Switzerland no longer a hiding place
IAS 38 Intangible Assets
U.S. debt crisis and downgrade draws ire from China
GLOBAL ACCOUNTANT September/October 2011
• News • Corporate Governance • Technical • Career
he Global Accountant would like to thank all readers from the United Kingdom to China; from Pakistan to Australia who has given endless support to our work in delivering independent, relevant and reliable information; the Global Accountant. As the exam dates approach the Global Accountant, as always, includes useful technical articles for you to read and study. [IAS 38 Intangible Assets p.22 and Leases with transition to IFRS p.18] In the news; SEC demands explanation from Groupon in relation to creative accounting. The IIRC has again called for change in corporate reporting. In relation to this while in Malaysia the Prince of Wales in a recent interview has stated that we are consuming more resources than the world can renew and companies must start being accountable for the damage they cause, through reporting, just as they report for other intangible values. The ICAEW has enjoyed the company of its fellow student visitors from China. Soft skills are truly essential employability ingredients. Employers seek individuals who possess these skills as much as academic qualifications. Jim Buckle, chief operating officer of LOVEFILM has spoken to the Global Accountant and emphasised on ‘transferable skills’ for those trainees who find themselves in non-relevant job roles. The Global Accountant will continue to support trainees in their job search and provide all necessary content to make landing that first ‘relevant’ job possible. Finally the Global Accountant would like to thank all our partners for their continued support. The Global Accountant will continue to work hard in delivering what they have long been looking for.
News 03 Brief 04 ‘Investment entities’ to record investments at FVTPL 05 U.S. debt crisis and downgrade draws ire from China 06 “The world has changed – reporting must too”
14 DFK International makes key appointment 16 Executive pay set to increase 17 Switzerland no longer a hiding place
Technical 18 Leases and Transition to IFRS
08 The sun could save employers millions in fraud
22 Accounting for Intangible Assets
09 Too expensive to process
26 Building world-class businesses for the long-term
09 Australia needs you 09 SEC demands GROUPON explain unusual term 10 Accountants need to be soft to be sharp
Career 30 Leader Profile 32 Conflict management
11 Regulator votes to study accounting “term limits” 12 ACCA looks forward to constructive dialogue with European commission on audit
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Thank you © Global Accountant 2011 ISSN 2047-878X
IFRS Foundation IIRC HKICPA Ernst & Young
Special Thanks: Steve Collings Gillian Lees
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Standard&Poor’s downgrade of the United States sovereign credit rating to AA+ from AAA has frustrated the nation’s largest foreign creditor, China.
Sir Michael Peat, Chairman of the IIRC, says: “The range of issues – economic, environmental and social – which determine an organization’s success has never been broader or more pressing.
“The profile of a typical fraudster is a long serving, trusted employee, who works long hours and is reluctant to take their annual leave.”
“Adjusted consolidated segment operating income,” paints a more robust picture of performance by excluding marketing and other expenses, critics have said. “Ultimately you don’t want people to feel beaten up for generating wealth” Career
“Possessing great interpersonal and networking skills are crucial to your job search.”
To quickly recap, the Conceptual Framework defines an asset as: ‘a resource controlled by the entity as a result of past events from which future economic benefits are expected to flow’.
An added hurdle for companies are global challenges including climate change, population growth and loss of biodiversity
Try to come out of the meeting with a goal that is achievable, realistic, measurable and will be reached by a certain time.
‘Investment entities’ to record investments at FVTPL
What’s the issue? IASB has published an exposure draft (ED) on ‘Investment entities’. The ED requires entities that meet the definition of an investment entity to record, with very limited exceptions, all investments at fair value through profit or loss (‘FVTPL’). This includes investments in subsidiaries, associates and joint ventures.
Definition of investment entities An investment entity is one that: • has no substantive activities other than investing in multiple investments; • explicitly commits to investors that its sole purpose is to invest for investment income, capital appreciation, or both; • issues units of investments that represent ownership in itself and are entitled to proportionate shares of its net assets; • has significant ownership interests that are held by unrelated investors;
• manages substantially all of its investments and evaluates their performance on a fair value basis; and • provides financial information about its investment activities to investors. Measurement The ED requires an investment entity to measure its investments at FVTPL with very limited exceptions. This accounting does not extend to its parent (if any), which is still required to consolidate (rather than FVTPL) the subsidiaries of the investment entity.
Disclosures The ED requires disclosures relating to: • information on investments controlled (e.g. name, country of incorporation); • changes in the status of an investment entity (i.e. when the entity becomes an investment entity and vice versa); • financial or other support provided by investment entities to their investees that they were not previously contractually required to provide, or intentions to provide such support; • restrictions on ability to transfer funds between investment entities and their investments; and • financial highlights such as pershare information, ratios, total return and capital commitments. Entities that are set up for investment purposes will be affected if these entities meet the definition of ‘investment entities’. Management should read the ED in its entirety to determine the impact and consider commenting on the ED. The comment period ends 5 January 2012. PwC Global, September 2011, “IASB proposes to require ‘investment entities’ to record investments at FVTPL”
U.S. debt crisis and downgrade draws ire from China Beijing takes steps to reduce dependence on dollar A Plus the official magazine of HKICPA, September 2011, “U.S. debt crisis and downgrade draws ire from China”
Standard&Poor’s downgrade of the United States sovereign credit rating to AA+ from AAA has frustrated the nation’s largest foreign creditor, China. In reaction to politicians’ handling of the debt situation and the subsequent lowering of the S&P rating, China’s official news agency, Xinhua, published several articles criticizing the U.S. for putting the world economy at risk. One Xinhua article called on U.S. leaders to exercise “some sense of global responsibility,” while a commentary urged the country to“come to terms with the painful fact that the good old days when it could borrow its way out of messes of its own making are finally gone.” China currently owns more than US$1 trillion worth of U.S. governmentissued bonds, a fact that Beijing emphasizes in its criticism. Despite the growing discontent, China has few options in terms of foreign-exchange investments. The nation holds US$3.2 trillion in foreign-exchange reserves, and few markets are able to handle such large inflows. “What can’t be helped is that U.S. Treasury bonds are still the safest, most stable, least risky bonds,and the U.S. debt market is the only market that can absorb China’s rapidly growing foreign-exchange reserves,” said a Xinhua article. While China has already taken preliminary steps to reduce its reliance on the dollar by shifting to other markets and currencies, recent events could cause the process to accelerate . “China will continue to seek diversification in the management of assets, strengthen risk management and minimize the effect of fluctuations of global financial markets,” said Zhou Xiaochuan, governor of China’s central bank, in a statement. During his trip to Europe in June, Premier Wen Jiabao said that China would boost its holdings of euro bonds in an effort to support the region, as well as to diversify its reserves.
“The world has changed – reporting must too” Business and investment leaders call for a new approach to corporate reporting in a landmark Discussion Paper, called Towards Integrated Reporting – Communicating Value in the 21st Century, published by the International Integrated Reporting Committee (IIRC).
ntegrated Reporting will provide more comprehensive and meaningful information about all aspects of an organization’s performance and position, presented in a much clearer, more concise and more user friendly format. In particular it will demonstrate the links between an organization’s financial performance and the social, environmental and economic context within which it operates. The development of Integrated Reporting is designed to enhance and consolidate existing reporting practices to move towards a reporting framework that provides the information needed to develop the global economic model to meet the challenges of the 21st century. Integrated Reporting will be clear and comprehensible, providing a meaningful assessment of the long term viability of an organization, meeting the information needs of investors and other stakeholders and supporting the effective allocation of financial,
manufactured, human, intellectual, natural and social capital. Sir Michael Peat, Chairman of the IIRC, says: “The range of issues – economic, environmental and social – which determine an organization’s success has never been broader or more pressing. It is for this reason that we need an approach to reporting that is fit-for-purpose in the 21st century. The world has changed – reporting must too. “All matters which are important in assessing an organization’s performance and position, past and prospective, need to be reported but not by making annual reports ever longer and more complex – they are too long already. The information needs to be provided clearly and concisely with the connections between financial, environmental and social impacts demonstrated and the clutter removed. This is what Integrated Reporting seeks to achieve.” The discussion paper Towards Integrated Reporting –
Communicating Value in the 21st Century presents the rationale for Integrated Reporting, offering initial proposals for the development of an International Integrated Reporting Framework and outlining the next steps towards its creation and adoption. Its purpose is to prompt input from all those with a stake in better reporting, including producers and users of reports. Professor Mervyn King, Deputy Chairman of the IIRC, says: “The IIRCs approach is one that will present a globally coordinated solution to reporting, avoiding the current problems with reporting requirements in different jurisdictions developing in different directions and at different speeds. Integrated Reporting reduces the compliance burden and enables more effective decision-making for investors and other stakeholders.” Sir Michael concludes: “I hope that corporate reporting stakeholders will feel able to support the development of Integrated Reporting and the work of the IIRC by contributing to this consultation process. The initiative to introduce a global Integrated Reporting framework is ambitious in vision and scope but the prize is considerable.”
The Integrated Reporting Discussion Paper and further information can be found at www.theiirc.org
The sun could save employers millions in fraud S
pecialist investigators at the
firm are advising employers that the summer holiday season is the peak time for detecting fraud as employees take a long break. The firm has revealed that its fraud investigation caseload peaks when alarm bells are raised by suspicious bosses and co-workers after company cheats leave their desks to go on their summer holidays. It believes that enforcement of twoweek holidays could reduce fraud by millions across the UK. Jonathan Middup, Partner at Ernst & Young’s Fraud Investigation & Dispute Services practice, says “We see a clear increase in fraud detection where companies enforce a compulsory two week break over summer. Perpetrators are away and not able to cover their tracks easily. Frauds, such as accounts manipulation that are covered up in the course of the year are often spotted when colleagues take over and notice something is not quite right.
simple and cost-effective anti-fraud measures is to ensure employees take at least two consecutive weeks holiday.” Current pressures on staff This year’s summer window is likely to be even more intense, as Ernst & Young research reveals that the economic downturn is putting increased pressure on employees to cut corners. Ernst & Young’s 2011 European fraud survey found that 88% of UK companies expect increased pressure on managers to deliver good financial performance, above the European average. Half of all UK managers surveyed say that they are likely to cut corners to meet targets. Middup continues: “The pressure is escalated this summer, given the level of concern about the economic situation and strong pressure to deliver on targets. Our findings show that many employees are finding work stresses unusually intense.”
“The profile of a typical fraudster is a long serving, trusted employee, who works long hours and is reluctant to take their annual leave. Without doubt, one of the most
Ernst & Young, August 2011, “Two weeks in the sun could save employers millions in fraud, Ernst & Young advise”
Forcing employees to take two weeks in the sun could save companies millions of pounds of fraud, according to Ernst & Young. Ernst & Young advises firms to: • Encourage a sustained holiday for staff; • Properly investigate issues which may at first appear to be a mistake or where suspicions may seem trivial; • Have clear policies about what constitutes unacceptable behaviour and what action will taken against fraudsters; • Get your processes right. Businesses should appoint an officer to undertake a risk assessment. Record incidents where ethical standards may have been breached, log concerns, and build the learning points into future processes; • Train employees to ensure they understand your policies. Give adequate support and ask employees to sign compliance statements; • Demonstrate a message of zero tolerance. As a first step, discuss the issues at a board meeting and ensure the minutes reflect that you have added anti-fraud measures to your code of conduct.
Australia needs you A Plus the official magazine of HKICPA, September 2011, “Australia ‘still needs foreign accountants’”
Too expensive to process PwC Global, September 2011, “Treasury Select Committee - PwC comments on the future of cheques”
ollowing the Treasury Select Committee’s report on the future of cheques, Steve Davies, UK retail banking leader, PwC, said: “There’s clearly a small segment of customers who continue to rely on cheques but use is in long-term decline. Cheques are expensive to process and new technology has afforded alternative payment options that are cheaper, faster and more secure for all parties in a payment transaction. Banks have to balance the continuing need to provide cheque services to a small proportion of customers with the cost, which is currently absorbed by all bank customers. The ongoing costs of providing options between traditional and new features could challenge the free banking model in place for the majority of UK bank customers.”
Australia will retain accountants on a migration list of skilled jobs in demand despite a big jump in the number of qualified accountants given visas. “We are keeping a watch on accountants but at the moment the data, and the advice that we’re getting from the professional associations, indicates that they should still be on the skilled occupations list,” Robin Shreeve, chief executive of Skills Australia, a statutory body that advises the government on work- force development needs. In the year to 30 June,
14,680 migration visas were granted to qualified foreign accountants, double the number in the same period in 2010.
SEC demands explain unusual term A Plus the official magazine of HKICPA, September 2011, “SEC demands Groupon explain unusual term”
The United States Securities and Exchange Commission has asked online coupon company Groupon to explain an unusual accounting measure it appeared to have invented in order to market itself to investors before its initial public offering. The metric, called “adjusted consolidated segment operating income,” paints a more robust picture of performance by excluding marketing and other expenses, critics have said. September/October 2011
Accountants need to be soft to be sharp soft skills are increasingly in demand. People want to do business with people they feel at ease with, and it’s surprising how crucial social codes are to establishing trust.
n mid-September ICAEW held a farewell event for 15 Chinese students from Chinese Institute of Certified Public Accountants (CICPA) who have spent the summer in London on a cultural exchange as part of the ICAEW-CICPA joint programme to help CICPA members become ICAEW chartered accountants.
Obviously, having a well-respected qualification, such as the ACA (Associate Chartered Accountant), is critical to build a successful career. However, that in itself might not be enough any more. If an employer has to decide between to otherwise even candidates, demonstrating softer skills might be the feather that tips the scales. The students had enjoyed a programme which took them into accountancy firms and businesses, to Stonehenge, Arsenal, the BBC, the Changing of the Guards and even Les Miserables as well as classroom sessions on International Financial Reporting Standards. However, the thing they talked about the most was learning ‘soft skills’ . Accountants might be focused on numbers but they should not neglect the importance of soft skills in today’s complex business environment. Whether making small talk during social networking, interview and presentation skills or learning about business meeting etiquette,
Soft skills relate to a person’s “EQ” or Emotional Intelligence Quotient. It is the group of social graces, personality traits, language and communication nuances, personal habits, friendliness and attitude that characterises the ways people interact and build relationships. Whereas in the past, hard or technical skills were considered the most important, business leaders and recruiters now understand that the ability to empathise, negotiate and gently influence play a greater role in today’s team-based work environment.
Accountants are typically stereotyped as rather introverted types whose only interest is numbers. Whilst having excellent numerical skills is vital to becoming a successful accountant, it is only part of the required package. The role of accountants has changed massively over the past few decades and they are now much more than book keepers; they are business decision makers at the highest levels and key information providers to the financial markets. As the profession evolves, along with the increasingly complex business and regulatory environment, accountants are expected to add value and play a management role. For example, Chief Financial Officers are no longer expected to be a ‘scorekeeper’. In companies across the world, CFOs are looked upon as an integral part of the business strategy team, a leader who is deeply involved in providing the essential financial strategy to support the company’s overall business strategy. Therefore, the ability to interact effectively, efficiently and convincingly with others is critical. Among the soft skills in high demand are listening and communication skills, presentation skills, analytical thinking, time management, assertiveness and diplomacy, the ability to negotiate and influence decisions, and team building. Another key reason for brushing up on soft skills is that they are very transferable, allowing you to continue building on the skills regardless of position or employer. Albeit perhaps less tangible than other
‘harder’ professional skills, soft skills – like any other skills – can be learned and developed. They can be refined and become a natural part of a person’s approach to dealing with a situation, get the most out of an opportunity or overcome a challenge. In the current climate, whether you work in business as a manager or as a business advisor, the ability to deal efficiently with people and problems is a highly sought-after skill. Businesses of all sizes and types have to deliver more for less and having the right staff with the right skills in the right positions has never been more important. Many of the decisions we make, whether it is about choosing an advisor or employing new staff, is influenced by our impression of a person as a person rather than a set of hard and demonstrable skills and qualifications. It is important not to ignore that fact. The students who took part in the cultural exchange are at the forefront of a new era for the profession in China. There have been many changes in Chinese accountancy over the last decade, with major reforms in 2002 and 2006 when the current financial reporting rules were introduced. What was then new is already called the ‘old GAAP’. There is a new generation of accountants coming to the fore in China, and learning soft skills as well as technical expertise will equip them to be the financial leaders of the future.
Regulator votes to study accounting “term limits” A Plus the official magazine of HKICPA, September 2011, “Regulator votes to study accounting ‘term limits’”
The auditing regulator in the United States has voted unanimously to inquire into whether companies should have to change their outside auditors every few years, with the aim of improving the quality of audits and encouraging auditors to be more independent of their clients. The Public Company Accounting Oversight Board has been critical of cosy relationships between auditors and their clients.
By Mark Protherough ICAEW Executive Director, Learning & Professional Development
ACCA looks forward to constructive dialogue with European commission on audit
Lessons have to be learned, and time is right to re-examine the role of statutory audit for a sustainable future, says the global accountancy body
ACCA is aware of the widespread
to ensure that the value of audit is
‘In pursuing these ambitions,
speculation concerning the forthcoming announcement by the European Commission of its future legislative proposal on statutory audit.
maintained and enhanced in the years to come’, says John Davies, head of Technical at ACCA.
however, we believe it is important to ensure that we do not resort to inflexible and bureaucratic measures which risk creating practical problems within the corporate sector and which could even prove counter-productive in terms of their effects on audit quality. Crucially, whatever arrangements are eventually adopted to replace the current Directive should, in our view, focus on outcomes as much as procedures’, he adds.
However, while ACCA will not make any formal public comment on the Commission’s proposals until they are actually made, they have, during the process of consultation which has already taken place, made their position clear regarding the future of audit policy in Europe. ‘We agree with the Commission that the time is right for all parties with an interest in audit to re-
ACCA accepts that maintaining and enhancing the value of audit may mean making significant changes to how audits are currently conducted and regulated. ACCA defended the idea that the scope of audit needs to be expanded so as to take on more responsibilities which are likely to make a real difference to shareholders and regulators, such as reporting on how companies manage their strategic risks. John Davies explains: ‘We share
examine the role of statutory audit in the light of our collective experience of the financial crisis. We support the Commission’s project to review all aspects of existing law and regulatory practice with the aim of learning lessons from that experience. While we accept that there are lessons to be learned, our position is that we continue to believe strongly in the value of audit
the Commission’s concerns about concentration in the listed company audit market and believe that changes should be made to the audit environment to encourage greater involvement on the part of smaller firms in listed company audit work. We also fully endorse the Commission’s goal of improving audit quality and accept that integral to that goal must be to
as a tool which can provide material benefits to companies and their various stakeholders and are keen
address issues relating to independence, objectivity and professional scepticism.’
‘ACCA looks forward to the publication of the European Commission’s plans later this year and to engaging in a constructive dialogue on them, both with the EU executive and the co-legislators. With this in mind, ACCA is organising a round table meeting on the issue in Brussels in early December’, John Davies concludes.
ACCA Global, September 2011, “ACCA looks forward to constructive dialogue with european commission on audit”
DFK International makes key appointment One of the world’s leading accountancy networks which celebrates its 50th anniversary in 2012 has made a key appointment. Céline Galophe has joined the London headquarters of DFK International – which is ranked among the top 10 global accountancy associations and has over 300 offices in more than 80 countries – as Assistant Executive Director/Regional Executive Officer. Céline, who is fluent in English, Spanish as well as her native French, is hoping her linguistic skills and fresh approach will help her engage with its members ahead of its landmark birthday next year.
‘The executive office of DFK International does a great job in making things happen.’ - Céline Galophe, New DFK International Assistant Executive Director/Regional Executive Officer
lophe New D F Directo K Internation al r/ Regio nal Exe A ssistant Exe cutive Officer cutive
She said: “I only want to add to that with the diversity that I can bring to the role with my language skills, background in human resources and communications and my young and fresh outlook.” Céline, aged 25, has moved to London from Mauritius where she lived for more than a year while working as a human resources development manager in the construction sector. She had previously enjoyed several internships with organisations in Spain, the USA and France whilst studying for her masters degree in business management, specialising in human resources management. Her position with DFK International has been created to support Executive Director Martin Sharp
and to assist with the increasing workload generated by the thriving Association. She said: “It is great to be part of DFK International and I am looking forward to helping the executive office bring real benefits to members. By improving communications, I hope to be able to help build even better relationships between members themselves and with the executive office.” Executive Director Martin Sharp said: “We are delighted to have Céline on board and she is already building contacts with members around the world and bringing fresh ideas to the way we run DFK International.”
Jul./Aug. 2011 September/October 2011
Executive pay set to increase Executive pay will rise in 2012, according to 79% of senior reward professionals across the FTSE 350 recently surveyed by PwC.
PwC Global, August 2011 , “Executive pay set to increase unless turbulent markets take their toll”
The findings come ahead of proposals expected this autumn from Vince Cable on executive compensation. The High Pay Commission is also expected to report further on the issue. Pay increases are most likely to be to base salaries. Of those firms expecting executive pay to rise, 65% will increase base salaries
only, while a further 30% will lift salaries along with other components, such as long-term incentives. Salary increases are expected to be between 2-4%, broadly in line with 2011 rates. But the picture is far from even, with pay freezes likely in around a fifth (13%) of companies. Likewise, brakes are being put on bonuses, with 85% of respondents expecting no increase in these. Sean O’Hare, reward partner at PwC, commented: “Even moderate pay increases in line with inflation are likely to prove controversial given the building public and political pressure to address the widening gulf between the highest and lowest earners, compounded by tough economic conditions. But whether anticipated salary rises play out next year will depend on whether markets improve. Increases that are not aligned to company and share price performance are likely to meet strong resistance from shareholders.” Bonus payouts in particular will depend on whether executives meet performance targets, which are likely to become more stretching. PwC data shows that bonus performance metrics are focusing more on company revenues, profits and strategy.
Sean O’Hare, reward partner at PwC, commented: “One of the biggest causes of shareholder concern has been bonuses paying out even when company performance has been disappointing, as was sometimes the case in 2010. Toughening up executives’ targets and ensuring they reflect business strategy has become a major focus.” Shareholders may also be reassured by measures that could see companies reclaiming chunks of executives’ pay in certain situations. A significant 30% of firms are planning to introduce so-called clawback in 2012. Most of these firms say clawback would take the form of reducing outstanding deferred shares or other long-term incentives. Sean O’Hare, reward partner at PwC, commented: “Whether tougher performance measures will mollify shareholders, politicians and the public will depend on whether they’re seen to work. Shareholders don’t object to top performers being well paid, the problem is sifting these from the mediocre ones. “Companies on their part need to get better at explaining why people are being paid particular amounts. Ultimately you don’t want people to feel beaten up for generating wealth.”
Switzerland no longer a hiding place Ernst & Young, August 2011, “ Switzerland no longer a hiding place for UK tax evaders – Ernst & Young comments on landmark tax agreement”
Chris Oates, head of Ernst & Young’s Tax Controversy team, comments on the landmark tax agreement between the UK and Switzerland, announced by HMRC in August. “The landmark disclosure agreement announced between the UK and Switzerland, marks a continuation of the UK Government pledge to crack down on tax evasion’ he said. A boost to Treasury coffers but individuals will remain anonymous to HMRC
any other tax treaty, these individuals will remain anonymous to HMRC in the UK. “This will undoubtedly provide a much needed boost to the UK’s finances; it is expected to generate billions of additional tax flows to the UK Exchequer, including an upfront payment by the Swiss banks of SFR 500m. But, HMRC will miss an opportunity to establish whether these individual cases are involved in much wider tax evasion as it will only be based on Swiss assets.
“It offers UK resident individuals with undisclosed tax liabilities arising from assets connected with
Side effects could see assets diverted to Liechtenstein “As a side effect of today’s announcement, we could also see an increase in people moving their assets to Liech-
Switzerland - the chance to wipe the slate clean, by making a lump
tenstein rather than paying up to the Swiss authorities. The Liechtenstein
sum payment to the Swiss authorities which then goes back into UK Treasury coffers. However, unlike
Disclosure Agreement only requires a back payment of taxes from 1999/2000 onwards, rather than the
total value of assets held in Switzerland. This could prove a more cost effective way to resolve past tax liabilities for UK individuals than the new Swiss arrangement. Failure to disclose at all, would ultimately result in very serious consequences and possibly criminal prosecution.” Oates concluded: “International cooperation between tax jurisdictions has improved massively over the last five years and we will only see more of this type of tax treaty in the future.”
Leases and Transition to
he International Accounting Standards Board (IASB) is currently looking at the accounting for leases and has issued an exposure draft. Its proposals would significantly affect the accounting for lease contracts for both lessees and lessors. Lessees would recognise assets and liabilities for all leases and the lease classification in the current lessee accounting model (IAS 17, Leases) would no longer exist. However, many entities, including public bodies, are still grappling with the current IAS 17 standard and the related provisions of IFRS 1, First-Time Adoption of International Financial Reporting Standards.
This article looks at some of the issues that first-time adopters and other users of IAS 17 will face. Accounting for leases can have a significant impact on the financial statements of both lessees and lessors. Leases are classified as finance or operating leases at inception, depending on whether substantially all the risks and rewards of ownership transfer to the lessee. The legal form of the transaction is not the determining factor. Under a finance lease, the lessee has substantially all of the risks and reward of ownership. All other leases are operating leases. Under a finance lease, the lessee recognises an asset held under a finance lease and a corresponding obligation to pay rentals. The lessee depreciates the asset. The amount recognised as an asset and liability by the lessee is either the fair value of the leased asset or the present value of the minimum lease payments using the interest rate implicit in the lease, whichever is lower. The lessee may need to estimate this interest rate but if this is not possible, the lessee should use its incremental borrowing rate. Lease rentals are split into two components: an interest charge and the reduction in the lease receivable. The lessor recognises the leased asset as a receivable. The receivable is measured at the â€˜net investmentâ€™ in the lease, which is the minimum lease payments receivable, discounted at the internal rate of return of the lease, plus September/October 2011
the unguaranteed residual which accrues to the lessor. Lease rentals are allocated between a reduction in the receivable and finance income so that finance income recognised represents a constant percentage rate of return on the net investment. Under an operating lease, the lessee does not recognise an asset and lease obligation. The lessor continues to recognise the leased asset and depreciates it. The rentals paid are normally charged to the income statement of the lessee and credited to that of the lessor on a straight-line basis. There are certain criteria, which help to determine the classification of a lease. These criteria are used as a guide and often the substance of the transaction is the overriding factor. The criteria that would normally lead to classification as a finance lease are: • Ownership is transferred to the lessee at the end of the lease term. • The lessee has an option to buy the leased asset at the end of the lease term, and it is reasonably certain that the option will be exercised. • The lease term is for the majority of the economic life of the asset. • At inception, the present value of the minimum lease payments amounts to at least substantially all of the fair value of the leased asset. • The leased assets are highly specialised and only the lessee can use them without major modification.
Additional indicators may point to the lease being a finance lease; they revolve around the ‘risks and rewards of ownership’ criteria - for example, the lessee benefits from fluctuations in the fair value of the residual by receiving rent rebates. The IASB deleted the specific guidance regarding classification of leases of land as from 1 January 2010, so as to eliminate inconsistency with the general guidance on lease classification. As a result, leases of land should be classified as either finance or operating, using the general principles of IAS 17. IAS 17 does not include an assumption that land is always an operating lease. This is to be applied retrospectively to existing leases if the necessary information is available at the inception of the lease. Otherwise, land leases should be reassessed on the date of adoption of the amendment. In determining whether the land element is an operating or a finance lease, an important consideration is that land normally has an indefinite economic life. Whenever necessary in order to classify and account for a lease of land and buildings, the minimum lease payments are allocated between the land and the buildings in proportion to the relative fair values of the leasehold interests. If the lease payments cannot be allocated reliably between these two elements, then the entire lease is normally classified as a finance lease. If leased land and buildings meet the definition of investment property under IAS 40, Investment
Property, then even if the land would normally be classified as an operating lease, it can be measured and recognised as a finance lease, provided that the investment property is subsequently measured at fair value. Lessors sometimes provide incentives for lessees to enter into operating leases. But whatever the form of an incentive, it should be spread over the lease term on a straightline basis. In effect, this reduces the cost of the rentals taken to profit or loss, so that the true rental cost to the lessee is reflected. There may be transactions which do not have the legal form of a lease but which contain a lease. Under IFRIC 4, Determining Whether an Arrangement Contains a Lease, arrangements which are not legally a lease are accounted for as leases if the fulfilment of the arrangement is dependent on the
use of a specific asset and the arrangement conveys the right to use a specific asset. An example of this type of arrangement is an outsourcing contract. A public body may, for example, outsource its refuse collection to a private sector provider. The private sector provider purchases the vehicles and uses them exclusively for the public body. The public body can use the vehicles and the vehicles are used in this connection for the major part of the assetâ€™s life, which means that the arrangement conveys the right to use all but an insignificant part of the asset. In this situation it is likely that the public body may have to recognise a finance lease. In the case of the public sector, some of these arrangements may have to be accounted for under IFRIC 12, Service Concessions. This applies where there is a contract with a private sector partner and the public sector has control of the services and a residual interest in the assets. IFRIC 12 may require the recognition of an asset in these circumstances. An amendment to IFRS 1 allows a first-time adopter to apply the transitional provisions in IFRIC 12, which are that IFRIC 12 must be applied retrospectively unless doing so is impracticable.
Many entities including public bodies are adopting IFRS for the first time. There are no explicit exemptions or exceptions in IFRS 1 from retrospective application of IAS 17 leases. A first-time adopter is therefore required to recognise all assets held under finance leases at the date of transition. This involves the determination of the fair value of the asset at inception of the lease or the present value of the minimum lease payments,
equipment but not to the operating lease prepayment. Thus the building asset may be stated at $5m but the prepayment must be restated to original cost, with the resultant debit to revaluation reserve. IFRS 1 provides an exemption from the requirements of IFRIC 4. Instead of determining retrospectively whether an arrangement contains a lease at the inception of the arrangement, entities may determine whether arrangements in
if lower, depreciated to the date of transition and calculating the finance lease liability based on the net present value of the minimum lease payments, amortised using the rate implicit in the lease.
existence on the date of transition to IFRS contain leases by applying IFRIC 4 at the date of transition.
It can be difficult and impracticable to determine the fair value of the asset acquired in the lease. The entity may elect at the date of transition to measure the asset capitalised at fair value by using the fair value as deemed cost exemption available to property, plant and equipment.
Example An entity pays a premium of $6m for a lease of property in 2009. This is capitalised as a fixed asset under local GAAP. On 1 January 2010, the date of transition to IFRS, the asset is revalued to $7m. The entity determines that at 1 January 2010, the relative values of the land and buildings are $2m for the land and $5m for the buildings. The entity has determined that the building is a finance lease and the land an operating lease. The fair value as deemed cost exemption is available to property, plant and
Extra exemption In 2009, an additional exemption provided further relief where the first-time adopter had under its previous GAAP made an assessment as to whether an arrangement contained a lease at a date other than that required by IFRIC 4; the first-time adopter need not reassess the position when it first applies IFRS if the outcome would have been the same. Under IFRS, in the lessorâ€™s financial statements, a finance lease debtor is recognised at an amount equal to the net investment in the lease. On transition, the debtor at the inception of the lease should be determined and full retrospective adoption should be applied. The carrying amount at the date of transition should be determined using a constant periodic rate of return on the lessorsâ€™ net investment and any differences with current carrying amounts treated as an adjustment to retained earnings.
Accounting for Intangible Assets This article will look at the principles contained in IAS 38 ‘Intangible Assets’ and take a look at the different sorts of intangible assets that can be recognised on the statement of financial position as well as those which are prohibited. Steve Collings Steve Collings is the audit and technical partner at Leavitt Walmsley Associates Ltd and is the author of The Interpretation and Application of International Standards on Auditing.
Many organisations will have intangible assets on their statement of financial position. Intangible assets can comprise assets such as: · Licences and quotas. · Patents and copyrights. · Computer software. · Trademarks. · Franchises. · Marketing rights. To be eligible for (potential) recognition on the statement of financial position, the intangible asset must
be identifiable. The term ‘identifiable’ essentially means that the asset has the capability of being separated from the rest of the organisation; in addition, an intangible asset can also meet the recognition criteria when it arises from legal rights. To quickly recap, the Conceptual Framework defines an asset as: ‘a
Therefore it follows that if the intangible is not capable of being separated from the business, or if it does not arise from legal rights and also does not meet the definition of an asset in the IASB’s Conceptual Framework then no intangible asset can be recognised on the statement of financial position and it is written off to profit or loss.
resource controlled by the entity as a result of past events from which future economic benefits are expected to flow’.
When you are dealing with the accounting issues for intangible assets, you need to be extremely
careful because some items might come across as being eligible for recognition, but in fact are prohibited. IAS 38 prohibits ‘internallygenerated’ intangible assets from being recognised on the statement of financial position; some examples of the more ‘common’ internally-generated items that are prohibited in IAS 38, which you might come across in studies (or even in real life) are: · goodwill · customer lists · brands · mastheads · publishing titles
Business combinations One word of caution to students who are currently studying financial reporting papers – IAS 38 does not cover goodwill acquired in a business combination (i.e. the purchase of a subsidiary); this is dealt with in the provisions of IFRS 3 Business Combinations despite the fact that goodwill is an intangible asset. I will be covering the principles in IFRS 3 in a later article.
for it. IAS 38 offers two choices in the form of: · the cost model; and · the revaluation model. Under the cost model, the intangible asset is carried at its cost and amortised over its expected useful life. If there are indicators of impairment in an accounting period, then the intangible must be written down to its recoverable amount (impairments are dealt with in IAS 36 Impairment of Assets). Do not forget that assets can never be stated at any more than their recoverable amount in the statement of financial position. In real life, the cost model is the most common method used to measure intangible assets after initial recognition.
Extreme care must be exercised if an organisation wishes to measure intangible assets under the revaluation model after initial recognition! This is because there has to be an active market in order to obtain fair values. The reality is that active markets are particularly rare and therefore the revaluation model is not used, though IAS 38 suggests active markets may exist for: · production quotas · fishing licences · taxi licences
Amortisation Once you have recognised an intangible asset at cost and you choose to measure it under the cost model after initial recognition, amortisation must be charged on an intangible asset which has a finite useful life. In the real world,
During a business combination, a presumption is made that the fair value of an intangible asset can be made reliably. However, during a business combination if the intangible asset does not meet the definition of, and the recognition criteria for, an intangible asset then the expenditure on the intangible asset should form part of the amount attributed to the goodwill on acquisition.
Measurement Once you have established that you have an intangible asset then you need to know how to account September/October 2011
amortisation is charged on a straight-line basis over the life of the intangible asset and usually has a residual value of nil. There are some intangible assets which might be considered to have an indefinite useful life. For such intangible assets, amortisation is not charged but these intangible assets are tested annually for impairment. There may also be circumstances or events which might
be accounted for as a change in an accounting estimate as per IAS 8 Accounting Policies, Changes in Accounting Estimate and Errors. Because it is an accounting estimate change, the change is applied going forward (prospectively) – in other words you do not go back and apply the change retrospectively (this is only done for changes in accounting policy).
lematic because of the extremely different accounting treatments between research expenditure and development expenditure. All research expenditure is written off to the income statement as and when it is incurred, whereas development costs can be recognised as an intangible asset if, and only if, an entity can demonstrate all of the following:
Research and development
· the technical feasibility of
mean that an intangible asset which had been previously assessed as having an indefinite useful life now has a finite useful life. When these situations arise, the change from an indefinite life to a finite life must
Many companies will carry out research and development; for example, a pharmaceutical company which is looking to bring out a new drug. The issue of research and development can be quite prob-
completing the intangible asset so that it will be available for use or sale; · its intention to complete the intangible asset and use or sell it; · its ability to use or sell the
intangible asset; · how the intangible asset will generate probable future economic benefits. The entity should also demonstrate the existence of a market for the intangible asset’s output or the intangible asset itself or, if it is to be used within the entity, the usefulness of the intangible asset; · the availability of technical, financial and other resources to complete the development and to use or sell the intangible asset; and · its ability to reliably measure the expenditure attributable to the intangible asset during its development.
Example 1. An entity spent $25,000 in undertaking market research into the design of a new product which will be made available within the next five years. The above example is a classic example of research expenditure which should be written off to the
income statement as and when it is incurred because such costs are incurred very early in the design stage.
development expenditure which has already been recognised as an expense in profit or loss cannot be reinstated as an intangible asset.
2. Another entity has just spent $100,000 developing a new drug which is going to be on sale within the next six months. The research phase was completed two years ago and the entity is able to demonstrate all six criteria for the recognition of development expenditure on its statement of financial position.
Amortisation of development costs When you have satisfied the IAS 38 criteria in respect of development costs, the entity must then amortise the capitalised development costs over the useful life as soon as commercial production begins.
Conclusion The $100,000 expenditure on the new drug is clearly development costs as the drug is going to be on sale within a short period of time. In addition, the entity has been able to demonstrate the recognition criteria for development costs in IAS 38. Be careful with development costs and how they are recognised as an intangible asset – development expenditure can only be recognised as an intangible asset after the recognition criteria has been met. Any
IAS 38 is a relatively straight forward accounting standard and the majority of its technical content is mainly common sense. Students need to have a full awareness of the recognition criteria which is contained in the IASB’s Conceptual Framework as well as the two subsequent measurement methods within IAS 38. Remember, it will be quite rare to adopt the revaluation model to value intangible assets – only when an active market exists will it be permissible to carry intangible assets at valuation. September/October 2011
Building world-class businesses for the long-term
hort-term thinking has hit the headlines in recent years as the catalyst for the recent economic crisis. Companies are being chastised from all directions for focusing on their own selfinterest and that of their shareholders and told they must act in the public interest. One key message comes up repeatedly in business debate – companies need to adopt a long-term approach to assure their own and society’s well-being. But what does a long-term approach actually look like in practice?
The real issue for most businesses is being able to juggle the link between the short and long-term effectively. What a company does today must contribute to the longterm vision rather than undermine it. Most important is to recognise the pressures that get in the way such as investor pressures for shortterm returns and for ‘following the herd’. But companies also need to be aware of issues such as poorly defined performance targets which promote the ‘wrong’ behaviours. The first problem is to define the relevant long-term time horizon, which is, of course, influenced by industry characteristics. However, much of the confusion can be cleared when companies distinguish between a long-term perspective and a long-term planning horizon. The perspective provides a guiding star that leads the company 20, 50, even 100 years into the future while the planning horizon must be more practical. It must provide enough scope to think radically, but not so much that it is abstract. Traditional strategic planning creates a useful hierarchy of ideas to support an organisation’s thinking from highlevel purpose to five-to-ten year strategic goals through to short-term operational actions. An added hurdle for companies are global challenges including climate
By Gillian Lees Head of Corporate Governance, CIMA
change, population growth and loss of biodiversity which mean that they have to incorporate a much broader range of issues into their planning than ever before. But companies that are able to work with future uncertainty and to translate this into short-term action can have a major competitive advantage. Management accounting tools such as the balanced scorecard and the CIMA Strategic ScorecardTM can help highlight the areas that companies must address to maintain sustainable business models and to manage the link between the short and long-term. There are a number of key aspects of the business model on which companies should focus to achieve sustainable success. These are: • cost leadership • a durable supply chain • satisfied customers • innovation • and motivated staff The first is cost leadership. This requires non-stop efforts to increase efficiency and reduce the cost of resources used by the business. Lowering costs allows organisations to generate higher margins at prices that are more competitive. Beyond the immediate corporate advantages, cost leadership also promotes decreased use of the world’s finite
resources while maintaining production levels. The second area is a durable supply chain. For a business to succeed in the long term, it needs to secure the supply of resources used to produce its goods and services. A durable supply chain is an inescapable component of a successful business model. An example would be offering suppliers of basic resources fair wages. Supply chain durability needs to be balanced against the goal to achieve cost leadership. For example, excessive pressure on suppliers to offer low prices could impact on their ability to pay fair wages, so having a longer-term adverse effect on supply chain durability. The third area is a motivated and skilled workforce. A successful business needs a committed, ethical and motivated workforce. Promoting an ethos of ‘doing the right thing, even when no one is looking’ will help both the business and the wider community. Ethical behaviour reduces the threat of fraud within an organisation and enhances the reputation of an organisation among its wider stakeholder group. The fourth critical area is attracting and retaining customers. No business can survive without customers who require its products and services. To succeed, business must
often anticipate their customers’ desires, even before they are aware of them themselves. Increasingly, customers are looking for socially responsible companies to supply their goods and services and seek to understand the origins of the materials that go into their goods or are used to deliver services. Among many examples, a growing proportion of consumers want assurances that no child labour was used in the manufacture of clothing. The final critical area is the ability to innovate. This underpins the other four key areas of focus. Innovation allows companies to find new ways to satisfy customer needs, keeps staff motivated and excited about the future, assures suppliers of a company’s prospects, and leads to cost-saving advances in production processes and services delivery. Once a relatively slow process, the scale and speed of technological change requires rapid innovation and demands the dedicated attention in organisations. In terms of environmental sustainability, the scale and nature of the challenges need innovative and creative approaches to business, often demanding new approaches to familiar problems. Organisations can never fully mitigate against risk and uncertainty. But if they build companies that are robust – in all dimensions – they will be best placed to not only survive the challenges of the future but also to thrive in what is an increasingly uncertain world. To find out more about CIMA’s Thought Leadership agenda www.cimaglobal.com/thoughtleadership
Lecturer Profile: Corporate Reporting BPP Professional Education Sheenagh Williams, ACA MCMI MInstLM • Teaching Location – London • Institution – BPP Professional Education • Professional qualifications – ACA [ICAEW] Professional memberships • Institute of Chartered Accountants in England & Wales • Chartered Management Institute • Institute of Leadership & Management • Associate Member of the Association for Project Managers
Professional memberships • Institute of Chartered Accountants in England & Wales • Chartered Management Institute • Institute of Leadership & Management • Associate Member of the Association for Project Managers Work experience Sheenagh studied while working for a small accountancy firm in Devon, UK. She then embarked on her Chartered accounting training at a mid-tier accountancy firm, where she worked in the Corporate Services Department on company audits and specialised in accounting software.
Sheenagh then worked at KPMG before moving to BPP in 2006 as a tutor in financial reporting and audit subjects (ACCA F3, F7, F8, P2). Sheenagh was responsible for tutor training in financial reporting, and then became a subject specialist in that area, writing course study materials & exams for BPP. Sheenagh is now the ACCA Programme Leader for BPP, responsible for the design & delivery of BPP’s ACCA programmes. She now specialises in teaching corporate reporting and teaches P2 in the London centres, currently at Shepherds Bush and Kings Cross.
“Sheenagh stands out among my tutors. Her explanations always leave you satisfied. She has that special knack of making difficult topics seem easy. She is a brilliant tutor.” Samba Omar Sowe, London
“Sheenagh Williams has a great passion for teaching. She helps me understand the most complex areas of P2, as well as being very friendly and approachable. Sheenagh is a fantastic tutor to have!”
“Sheenagh is an excellent tutor. She is clear and explains more if I don’t seem to understand. She is pleasant and takes time out to listen to us even during breaks or after lectures.”
Claudio Canales, London
First Intuition Paul Moore, FCA • Teaching Location – London • Institution – First Intuition • Professional qualifications – FCA (ICAEW) Work experience Paul qualified as an accountant with Deloitte in 1998, where he worked in the audit department. He joined BPP in Reading, Berkshire, in 1998 and became a Director there in 2001. In 2007, He helped set up First Intuition in London where he now teaches Corporate Reporting.
“Absolutely brilliant. Paul’s enthusiasm for teaching is infectious. He keeps the energy levels high even when its tempting to start flagging. Great stuff - really inspiring”
“I was very impressed with the course and the tutor, who was very helpful and answered questions when asked.”
“Paul is excellent. A+” Stephen K June 2011
Mark G, June 2011
Steve A. June 2011
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PROFESSIONALS | TRAINEES | STUDENTS
JIM BUCKLE Chief Operating Officer, LOVEFiLM
Leader Profile Jim has a first class honours degree in English Studies. He trained and then qualified as a Chartered Accountant whilst at KPMG a worldwide leading accountancy and consultancy firm. Since qualifying, Jim Buckle has held a range of senior finance and general management roles, primarily in the media and technology sectors, initially with the BBC and Dell Computers and more-recently in venture backed start up and fast growth businesses. Prior to joining LOVEFiLM he was Managing Director of a major property search website, until leading a successful sale of the business to News International. Jim joined LOVEFiLM as CFO [Chief Finance Officer] in April 2006 shortly after its merger with Video Island and has been COO [Chief Operating Officer] since the sale of the business to Amazon.com Inc. in February 2011. LOVEFiLM provides movies and TV series by post and via the internet, to over 1.7 million subscribers in 5 European countries.
“Possessing great interpersonal and networking skills are crucial to your job search.” says Jim Buckle. Many trainees and students do find themselves in areas of work which have no relation to accounting or finance. It is understandable through the ever growing competition amongst graduates and the rising need to start earning money after long years of just spending. “This is not necessarily a bad thing. The importance of being able to carry over skills from one job to another is the key” says Jim Buckle. Those who do fit in to the criteria above and who do find it difficult to move out of their current areas of work should understand that they do have some skills which they can carry over and start listing them on their CV. Skills such as customer service, problem solving, team work, communication, IT skills are all transferable values regardless of the work you do and should always be emphasised on your CV if you do not have relevant work experience.
Conflict management Conflict is something which happens in every walk of life from politics to the family to the workplace. Some managers believe that conflict in the workplace is an almost inevitable consequence of highly motivated, dynamic and creative people working together closely. Whether this is true or not, conflict is something that a manager should expect and even anticipate, and even though each single conflict situation may be different, the techniques for managing and attempting to resolve it are highly similar.
Why does conflict arise? Conflict may arise due to a number of factors. These include: • Poor communications – if people don’t know what decisions are being made or what changes are taking place in the organisation, conflict is inevitable. • Poor leadership – this includes leadership which is too weak (not giving enough guidance, feedback or praise) or too strong (when the manager is perceived as being aggressive or insensitive). • Ineffective or unclear decisionmaking processes – it is vital that people know, understand and respect these crucial processes. • Lack of clarity in roles and responsibilities – when people aren’t clear about who is doing what, they may end up treading on each other’s toes!
• Clash of values or personalities. • Change – a lot of people don’t like change even if it may be for the better: change has to be managed very carefully to avoid conflict. How can conflict be resolved? Clearly, there are no easy solutions. Yet some things can be kept in mind when attempting to resolve conflicts. • Recognise a conflict as soon as it appears and acknowledge it. Do not avoid it hoping that it will go away. It won’t. A conflict not directly addressed will only get worse. • Arrange a meeting with the people involved as soon as you can. Meet with all the people involved. Do not meet separately with people in conflict – this will only cause suspicion, and you must remain impartial.
• Stay objective and unemotional at all times. Focus on the issues involved and not on the people involved. Keep personal feelings away from work issues. As manager, you should avoid taking sides in a power struggle. • Be prepared to accept some of the responsibility for a conflict having arisen, if necessary. • Attempt to get the interested parties talking to each other. Make sure that there is clear, open, accurate and complete communication. • Use active listening techniques – make it clear that you have heard and understand what each party has to say. • Ask each participant to describe what specific action they would like the other party to take. • Try to come out of the meeting with a goal that is achievable, realistic, measurable and will be reached by a certain time. Arrange a follow-up meeting to review progress. Make it clear that you are following and interested in the situation, and that you are doing all you can to resolve it. • Realise that not all conflict can be resolved. Know where your limits are.
REFERENCE This article first appeared at www.britishcouncil.org/learnenglish and is reprinted with the permission of the British Council
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