations can bring to the table. Almost all FIDEF’s sub-Saharan members also adhere to the OHADA

‘THE GOAL IS NOT TO BLINDLY IMPLEMENT A FRAMEWORK. BEFORE IMPLEMENTATION WE MUST ASK, WHAT IS THE KEY INTEREST?’ mainly in African countries, of wellmeaning but too often only partially successful World Bank missions. On many occasions, overly rigid schedules and lack of follow-up support were the main roadblocks to real progress. ‘The files end up afterwards in the filing cabinet,’ she says. ‘It is vital to prepare sufficiently beforehand – and equally, to stick it out for the duration of a project – so that confidence can be gained and systemic frameworks understood. ‘Very often when working with members, it is vital to say

(in English, the Organisation for the Harmonisation of Business Law in Africa) system of business laws and implementing institutions, based on an international treaty which created a supranational court system, intent on ensuring a degree of judicial uniformity and consistency. OHADA members are nearly all former French colonies, and therefore largely share common legal traditions and practices. The biggest and clearest advantage this presents FIDEF is how OHADA membership can virtually sideline some of the political foot-dragging that

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08/02/2012 13:20


has hindered development throughout Africa for so long. ‘At the political level, especially in central Africa, some governments have delayed taking the steps necessary’ for furthering IFAC compliance, she says. But if instruments can be introduced at the OHADA or other supranational levels, ‘it becomes easier to comply. This can create financial synergies and a sharing of resources to achieve longterm goals. ‘We had to convince everybody first, but I feel that we are now on the way to achieving this. Today, whether it’s the World Bank or IFAC, everybody agrees on this principle. ‘Within the next two or three months, there could be a big OHADA zone-level meeting which could be the basis of moving forward.’ That at least is a possibility once it has been firmly established that common fundamental principles have been agreed.

From the English FIDEF priorities for 2012 include streamlining and encouraging more proactive feedback among members on the translation of Englishlanguage texts issued by IFAC and the International Accounting Standards Board (IASB). These are essential in furthering internationally accepted auditing and accountancy norms. Under its current president, Belgian Michel de Wolf, FIDEF wishes to further the work in this area which was begun by its first North American head, Jean Précourt of Canada, who served as president in 2007–08. The last few years have indeed seen major steps undertaken, both in providing faster translations and encouraging more comprehensive feedback from FIDEF members on issues affecting normalisation. A major initiative regards exposure drafts, which FIDEF is now striving to translate and summarise in French as quickly as possible. These are then

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The CV 2008

Appointed FIDEF delegate general.


Vice president of the Commission Nationale d’application des Normes de la Compagnie Nationale des Commissaires aux Comptes, the French national commission on standards for the accounting and auditing professions.


Under an agreement with the CRCC, trains local accountants in Rabat, Morocco.

1993–2000 & 2003–10 Elected vice president of the Compagnie Régionale des Commissaires aux Comptes de Paris (CRCC – Regional Company of the Auditors of Paris). Concurrently a member of the National Council of the CNCC (Compagnie Nationale des Commissaires aux Comptes).


Works with husband Dominique in helping African accounting interns qualify for French diplomas.


President of the professional association of the Essonne region, near Paris.


Qualifies as an accountant and auditor.

sent to all members for independent review and feedback. It is this kind of proactivity that ‘multiplies the chances for FIDEF to react, contribute to and influence normalisation’, she says. Offering first-rate professional training at both initial and more advanced levels is another key FIDEF goal – a critical one in member countries still unable to offer sufficient professional qualifications at internationally accepted levels. In addition to its work in facilitating academic exchange programmes and designing and distributing communications and training tools, FIDEF is putting together a comprehensive study on how best to help those members struggling to meet international compliance standards. While she does not think there are any innate fundamental differences between francophone and anglophone approaches to accountancy as a whole, she sees distinct advantages – both practical and less tangible – for member states that share a language. It is interesting to note in this regard that five eastern European states are long-term members of FIDEF and are not French-speaking countries at all: Albania, Bulgaria, Moldova, Romania and Ukraine. But she attributes this membership to an affinity created by the French language’s centuries old status as, quite literally, the lingua franca throughout much of Europe for diplomats and others who made up the better-educated classes.

Civil vs common law However, as a transcontinental advocate for the promotion and definition of internationally acceptable norms and values, she is quick to admit that longstanding legal cultures present major obstacles in most francophone countries: namely their civil law tradition, which is critically

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The basics FIDEF

different from that of common law jurisdictions, where there is the concept of binding precedent. ‘Where there is an [established] norm in the Anglo-Saxon world, they apply it. In the francophone world, they first need written law to apply it,’ she explains. She also sees problems arising from France’s somewhat peculiar and gradual adoption of IFRS standards. While reforms are ongoing, mandatory IFRS standards in France presently apply only to accounts published by listed companies; unlisted companies, including many of the small and medium sized companies that FIDEF works hard to support, may do so if they wish. This state of contrariness was addressed directly at FIDEF’s October conference, particularly as it concerns the many and varied complications it is creating for tax compliance. ‘We simply can’t ask non-listed companies to present different accounts to investors and managers,’ she says. But the delegate general is all too aware that such problems may seem secondary at best for many African FIDEF members, where efforts to attract vital foreign investment have so often been diminished or destroyed by problems ranging from rampant corruption to political conflict.

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Whether working at the regional, subregional or national level with member state governments – or indeed when communicating with the World Bank or IFAC – FIDEF’s guiding philosophy remains ‘to explain and convince’ despite the constant presence of ‘almost brutal’ political and social difficulties.

Political issues ‘We are never divorced from political issues,’ she says. And clearly, in the Middle East and North Africa, ‘2011 was an especially challenging year’. She adds: ‘It’s a great tragedy with all of Africa’s amazing potential’ that so many chronic problems seem so intractable. Ivory Coast, for example, ‘has been completely undermined by political crisis’. However, the delegate general thinks that 2012 will turn out to be a key year for FIDEF, particularly since certain initiatives taken at regional and subregional levels in western and central Africa have done so much to convince everyone involved of the merits of the organisation’s goals. Across the French-speaking world, FIDEF’s primary objective remains ‘to maintain a guiding role until the natural completion of a project’, she stresses. David Hayhurst, journalist based in Paris

Founded in 1981, FIDEF (Fédération Internationale des Expertscomptables et commissaires aux comptes Francophones, or in English, the International Federation of Francophone Accountants) currently has 30 full national members and 15 associates in 34 countries in Europe, Africa, the Americas, the Middle East and Asia. It represents around 65,000 accounting professionals. FIDEF is an affiliate member of IFAC, an observer member of the UN’s Intergovernmental Working Group of Experts on International Standards of Accounting and Reporting (ISAR), and a board member of the Fédération des experts-comptables méditerranéens (FCM – the Federation of Mediterranean Public Accountants). Its three main objectives are to promote the greater recognition and authority of French-speaking accounting professionals at the national level by furthering the profession’s institutionalisation, to work at regional and subregional levels by establishing professional bodies and aiding relevant organisations, and, internationally, to assist members in their efforts to join IFAC. It is also active in translating and disseminating texts relating to international accounting and auditing standards, while supporting quality control activities in member states. FIDEF also helps to design and distribute communications and training tools to raise awareness of key professional areas of concern, both pertaining to specific national issues as well as among members of the profession more generally.

08/02/2012 13:20


into the maelstrom

Despite its promising start, the euro is now in a state of chaos – and with no prospect of escape any time soon. How did it come to this?


or most of the past decade, the euro was considered one of the best currencies in the world: stronger than the dollar, more popular than the Swiss franc or the British pound, odds-on favourite to become the world’s next reserve currency. Now, that’s changed. The European sovereign debt crisis that began a little over two years ago has shaken faith in the common currency of 17 European Union (EU) members. A number of European banks and countries are in fiscal disarray, and some disgruntled Europeans in both the stronger and weaker parts of Europe talk about breaking up the currency union. By the end of 2011, the 10-yearold currency had fallen from US$1.45 over the summer to US$1.29. Most forecasters now predict US$1.10 – US$1.20 by the end of 2012 – and no one’s talking about it becoming the top reserve currency anymore. How did the euro go so far wrong? Looking at the euro crisis in retrospect, it seems to have happened in the same way that a character in Ernest Hemingway’s novel, The Sun Also Rises, says he went bankrupt: ‘Two ways. Gradually, and then suddenly.’ In the case of the euro, it has been the other way round.

Suddenly... The common currency made it impossible for member countries to

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set their own interest rates or print their own money, yet did not require specific fiscal performance. Member countries promised not to run deficits of more than 3%, but the agreement had no penalties for those that ran over those limits, and indeed a number of countries have done so repeatedly since the 1992 Maastricht Treaty, with little consequence. Critics at the time argued that this might eventually lead some poorer countries to take advantage of the strong collective balance sheet, or that harnessing rich and poor countries together would lead to harsh, punishing economic conditions for people in the poorer parts of Europe. Or both.

...and gradually... In the beginning, however, none of this seemed to be a problem. The 2002 adoption of the new currency went smoothly and, for nearly a decade, the euro was seen as a success. Day to day, the common currency made business easier, and conducting business between countries that a few decades before had fortified borders became much less complicated. Intra-union investment grew. Italians complained a bit about higher prices, but the European economy did become more integrated. After starting out at below the dollar, the currency

continued to appreciate through most of the noughties, becoming in relatively short order one of the world’s leading currencies. ‘As long as it worked, I think everybody benefited from it, but for different reasons,’ says Paul Jorion, a Le Monde columnist and former commodities trader. But beneath the surface, the monetary union began to have difficulties. Productivity kept rising more quickly in Germany than in the south, made even more competitive by restrictions on raising wages that exacerbated Europe’s economic imbalances. Harvard economist Martin Feldstein has pointed out that since the euro’s launch, relative labour costs in southern Europe have risen by 30% compared to those of the north, making the southern economies much less competitive than they were 10 years ago. Poorer countries took advantage of the easier access to low-interest loans that the eurozone gave them. In Spain and Ireland, this easier credit was channelled into a huge but ultimately disastrous building boom. Relaxed credit made it easier for the poorer countries to delay reforms that EU administrators said were necessary to make their economies more competitive. Debt rose quietly, and even vast bank bailouts made in the aftermath of the 2008 credit

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PRODUCTIVITY KEPT RISING MORE QUICKLY IN GERMANY THAN IN THE SOUTH, MADE EVEN MORE COMPETITIVE BY RESTRICTIONS ON RAISING WAGES crisis, such as Ireland’s move to back its troubled banks, didn’t seem to damage faith in the euro system.

…and suddenly, again Although a few eyebrows were raised over Greece’s spending for the Athens 2004 Olympics, it wasn’t until December 2009 that the story about the true size of Greece’s sovereign debt broke. Revelations that Greek government debt now exceeded €300bn – a vast amount of money for a population of 10.7 million, 113% of gross domestic product (GDP) and almost double the allowed level – shocked the markets. Initially, however, there was little governmental response. ‘There was a kind of window of opportunity, let’s say in the first six months of 2010, where they could have reacted, but they let that period go. They didn’t do anything,’ says Jorion. As a result, the costs of the bailout skyrocketed, he says, from a few billion to hundreds of billions.

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Rounds of discussions and bailouts followed throughout that year – first with Greece, then with Ireland. Later, Spain, Portugal and even Italy also became causes of concern. Germany did not want an unconditional bailout of Greece and the other broke countries. In a country with an ancestral fear of a repetition of its 1920s hyperinflation, no one wanted to hear about deficit spending – especially to preserve other people’s pensions. At the same time, the Greeks argued that the country was too poor to pay the debt back. There was some speculation that Greece, or one of the other countries at risk of default, might leave the currency union. But with most of the debt euro-denominated, the devaluation game would not be cost-free, either. Nor were deep bond haircuts possible. German and French banks and pension funds were major holders of the Greek debt, so cutting the amount owed could lead

to serious domestic troubles further north, particularly for France, which stood in danger of losing its AAA bond rating. Finally, in December 2011, the eurozone countries agreed in principle to austerity and a programme of fiscal discipline, but many details remain to be worked out. Nor is it clear that the deal will even be adopted. Multiple parliaments will need to approve the plan – and we may even see a few national referendums. ‘The European Council has given us kind of a flavour of where we are going and we are going the German way, and we all know that but implementation risks are huge,’ says Jose Manuel Amor Alameda, a partner at Analistas Financieros Internacionales, a Madrid-based risk analysis agency.

What next? But even as heads of state continue to talk about responsibility and financial discipline, what seems to be happening is the opposite: devaluation. As the European Central Bank (ECB) extends more loans and prints more money, investors are losing some of their faith in the euro.

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Any devaluation has winners and losers. In this case, one of the losers seems likely to be Asia. Higher prices in euro terms will squeeze Asian export margins. A weaker euro will also tend to focus more investment inward, further lowering European foreign direct investment (FDI), which already fell 62% in 2010, the latest year for which figures are available from the European Union (EU). Total global investment has already fallen from €281bn in 2009 to €107bn in 2010, according to EU statistics – only 20% of the €550.5bn where it stood in precrisis 2007. However, aside from the drag on exports and FDI, devaluation does have one positive quality for Asian companies: it makes European companies a bargain. ‘Asian strategy will shift from export to investment in Europe,’ predicts Jagdish Sheth, a professor of marketing at Emory University and author of Chindia Rising (2008). Peter Williamson, a professor of international management at Cambridge University’s Judge Business School, agrees. ‘The Chinese are always looking for a good deal and they’re under quite a lot of pressure from the Chinese authorities not to be seen to be overpaying,’ he says. For fast-growing Asian firms, the prospect of entry into the world’s largest economy and the chance to acquire a smart, technically excellent company will prove attractive – particularly if Sheth is right that Chinese buyers now feel the US is a risky place to make an acquisition. The country has, he believes, become somewhat xenophobic since the 11 September attacks and memories of prior merger rejections linger. But their buys in Europe won’t be indiscriminate. Williamson expects that the Chinese will focus not on access to the market but companies that could be useful in their fast-growing markets back home, such as major energy companies or small technology businesses. Often, he says, targets will be companies that they have worked with for some time.

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In most respects, that’s a good thing for Europe. While governments typically like to talk about a strong currency, a weak one actually has a lot of advantages, at least in the beginning. As the euro declines, imports will become more competitive, boosting demand everywhere in the union from Greece to Germany. With prices at a discount, outsiders – everyone from tourists to investors – will find the world’s largest economy now suddenly on sale. More exports should make things a bit better for European youth, too. Almost 49% of young people in Spain are unemployed, with nearly the same rate among young Greeks. With the odds that long against getting a job, ‘revolutionary’ tends to be high on the list of occupational choices. Overall, ECB figures quoted in a recent Morgan Stanley forecast estimated that a weakening of the euro by 10% in 2012 would add 0.7% to EU GDP in the first year and 1.2% in the second. Plus, the debt itself is devalued with respect to foreign bondholders, reducing the risk of crisis.

Grim outlook Over the long run, however, the outlook is still grim. Spanish analyst Amor believes that the German plan will be implemented, despite the many ways it could flounder: at the moment, there is no alternative. ‘In Spain, the government will get a page with all the things they have to do and they’ll sign it,’ he says. ‘They have no other choice.’ However, Amor doesn’t believe that austerity will be enough to end the crisis. ‘You want a more robust union in terms of fiscal discipline, supervision, sanctions, etc? ‘That’s [all] very well, but at the end of the day, the economies are going to be bleeding. So how long is this going to last until the constituencies start saying, we’ve had enough? And that’s the moment of truth. But that’s probably two or three years down the road.’ Bennett Voyles, journalist

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-AB UK ads.indd 2

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NIGHTMARE OF Whatever happens to the eurozone, one thing is certain: any changes will impact business systems and software hugely


redicting the future is a risky business, but it seems safe to state that the eurozone of the future will not be like the eurozone of the past. How different it will be remains to be seen: Greece or Portugal or even a post-election France could leave, in an orderly or disorderly fashion; a two-tier eurozone could emerge, along with a supereuro currency; and the euro could collapse and push the world into years of depression and economic turmoil. The possibilities, it seems, are limited only by your imagination, or lack of it. If the unthinkable does happen, it could be bad news for businesses inside and outside the eurozone, as various types of contagion seem likely to spread far and wide, and the accountancy profession will have its work cut out dealing with the fallout.

Tip of the iceberg ‘Regulators and businesses will need to take a pragmatic approach,’ suggests Chas Roy-Chowdhury, ACCA head of taxation. He says that even if just one country departs the currency bloc (arguably the least-worst scenario), then changes could be needed to statutory rules for accounting and tax, along with the many computer systems which reflect them; obvious challenges such as revaluing and repricing stock would be just the tip of the iceberg. As a provider of financial products and services, Friends Life has to be particularly diligent when it comes to risk assessment, and it has already considered the implications that many possible euro scenarios could have for its business systems. ‘We have reviewed customers in the eurozone and looked at the policy administration

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systems that feed into finance, because we knew that this was an area where developments could create a lot of work for us internally,’ says Will James, the accountant who is head of finance systems at Friends Life. But various other systems could be impacted too. Which software and systems feel the impact depends on business sector and structure, geographical location, exposure to foreign exchange transactions, and the flexibility, sophistication and multicurrency capabilities of the software and systems in place. The list of possibilities includes accounts production, analytics, bookkeeping, business intelligence, customer relationship management, document management, e-commerce, finance, payroll, project management, treasury, tax and myriad spreadsheets – and not just inside your own business, but elsewhere in the supply chain too. Friends Life has established that some of the systems that could be affected are internal and some are not. ‘We have a lot of price feeds from external providers, and these are outside our control,’ explains James.


‘Companies must not ignore worst-case scenarios, which, though unlikely, could be devastating,’ warns Nuno Fernandes, professor of finance at the International Institute for Management Development in Lausanne, Switzerland. He says that ‘business leaders must realise that there is a threat of the euro breaking up and of several eurozone countries reverting back to their former currencies’, and then consider both the direct and indirect potential impact. Fernandes suggests a seven-step process as the basis for contingency plans (at, and he also has advice for accountants: ‘Assess the impact on the value chain, and develop a scenario analysis of how payment systems, internal control systems, etc, should function. Not having a contingency plan is bad risk management.’

09/02/2012 14:34


UNCERTAINTY Risk-assessing software within the business is easier. Take finance. ‘We have worked with our software provider to look at areas such as the purchase ledger and expenses, and if we need to add or remove a currency, or cancel an original entry and then revalue it, we can do this fairly easily,’ James says. But that doesn’t mean everything could be done overnight. Dean Dickinson, managing director for public sector and enterprise at Advanced Business Software (ABS), explains: ‘Once we know what the tax and accounting rules would be, we could probably make the necessary changes to our software and create the currency conversion tools for our customers within a week.’ That would at least allow the transition process to get under way. ‘After this, customers would need to test all their base data and feeder systems,’ says Dickinson, which could take longer. ‘In some businesses, you could be looking at two or three months’ work,’ he says. There could be more software challenges going forward too, relating to historical information. ‘Outstanding debts in euros may need changing to a new currency and then reconciling, and bank payments systems will have to change to cater for multiple currencies,’ says

Stuart Anderson, director, sales and marketing, at Pegasus Software. Like ABS, Pegasus has plans to support its user base. ‘We would have to work with our customers to develop utilities to allow them to continue to trade, which could become a complex area to develop,’ says Anderson. For businesses using a system without multicurrency features, it could all be a lot more challenging. There are plenty of programs (and gazillions of spreadsheets) that were never intended to deal with more than one currency. So singlecurrency software could create problems for businesses inside any country that leaves the eurozone, and for some of their customers and suppliers in other eurozone countries. ‘If you have opted for a self-build website or low-cost e-commerce option, as a lot of small

businesses have, you may not be able to do multicurrency price lists or sales,’ warns Mike Risley, commercial director at Nolan Business Solutions.

Payroll problems Even software and systems that can deal with multiple currencies, their conversions and any complex triangulation involved may face challenges in areas such as payroll. ‘The conversion of currencies isn’t intrinsically a problem,’ says Iain Moffat, international director of MidlandHR, but ensuring the transparency and fairness of the conversion rates for affected employees could be. ‘A lot of payroll calculations are determined by retrospective detail, such as pay awards,’ he explains, ‘and this is an area that could drive some significant change programmes.’ Software that saw you through the euro’s birth will probably get you through its death, but Gary Turner, managing director of New Zealand software developer Xero, warns: ‘That was an orderly change and both currencies were retained in parallel for a period after the euro’s introduction to assist in the transfer.’ This may not be possible going forward, and who knows how far the contagion might spread? ‘We have scenario plans in place for most eventualities, but no matter what we do a risk will remain,’ says James, ‘because there are too many uncertainties.’ Lesley Meall, journalist

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09/02/2012 14:34


RELIEF IN SIGHT? Vietnam has reached a crucial stage in reducing government bureaucracy, according to the OECD, but it remains to be seen whether simplification of its VAT system will follow


s Vietnam goes through a rapid period of social and economic change, so do the nation’s laws. Tax governance and policy reform are crucial for the development of the tax sector as well as the economy, and they are a rising priority for both local and foreign businesses in the country. But, as lawmakers have set and amended tax law in the country, it has become more complex, particularly for corporates. Vietnam is the second fastest growing economy in Asia, and over the past two decades Vietnam’s tax framework has had to work fast to keep pace with development, while also maintaining budget revenue for the state. Currently, Vietnam relies

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heavily on indirect tax as a key source of revenue. Vietnam’s value-added tax (VAT) system is one of the most complicated, if not the most, in the region. Unlike New Zealand’s goods and services tax (GST), which is considered one of the simplest in the world, Vietnam’s has two methods of declaration: a tax credit method applied to corporates; and a direct method applied to individuals and households. ‘VAT is applied either to actual or presumed turnover. This has a cascading effect as VAT is not able to be claimed as an input,’ according to Tom McClelland, partner and tax leader at Deloitte Vietnam. McClelland has been heavily involved in tax policy

since he arrived in the country in 1998 and contributes to the development of Vietnam’s tax regime.

Traditional trading Around 76.5% of Vietnam’s 90 million people live in rural Vietnam; and 62.5% of the country’s entire gross domestic product comes from rural areas. Until now, the biggest Vietnamese and foreign companies have been in the biggest six cities: Ho Chi Minh, Hanoi, Nha Trang, Da Nang, Hai Phong and Can Tho. Types of industry and business vary but there are countless family run stores and small businesses both in cities and rural areas. In the big six cities there are around 90,000

10/02/2012 10:51


Uniform change: Vietnam’s General Department of Taxation wants 90% of enterprises to use e-tax services

because they have to – it isn’t possible to pay for fresh food from a street stall or market with a debit card. Hoang Vu is a tax consultant with Ernst & Young in Hanoi. He says one of the reasons for the complicated system is the vast use of cash, together with the underdeveloped banking system. ‘Cash is still the most popular means of payment, which means it is easy for suppliers to under-declare VAT-taxable revenue by not issuing invoices to consumers,’ he explains. ‘This causes a lot of difficulties for the government in trying to collect taxes, with complicated mechanisms aimed at controlling and monitoring the output and input invoices.’ The direct method of VAT is complicated and has caused issues for banks and businesses alike, but there was a reason it was introduced. ‘The direct method was no doubt introduced to accommodate the large number of individual, and particularly household businesses, in Vietnam,’ says McClelland. ‘The Vietnam VAT system has been adapted to the local business environment and structure, for example the various VAT rates and the unique

‘A HARMONISATION OF THE VAT RATES TO ONE RATE SHOULD ALSO BE AN OBJECTIVE AND THE GOVERNMENT IS WORKING TOWARDS THIS’ traditional grocery stores, according to Nielsen Vietnam’s 2010 census. Despite rapid changes in the retail landscape with the introduction of modern trade and supermarkets, traditional trade is still predominant. And while the use of debit and credits cards has increased significantly over the past five years (8% of bank account holders had a debit card in 2006 v 43% in 2010 according to Nielsen), Vietnamese people still use cash for purchases. That’s often

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direct VAT method.’ VAT was introduced in 1999 and initially levied at four different rates: 0%, 5%, 10% and 20%, with many discretionary exemptions. It has undergone minor surgery since then, with the government reducing the number of tax rates to three (0%, 5% and 10%) and decreasing the number of discretionary exemptions. But accountants still find the system overly complicated and call for further simplification.

Loc Huu Phan, chief accountant for shipbuilding company Strategic Marine Vietnam, thinks Vietnam’s VAT system must be simplified further: ‘Vietnamese law changes so often, we are very confused about how to apply VAT law. The government tried to overhaul it, but even now the VAT regime is still complicated.’ It’s commonly agreed that complicated tax systems impact the economy negatively. But are there any benefits? ‘There are no advantages in complexity, however there are advantages in more detailed tax legislation where it gives taxpayers more certainty,’ say McClelland. ‘A harmonisation of the VAT rates to one rate (other than 0%) should also be an objective and the government is working towards this. Moving to a threshold system where only taxpayers having turnover over a certain threshold are required to register for VAT as in several other countries, eg Singapore, may be preferable. The New Zealand GST system is probably the purest in the world with one rate and minimal exceptions.’

Less reliance on cash Hoang also agrees more needs to be done. He says a more effective solution would be to encourage the use of electronic payment in transactions and from there, more effectively control transactions in the economy, reducing the complexity in the VAT system. ‘The introduction of the 20 million dong limit for cash settlement with one supplier in one day is the first step,


VAT applies to goods and services consumed in Vietnam. The standard VAT rate is 10% and a lower rate of 5% is applicable to provision of essential goods and services. For exported goods and services, the rate is 0%.

10/02/2012 10:51



Activities exempt from VAT include: The transfer of land use right. Certain credit services, loans, finance leasing, investment fund, capital assignment and securities trading. Medical examination and treatment services. Public passenger transportation by bus. Teaching and training. Life insurance, student insurance, livestock insurance, and types of non-commercial insurance activities. Certain agricultural production. Imports for humanitarian and non-refundable aid. Transfer of technology and computer software. Post, telecommunication and internet services under government programmes. Machinery and equipment and special means of transport which are not yet produced in Vietnam and which are imported by a foreign-invested enterprise (FIE) or business cooperation contract (BCC) parties as fixed assets of the enterprises (see below). Construction materials not yet domestically produced and imported to form fixed assets of a FIE or to carry out a BCC. Goods and services of business with income below a certain threshold. Materials of a FIE or BCC imported to produce products to supply to an enterprise which directly produces products for export.

* * * * * * * * * * *

* * *

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Untraceable: while the use of debit cards has risen, cash is a must to buy from markets but this needs much further progress,’ he adds. Australia’s Monash University recently took up the challenge of trying to simplify the system. James Giesecke and Tran Hoang Nhi of the Centre of Policy Studies managed to create a model which kept tax revenues for the

lack of efficiency in the public service sectors, including in taxation. But since the end of the war in 1975, Vietnam has overhauled its centrally planned economy to a mixed one. More recently, it has instituted radical simplification of the entire public sector along with tax reform. In 2007, the government

‘ONE OF THE KEYS TO SUCCESS IS HAVING A STRONG COORDINATING AND AUTHORITARIAN UNIT AT THE CENTRE OF GOVERNMENT’ government at the same level, but with reduced tax collection costs. It was based on a core VAT simplification that removed all discretionary exemptions and all VAT rates on non-exports equalised at a single revenue-neutral rate – 8.3%.

Leading the way Meanwhile, the General Department of Taxation (GDT) is in the process of reforming the tax system, and is slated to finish in 2020. Ultimately, it aims to improve administrative procedures to the point where Vietnam is a leading South-East Asian country in terms of its tax system. The GDT hopes to have at least 90% of all enterprises using e-tax services; 65% carrying out tax registration and declaration via the internet; and perhaps the most difficult task – 80% of taxpayers satisfied with services provided by tax offices. Vietnam is often criticised for its

launched Project 30, which planned to cut administrative bureaucracy by 30%. As of December 2011 that goal had not been reached, but it has reached what the Organisation for Economic Co-operation and Development (OECD) calls a ‘crucial stage’ in attempting to implement its radical cuts. The OECD believes that one of the keys to Vietnam’s success is having a strong coordinating unit at the centre of government, with backing from senior politicians. Nguyen Xuan Phuc, the minister who led the reforms, is now deputy prime minister. Whether Vietnam will succeed in reducing red tape or further simplify its VAT is yet to be seen. Whether it’s ready to undergo further changes at this pace is another issue altogether. Asha Phillips, journalist

10/02/2012 10:51


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10/02/2012 11:21


inflation watch

With the threat of inflation looming large in Asia, companies would do well to act now to prepare for the challenges – and opportunities – that they could be presented with


o one imagines that Asians will be pushing wheelbarrows full of banknotes to the grocery store any time soon, but inflation is heating up enough for some finance experts to warn that companies should start taking it into account in their strategic planning. Although the biggest emerging Asian economies may be somewhat protected by various kinds of capital restrictions (such as strict loan-tovalue limits on mortgages in China), and generally strong sovereign cash positions, experts say that many Asian companies may still face some serious inflation risks in the near future. So how do you prepare? While most Asian executives have dealt with rocky macroeconomic reversals at one time or another, most people familiar with the sustained inflation of the 1970s are now long retired. To try to figure out the best response, some economists and consultants are now dusting off 30-yearold playbooks to look for guidance. Here are their top recommendations:

1 Don’t wait until it hurts

As with most preventative measures, the time to prepare for inflation is before you think you’ll need it. ‘It’s a sweet poison,’ explains Ulrich Pidun, a principal in the Frankfurt office of The Boston Consulting Group (BCG) and co-author of two papers on inflation. ‘You don’t feel the threat because it feels so nice at the beginning.’

In an inflationary environment, the first symptom tends to be a strong growth in sales. If some of your costs, such as labour, aren’t climbing as quickly, this can seem like a real gain,’ says Pidun. Only later will your costs begin to creep up – and if they start to outstrip your ability to raise prices, your margins will suffer and you could find yourself in a serious bind. Squeezed margins are already taking their toll in China, where thousands of factories shut in 2011. ‘A consolidation is taking place in the market, with better run and better capitalised players grabbing market share and becoming volume players,’ says Shaun Rein, managing director of the China Market Research Group and author of The End of Cheap China.

2 Keep costs down

Theoretically, it makes sense to take on more debt just before an inflationary period, on the expectation that those debts will be cheaper to pay off down the line. However, BCG research has found that companies that carried high leverage in the 1970s actually tended to suffer in the stock market. Lack of cash can reduce flexibility at a time when you need it most, Pidun argues. ‘Your debt becomes cheaper in real terms, but the more important effect comes from whether or not you can afford to do your investments that are required. In this sense, having debt is negative because you may forego certain attractive investments just because you

‘wage inflation is a huge issue at the moment. unless it’s curtailed you could see companies struggle and even fall over’

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cannot pay for it, because asset prices inflate as well during inflation.’ BCG argues instead that the better policy is to try to cut costs as much as possible, giving the company more flexibility to handle inflationary pressures later on. Certainly, companies look for possibilities in writing long-term contracts that reign in costs, finding instruments to hedge rising materials costs, and in looking for ways to hold down labour expenditures. In China, rising wages are seen as a key component of inflation, rising so quickly that many companies are nearing a crisis point. ‘Wage inflation is a huge issue at the moment and actually it’s getting to the stage where unless it’s curtailed you could start to see companies struggle and even fall over,’ says Russell Brown, managing partner of LehmanBrown, an accounting and business advisory firm specialising in Chinese companies. This is not only an issue in China. A recent survey by Vietnamese employment agency Navigos Search found that in 2011, more than 70% of managers and executives, and 68% of general staff, saw raises of at least 11%. As a result, some Chinese companies are doing what developed countries did 10 years ago and outsourcing their work to China – western China, that is, where wages are lower and the government is offering tax incentives until 2020 to employers who open new factories and facilities. In general, although the recent trend has been towards making more costs variable, in an inflationary environment, it is better to try to create more fixed costs, Pidun says.

09/02/2012 14:33


Just how serious might those rises be? One key component to watch is where the dollar is trading. A study by Steve Hanke, a professor of applied microeconomics at Johns Hopkins University, found that 50% to 60% of the volatility in most commodities ties back to movements in the dollar. As most major commodities trade in dollar terms, any decline in the dollar will serve to drive up the price of the commodity. But don’t expect Asia to try to diversify out of the dollar any time soon. Hanke says that reserve currencies typically last a very long time. ‘The average life of these things has been over 300 years each. It’s very hard to challenge a dominant world currency,’ he says.

becoming an issue, says Hanke – not just because of fuel costs but because long sea voyages can expose cargo owners to shifts in cost and more expensive trade financing. Growth in receivables may be even more dangerous. For example, if a company with US$1bn in sales grows by 5% a year, it will need US$50m more in working capital. However, if inflation is climbing at 10%, even if the economy is still moving, working capital is suddenly US$150m. ‘This can really pose a problem if you don’t have the cash to finance it. You may forego certain contracts or you may forego certain investments that you just cannot afford anymore,’ Pidun says.

3 Squeeze your working capital

4 Forget your instincts

If raw material prices rise consistently, companies may start to hoard to protect themselves from further increases. But more inventory in the warehouse translates into more money tied up in working capital – and that can make the company much less efficient. Shipping is also

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Inflation creates an economic situation so different from the ordinary that it can be difficult even for professionals to come to terms with its full implications. The most common mistake is to think in nominal values. For example, some researchers have theorised that although

stocks are supposed to be a good hedge against inflation, they actually did not perform well because analysts made a mistake in how they evaluated cashflows, according to Hersh Shefrin, professor of finance at Santa Clara University’s Leavey School of Business. ‘They didn’t adjust future cashflows appropriately for inflation but they did adjust the discount rates for inflation,’ Shefrin says. ‘In a highly inflationary environment, what that does is it penalises future cashflows very heavily.’ Management experience may also introduce biases into your understanding. ‘People ignore historical evidence from either before they were born or before they were paying attention,’ Shefrin says. ‘People who were around during the 1970s will tend to forecast higher rates of inflation than people who came of age in the 1990s.’ This kind of systematic bias even holds true for professionals. All through the 1980s and 1990s, when inflation began to decline, economists kept missing the fact that inflation was slowing down. ‘Throughout the 80s and early 90s you could almost predict the size of the error in the announcement of the [Consumer Price Index] based on the inflationary forecasts done by professionals because they were

09/02/2012 14:33


consistently off by about the same bias,’ Shefrin says. ‘It’s not that people don’t learn, it’s just that they don’t learn quickly,’ says Shefrin. ‘They learn slowly and sometimes painfully.’

5 Set your pricing strategy

Most of all, you will need to reconsider your pricing strategy. The most defensive strategy of course – and the one most often recommended – is to try to keep pace with inflation, but this is not the only option. In Europe and the US, some packaged food companies have maintained prices but reduced the amount of food in the package. Other, more inventive solutions may also be possible. There may be an opportunity for a new business model that can give the buyer a greater perception of control, such as the Bristol-Siddeley aircraft engine ‘power-by-the-hour’ model, a 1965 innovation by the British engine company that leased running time rather than equipment itself, making it easier for the leasing company to forecast prices. Inflation can even be an opportunity for a producer with a lower-cost structure, who may want to hold on tight and force the higher-priced competitors out of the market. But even if your company is not in a position to do this, it is something to be wary of, given the propensity of Chinese companies to wage highstakes price wars when they see an opening.

Conclusion – stay alert In the East, there is little room for error. Restructuring tends to be difficult to arrange outside the major cities, Brown says, and little financing is available to do this. ‘There’s a reasonable amount of capital sloshing around, in terms of venture capital and private equity firms, but there’s a limited amount of capital around for restructuring or transformations,’ he says.

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Private equity firms are now spotting opportunities in the tighter credit conditions, says Henry Ong, a mergers and acquisitions (M&A) lawyer for Weil Gotshal & Manges in Hong Kong. With the slowdown in the initial public offerings (IPO) market, many young companies are feeling the pinch as impatient investors look to cash out – creating an opening for private equity. Accountancy firms may be even luckier, with any change in the business climate a potential opportunity. Russell Brown, managing partner of LehmanBrown, plans to open three new offices in western China over the next three years, as more coastal firms move inland in search of lower wages. He is also looking to expand the firm’s expertise in turnaround management. As for wage inflation, bad news for the profit and loss account is good news for the personal balance sheet, particularly for executives. A survey by global executive search firm Russell Reynolds Associates found that compensation for executives in India and China continues to rise more than 12% a year. The study also suggested that this may be a good time to move to developed world multinational corporations (MNCs); with the differential between expat and local packages eroding, MNCs may be more likely to up their bid.

Of course, economic forecasts are far from exact; as one old joke puts it, economists have predicted nine out of the last five recessions. Yet the difficulties with sovereign debt and government revenue shortfalls all over the world suggest that the odds are good that there’s inflation in your future. However, if inflation does stop suddenly, it always ends in a recession, according to Pidun. At that

point, the tactics need to change again. While free cash is still going to be welcome, companies typically need to hit the brakes. ‘Just as the beginning of an inflation is very favourable for consumption, the end of an inflation is very dangerous for it,’ Pidun says. Instead, think about reducing capacity, preserving cash and identifying distressed competitors you may be able to take over. Bennett Voyles, journalist

09/02/2012 14:33


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06/02/2012 10:47

10/02/2012 11:27



The EU is to relax its disclosure rules for micro companies, but ACCA’s John Davies questions whether the developments will lead to tangible benefits


our years after the idea was first proposed by the European Commission, the EU has finally agreed to introduce new, slimmed-down accounting rules for Europe’s ‘micro’ companies. Under a compromise agreement between the European Parliament and member states, disclosure relaxations for the estimated 19 million such companies in the EU are set to come into effect over the next two years. Since 1978, all limited liability companies in the EU have had to comply with the requirements in the EU’s Fourth Company Law Directive on the form, content and publication of annual accounts. All national laws governing these matters derive from the requirements of the directive. There have for many years been derogations from the standard rules for small and medium-sized enterprises (SMEs), but no further special treatment beyond this for very small entities. With the new agreement, which technically amends the Fourth Directive, member states can provide for additional exemptions for companies that meet two out of the following three criteria on their balance sheet dates: turnover not exceeding €700,000 balance sheet total not exceeding €350,000 average number of employees in the financial year not exceeding 10. Member states will be able to choose to exempt micro companies in their

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jurisdictions from a number of current provisions, including: the requirement to include in their balance sheets ‘prepayments and accrued income’ and ‘accruals and deferred income’ the requirement to prepare notes to the accounts, provided that information on guarantee commitments, loans to directors and acquisition of own shares (in all cases if appropriate) is included at the foot of the balance sheet the requirement to prepare a directors’ report. They will also be able to permit micro companies to adopt streamlined formats for their balance sheets and profit and loss accounts, showing, in the latter, only figures for turnover, other income, cost of raw materials and consumables, staff costs, value adjustments, other charges, tax and profit or loss. The amended directive states expressly that a set of accounts drawn up on this basis will be regarded as meeting the core test of giving a true and fair view. Arguably the most interesting of the exemptions is the option to exempt micro companies from the obligation to publish annual accounts. Strong political pressure had been exerted, primarily by Germany, to spare micro companies what was presented as the ‘burden’ of publication. Under the amendment, member states may exempt micros from the existing

* *


publication requirement. But this must be on condition that the company’s balance sheet, complete with any required supplementary information, is filed – ie not necessarily published – either with the country’s designated companies register or else with an alternative official authority designated by the country concerned (which could conceivably be the national tax authority). If the member state chooses to require filing with an alternative authority, then that authority will be required to ‘provide’ the register with the information filed. This form of words opens up the possibility that the information filed by individual micro companies will not routinely be placed on the public record. Companies registers will need to record the information filed or otherwise provided, but will not be obliged to then make it available for public inspection, as is the case at present. The alternatives open to member states are therefore either to choose to retain the existing practice of publishing micro-company accounts and making them available for public inspection, or to require registries to make micro-company accounting information available only on request. The impact of the new amendment will be less than it would have been under earlier proposals from the Parliament, which would have exempted micro entities from reporting obligations altogether. Under the

13/02/2012 10:27


ARGUABLY THE MOST INTERESTING OF THE EXEMPTIONS IS THE OPTION TO EXEMPT MICRO COMPANIES FROM THE OBLIGATION TO PUBLISH ANNUAL ACCOUNTS compromise, micro companies will still be required to prepare accruals-based annual accounts which give a true and fair view, and while it may become more difficult for searchers to access accounting information on very small companies, especially if they want to

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do this on a cross-border basis, they should still be able to do so. The agreement having been made, the ball is now in the court of the 27 member states. Each will decide whether they want to take advantage of the new exemptions at all and, if they

do, which they wish to take up. Throughout the process of consultation and debate on this issue, ACCA has queried whether any tangible benefits would actually ensue from stripping down disclosure rules in the way proposed. In the current economic climate, however, it seems likely that most EU states will see this as an opportunity to show their domestic SME sectors that they are serious in tackling business burdens. John Davies is ACCA’s head of technical

10/02/2012 10:53


STILL ESSENTIAL But more is needed to make the annual report truly fit for purpose, says ACCA’s Ian Welch


ome debates, it seems, go unresolved for years despite their importance. The future of corporate reporting is one. It is now more than five years since the leaders of the biggest six accounting firms declared that the reporting system was ‘broken’. They called for quarterly static financial reports to be replaced by real-time reporting, bringing in a much wider range of performance measures. And they argued that more non-financial information, customised to the user and more easily accessible, would have to be issued by companies as part of a process of bringing corporate reporting into the digital era. In many ways, of course, 2006 seems like a different world. Postglobal financial crisis, the pressing issues for companies have moved on from the boom days, and debates on financial reporting may not be top of the immediate agenda for many. But with more pressure than ever on corporate performance, ACCA recently took another fundamental look at whether the time and effort that still goes into company reports is justified. We surveyed 500 investors and other users in the UK, US and Canada to see whether their views on the usefulness of the annual report had changed since the global financial crisis broke.

More scrutinised than ever Given the resource they expend on the annual report, companies may find it reassuring that 50% of respondents still named the annual report as their primary, or indeed only, source of information about a company. Clearly, those who argue that the traditional annual report no longer has any value

INT_F_annualreport.indd 36

are guilty, at least, of exaggeration. In fact, a majority (57%) of users said they now tended to read reports more carefully than before the crisis. Nonetheless there were many criticisms of annual reports: 47% said they were too long; 40% too general to be useful; and 35% backward-looking. In addition, 35% said reports were too complex, with more than two-thirds of them blaming reporting standards, as well as legal requirements, for making

50% OF RESPONDENTS STILL NAMED THE ANNUAL REPORT AS THEIR PRIMARY, OR INDEED ONLY, SOURCE OF INFORMATION ABOUT A COMPANY them so. This follows the pattern of previous research (in a 2009 ACCA report, Complexity in Financial Reporting, respondents clearly indicated they found International Financial Reporting Standards overly and unnecessarily complex) but suggests standard-setters still have much work to do. Discouragingly, more respondents disagreed than agreed that information provided in annual reports was clear and concise. This is worrying given that the issue of clarity was rated highly in the survey. Is this just the poor state of reporting practice or is the format of the report itself causing the problems? Either way it is an indictment of the current state of reports, given that so many respondents still rely on them. So what did the users want to see? The biggest single answer (71%) was enhanced reporting on risks, which may not be surprising but is definitive nonetheless. A clear statement of a company’s key risks and how it intended to mitigate them was the

most pressing issue. Regulators such as the UK’s Financial Reporting Council have put this at the top of their agenda – a wise move, our study would suggest. The FRC’s ‘cutting clutter’ initiative to reduce the amount of nonessential material in reports would also appear timely. Despite standard-setters asserting that investors are the primary audience for the annual report – a view that ACCA would strongly endorse – there was still a belief that the variety of audiences using the report had led to a lack of focus by companies. And, more worryingly, just as many respondents disagreed as agreed that standards themselves encouraged companies to provide a correctly balanced view of their performance – ie to include bad news as well as good. Almost half the respondents believed too much promotional material had crept into annual reports, undermining the concept of neutrality that must underpin any meaningful report.

08/02/2012 13:18



57% I review the annual report more carefully than before 21% Preliminary results still effectively guide my assessment 18% I still use other sources 4% I now read the annual report, where I did not previously


50% 17% 9% 8% 5% 4% 3% 3% 1%

Annual report Media/press reports/Google searches Recommendations from personal contacts Investor briefings/company prospectus Interim report Liaising with board members directly Liaising with investor relations team directly Other Preliminary announcement



There were some interesting findings in terms of ‘emerging issues’. Notably, while the value of social and environmental data had declined in immediate importance for many investors, the advent of integrated reporting appeared to bring genuine hope of reversing this trend. Including such information in an integrated report (IR) would add value, most said. This finding will encourage the International Integrated Reporting Committee (IIRC) as it tries to deliver an IR framework by the end of 2013. A move closer to more timely information was also favoured by most, indicating that the 2006 aspirations of real-time reporting are still valid even if not enough has happened over the past five years to take them forward. The report was used by many respondents in conjunction with other sources such as quarterly reports, brokers’ reports and press releases. ACCA believes the profession needs to address how such information – especially given the emergence of social and mobile media platforms offering immediate data – can be assured. This might be key to the future of corporate reporting. But in the meantime, what conclusions should we draw? First, investors should be repositioned as the primary audience for the report and be better engaged in its evolution. Second, more emphasis on risk and forward-looking information is needed. And third, a determined effort to prune and simplify annual reports would help all stakeholders. ACCA’s study Reassessing the Value of Corporate Reporting is available at www. Ian Welch is ACCA’s head of policy

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08/02/2012 13:18



Just another day at the races… [

The proposal to modify US GAAP in the interests of private companies has people worried that the country will be saddled with a whole stable of reporting standards frameworks, says Ramona Dzinkowski

Bob Herz, former chairman of the US Financial Accounting Standards Board (FASB), always referred to working on joint projects with the International Accounting Standards Board (IASB) while developing US GAAP as ‘riding two horses’. Now with the proposal for modifying US GAAP for private companies, the FASB could be looking at riding three or more: International Financial Reporting Standards (IFRS), US GAAP, IFRS/US GAAP in transition – and US Private Company GAAP. Last October, the Financial Accounting Foundation (the independent organisation that oversees and administers the FASB in the US) released its plan for improving/ modifying GAAP in the US for private companies. At its core, the plan proposes to create a new body, the Private Company Standards Improvement Council. The council would identify US GAAP standards that require modification, and vote on specific proposed exceptions or modifications that would then be subject to ratification by the FASB and submitted for comment. The rationale behind the proposal was that the FASB was not as responsive as it should be to private company needs, so a new entity with more muscle than the existing Private Company Financial Reporting Committee should be created to represent this group to the board. The proposal seems clear enough, mainly addressing due process for examining how US GAAP could be modified to better support private companies. But with the comment period having closed in January, we again see that

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in the world of accounting, things are not always as they seem. Some are worried that the proposal implies a reduced role for the FASB in potentially modifying US GAAP for private companies, and fear the

rise of a two-GAAP system in the US. Ultimately their concern is that two GAAPs would reduce comparability between the financial statements of private companies, as well as between the financial statements of private and public companies. On the other side of the spectrum, if the FASB does have the final say in revisions to private company GAAP, as suggested by the proposal, how authoritative will the new council be? Is a council still subject to the FASB’s blessing really new? Isn’t it pretty much the same as the Private Company Financial Reporting Committee that currently exists at the FASB, with an expanded terms of reference? And here’s more to thicken the plot. Let’s assume the US follows the ‘condorsement approach’ of IFRS adoption considered by the Securities and Exchange Commission (SEC), whereby the IASB will be the standard-setting body for the US, with the FASB having a supporting role. Will private companies also have to follow condorsement, or could they adopt US GAAP, or IFRS for SMEs as written by the IASB? Or will the Americans take the Canadian path and create a made-at-home solution by essentially developing a new private company GAAP altogether? At this point it’s too hard to tell who will have the ultimate say in the GAAP that US private companies will use in future: the FASB, the new council, the IASB or ultimately the SEC. It’s certainly too complicated a puzzle for the untrained eye. How many horses would the US be riding then, Mr Herz? Ramona Dzinkowski is a Canadian economist and award-winning journalist

08/02/2012 13:18

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07/02/2012 14:56



What they really want


In an age of information, the annual report remains a key tool for investors. So let’s make it better, says ACCA president Dean Westcott

After all the effort that accountants put into preparing and validating annual reports, there is sometimes a feeling that the intended audiences do not read them carefully and in some cases never even open them. Yet a recent ACCA survey of 500 investors, capital providers, suppliers, customers and report preparers in the UK, the US and Canada found that stakeholders do value the annual report. Half cited it as their primary source of information about a company, and over a third saw it as an easy way to assess information on a company. It all suggests that the annual report has become more important since the financial crisis, with users reviewing reports more carefully than at any time. But that closer scrutiny has brought with it some key issues for all finance professionals who prepare reports. The report, Re-assessing the Value of Corporate Reporting, suggests that for all their usefulness, annual reports are being held back by confusion over their different audiences, their complexity and their lack of timeliness. Respondents say there is a need for a greater focus on forward-facing plans, risk management and the effective integration of these and other issues into the report in a more coherent way, with investors positioned as the single most important audience. Nearly half also said too much ‘promotional material’ had crept into reports; 47% added that reports were too long, 40% too general purpose, 35% too backwardlooking and 35% too complex (68% of whom blamed reporting standards and 61% legal requirements). Even more important is what users actually wanted to see in reports. More than two-thirds wanted more on risks that could affect company performance, and how the business planned to manage or mitigate key risks. And while many respondents noted a drop in interest in social and environmental information, they also welcomed a move to integrated reporting as a way of reviving the value of this data to them. There are challenges here: respondents say that reports need to be simplified, written with investors in mind, and more forward-looking and risk-aware. But these challenges also present huge opportunities for us to ensure that report users not only engage with the reports we produce, but get the answers they really want. Dean Westcott FCCA is finance director of Hinchingbrooke Hospital in Cambridgeshire, England

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08/02/2012 13:17



Baker Tilly International increased its revenues by 5%, to US$3.2bn, in the year ending June 2011. The highest growth rates were in consulting, which grew by 21%; accounting, which rose 15%; and tax advisory, which grew by 7%. The auditing practice revenues fell by 7%. The biggest growth was in Asia Pacific, where revenues increased by 40%, to US$490m, and Latin America, which grew by 24% to US$70m. Revenues grew only 1% in North America, to US$1.54bn, and they fell in the Europe, Middle East and Africa region by 1% to US$1.12bn. Geoff Barnes, president and CEO of Baker Tilly International, said: ‘We have delivered robust results in what is a difficult global environment… Our results accurately mirror the economic environment in which our clients are operating, reflecting a two-tier recovery with different regions moving at different speeds.’

The view from: Zambia: Chilala Banda ACCA, senior manager, Grant Thornton Q What are your top priorities each day? A It’s all about planning, not just with achievement, but my own personal targets in mind. I also have to make sure the people in my team are out of the door in plenty of time to get to assignments if they’re working at clients’ offices. Q How has the way clients rely on their accountants been changing? A Our clients want our opinion on areas where they can make savings or, conversely, increase returns on their investments and business activities. It might be that we identify better financial controls or ways to improve efficiencies – but whatever our input, we deliver as business advisers, helping them anticipate and meet challenges. Q How should professional services firms approach talent attraction and retention? A I believe one of the most important aspects of working is having a strong sense of belonging, especially if you’re expected to add value. Firms with proactive mentoring policies – partnering good people with senior managers – are more likely to appeal to the most talented professional individuals, and to hold onto them as they develop.


Deloitte has established a new member firm in Ulaanbaatar, Deloitte Onch LLC, after Mongolian professional services firm, Onch Audit, joined Deloitte’s international network. Deloitte said the expansion was important, given Mongolia’s position as one of the world’s fastest-growing economies, backed by significant natural resources. It will also add benefit to the Deloitte Global Mining Industry team. The new member firm will continue to be led by founder Onchinsuren Dendevsambuu, a former senior auditor at Arthur Andersen and Ernst & Young in Ulaanbaatar and Moscow.

INT_YPRAC_Intro.indd 41


41 Practice The view from Chilala Banda of Grant Thornton; potential problems with mandatory auditor rotation 45 Corporate The view from Susana Jardim of Woodside; fulfilling the potential of shared services and outsourcing; behind the scenes with ACCA members at Royal Dutch Shell

Q What career advice would you give newly qualified accountants? A It is tempting to seek a higher salary but there’s more to life than money. Instead of an impulsive move, assess your working environment to determine what you might gain by acquiring more experience there before moving on. Q How do you keep a work-life balance? A My work requires me to put in the hours during the week, and sometimes spend time away from home. I make an effort not to work at weekends, preserving that time for family and church.


Office locations: Lusaka, Kitwe Zambian firm: Six-partner practice, part of Grant Thornton International

10/02/2012 13:06



The problem with rotation… In the wake of reporting catastrophes, the PCAOB is proposing mandatory auditor rotation in the US. But is this a solution in search of a problem, asks Ramona Dzinkowski Since the early 1970s, auditor rotation has been the subject of some debate in America and elsewhere. With the recent financial market crises, the topic has again reached the public policy domain with the US Public Company Accounting Oversight Board’s (PCAOB) Concept Release on Auditor Independence and Audit Firm Rotation on 16 August 2011. At that time the PCAOB reported that, for the largest 100 companies (based on market capitalisation), auditor tenure averaged 28 years, and 21 years for the 500 largest companies. According to PCAOB chairman James Doty, the main reason to consider auditor term limits is that ‘they may reduce the pressure auditors face to develop and protect long-term client relationships to the detriment of investors and our capital markets’. More specifically, the release states: ‘By ending a firm’s ability to turn each new engagement into a long-term income stream, mandatory firm rotation could fundamentally change the firm’s relationship with its audit client and might, as a result, significantly enhance the auditor’s ability to serve as an independent gatekeeper’ (PCAOB Release No. 2011-006, page 9). In the concept release, the PCAOB, while indicating that improvements in the rigour of inspections and the remediation process have improved audits, expressed concerns about both the frequency and the type of audit deficiencies it continues to find. For example, in its inspections of the largest accounting firms from 2004 to 2007, it noted: ‘Inspectors continue to find deficiencies in important audit areas, both established and emerging. These areas include critical and high-risk parts of audits, such as revenue, fair

INT_YPRAC_rotation.indd 42

value, management’s estimates, and the determination of materiality and audit scope. These deficiencies occurred in audits of issuers of all sizes, including in some of the larger audits they reviewed. In some cases, the deficiencies appeared to have been caused, at least in part, by the failure to apply an appropriate level of professional scepticism when conducting audit procedures and evaluating audit results. In addition, even in areas where inspectors have observed general improvement, deficiencies continue to arise.’ In particular, the PCAOB noted that the audits in which inspectors faulted the firms’ application of professional scepticism and objectivity included ‘some of the larger audits inspected’ (pages 5–6). With this in mind, the release focused on the role of mandatory auditor rotation in improving independence and objectivity in audits, and asked for feedback on the following key issues, among many others: Will rotation significantly enhance auditors’ objectivity, professional scepticism and ability and willingness to resist management pressure? What effect would a rotation requirement have on audit costs? Would a periodic ‘fresh look’ at a company’s financial statements enhance auditor independence and protect investors? If the Board decided to move forward with the proposal, what would be an appropriate term? To what extent would a rotation requirement limit a company’s choice of an auditor? With the comment period closing in December, we see the balance of the argument in the ‘nay’ camp, with the majority of corporate respondents decidedly against mandatory rotation.

* * * * *

More specifically, they suggest that in today’s complex environment a deep level of knowledge around a company and its industry, its operations and financial history is mandatory in conducting an effective audit, which calls into question the wisdom of shortening engagements. Under these circumstances, rotation will result in less effective audits, not the other way around. For example, says Douglas Muir, CFO of Krispy Kreme Doughnut Corporation, ‘Forced rotations may remove valuable institutional knowledge from the audit process precisely when the audit committee believes that such expertise is necessary for the protection of investors and other users of financial statements.’

Cost concern Also, at a time when the US economy is still struggling to regain its economic footing, costs are the biggest concern, with rotation potentially significantly increasing audit fees and related expenses. As Scott Kuechie, executive vice president and CFO of Goodrich Corporation, explains: ‘The cost of the audit would most likely increase significantly as more audit hours would be required to learn the accounting and processes at the new client. Likewise, the cost of client support would also increase to support the auditors.’ Therefore, he concludes, ‘We do not believe that the benefit of mandatory auditor rotation would exceed the cost.’ And what do the auditors have to say about mandatory rotation if in fact there is an opportunity to increase audit fees? This time, the auditors seem to be decidedly in agreement with corporate America. More specifically, Deloitte and Touche (the only Big Four firm to have responded in writing to the proposal) makes clear that they really don’t think auditor rotation will cut it when it comes

09/02/2012 14:35


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to ‘increasing auditor independence, objectivity and professional scepticism’. CEO Joe Echevarria, commenting on behalf of Deloitte, concludes the following based on ‘an objective assessment of the literature on mandatory rotation’: Research studies show that restatements and frauds are less likely to occur with longer auditor tenure. The majority of studies on mandatory rotation reach an unfavourable conclusion on the balance between costs and benefits. If mandatory rotation were required at the 500 largest US companies, a 10-year phase-in process would entail 50 auditor changes every year compared to the recent average rate of five per year. The economies and capital markets of countries that have adopted mandatory rotation are not directly comparable to those of the US. Some countries that have adopted the policy have discontinued or curtailed it. Research that is available tends to be unfavourable on the effects of mandatory rotation.

* *

on the part of the auditor’. Hanish suggests that in place of mandatory rotation the PCAOB considers further limiting the scope of non-audit services the audit firm can provide to its audit clients. In particular, he calls for the PCAOB to be more prescriptive on all other non-audit services that can be provided, potentially limiting all advisory services. ‘We believe,’ he says, ‘that action in this area may address the PCAOB’s concern that the auditors are attempting to maintain good client relationships at the expense of performing a quality audit to engage in more lines of business and provide additional services to the company.’ Other observers, like Richard Hawley, CFO of Nicor, also suggest that audit rotation answers nothing. Having been


At the end of the day, would shorter engagements have prevented some of the reporting and assurance catastrophes of the last two decades? Arnold Hanish, CFO of Eli Lilly, calls into question any relationship



Sarbox sufficient? Finally, as to the need for the PCAOB to explore extra rules around auditor independence, others suggest that Sarbanes-Oxley has actually covered it off quite nicely. Says Robert C Greving, chairman of the audit and enterprise risk committee of CNO Financial Group, a $32bn holding company: ‘The rules put in place by the SarbanesOxley Act charge the audit committee with the selection and oversight of the audit firm... We believe the audit committee is in the best position to evaluate whether the auditors are independent and objective and whether it is in the best interests of the shareholders to initiate the process of selecting a new firm.’

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between audit failure and audit tenure outlined in the PCAOB release: ‘We are not aware of any relevant data or evidence linking lengthy audit firm tenure to audit failures. In the release, the PCAOB attempts to draw a line between the numbers of audit failures identified as part of their inspection process and the tenure of the audit firm. In evaluating this relationship, it is important to note that the sample of audits that the PCAOB inspects is not a representative sample as a risk-based approach is utilised so that the board can focus their review on the most errorprone situations.’ He concludes that the evaluation of this topic as a concept release is ‘premature without the existence of any factual data to establish a clear link between mandatory audit firm rotation and increased independence, objectivity and professional scepticism

on both sides of the situation (as an audit partner, a Fortune 500 and 1000 CFO and chair of a public company audit committee), he is ‘very concerned that consideration of mandatory rotation of audit firms is a wonderful theoretical solution looking for a non-existent problem’. Furthermore he questions the need for yet more government intervention in corporate business. ‘My issue with the proposal are many,’ he says. ‘First, it presumes the company boards and management...are not capable of selecting firms that will live up to professional standards, and are in need of government assistance in making a change when necessary. I don’t believe there is any significant evidence to suggest that is the case.’ Ramona Dzinkowski is a Canadian economist and award-winning journalist

09/02/2012 14:35


SA BANKS FEAR RISING FRAUD Fraud and criminality are major anxieties for South African banks, rating much more highly as causes for concern than for banks in other countries, according to PwC’s global Banking Banana Skins report, conducted by the Centre for the Study of Financial Innovation. However, PwC – which consulted seven South African banks – found the country in a stronger state than its counterparts in much of the world. Tom Winterboer, financial services leader for PwC Southern Africa and Africa, said: ‘South Africa’s banking sector has held up well in the face of the global financial crisis of 2008. This is largely due to tight regulation, good governance and being well capitalised.’ Based on over 700 responses from 58 countries, the survey identifies high-level issues where the banking industry may be vulnerable.

SOCIAL VALUE SHOULD BE NOTED More than three-quarters of private sector leaders want their corporations judged by their social value, according to a Deloitte survey conducted by the Economist Intelligence Unit. It found that 76% believe the value of a company should be measured by the contribution its core business makes to society, as well as by its profits. Some 73% believe that their core business activities do make a positive contribution to society. Eighty-two per cent said their organisation had a statement of ‘societal purpose’, yet only 25% thought that this was well known by customers, consumers and clients.

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The view from: Australia: Susana Jardim ACCA, project accountant, Woodside, Perth Q What are your top priorities when you start work each day? A I always print out my diary and get the more straightforward emails out of the way. Q How do finance professionals in energy contribute to corporate performance? A My role focuses on production finance; supporting management and budget-holders so that they can make sound decisions, understanding and navigating round spending implications for their own areas of responsibility and the wider business. Most oil and gas projects demand rigid financial discipline, a robust, calculated approach to risk and timely information that anticipates business needs. Q What challenges do Australian oil and gas companies face in the current economic climate? A Meeting substantial demand from new and growing Asian export markets is placing strain on the country’s exploration and production capacity. Sustainability issues add another dimension; energy companies have to continually produce highly valuable commodities while safeguarding the environment and communities.

45 Corporate The view from Susana Jardim of Woodside; fulfilling the potential of shared services and outsourcing; behind the scenes with ACCA members at Royal Dutch Shell 41 Practice The view from Chilala Banda of Grant Thornton; potential problems with mandatory auditor rotation

Q How easy is it for you to maintain a work-life balance? A Managers here recognise that a happy, healthy workforce is productive and motivated. Taking a lunch break isn’t frowned on. Q How do you unwind? A I’m a keen astronomer. Viewing the night sky instils a sense of perspective.


Lives: Perth Educated: Murdoch University Former roles: Trained as a capital business adviser with Alcoa World Alumina Minerals; management accountant with AngloAmerican

10/02/2012 13:06



Getting into gear In the second part of his series, ACCA’s Jamie Lyon says that more ambition and better change management are needed to fulfil the potential of shared services and outsourcing Shared finance services and outsourcing have been a significant success, driving down the cost of finance operations through labour arbitrage, stimulating processing efficiency and ticking the finance standardisation box. They have also helped to ensure consistency and to leverage IT to deliver benefits. But, according to professionals working in the field, finance transformation through shared services and outsourcing has not yet had a significant impact on broader business performance, and there is much untapped potential. These are some of the findings in ACCA’s recent report, Finance Transformation: Expert Insights on Shared Services and Outsourcing, which features commentary from 20 world-leading experts in the shared services and outsourcing space. It considers fundamental questions about how CFOs and finance leaders are evolving the finance function to drive down its cost and improve efficiencies, and, critically, how they are seeking to raise the effectiveness of finance as a partner to the business. Other advantages of shared services and outsourcing cited in the report include better governance and control as improved standardisation has delivered greater levels of transparency over finance operations. Our experts agreed that headway had also been made in getting better information

across the business to help decisionmaking and performance measurement. In many respects, the tactical aspects of finance shared services and outsourcing are now well established


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and delivered. The model has continued to evolve with the emergence of centres of excellence to house typically specialist finance responsibilities such as tax and treasury, complemented by an overarching governance-type function which brings together the constituent parts of the finance model to make it all tick along nicely – in theory. So far, so good, but the conclusion from the report is that much more can be done. Much more value could be added by evolving the finance function further and optimising its structure to unleash new levels of business benefits and make an impact on broader business performance. So why is it that transformation initiatives to date have not always delivered on their promises? First, the report suggests that it is about the ambition of finance leaders and the capability of organisations to successfully deliver on the enormous change programme that is required. Levels of transformation ambition vary. Some finance leaders see finance transformation as a means to transform the business too, rather than simply stopping at a better finance function. Other finance leaders take a slightly different perspective, seeing transformation through shared finance services or outsourcing primarily as a ‘functional finance’ fix. To this end clients differentiate between the capability of providers, seeing some as well placed to help drive business and not just finance solutions. At the heart of transformation success, however, is change management. The so-called ‘softer stuff’ continues to be the greatest impediment to achieving the goals of finance transformation through shared services and outsourcing.

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VIEW FROM EY: *JAMES MEADER, PARTNER Graham Russell, director of business process outsourcing at WPP Group, says: ‘In all these finance transformation journeys, the hardest part is always change management. People don’t know what they don’t know. And it’s never easy to take people on this journey when they don’t know where they are going, and they are not quite convinced because the function works today and has worked for a long time. There’s a natural pushback to change.’ Many of the experts contributing to the report acknowledged concerns about the capability of organisations to manage the change process effectively. Another key problem with transformation programmes to date has not, perversely, been to do with optimising the remote delivery operations, whether through shared services or outsourcing, at all. Rather, it is that too little attention has been paid to the role and purpose of the retained finance function. This is ironic, because a key driver behind finance transformation is to free valuable finance staff at the centre or embedded in the business units from finance processing so they can concentrate on higher value insight to support commercial decision-making. Logically this means that many businesses are not tapping into and exploiting as much value as they could be. The retained finance function has been underutilised and its purpose lacks articulation. Anoop Sagoo, senior executive for business process outsourcing at Accenture, summarises the problem: ‘It’s difficult to conceive when you’re designing a shared service model that you can get a finance and accounting operation to the right level of efficiency and effectiveness without considering the retained finance function.’

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In ACCA’s report, both leaders and providers cite the lack of focus on the retained team as a major obstacle to transformation success when adopting shared services and outsourcing. Often the retained team’s roles and responsibilities are not well articulated in the haste to implement, resulting in overstaffing and the formation of a shadow organisation. A key impetus for shared service and outsourcing implementations is that the transaction processing activities are removed from the business, leaving the high-value business partnering activities at its heart. However, many businesses struggle to define business partnering roles clearly and to communicate the transition properly. The result of this can be accountability confusion, skill gaps in the retained team, loss of trust by the business and unclear career paths. To address these challenges, businesses need to define clearly what is expected of the retained organisation, to conduct a skills assessment and train the team, as well as to ensure that career paths are developed and transparent.

Learning curve Once more, it is the issue of capability that is fundamentally at the heart of this problem. The new role for the retained finance team drives a completely new skill requirement. It moves responsibility away from delivering many traditional finance responsibilities and towards sometimes managing governance and service delivery, or becoming a much more valued partner to the business. Commerciality, depth of business understanding, communication and influencing skills are now key. It also calls into play new behaviours. John Ashworth, global head of business process outsourcing at Pearson, says: ‘It requires a certain sort of behaviour, which is to embrace the change and look for opportunities to push deeper and create purpose for the retained function.’ To get this right is a big call. Great change management capability is key to success. Mastering the ability to effectively make the change to the new model will be a critical skill.

LAST MONTH HOW SHARED SERVICES AND OUTSOURCING INCREASINGLY DRIVE PERFORMANCE Jamie Lyon is head of employer services at ACCA you are a CFO or FD interested in * Iffinance transformation, shared services or outsourcing and want to contribute to ACCA’s programme, contact, +44 (0)20 7059 5513

09/02/2012 14:35


Inside Shell

At the controls In the latest in our series on ACCA members’ experiences at big-name businesses, we visit Royal Dutch Shell’s HQ in The Hague and meet Rui Bastos and Calvin Chiu

Walking through the Shell headquarters in The Hague is like taking a tour through the company’s 200-year history. Cleaving the building is a grand staircase, which divides a modern 1980s structure from the original Renaissance-style edifice built in 1915. An old diesel pump stands guard by the main entrance, belying the company’s beginnings as a oneman antiques and oriental seashell dealership in London’s East End. The thriving oil and gas business now employs 93,000 people in more than 90 countries, is active in 36 different industries and made a profit of US$31.185bn (around £20bn) in

INT_YCorp_InsideShell.indd 48

‘THE CLASSICAL AUDIT APPROACH IS CHANGING RADICALLY. WE’RE DEALING WITH NEW REALITIES TODAY. RISK IS NO LONGER JUST ECONOMIC RISK’ 2011. The Dutch royal family owns a small shareholding – less than 1% – a throwback to the 1907 merger between the London-based Samuel family’s Shell Transport and Trading Company, which had grown from that seashell dealership into a flourishing oil exporting business, and the Royal Dutch Petroleum Company, its main competitor at the time. Shell’s operations are twofold: the exploration and extraction of crude oil

and natural gas, and the refining business. The latter converts crude oil into fuels, lubricants and bitumen. Shell also produces biofuels and invests in solar and wind energy, as well as carbon capture and storage. With projects in countries as far afield as Oman, Iraq, Nigeria, Canada and Australia, it has a complicated web of interests to manage. ‘Shell operates worldwide, and oil and gas is an extremely risky and

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complex business, so you’ve got to understand the dynamics of the external environment, be it political, regulatory, economic and technical,’ explains Calvin Chiu, a governance, risk and controls (GRC) adviser in Shell’s central finance section. Originally from Shanghai, Chiu works in a team of 12 in Shell’s corporate HQ in The Hague, which he describes as ‘the centre of risk management’ for the company. ‘We’re the custodians of the financial part of the Shell control framework and we actively interact with internal audit, external audit, the IT community, financial controllers, community financing and business financing projects,’ he says. ‘I usually deal with a network of governance, risk and control managers and deliver results through them.’ Chiu has helped steer a major overhaul of Shell’s controls framework in his five years at the company. The project was spurred by the introduction of the Sarbanes-Oxley Act in the US, which set strict new standards for corporate governance in the wake of the Enron, Tyco and WorldCom financial scandals. ‘We looked at our control framework to streamline it, make it leaner and meaner,’ he says. ‘We managed to reduce the number of controls from 46,000 five years ago to about 13,000 today, with a core of less than 2,000 – for a company the size of Shell this is a very impressive achievement.’ He is proud of the project, which he says has created a sort of ‘Enterprise One’ mentality. He adds: ‘We have upstream business, downstream business, and all these businesses organise themselves as if they’re independent companies, but by implementing this control framework we managed to glue these different organisations together.’ The evolution of the control framework coincided with the creation

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The CV


Head of corporate and IT audit, Shell.


Partner, technology and security risk services, at Ernst & Young, subsequently assurance and advisory business services partner.


Chief financial officer at PA Cargo.


FCCA with honours degrees in finance, accounting and IT audit, and an MBA from Insead.

The CV


Adviser on governance, risk and controls at Shell. In 2011 spent six months in Dubai, dealing with planning, economics and reporting for Middle East and North Africa. Due to move to group strategy and planning as financial planning analyst.


Various finance roles at Cisco Systems, including financial reporting, processes, systems and SarbanesOxley audit and compliance.


Business planning and marketing at China Eastern Airlines.


BSc in environmental science and engineering, and an MBA from Bradford University. Qualified as ACCA in 2010.

10/02/2012 13:05

Inside Shell



All figures refer to 2010 unless otherwise indicated


Share of the world’s oil produced by Shell


Share of the world’s gas produced by Shell


Barrels of oil and gas produced a day


Litres of fuel sold in 2010



Number of Shell employees

Number of refineries and chemical plants worldwide



Number of countries in which Shell operates

of centres in Kuala Lumpur, Chennai, Manila, Glasgow and Krakow, effectively migrating and centralising large parts of the finance function to Shell locations worldwide. The centres provide an array of services, such as accounting, reporting, management information and inventory management, to Shell companies across the globe. The effort to ‘standardise and simplify the financial control framework’ is part of the migration, Chiu says. ‘However, when you operate all these controls in an offshore environment, then you talk about very different risk profiles.’ Rui Bastos, Shell’s head of corporate and IT audit, enumerates some of the challenges faced by a company that spans multiple continents, time zones and sectors: ‘The variety of topics crossing my desk is phenomenal. One day it’s cloud computing security concerns, the next how to manage controls in the shared service centre or how we deal with physical security in high-risk locations. We also operate in more than 30 different industry sectors, so we are impacted by most major pieces of financial or regulatory

INT_YCorp_InsideShell.indd 50


Number of Shell service stations worldwide

Net income (profit) in 2011

legislation around the world.’ Bastos, who is Portuguese and South African, came to Shell from auditor Ernst & Young. He also oversees the operational logistics of Shell’s almost 400 audits a year, conducted with the help of more than 200 Shell internal auditors all over the world. Shell’s internal audit function operates out of four main hubs in Kuala Lumpur, Houston, London and Nigeria.

Working together ‘We’re a microcosm of the entire Shell organisation,’ says Bastos. ‘We work with integrated audit teams of finance, IT, upstream, downstream, and the other specialty skills required to deliver a specific audit. We have a specialised data analytics team that support internal audits, investigations, regulatory compliance and our continuous auditing activities. ‘We’re also asked to play an advisory role on a variety of topics, given our broad exposure to Shell through our audits. The broad audit coverage allows us to provide very good insights into how a variety of activities are happening on the ground.’

He says that this kind of knowledge is crucial for internal audit to add value: ‘You are called on to discuss a variety of topics with Shell senior management and the audit committee, which requires good insights on what is happening in all levels of the organisation. These insights are key to understanding the consequences of the issue for the rest of the organisation, but also to help shape how the organisation moves forward. From an internal audit perspective, it is both extremely impactful, but also personally very rewarding.’ Spreading these kinds of insights and know-how around the business is part of Shell’s ethos, Chiu says. He transfers the skills he has gleaned from working in corporate HQ to young professionals in the new business service centres, although anyone in the finance function can apply for extra training at any point in their careers. Chiu, in fact, went on a four-month stint to the Dubai office to write the 2012 regional business plan. ‘Shell very much encourages people to move on – almost demands that people move on once every four years to take on

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Pump it up: Shell is a highly vertically integrated business that is active in every area of the oil and gas sector, including exploration and production, refining, distribution and marketing, petrochemicals, power generation and trading

‘COMPLIANCE IS NOT A BUREAUCRACY; IT DOES CONTRIBUTE TO YOUR BOTTOM LINE. BP’S MARKET VALUE WAS WIPED OUT BY A THIRD BY THE GULF SPILL’ different challenges,’ he says. Finance professionals can hone their skills in Shell’s ‘open university’, which offers classroom and remote learning. Bastos adds that internal audit adds to the available finance training with targeted audit and leadership skills training via individual development plans. ‘You’re rotating through a variety of audits every year, in essence accelerating your exposure to very different parts of the organisation,’ he says. ‘This exposure gives you a better appreciation of the link between risk and control and what it takes to make a large company like Shell succeed.’ And training is becoming even more important given the radical changes afoot for audit and governance, and the finance function in general. ‘The classical audit approach is changing radically,’ says Bastos. ‘We’re dealing with new realities today; we’re far more information-intensive than we’ve ever

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been. Our position within the organisation and wider society is changing as well – the concept of risk is no longer just economic risk.’ After Enron, WorldCom and Tyco, GRC professionals have to ‘make risk part of the top agenda of senior management’, Chiu says. ‘Risk and compliance is not a bureaucracy; it contributes to your bottom line. BP’s market value was wiped out by a third immediately following the Gulf of Mexico spill.’

Contrasting roles He draws a contrast between his role in governance, risk and control with the internal audit function: ‘Internal audit looks at the events that have already taken place in the past, whereas GRC – and Rui may dispute this – is more forward-looking.’ And Bastos does indeed disagree. He says that internal audit in Shell has

‘been at the forefront of identifying many of the emerging risks and helped trigger the necessary changes in Shell to manage these risks’. It’s an aspect of the role that will be even more central to internal audit in the future. ‘When you look at the way internal audit is moving, it’s increasingly having to predict the impacts of emerging internal and external challenges, and to assess how formal corporate control frameworks but also softer controls (such as corporate culture) will cope, and how the organisation responds. ‘Audit skills will need to continue evolving in this direction. Providing this level of insight will require a higher level of business expertise and knowledge, being able to translate risk and control issues in terms not only of financial but also of social, political and environmental implications.’ Chiu agrees, adding that finance professionals are becoming more integral to business. ‘They are or they should be trusted business partners in the organisation,’ he says. Sarah Collins, journalist

10/02/2012 13:05



A ticklish IFRS migration Nigeria’s move to IFRS raises a number of difficult financial reporting issues that companies will need to address, as PwC’s Berna Buys and Tony Oputa report

Many entities in Nigeria have started the process of converting to International Financial Reporting Standards (IFRS) following the announcement of IFRS adoption by the Nigerian Accounting Standards Board (NASB) in September 2010. The process of converting to IFRS has proved challenging in many other territories around the world, and Nigeria is no different. But while many of the transition issues are universal, Nigeria faces challenges that are unique to its environment.

Consolidation scope An area of significant difference between IFRS and Nigerian GAAP is the scope of consolidation. Although the definition of control under Nigerian GAAP is comparable to IFRS, the percentage voting power is regarded as the most significant factor in determining whether an entity has control. Other indicators, such as board representation, are often not considered to carry as much weight. In addition, there is no guidance in Nigerian GAAP on special-purpose entities (SPEs); in practice, these are not consolidated unless ownership interest exceeds 50%. The Companies and Allied Matters Act (the Nigerian company law) also provides an exemption from consolidation where the subsidiary and holding company’s businesses are so different that they ‘cannot reasonably be treated as a single undertaking’.

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Accounting for associate undertakings in accordance with Nigerian GAAP is similar to IFRS. Significant influence is also presumed to exist under Nigerian GAAP when an entity holds a greater than 20% interest in the voting rights of the entity. However, other indicators are often not regarded as evidence of

form of production, trade or provision of services’. This definition incorporates financial assets such as equity and debt investments but also includes investment property. Equity investments are often carried at cost, and long-term debt investments are measured on a basis comparable to amortised cost under Nigerian GAAP.

THE LACK OF OBSERVABLE MARKET PRICES AND REQUIRED MARKET INPUTS COMPLICATES THE DETERMINATION OF FAIR VALUE significant influence, so a number of investments that would be associates under IFRS are accounted for at cost.

Fair value accounting More assets and liabilities are stated at fair value under IFRS than under Nigerian GAAP. Accounting for certain financial instruments at fair value in accordance with IAS 39, or IFRS 9 if adopted early, is expected to have a significant impact. No Nigerian GAAP equivalent exists for accounting for financial instruments; however, certain types of financial asset are covered by the definition of investments. The scope of the definition of investments under Nigerian GAAP is broad, as it covers all assets ‘acquired by an enterprise for the purpose of capital appreciation or income generation without any activities in the

Accounting for certain assets and liabilities at fair value is an area of significant difference, and implementation is difficult. The lack of observable market prices and market inputs required for valuation techniques complicates the determination of fair value. In addition, market prices in Nigeria are typically wide-ranging.

Increased disclosure/transparency Many more disclosures are required under IFRS than under Nigerian GAAP. Companies are often uncomfortable with the level of transparency this generates, particularly as it relates to segment reporting and relatedparty disclosures. The guidance in Nigerian GAAP for segment reporting was derived from the old IAS 14 and requires entities to disclose segment information for business as well as

09/02/2012 11:35


The road well travelled: all Nigerian entities will have to move from local GAAP to IFRS for reporting their financial statements over the next few years

geographical segments. The Companies and Allied Matters Act requires entities to disclose loans, including balances at reporting date, and other transactions favouring directors and officers. Nigerian GAAP offers no other definition of related parties or requirements to disclose transactions with related parties. The only other similar obligation to disclose ‘insider-related credits’ is imposed on entities regulated by the Central Bank of Nigeria (CBN). The CBN defines insider-related credits as ‘transactions involving shareholders, employees, directors and their related interests’. The term ‘director’ includes a director’s wife, husband, father, mother, brother, sister, son and daughter and their spouses. The CBN’s disclosure requirements do not apply to credits extended to employees under their employment scheme of service, or to shareholders whose shareholding and related interests are less than 5% of the bank’s paid-up capital at the end of the reporting period. The identification of related parties for IFRS reporting purposes is proving difficult for many entities in Nigeria, particularly related entities that are controlled or jointly controlled by key management personnel and their close family members. For the purposes of IFRS reporting, key management personnel is defined as ‘those persons having authority and responsibility for planning, directing and controlling the activities of the entity, directly or

INT_T_nigeria.indd 53

indirectly, including any director (whether executive or otherwise) of that entity’. Extracting information about related-party transactions is also complex, as processes to identify these transactions did not previously exist.


Other areas of difference Another significant area of difference is share-based payments. Nigerian GAAP does not provide any guidance on accounting for these transactions. Measurement of property, plant and equipment (PPE) may also result in differences when an entity moves to IFRS. There is no guidance on the use of residual values in determining the depreciable amount under Nigerian GAAP, and componentisation of assets is not required.

IFRS – a moving target One of the big challenges for Nigerian entities in preparing IFRS financial statements is the availability of data. Providing the information required for IFRS reporting purposes is difficult, if not near-impossible at times. IFRS is a moving target, and significant changes are expected in the next few years. While coming to terms with the new data requirements and considering system changes, entities will also need to be aware of such changes. Berna Buys is from PwC’s Capital Markets Group in South Africa, and Tony Oputa is from the firm’s Conversion Advisory Group in Nigeria



Nigerian GAAP comprises Nigerian Accounting Standards (NAS) and the Nigerian Companies and Allied Matters Act. NAS consists of 30 Statements on Accounting Standards (SAS) broadly based on old IAS standards and containing some industry-specific guidance. Local practice for transactions not explicitly covered by SAS varies. Statements must be prepared under IFRS for financial years beginning on or after 1 January 2012 (all listed entities and significant public interest entities, or PIEs); on or after 1 January 2013 (all other PIEs); or on or after 1 January 2014 (all other entities). Application of IFRS will require more judgment than Nigerian GAAP, which in many instances is more rules-based. This has raised concern that there may be divergence in practice when applying a principles-based accounting framework.


PwC inform Can’t find the IFRS guidance you’re looking for? It’s now easier to do your research on PwC inform, an online technical accounting resource for IFRS. For more information, see ‘Doing research’ on the PwC inform home page at 60-day free trial available.

09/02/2012 11:35



Equity transfer: prepare for scrutiny Rose Zhou considers the transfer pricing considerations on indirect equity transfers of China tax resident enterprises by non-China tax resident enterprises

Along with the reinforced transfer pricing (TP) administration, indirect equity transfer of China tax resident enterprises (TREs) by non-China tax resident enterprises (non-TREs) is becoming one of the hottest topics. The State Administration of Taxation (SAT) has issued a series of regulations which provide the legal framework for restructurings, mergers and acquisitions, and equity transfers. In certain recent cases of equity transfers by non-TREs, the intermediary holding company was looked through by the Chinese tax authority according to the ‘substance-over-form’ principle under Circular 698 (Strengthening the Administration of Corporate Income Tax on Income of Non-resident Enterprises from Transfer of Equity Interests, Guoshuihan [2009]), and thus the capital gain (CG) generated by the sale of the intermediary holding


Hong Kong


INT_T_transfer.indd 54




company that holds a Chinese company was treated as China-sourced income and was accordingly taxed in China. Circular 698 stipulates that the CG from equity transfer is calculated as the transaction value (TV) less the net asset value (NAV). However, from a TP perspective, it is arguable whether the full amount of CG calculated in such a way is reasonable for China taxation purposes. This article raises several TP considerations for determining the reasonable value of TREs indirectly transferred by non-TREs, and so the CG tax liability in China. Three hypothetical cases are provided, in which Group Y acquires Company A (located in Hong Kong) and its subsidiary (Company B, located in mainland China) from Group X (see below). Company A is disregarded by the Chinese tax authority as it has no commercial substance.



Premium value to be taxed? Under many circumstances, acquisitions are conducted to fulfil strategic commercial purposes – for example, market penetration, market monopoly or business synergies. Such acquirers are often willing to offer a TV higher than the economic value (EV). (For the purpose of discussion in this article, EV refers to transaction value that’s derived from certain economic valuation methods.) In such a case, the acquirer pays a premium value (PV).

Case 1 Assume Group Y undertakes the acquisition to monopolise the China market. The NAV, EV and TV are 100, 150 and 200 respectively. Thus, the PV can be calculated as TV minus EV (ie 200 – 150 = 50) (see opposite). In such a case, it is arguable that the Chinasourced CG should be calculated as the excess of TV over NAV (ie 200 – 100 = 100) or the excess of EV over NAV (ie 150 – 100 = 50). Or, through certain market and economic analysis, the proportion of PV for China and foreign jurisdiction CG taxation purpose can be determined.

Disregarded intermediary holding company has no commercial value at all? Based on Circular 698, if the intermediary holding company has a small headcount and tiny revenue at the point of the equity transfer, it is more likely than not that its existence will be disregarded. In many cases, however, considering the function/risk/ asset profile as a result of the

09/02/2012 14:34


Case 2






China-sourced CG = 200 – 100? Or = 150 – 100? Or reasonable proportion?


Assume Company A has a tiny business and an employee headcount lower than 10. Company B is a distributor. Ever since its establishment, Company B has enjoyed a remarkable sales performance thanks to the great contribution by Company A in marketing and sales activities (see below). For instance, Company A shares its customer list with Company B. In addition, the fact that Company B is the subsidiary of Company A (which owns a high business reputation) is one of the major reasons why customers are willing to sign contracts with Company B. Under such circumstances, it may be unfair to disregard the role and


GROUP Y Transfer

Hong Kong




INT_T_transfer.indd 55

Value contributed by Company A:


Small headcount; Contributes customer list and marketing efforts




PV 50

value of the intermediary company in the supply chain based merely on headcount and business scale at the point of transaction. The TV is 100 (assuming no PV has been recognised in this case). The acquisition is conducted by Group Y not purely for indirect acquisition of Company B but also for the value of Company A. However, due to its headcount and business scale, it is asserted by the Chinese tax authority that Company A has no commercial substance, and thus is disregarded. Under such circumstances, by conducting the function/risk/asset analysis (especially related to historical operation), the value of Company A along the supply chain can be reasonably identified. If it can be quantified that 20% of the TV is attributed to Company A, the real value of Company B shall be 80. Arguably

Real value of Company B

complicated intercompany arrangements historically, role and commercial value of the intermediary company cannot be denied.

China-sourced CG=100 – NAV? Or = 80 – NAV?

09/02/2012 14:34



the real value (80) instead of the TV (100) shall be the basis for the calculation of China-sourced CG.

How to allocate the intellectual property? In many cases, enterprises’ business operations involve intellectual property (IP) that is not legally registered, such as know-how, customer list and distribution channel. For an indirect equity transfer case, if such IP is co-developed by the intermediary company and the Chinese entity, quantitative analysis can be conducted to evaluate the contribution made by each party to the IP value and so the IP value attributable to the Chinese entity.

Case 3 Assume Company B is a manufacturer. Certain know-how is generated through collective efforts of both Company A


and Company B for the manufacturing process of Company B. The TV is 200, which includes the value of the above-mentioned know-how at 50. Assume that the NAV of Company B is 100, and thus the total CG is 100 (ie TV – NAV = 200 – 100). By conducting detailed function/risk/asset analysis, it can be quantified that Company A and Company B made equal contribution to the formation of the know-how. As such, the IP attributable to Company B arrives at 25 (ie 50 x 50%) (see below). It is then arguable that China-sourced CG should be calculated as 200 – 100 – 25 = 75.

Conclusion Without a doubt, Chinese tax authorities are becoming more and more sophisticated in advanced antiavoidance areas. They are very keen on the scrutiny of equity transfer



involving China entities, directly or indirectly, and recent equity transfer cases we’ve observed were concluded with huge assessment of capital gain tax adjustment. As such, the need to respond to such scrutiny becomes very important for multinational companies with complex shareholding structures involving Chinese entities. Although more real cases are to be seen in terms of the Chinese authorities’ attitude on the role of TP analysis in determining China-source CG in indirect equity transfer of TREs cases, solid and reasonable TP analysis (on PV, commercial value of intermediary company and IP), along with a valuation study, certainly provides a plausible solution to reduce the potential China capital gain tax liability. Rose Zhou is a partner, tax and transfer pricing, at Grant Thornton China


A 25/B 25





INT_T_transfer.indd 56


50-50 contribution to knowhow (ie 50) by Company A and Company B



Hong Kong

China-sourced CG = 200 – 100? Or = 200 – 100 – 25?

09/02/2012 14:34

Technical update


A monthly round-up of the latest developments in financial reporting, audit, tax and law FINANCIAL REPORTING IFRS 9 CHANGES The International Accounting Standards Board (IASB) issued IFRS 9, Financial Instruments, in November 2009. At that time it also said that it might be necessary to make further changes as a consequence of the ongoing project to develop an IFRS for insurance contracts. The IASB has now announced that it will undertake a project to make limitedscope changes to IFRS 9. At the same time, the IASB and US Financial Accounting Standards Board (FASB) will work together to try and reduce the differences that currently exist in their respective models for classification and measurement. The IASB has also stated that in making any amendments, it will be mindful of the fact that many preparers will have already invested time in planning for the implementation of IFRS 9 in 2015. While it has been a slow start to the year as new pronouncements and exposure drafts are concerned, this is unlikely to remain the case as 2012 progresses. A review of the IASB’s workplan shows that there are a number of very important exposure drafts and standards due in the first half of the year. These are listed below. Leases – a revised exposure draft is anticipated which will continue with a model


INT_T_update.indd 57

Houses of Parliament, London


that will require the majority of lease contracts to be recorded ‘on balance sheet’, but will simplify the way in which those leases are measured compared with the original proposals, particularly for lessors. Financial instruments – a new IFRS for general hedge accounting, which the IASB considers will reduce complexity and allow entities to more closely align their accounting to the hedging models they apply in running their businesses. An exposure draft in respect of macro hedging will follow in the second half of the year. There are also plans to re-expose the proposals


addressing the impairment of financial instruments. Insurance contracts – originally exposed in 2010, the proposed standard has been subject to substantial reworking in many key areas and will therefore also be re-exposed.

Yvonne Lang, director, Smith & Williamson

EUROPEAN UNION EU TAKES UK TO COURT OF JUSTICE OVER TAX REPAYMENT SYSTEM The UK government is being taken to the European Court of Justice (ECJ) with the European Commission claiming it has made it

almost impossible for British taxpayers to recover some taxes levied in breach of European Union (EU) rules. Brussels dislikes aspects of the UK Finance Act 2007, claiming it effectively abolished a ‘remedy for repayment of taxes paid in mistake of law’, making it ‘impossible or excessively difficult’ for them to recover the money where tax was paid in breach of EU legislation (which should have primacy over UK law in any case). The Commission was also upset that the abolition did not include any transitional rules to cushion the blow. The ECJ finds the UK has broken EU tax laws through the act; it can order reform, and levy huge daily recurring

10/02/2012 12:36


Technical update

Stephany Griffith-Jones of Columbia University all backed the tax for sourcing revenue from high-frequency traders and intermediary financial players. They even argued the tax could boost eurozone GDP by 0.25% and stabilise the economy by curbing risky trades.

Konrad Adenauer Building, Luxembourg

fines of thousands of euros payable until Britain complies. More at http:// EU PUSHES FOR VAT REFORM IN LUXEMBOURG The European Commission is threatening legal action against Luxembourg, a key European financial centre, unless it closes loopholes in its VAT system regarding independent groups such as professional associations. The Commission argues that under EU law, VAT must be paid on all association services, except for those already universally exempt from sales tax. However, VAT law in the Grand Duchy allows all services provided by independent groups to be VAT-exempt, as long as

INT_T_update.indd 58

the members themselves are largely untaxed on their work (usually up to 70% of turnover). Group members can also deduct VAT charged to their group or association on purchases made in the name of the member, but for the benefit of all group members. EU FRAUD EARLY WARNING SYSTEM UNDER ATTACK The European ombudsman, the European Union (EU) official investigating allegations of wrongdoing by EU institutions, has attacked a European Commission database identifying companies and individuals worldwide deemed a threat to the EU’s financial interests – saying the EU

should allow access to its financial information. Ombudsman P Nikiforos Diamandouros argued the use of this Early Warning System was too secretive, with subjects listed not usually being informed. Brussels also did not allow appeals against such listings. More at http:// FINANCIAL TRANSACTION TAX PLANS GATHER SUPPORT Support for the imposition of a eurozone financial transaction tax has been voiced at a hearing of the European Parliament’s economic and monetary affairs committee hearing. Avinash Persaud of Intelligence Capital, Sony Kapoor of Re-Define and

GLOBAL ECO-ACCOUNTING DATA SYSTEM CREATED The European Commission has hailed as a success the creation by European Union-funded researchers of an environmental cost accounting system. EXIOPOL software is designed to accurately value the impacts on the environment and health of various economic activities, assessing micro-data on consumption patterns sourced from governments worldwide. The project used €5m of EU funds. www.feem-project. net/exiopol EU FOOD POLICY FINANCIAL CONTROLS STREAMLINED The European Union’s (EU) financial watchdog, the Court of Auditors, has persuaded EU ministers to further reform accounting controls for the EU’s Common Agricultural Policy (by far its largest spending programme). The court had called for better supervision by member states of spending in real time, to reduce the repayments later demanded by the European Commission because of financial irregularities. Keith Nuthall, journalist

10/02/2012 12:36

CPD units on the web



Current or non-current liability? Accounting for liabilities may appear to be straightforward but simple rules can have significant effects on corporate financial statements, explains Graham Holt

There have recently been some major breaches of debt covenants reported by companies, but the issue then arises as to how this liability is reported. The question is whether the liability is a current or non-current liability and how to present the liability in the statement of financial position. IAS 1, Presentation of Financial Statements, paragraph 60 stipulates that an entity should present current and non-current liabilities as separate classifications in its statement of financial position, except when a presentation based on liquidity provides more relevant and reliable information. Whatever the method of presentation, an entity should disclose the amount expected to be settled after more than 12 months and less than 12 months. When an entity supplies goods and services with an identifiable operating

Financial liabilities include trade and other payables. If a liability category combines amounts that will be settled after 12 months with liabilities that will be settled within 12 months, note disclosure is required which separates the longer-term amounts from the 12-month amounts. Paragraph 69a窶電 of IAS 1 states that liabilities are to be classified as current if any one of four specified conditions is met. The conditions are: A It expects to settle the liability in its current operating cycle B It holds the liability primarily for trading C The liability is due to be settled within 12 months D It does not have an unconditional right to defer settlement of the liability for at least 12 months after the reporting period. All other liabilities are to be

SOME CURRENT LIABILITIES SUCH AS TRADE PAYABLES AND EMPLOYEE COSTS ARE PART OF THE NORMAL WORKING CAPITAL cycle, separate classification of current and non-current liabilities highlight liabilities due for settlement in the period. Information regarding the realisation of liabilities is useful in assessing the solvency of an entity as IFRS 7, Financial Instruments: Disclosures, requires disclosure of the maturity dates of financial liabilities.

INT_UK_AP_T_HoltCPD.indd 59

classified as non-current. IFRS 7 does not deal with the classification of financial liabilities but the disclosure of information that enables users to evaluate the nature and extent of risks arising from financial liabilities to which the entity is exposed. IFRS 9, Financial Instruments, deals with the classification and

measurement of financial liabilities. In October 2010, the International Accounting Standards Board (IASB) published additions to the first part of IFRS 9 on classification and measurement of financial liabilities. The requirements in IAS 39 regarding the classification and measurement of financial liabilities have been retained, including the related application and implementation guidance. This means that there are two measurement categories for financial liabilities, which are fair value through profit or loss (FVTPL) and amortised cost. The criteria for designating a financial liability at FVTPL also remain unchanged. Some current liabilities such as trade payables and employee costs are part of the normal working capital of the entity and the entity classifies the amounts as current even if they are to be settled outside of the 12-month period. There are some current liabilities that are not part of the working capital cycle but are due for settlement within 12 months or are held for trading. Financial liabilities are an example of this fact. Financial liabilities are classified as current when they are due for settlement within 12 months, even if the original term was for a longer period than 12 months and an agreement to refinance on a long-term basis is completed after the reporting date but before the financial statements are authorised for issue.

09/02/2012 15:20



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

FINANCIAL LIABILITIES ARE CURRENT WHEN THEY ARE DUE FOR SETTLEMENT WITHIN 12 MONTHS, EVEN IF THE ORIGINAL TERM WAS FOR A LONGER PERIOD AND AN AGREEMENT TO REFINANCE IS COMPLETED AFTER THE REPORTING DATE BUT BEFORE THE FINANCIAL STATEMENTS ARE AUTHORISED FOR ISSUE Case study 1 An entity operates in the oil industry. It is constructing and operating an oil rig, which is financed partly by a loan raised in 2010 and the entity classified the loan correctly as a non-current liability in accordance with paragraph 69 of IAS 1. In the statement of financial position at 31 December 2011, the entity reclassified the loan as a current liability. In the 2011 financial statements, the entity disclosed, as an event after the reporting period, that the loan had been settled with cash received under an oil production agreement. The entity also disclosed that a letter of intent in connection with the agreement had been signed by the end of the 2011 financial year. In the directors’ report for the year, the entity stated that the loan was classified as a current liability due to the fact that the loan had been settled in February 2012 when the oil production agreement became legally binding. The original settlement date was 31 December 2015. The entity stated that it had reclassified the loan

INT_UK_AP_T_HoltCPD.indd 60

in accordance with IFRS 7, Financial Instruments: Disclosures.

Solution IFRS 7 applies only to information disclosed in the financial statements and not to the classification of liabilities. Therefore, the standard is not relevant. The classification of the loan as a current liability does not comply with paragraph 69 of IAS 1. In respect of the 2011 financial statements, the oil production agreement, effective in February 2012, was a non-adjusting event after the reporting period as determined in accordance with IAS 10, Events After the Reporting Period. It can be concluded that the loan should have been classified as a non-current liability in the 2011 statement of financial position because the entity did not meet any of the conditions set out in paragraph 69a–d of IAS 1: A The project loan is not a liability which would be settled in the issuer’s normal operating cycle

(paragraph 69a). The loan is a financial liability providing financing on a long-term basis. It is not part of the working capital used in the entity’s normal operating cycle. B The issuer did not hold the loan primarily for the purpose of trading but for the purpose of financing the construction of the oilrig (paragraph 69b). C The loan was not due to be settled within 12 months after the reporting period (paragraph 69c). D The entity had an unconditional right to defer settlement of the liability for at least 12 months after the reporting period, because the loan was not due to be settled within 12 months after the reporting period (paragraph 69d). Paragraphs 74–76 of the standard address the consequences of a breach of a provision of a long-term loan agreement on or before the end of the reporting period with the effect that the liability becomes payable on demand. In this case, the liability is classified as current, even if the lender has agreed, after the reporting period and before the authorisation of the financial statements for issue, not to demand payment as a consequence of the breach. Under IAS 1, a liability is classified as current as the entity does not have an unconditional right to defer settlement of the liability for at least 12 months after the reporting period. However, the liability is classified as

09/02/2012 15:20


non-current if the lender agreed by the reporting date to provide a period of grace ending at least 12 months after the end of the reporting period, within which the entity can rectify the breach and during which the lender cannot demand immediate repayment.

the covenants as of 31 December 2011. Thus, as at 31 December 2011, having failed to fulfil the contractual obligations and being in breach of relevant covenant, the leasing company was entitled to require the entity to repay the debts immediately.

Case study 2


In December 2010, an entity agreed a 10-year leasing agreement with a leasing company and undertook to comply with certain covenants during the term of the lease agreement. The agreement stipulated that, in the event of a failure by the entity to fulfil any of the contractual obligations, or having failed to rectify any such breach within a one-month period, the lessor had the right to terminate the leasing agreement. In such a case, the entity would have to pay all unpaid amounts due before the termination of the agreements. As at 31 December 2011, the entity was not in compliance with the covenants stipulated in the leasing agreement. It was additionally established that on 31 January 2012, the entity was still not in compliance with the specified leasing covenants. In the 2011 consolidated financial statements, the debt relating to the leasing company was classified as non-current in accordance with the payment schedules included in the original agreement. The entity had received, from the lessor, a notification confirming the failure to comply with

The entity’s presentation of the debt as a non-current liability is not in accordance with IAS 1, paragraph 60 that specifies the circumstances in which liabilities are to be classified as current. The amounts outstanding in respect of this arrangement at 31 December 2011 should have been disclosed as a current liability. IAS 1 stipulates that a liability shall be classified as current where it is due to be settled within 12 months after the reporting date, and the entity does not have an unconditional right to defer settlement of the liability for at least 12 months after the end of the reporting period.

INT_UK_AP_T_HoltCPD.indd 61

Conclusion Accounting for liabilities may appear to some to be relatively straightforward but simple rules can have significant effects on corporate financial statements. 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

09/02/2012 15:23



CPD: coaching and mentoring If you coach or mentor staff, the activity can count as work-based learning and so help to satisfy your continuing professional development requirement What is work-based learning?

The workplace can be a rich source of learning and many of the activities you carry out can contribute to your continuing professional development (CPD) if they help you develop your knowledge or skills. Members following the unit route can gain both verifiable and non-verifiable CPD from a range of work-based activities. Another way of achieving your CPD requirement is to work for an ACCA Approved Employer – professional development. ACCA will recognise any learning activity you undertake, provided that it is relevant to your role or career and contributes to your individual learning and development needs.

What is coaching and mentoring? Coaching and mentoring is generally undertaken as part of a people management role. It usually involves helping an individual to develop specific skills and knowledge around their job. Coaching is a key part of helping others to develop, but it can also help you to develop new skills. By acting as a coach or mentor, not only will you reap the benefits of working with junior colleagues, who will become more able, enthusiastic and ambitious as a result, but you’ll also develop the characteristics and behaviours required of today’s rounded business professional.

How can coaching and mentoring contribute to CPD? Learning certain techniques can not only help you be an effective coach or mentor, but can also be a valuable contribution towards your CPD. For example, these can contribute if

INT_A_CPD.indd 62

you are learning new skills through coaching and mentoring a colleague. Examples of how you can gain CPD from coaching and mentoring include: researching for or preparing for a coaching session conducting a coaching session, if this is new to you or if you are attempting new techniques.

* *

How can I calculate verifiable CPD? It is important to consider whether you learned something through the coaching and mentoring session’s

research, preparation or delivery. If you did, it will contribute to your CPD. Keep notes of your research and the session; the person being coached or another colleague can confirm the learning took place. Remember the learning can be counted as verifiable CPD if you can answer yes to the following questions: 1 Was the learning activity relevant to your career? 2 Can you explain how you will apply the learning in the workplace? 3 Can you provide evidence that you undertook the learning activity?

What are the other benefits of coaching and mentoring? preparing for coaching or * From mentoring, through the session

itself to your post-session review, you’ll improve your self-awareness and your ability to identify your own areas for development. By being a workplace mentor to an ACCA trainee, you will be key to them completing their practical experience requirement (PER) and achieving ACCA membership. The achievements and leaps forward of those you coach or mentor will reflect well on your own leadership ability and potential.



Do you want to give something back? The skills described above are also applicable to the role of the ACCA Workplace Mentor, another way of gaining CPD in the workplace. You can learn new skills in a coaching and mentoring role, and also contribute to the development of the profession, helping to ensure that new ACCA members have the skills, attitudes and behaviours required to be a qualified accountant.

08/02/2012 13:15



Elections to Council As ACCA’s governing body, Council plays a pivotal role in ACCA affairs. It ensures that ACCA operates in the public interest and delivers the objectives stated in its Royal Charter. Council sets ACCA’s overall direction through regular approval of strategy. It acts as a link between members and the professional body, and leads the organisation in the interests of both. It is accountable both to members and the public interest. It acts for all members and future members (today’s students). It provides leadership of ACCA and stewardship of its resources. Council develops policy for ACCA as a whole and Council members are volunteer custodians acting for the well-being of the whole organisation. Whatever their geographical or sectoral bases, Council members do not represent particular areas or functions

* * * * * *

INT_A_Council.indd 63

and are elected by the membership as a whole. ACCA members of all ages and backgrounds are encouraged to stand for election to Council. Long-term or technical experience is valuable, but so is the proven ability to participate actively in strategic decision-making. Council experience as such is not necessary. However, an understanding of good governance is essential, and personal and professional integrity must be of the highest order. Specifically, ACCA expects members to bring the following skills and attributes to Council: an ability to take a strategic and analytical approach to issues and to see the big picture; an understanding of the business and the marketplace; communication and networking skills; an ability to interact with peers and respect the views of others; decision-making abilities; an ability to act as ambassadors in

* * * * * *

many different environments; planning and time management; and a willingness to learn and develop. Nominations are now invited for election to Council at the 2012 AGM. Candidates must be nominated by at least 10 other members in good standing. Candidates should supply a head and shoulders photo and an election statement of up to 180 words, which should not include references to email addresses or websites. Candidates are also required to sign declarations of their willingness to comply with, and be bound by, the code of practice for Council members. Further information on the Council election process, including pro forma of nomination forms, may be obtained by writing to the Secretary at 29 Lincoln’s Inn Fields, London WC2A 3EE, by faxing +44 (0)20 7059 5561, or by emailing michael.sleigh@accaglobal. com (please put ‘Council Elections’ in the subject box).

* *

10/02/2012 10:50


Taking the pulse of the global economy In his regular quarterly report, ACCA’s Manos Schizas looks at what ACCA members around the world are saying about the global economy – and it doesn’t make for happy reading For a year and a half, ACCA’s Global Economic Conditions Survey (GECS), now carried out in association with the Institute of Management Accountants, has recorded the slowdown in the global economic recovery. However, over the last half of 2011, the global economy has taken a marked turn for the worse, led by a substantial fall in international trade. While the negative trend in global business confidence eased in late 2011 compared to the third quarter, and there are encouraging signs from resilient new orders, the damage done to global demand over the last year has been substantial. As a result, small and very open economies have been hit hard, recording levels of business confidence usually seen in the troubled economies of western Europe. The cumulative effect of three consecutive quarters of weakening demand is beginning to take its toll on business. A detailed analysis of the GECS findings suggests that falling revenues are the strongest contributor to falling business confidence, followed by the deteriorating global economic outlook and continuing weakness in new orders. Once these, as well as the


The findings of the survey suggest that the trend in business confidence has actually improved slightly in the Americas. Eighteen per cent of respondents said they were more confident in the prospects of their organisations than they had been three months earlier, against 39% who reported a loss of confidence. In the US and Canada, 18% and 16% of respective respondents were more confident, while 38% and 45% were less so. Many also perceive that the global economy is getting worse; 48% in Canada, 28% in the Americas and 27% in the US. In the US, respondents expect that their governments will increase spending in the face of a weakening global economy, but at the price of fiscal sustainability in the long run. While weak demand was the most commonly cited business challenge reported globally, markets in the Americas, particularly Canada, are performing much better.

INT_F_gec.indd 64

rising incidence of late payment and business failures are taken into account, the effect of tightening credit is only negligible. Still, with banks facing an uphill climb towards capital adequacy, tightening finance must soon add to the challenge of a flagging recovery. The result is a deteriorating outlook for business cashflow around the world which may be driving a rise in business failures. Consequently inflationary pressures, which built up steadily over the past two years, are now easing.

THE CUMULATIVE EFFECT OF THREE CONSECUTIVE QUARTERS OF WEAKENING DEMAND IS BEGINNING TO TAKE ITS TOLL ON BUSINESS. FALLING REVENUES ARE THE STRONGEST CONTRIBUTOR TO FALLING BUSINESS CONFIDENCE In line with this deteriorating outlook, our findings point to weakening trends in employment and investment globally. This is particularly worrying as these two indicators have remained weak throughout the last three years and are crucial to any kind of sustainable recovery. Finally, our findings suggest that governments have to perform a tough balancing act in coming years if they are to support a flagging economic recovery. Sustainable fiscal stimulus is a luxury that not all governments can afford, especially among developed nations, while austerity is proving hard to reconcile with sustained growth, unless perhaps as a response to exogenous shocks. As a result, government approval levels are at a record low, just when they are most likely to influence business confidence. Manos Schizas is ACCA’s senior policy adviser

10/02/2012 13:46


READ THE FULL REPORT AT: THE ACCA GLOBAL ECONOMIC CONDITIONS SURVEY – HOW TO TAKE PART world more than 300 times. So why not have your say when the next quarterly survey opens on 17 February? Everyone can participate – simply look for the



30 Breaking down the ACCA Confidence Index 20 geographically reveals some striking variations, with members in Africa showing most confidence. 10 0 -10 -20 -30 -40 -50 -60 -70 -80 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 2009 2009 2010 2010 2010 2010 2011 2011


THE DANGER DOWNPOINT The ACCA Confidence Index correlates strongly with economic growth globally. A reading of below -13 suggests the economies of the developed world are contracting and the global economy is slowing to a halt.

link in AB Direct. If you have a story to tell, you can also join our panel of commentators by emailing emmanouil.

100 BALANCING 75 50 25 0 -25 -50 -75 -100


SAUDI ARABIA 68.8 -9.3 MAINLAND 52.8 CHINA 29.1 HONG KONG 52.4 -31.3 UAE 14.8 -39 USA 11.3 58.5 AUSTRALIA -25 -40.4 UK -38.3 -17.5 IRELAND -90.6 -27.1

The views of ACCA members are highly valued and receive widespread media coverage. The Q4 2011 survey was quoted in the press around the

Q3 2011

Q4 2011

The towers show how members think public spending will change in the medium term (increases shown in black), while the cakes show whether members see this level of public spending as excessive (above the line) or insufficient.

30 20 10 0 -10 -20 -30 -40 -50 -60 -70 -80

Sample: 2,186 ACCA members around the world

Q3 2009

Q4 2009

Q1 2010

Q2 2010

Q3 Q4 2010 2010

Q1 2011

Q2 2011

Q3 2011

Q4 2011


Business confidence remains in negative territory. The graphics show the percentage of respondents saying they have gained business confidence, minus those who have lost it.

INT_F_gec.indd 65

10/02/2012 13:47


ACCA news Virtual club opens doors

Inside ACCA 64 Global concern What ACCA members think about economic conditions 63 Council Nominations open for the election to Council to be held at the 2012 AGM 62 CPD: coaching and mentoring How you support your colleagues can count towards your continuing professional development requirements

ACCA has opened a virtual briefing centre with theatre, networking centre and digital library. The virtual theatre will host free, live and on-demand audio and video webinars throughout the year. Current webinars include automated internal reporting, business process outsourcing and shared services, and integrated reporting. In the networking centre you can join group chats or chat privately with other ACCA members, see who’s online and add presentations, documents and contacts to your online briefcase. You can search content and other ACCA members who have registered to join the virtual briefing centre, update your profile settings, choose an avatar, exchange V-cards with other delegates – and let us know what you think through the feedback link. Assets will be added to the digital library every month and we’ll keep you updated in your weekly issue of Accounting and Business Direct. Right now you can access digital editions of Accounting and Business magazine, and download articles and technical podcasts. You can also read white papers, solution briefs and case studies from our content partners – IBM, Concur and Meridian. Chris Quick, editor-in-chief of Accounting and Business, provides a two-minute video overview of the centre in the lobby area. Use of the virtual briefing centre can count towards your verifiable CPD requirement if the learning activity is relevant to your career, you can explain how you will apply the learning in the workplace and also provide evidence that you undertook the learning activity.

IMA BOOST FOR ACCA SURVEY ACCA has joined forces with the US-based Institute of Management Acccountants (IMA) to make its Global Economic Conditions Survey an even more robust and powerful record of the state of the world’s economy. The latest edition of the quarterly survey shows that with international trade continuing to dry up at the end of last year, finance professionals expect the global economic downturn to return with full force during 2012. Turn to page 64 for more.


The International Integrated Reporting Council (IIRC) has moved into ACCA’s offices in London. The body’s CEO, Paul Druckman, and its UK-located team of around 10 people will be based at ACCA’s offices for two years. Druckman said: ‘ACCA has been involved for so long in corporate responsibility and sustainability that its deep connection to integrated reporting is only reinforced by this generous gesture.’


INT_A_backpage.indd 66

10/02/2012 15:45

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ab accounting and businesS 03/2012

get verifiable cpd units by reading technical articles

eurozone crisis will tech systems take the strain?

reporting value

Why the annual report matters vietnam reducing red tape nigeria ifrs transition global economy survey

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10/02/2012 12:56

AB INT_March 2012  

The March 2012 issue of Accounting and Business – International edition – ACCA.

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