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GLOBAL ACCOUNTANT Mar/Apr 2011
• News • Technical • Corporate Governance • Business English • Job Skills
Editors Desk Global Accountant is proud
to announce the latest achievement of AfiD [Accounting for International Development] in providing almost £750,000 of accounting services via their 100th volunteer accountant. The Global Accountant magazine encourages all accountants who wish to make a true difference in global development to join AfiD for an amazing experience. To read more go to p.16. The exams period is near and majority of our student readers are busy getting ready for their June 2011 exams and so is the Global Accountant. We would like to hear from our student readers regarding topics that are interest to you. Our last exam issue [Nov/Dec 2010] was a hit with exam paper questions and answers covering 75% of the marks. For those who are yet to register go to the Global Accountant website www. GlobalAccountantMagazine. com and register for your free magazine.
GLOBAL ACCOUNTANT CONTENTS News
18 Islamic Finance
04 ACCA launches Foundations in Accountancy
05 Incoming IASB chief says accounting standards work
06 Diversity reporting
24 SEC Under Fire for Ethical Lapse
07 Prada plans to list in Hong Kong
26 Fraudulent Reporting doesn’t pay
08 Leases on balance sheet
09 Joint Voice for IFRS Dialogue
28 Words of the Month
10 Performance Obligations Fulfilled? 12 ‘Fit for the 21st Century’
Job Skills 30 Covering Letters 32 Strategic Thinking
13 Maximising people power
Published by: Global Accountant South Bank Technopark 90 London Rd., London SE1 6LN UNITED KINGDOM Contributors: ACCA PricewaterhouseCoopers IFRS Foundation IIRC HKICPA British Council Deloitte Ernst & Young
© Global Accountant 2011
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Global accountancy body launches a new suite of awards that offers maximum flexibility and maximum employability. “Accounting standards are important to market stability, the principal responsibility rests on regulators.” Technical
More than 300 institutions THAT qualify as Islamic Banking institutions in more than 50 countries. Corporate Governance
“All parties involved in the financial reporting process need to continue to focus on ways to prevent, deter, and detect fraudulent financial reporting.” Job Skills
Strategic thinking is both analytical and creative, while non-strategic thinking tends to be one or the other.
Prada would be the first global luxury brand to list in Hong Kong.
Islamic finance has grown rapidly in the finance sector and is becoming increasingly popular worldwide.
Provisions, contingent liabilities and contingent assets can often cause confusion among accountants. Mar/Apr 2011
ACCA launches Foundations in Accountancy
Global accountancy body launches a new suite of awards that offers maximum flexibility and maximum employability ACCA (the Association of Chartered Certified Accountants) has launched Foundations in Accountancy, a new flexible suite of entry-level awards, designed to meet the needs of both students and employers. Foundations in Accountancy was created after detailed consultation with employers, learning providers, members, students and other professional accountancy bodies and regulators. Foundations in Accountancy provides a solid grounding in financial and management accounting, and includes a module in professionalism and ethical behaviour. The awards include: • Introductory Certificate in Financial and Management Accounting • Intermediate Certificate in Financial and Management Accounting • Diploma in Accounting and Business and • Certified Accounting Technician Qualification (CAT) which includes specialist papers and work experience in audit, tax and financial management. Alan Hatfield, ACCA’s director of learning, says: “With Foundations
in Accountancy, students will benefit from the flexible range of entry points, meaning they can begin at the right level for them, and then progress through the awards. And when it comes to flexibility, they can complete qualifications in their own time, selecting those which best suit their own career needs and aspirations.” Foundations in Accountancy also sees certification awarded at each level, helping students to monitor their progress, and helping employers to recruit and train to meet their own business needs. The practical content means that the knowledge
students gain is directly applied to the workplace, offering immediate benefits to existing and prospective employers. Alan Hatfield continues: “Increasingly, employers need to know that they are taking on competent employees in account-support roles, often referred to as an accounting technician role. Employers can be assured that Foundations in Accountancy will train individuals to high standards, and that their training will be recognised all over the world.
“With Foundations in Accountancy, employers can also be assured that candidates have the right professional and ethical skills that are required in the work place in a junior accounting or technician role. The syllabuses span the key elements of financial and management accounting at all levels offered, and also include an Accountant in Business exam at the Diploma level which puts students’ new knowledge into a legal, economic and regulatory context.” Alan Hatfield concludes: “Foundations in Accountancy represents the building blocks of finance because it develops skills and competences tailored to the needs of employers, the public and other key stakeholders. “But more importantly, professionalism and ethical behaviour is placed at the core of the awards – two attributes necessary in the fast moving environment in which the accountancy profession works. Through Foundations in Accountancy, ACCA continues to provide opportunities for talented people, whatever their background or prior learning, to progress to become a professional accountant. With ACCA, students may also acquire a degree en-route to becoming a professional accountant, offered in partnership with Oxford Brookes University-which now has over 10,000 graduates.”
Incoming IASB chief says accounting standards work A Plus the official magazine of HKICPA, March 2011, “Incoming IASB chief says accounting standards work”
In his first speech as incoming chairman of the International Accounting Standards Board, Hans Hoogervorst defended accounting rules in providing transparency in financial reporting, despite criticism that bank audits have failed to alert the market to big financial problems. Hoogervorst said that while accounting standards are important to market stability, the principal responsibility rests on regulators. “Accounting standard setters are sometimes suspicious that they are being asked to put a veneer of stability on instruments that are inherently volatile in value,” he told a European Commission conference on financial reporting and auditing in February. He cited the European banking stress tests in July last year as a case where auditors and regulators appear to have differing views. He said the stress tests conducted by EU banking regulators failed to reflect falling values of sovereign bonds being held by banks because they were measured using book value. As a result, Irish banks that passed the stress tests later turned out to be insolvent and needed to be bailed out. “I also wonder what kind of message this stress test gave to auditors. The European Commission is asking questions about the fact that auditors gave clean bills of health to almost all the banks that failed during the credit crisis. But how critical will auditors be when they see regulators consider that severely discounted securities carry no risk?” said Hoogervorst, who heads the Dutch markets regulator AFM until April. His comments came after the IASB and the U.S. Financial Accounting Standards Board jointly issued draft rules on accounting for bad loans. The new rules require banks to anticipate losses on their loans earlier so they have more time to find capital to cover them and not be bailed out by taxpayers at the last minute. “We are keenly interested in whether this revised approach provides relevant and timely information about credit losses, and whether reporting entities find the proposed requirements operational,” said Leslie Seidman, chairman of the FASB. The loan impairment proposals was available for public comment until 1 April.
ACCA Global, January 2011, “ACCA launches Foundations in Accountancy” Mar/Apr 2011
Diversity reporting Diversity in the boardroom is needed to avoid ‘group think’ Companies need to redouble their efforts to exploit the best talent available for the boardroom, irrespective of gender or background, says ACCA (the Association of Chartered Certified Accountants) in its response to Lord Davies’ report Women on Boards. As a first step, ACCA wants to see transparent diversity reporting by companies placed at the heart of these efforts. ACCA welcomes the recommendation that companies adopt policies on boardroom diversity and report annually on progress made. Helen Brand, chief executive of ACCA, says: “ACCA supports greater diversity in terms of gender, but also in terms of background and experience. Transparency is the key to overcom-
ing gender inequalities in companies – not quotas. We would not want to see new regulation on this issue and trust that companies will commit themselves to enhancing boardroom representation on a voluntary basis. To allow for greater transparency, ACCA recommends that companies should routinely report gender-detailed HR data for all staff, including board members.”
opportunity and diversity.” ACCA recommends:
ACCA believes that diversity on boards makes good business sense, as different perspectives can help to avoid ‘groupthink’ – where boards appoint new members in their own image – which is a particular concern as the pool from which new directors is drawn at present is already small.
• transparency in disclosure of genderdiverse board practices – especially where companies publicly disclose their board membership. This involves setting clear performance standards and evaluation criteria for promotions, rather than making them on personality grounds. • that organisations should build support programmes and provide access to role models, networks and mentors to help women break down the boardroom doors. • the development and advocacy of a business case for gender diversity on boards – this would involve business leaders openly championing the place of women on boards. • that organisations instil a corporate and governance culture promoting gender diversity on boards, with a corporate culture supports diversity.
Helen Brand adds: “If the rise from middle management to board positions is not delivering, then barriers to this ascent need to be removed. Policy areas such as work life balance, salaries, mentoring, organisational and board culture, the ‘tone at the top’, and women’s own attitudes towards career progression need to be addressed. These need to be rationalised rather than bringing in quotas, which might prove counter conducive to the values of
ACCA believes that while companies may very well benefit from having a broader basis for their decision-making, board appointments must ultimately be about assembling the right collection of skills and experience. The code of corporate governance contains the fundamental principle that each company must be led by an effective board. This means that the structure and composition of the board must enable the company
to achieve this goal of collective effectiveness. A fixed requirement to appoint board members on the basis of their gender, or some other characteristic, would risk undermining a board’s ability to achieve this objective. Helen Brand explains: “Making appointments to a board of directors of a public company is a very serious business and should be taken seriously both by the company and the individual director. Company law imposes extensive personal responsibilities on individual directors: all directors need to be able to fulfil these responsibilities in their own interests and those of their board colleagues. The Financial Services Authority conducts additional checks into the competence and integrity of any candidate for senior appointments to financial institutions – whether they are men or women.” Helen Brand concludes: “The decision in Lord Davies’ report not to recommend quotas is sensible since it will avoid a ‘tick box’ mentality–after all, women are perfectly capable of being appointed to board-level positions on merit. Encouraging women into senior management positions is a crucial part of the global drive to improve equality between men and women. In an environment with a shortage of independent non-executive directors with appropriate skills, women are still a largely untapped source of talent for boards.”
Prada plans to list in Hong Kong A Plus the official magazine of HKICPA, March 2011, “Prada plans to list in Hong Kong”
Prada S.p.A., the Italian luxury fashion label, said it will proceed with an initial public offering in Hong Kong this year amid rapidly growing demand for luxury goods from mainlanders. The Milan-based company, which also owns the Miu Miu, Car Shoe and Church’s brands, has kicked off a listing process that could value it at more than €6 billion, Reuters reported. Prada in February reported a record 31 percent growth in 2010 revenue to €2 billion, with Asia becoming its fastest-growing market, posting a 48 percent sales growth. The company, which has attempted three offerings in the past decade but scrapped every one due to market conditions, wants to raise up to €1.5 billion, the South China Morning Post reported. Prada would be the first global luxury brand to list in Hong Kong. HKEx Chairman Ronald Arculli recently visited Italy in an attempt to find more companies to list in Hong Kong.
24 February 2011 , “Transparent diversity reporting is key to overcoming gender inequalities in the boardroom, says ACCA” Mar/Apr 2011
Leases on balance sheet PwC, March 2011, “Proposals put leases on the balance sheet”
entities. However, certain types of lease are excluded. The ED includes leases of property, plant and equipment, but does not include leases of intangible assets.
timing of recognition will change for assets leased under operating leases. Straight-line rental expense will be replaced by depreciation. The ED also covers lessor accounting.
It also excludes leases to explore for or use natural resources (such as oil), leases of biological assets and leases of investment property measured at fair value.
Disclosures and transition
The International Accounting Standards Board (IASB) and US Financial Accounting Standards Board (FASB) have published a joint exposure draft, Leases. The primary objective is to ensure assets and liabilities arising from lease contracts are recognised on the balance sheet. The ED will significantly change the way entities account for leases. Some entities will be affected more than others, depending on the number and type of leases in existence at the transition date. The proposals were issued in August 2010 and will apply to all
The proposed model will eliminate off-balance-sheet accounting by lessees. All assets currently leased under operating leases will be brought onto the balance sheet, removing the distinction between finance and operating leases. The new asset (representing the right to use the leased item for the lease term) and liability (representing the obligation to pay rentals) will be recognised and carried at amortised cost, based on the present value of payments to be made over the term of the lease. The proposed model will require lease renewal and contingent rents to be continually reassessed, and the related estimates to be updated as facts and circumstances change. Income statement ‘geography’ and
More extensive disclosures will be required, focused on qualitative and quantitative information, and on the significant judgements and assumptions made in measuring and recognising lease assets and obligations. Pre-existing leases are not expected to be grandfathered. The new approach is expected to be applied for all outstanding leases at the date of the earliest period presented, using a simplified retrospective approach.
Action plan The implications of the proposals are wide-ranging and companies will need to consider carefully what this means for their business in both the short and long term. The IASB will review the comment letters (after the 15 December deadline) before issuing a final standard. The effective date is likely to be 2012 or later, since no effective date has been proposed in the exposure draft.
Joint Voice for IFRS Dialogue PwC, March 2011, “Proposals put leases on the balance sheet”
India and Japan have signed a Memorandum of Understanding (MoU) to jointly address critical issues around International Financial Reporting Standards (IFRS). The aim is to tackle any concerns they have on application or convergence and to strengthen their say on hot topics at the International Accounting Standards Boards (IASB). The MoU was signed during the first meeting of the newly created India- Japan Joint Working Group in July 2010. The group has representation from the regions’ governments, stock exchanges, regulators, accounting standards boards, accountancy bodies and others. The MoU will focus on facilitating exchange of views and cooperation on legal, regulatory and other issues. It will also strive for consensus and seek to provide leadership on emerging issues by engaging with global, regional, intra-regional organisations and its member bodies.
Performance Obligations Fulfilled? PwC, March 2011, â€œRevenue recognition model to changeâ€?
The exposure draft for a single new revenue recognition model was published by the International Accounting Standards Board (IASB) in June 2010. It proposes significant conceptual changes that will affect most companies and is expected to fundamentally alter the way some entities recognise revenue. The exposure draft, Revenue from contracts with customers, was issued by the IASB and US Financial Accounting Standards Board (FASB) as part of a joint project to develop a common revenue standard. The proposals would require a contract-based approach that focuses on the assets and liabilities created when an entity enters into and performs under a contract. Entities that have followed industry-specific guidance in the past may be more significantly affected than others. For example, the new model could cause pervasive change in the construction, pharmaceutical, aerospace and defence, and technology sectors. Arrangements excluded from the proposals include: lease, insurance and financial instrument contracts, and guarantees (other than product warranties).
Performance obligation The proposed model requires revenue to be recognised when an entity satisfies a performance obligation to its customer. A performance obligation could be an online retailer promising to deliver an MP3 player; or a promise to build and deliver an aircraft carrier.
Identifying performance obligations in a contract will require significant judgement. It may be particularly challenging for service arrangements and long-term contracts, such as a contract to build a ship. Another challenge is to determine when performance obligations should be combined and when they should be separated, which is necessary to determine the amount and timing of revenue recognition.
percentage of box office receipts. Revenue would be recognised when the box office receipts can be estimated.
Revenue would be measured based on the transaction price, which is the amount the customer promises to pay in exchange for goods or services. This may be difficult to determine where consideration is non-cash or could vary in the future.
Greater use of estimates is expected under the new proposals and the transaction price will include variable or contingent consideration when such amounts can be reasonably estimated, which is a fundamental change from most current practice. The transaction price will need to be measured using a probability-weighted estimate of the consideration expected to be received. For example, movies are licensed for a base fee plus a
The proposed model requires an ongoing assessment of costs expected to satisfy outstanding performance obligations. A loss is recorded immediately if the direct costs exceed the allocated transaction price related to a performance obligation.
The proposed model would require more extensive disclosures than currently required under IFRS. These disclosures focus on qualitative and quantitative information, and the significant judgements and assumptions made in measuring and recognising revenue.
Next steps The comment period for Revenue from contracts with customers closed in October 2010 and the IASB is now be deliberating how the final standard will look. No specific effective date has been proposed, but it is unlikely to be before 2014.
‘Fit for the 21st Century’ PwC, March 2011, “IIRC aims for new model ‘fit for the 21st century’”
The formal launch of the International Integrated Reporting Committee (IIRC) in August 2010 is evidence that many prominent stakeholders believe much more thought and effort is needed globally to ensure reporting of company performance develops in a way that is market relevant, cohesive and accessible. Partner at PwC said: “This is an important step on the journey to create a new corporate reporting model fit for the 21st century.” The first meeting of the IIRC steering committee in London, agreed to a radical programme to develop the integrated reporting framework. It also committed to engage the G-20 in 2011 on the changes that need to be put in train to integrate mainstream financial reporting with other significant information, such as on governance, remuneration and environmental and social issues.
Stakeholders involved in the project include regulators, stock exchanges, accounting firms and businesses, such as Nestlé, Aviva, EDF, HSBC and Tata, and influential not-for-profit groups such as the Global Reporting Initiative and the Accounting for Sustainability Initiative. It is significant that the initiative is also backed by the International Accounting Standards Board and the US Financial Accounting Standards Board. “The case for globally consistent financial reporting standards is well understood and accepted,” said IASB chairman Sir David Tweedie. “It is appropriate
to apply the same global approach to other aspects of corporate reporting. This initiative represents an important step on that journey.” The intention is to provide consistent standards to help with the development of more comprehensive and comprehensible information about an organisation’s total performance (prospective as well as retrospective) to meet the needs of investors. Currently, the quality and relevance of reporting on non-financial information varies widely, largely because there is no single set of globally accepted standards for
Maximising people power ACCA Global, March 2011, “Maximising people power – the finance function under pressure”
• Securing the right talent is one of the biggest challenges faced by CFOs • Finance Business Partnering is the way ahead to gain competitive advantage The training, development and retention of the finance function is crucial to the success of an organisation, especially in the current economic climate, asserts a new report from ACCA (the Association of Chartered Certified Accountants) and KPMG called Maximising People Power: Effective talent management in finance. The report emphasises that securing the right talent is one of the biggest challenges faced by Chief Finance Officers (CFOs), adding that the finance function must now take the opportunity to make a difference to their organisations’ success – whether in the public or private sector, whether in a listed multinational or small and medium sized enterprise. measuring and reporting this information. Professor Mervyn King, GRI chairman said: “Integrated reporting... equips companies to strategically manage their operations, brand and reputation to stakeholders and be better prepared to manage any risk that may compromise the longterm sustainability of the business.” Ian Ball, CEO of the International Federation of Accountants added: “The goal of the IIRC is not to increase the reporting burden on companies and other entities. Rather, it is to help them and all their stakeholders make better resource allocation decisions...”
Ian Lithgow, partner, KPMG says: “The next decade presents a critical opportunity for finance professionals to help create and sustain long term value for organisations. But the challenge lies with employers to realise and leverage talent within their finance function.” The ACCA adds: “Last year we found that only 20 per cent of organisations had a talent strategy for their finance team. We found that most talent management strategies weren’t strategic at all – they were informal, sometimes run in isolation of other departments and not part of a wider integrated plan. This cannot continue.” The report says that the responsibility lies with CFOs to establish and maintain great talent practices. Any plans they may have for restructuring the finance function must include a talent management plan that addresses the skills, capabilities and experience levels that are needed. The report also suggests eight key components for CFOs that are facing this challenge:
• Define talent – Organisations need to identify what talent looks like the key skills and behaviours that finance professionals must have to deliver the organisational strategy. • Identify recruitment and talent needs – Organisations should look at both the long and short term needs of the business and the finance function, recruit from within and without the function, and bring individuals into finance who have an established business or commercial understanding. • Define the competencies needed – The next step is to consider what technical, business and behavioural competencies are needed. • Target development – Some fi-
T a l e nt
e P oW r
nance roles will be more critical to the organisation than others. Junior roles can be as critical as more senior ones. • Offer comprehensive learning – Leading organisations offer a comprehensive range of learning and development activities, which can be selected to suit the needs of the individual. Organisations are
The report also says that there is an increased demand for the relatively new role of the Finance Business Partner (FBP) – the highly commercial accountant who applies their core technical knowledge to business issues and provides the much needed finance lens on organisational decision making.
increasingly using Finance Academies to provide structured and consistent training. • Structure career paths – Organisations must develop career paths for finance personnel that enable them to reach and aspire. • Use performance management and reward – Align this to the overall organisational strategy, with rewards linked to individual
Ian Lithgow concludes: “Finance Business Partnering is crucial to the whole business. It helps raise standards, takes a forward looking approach and has a strong commercial view. However, the Finance Business Partner needs to be free from the distractions of core finance work to offer this level of support.
achievements. • Review regularly – The whole talent framework needs to be assessed on an ongoing basis to ensure it continues to meet the requirements of the wider organisation and the finance function itself.
“But the challenge for CFOs is to counter the effects of the recent economic slow down which has frustrated many talented management efforts. Now is the time to increase the focus on talent
management. There will be a need to keep high performing individuals motivated and committed. The astute CFO recognises the benefits of great talent practices extend beyond this, to succession planning, to cultivating the skills that finance professionals need to prove the performance of their organisations and drove long-term sustainable value.” The ACCA concludes: “Talent management is broader than the individual; it is about managing aspirations and bringing a diverse range of talents together across the organisation for the benefit of the business; it is about boosting the finance function’s credibility both internally and externally. There are tremendous opportunities ahead of us, and our experience tells us that those organisations who put talent at the heart of their finance function gain competitive advantage.”
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Overseas Volunteering with
In a little over 18 months since our first volunteer, Accounting for International Development is pleased, and incredibly proud, to announce the placement of our 100th volunteer accountant. On 17th March Sarah Johnson, a chartered accountant with Ernst & Young, will travel to Pondicherry in southern India to support the very deserving staff at Sharana, a small community based organisation working hard to give disadvantaged children an education.
100 + 12,000 = 70 Volunteer Accountants
Priceless support for
Sarah’s eight week assignment will take the total hours of pro-bono financial management, coaching and consultancy by our amazing volunteers to over 12,000. An extraordinary effort, that assisted the development, and in some cases survival, of some fantastic organisations. “After 3 years working in air-conditioned offices, drinking lattés and compiling endless excel workbooks of audit testing, I’m thrilled to be able to use what I’ve learnt and see my efforts add real value to those most in need. Having recently qualified and benefited from the expertise and training provided ICAS and E&Y, I felt the time was right to give something back” said Sarah. A sentiment shared by probably all of our 100 volunteers. Josephine Dauda, originally from Sierra Leone now working as a management accountant in London, decided to use her annual leave to visit her home country and share her skills with EducAid; a small UK charity that runs the only free secondary schools in Sierra Leone. “I was very nervous and perhaps a little skeptical of my value at first, but their smiling faces and genuine appreciation of my efforts quickly put me at ease. It was great to be able to use what I know, and take for granted, to make a real impact on an organization that is doing truly good things in my home country” said Josephine.
AfID offers accountants the opportunity to make a genuine difference as overseas volunteers while at the same time gaining invaluable hands-on experience in the international development sector. Assignments of between 2 & 12 weeks form part of an ongoing strategy to build the financial management capacity and long term sustainability of small community based charities across Africa and Asia.
Josephine and the staff at Educaid – Freetown, Sierra Leone
Grahame Woodward, an interim FD running his own business in Birmingham made time around his client commitments to share his wealth of experience with the Comboni Samaritans of Gulu in Uganda. His expert advice over 4 weeks was invaluable, strengthening their control of day-to-day financial activities and ensuring that a sound financial strategy was in place which would enable the organisation’s work in the community could continue should donor funding be reduced in the future. “I was overwhelmed by the extent of the appreciation of my support and advice from the staff. My expectations, personally and professionally, as to what I could achieve were more than fulfilled. AfID’s support in providing the opportunity and delivering such professional support was critical. Indeed, I strongly believe many working accountants would love to become involved in this process. It’s just a matter of spreading the “word” and making it easy to happen!” As a newly qualified accountant with Deloitte Rob Davies had the opportunity to take a four month sabbatical and volunteer in Tamil Nadu, India, providing much needed accountancy and entrepre-
neurial advice to a small charity, which included budgeting & financial planning for a new market stall selling the crafts of local women. “Whilst I feel I have contributed to making a real difference in people’s lives I have also taken a lot from the experience for myself. It is one of the best things I have ever done; I have more confidence, met some fantastic people and had the experience of a lifetime. I will definitely be going back to see my new friends” said Rob.
Rob Davies and the children at Sharana – Pondicherry, India
It’s worth noting that 100 volunteers equates to over 12,000 hours of professional coaching, close to £750,000 of accounting services. But in real terms the true value of this time is immeasurable, as they have all made a tremendous difference to long term sustainability of many amazing community organisations. We asked Sarah how she felt to be the 100th AfID volunteer and she said, “I am delighted and I hope that I can inspire 100 more! This is a fantastic achievement and goes a long way to dispelling the myth that accountants are boring! ” We couldn’t have said it any better.
For more information about volunteering as an accountant please visit www.afid.org.uk | Email firstname.lastname@example.org | Tel. 0203 287 1177 Mar/Apr 2011
Islamic Finance Islamic finance has grown rapidly in the finance sector and is becoming increasingly popular worldwide. Since the setting up of the first Islamic financial institutions in 1963 in Egypt there are now more than 300 institutions that qualify as Islamic Banking institutions in more than 50 countries.
Investments must have a social and an ethical benefit Kim Smith, FCCA ACA
Managing Director ATC International
The rising demand for Islamic finance qualifications has seen varying responses from a number of professional bodies. In 2007 the London-based Chartered Institute for Securities & Investment (CISI) launched the Islamic Finance Qualification (IFQ) and the Chartered Institute of Management Accountants (CIMA) introduced a Certificate in Islamic finance (Cert IF). CIMA has made publicly available an Islamic finance glossary of terms and contracts (Arabic English) in both on-line and downloadable formats (see http://www. cimaglobal.com). The Association of Certified Chartered Accountants (ACCA) has brought its syllabus in the area of financial management up to date with developments by including concepts of Islamic finance within the syllabus. This short introduction to the topic sets out the main principles of Islamic finance and explains some of the basics methods for making returns. Islamic finance broadly covers all financial activity that is consistent with Islamic law (Shari’ah). The main principles of Islamic finance include
the prohibition of: - The payment and receipt of interest (riba); - Investment in unlawful activities (haram) (e.g. concerning alcohol and drugs); - Transactions involving speculation of gambling (masir); and - The sale of probable items whose existence or characteristics are not certain (gharar).
“Mudaraba” (venture capital)–the mudarib manages the investment project and provides the labour while all financing is provided by another party. Profits, which cannot be guaranteed, are shared in a predetermined ratio. Losses are borne by the finance provider. An Islamic bank takes a management fee for investing money provided by investors as mudarib.
Also investments must have a social and an ethical benefit (so not merely for return).
“Murabaha” (cost-plus financing)–is a method financing the sale of assets. A sale contract between a bank and its client includes an agreed profit margin (either a percentage or lump sum). The client may take delivery of the goods from the seller in an agency arrangement. Payment is usually in instalments. The profit mark-up is fixed and cannot be increased so the bank cannot charge additional profit on late payments.
Under the Shari’ah, a lender making a loan for a business purpose makes a legitimate gain only if he shares the risk. Any risk-free gain or “guaranteed” rate of return on a loan is interest. Because of the restriction on interest-earning investments, Islamic banks traditionally offer two kinds of services: - Those which are provided for a fee or a fixed charge (e.g. safe deposits, fund transfer, property sales and purchase of investments); andPartnerships in investments with the sharing of profits and losses. Basic methods of Islamic financing include Mudaraba, Murabaha and Ijara.
“Ijarah” (leasing)–the bank buys and leases to the client equipment for a fixed period for a fixed rental fee. The bank owns the equipment (as under an operating lease). Where an Ijara is a lease purchase the obligation to purchase the equipment at the end of the period is pre-agreed.
Provisions Steve Collings, FMAAT FCCA is audit and technical director at Leavitt Walmsley Associates and a freelance technical writer.
Definitions A provision is a liability that is of uncertain timing or amount, to be settled by the transfer of economic benefits. A contingent liability is: (a) A possible obligation arising from past events whose existence will be confirmed only by the occurrence of one or more uncertain future events not wholly within the entity’s control, or. (b) A present obligation that arises from past events but is not recognised because it is not probable that a transfer of economic benefits will be required to settle the obligation or because the amount of the obligation cannot be measured with sufficient reliability. A contingent asset is a possible asset arising from past events whose existence will be confirmed only by the occurrence of one or more uncertain future events not wholly within the entity’s control.
Recognition of a Provision FRS 12 and IAS 37 are identical in nature and contain 3 criteria which must be met before a provision can be recognised in the financial statements. These criteria are:
Provisions, contingent liabilities and contingent assets can often cause confusion among accountants, particularly in deciphering when to recognise a provision or disclosing a contingency. This article looks at the provisions laid down in FRS 12 and IAS 37 ‘Provisions, Contingent Liabilities and Contingent Assets’ and FRS 21 / IAS 10 ‘Events After the Reporting Date’ and discusses when and when not to recognise a provision.
(a) The entity has a present obligation (legal or constructive) as a result of a past event. (b) It is probable that an outflow of resources embodying economic benefits will be required to settle the obligation. (c) A reliable estimate can be made of the amount of the obligation.
Figure 1 Company A has decided to close its international branches and
consolidate its international operations into its domestic operations. It puts a full announcement to the international staff out on 20 November 2009. It has calculated the redundancy provisions and has included the redundancy provision in the financial statements for the year ended 31 December 2009. Company A has an obligation as a result of a past event: the announcement on 20 November 2009 of the redundancies. It is probable (i.e. more likely than not) that an outflow of economic
benefits will be required to settle the obligation: the redundancy payments. A reliable estimate can be made of the amount of the obligation: the redundancy calculations. Company A has therefore met all three criteria laid down in FRS 12 / IAS 37 and therefore a provision can be made.
Figure 2 Alicia Limited has made a provision for damages amounting to $10,000 in its financial statements for the year ended 31 December 2009 in respect of a legal claim brought against the company by one of its customers. The legal advisers have advised that at the reporting date they are uncertain as to the potential outcome of the case.
Contingent Liabilities Contingent liabilities are not recognised in the financial statements. Instead contingent liabilities are disclosed within the notes to the financial statements. Under FRS 12 and IAS 37, a contingent liability is: (a) A possible obligation that arises from past events and whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the entity, or. (b) A present obligation that arises from past events but is not recognised because: (i) it is not probable that an outflow of resources embodying economic benefits will be required to settle the obligation; or (ii) the amount of the obligation cannot be measured with sufficient reliability.
Alicia Limited should not recognise a provision for damages of $10,000
because it is not â€˜probableâ€™ that an outflow of resources will be required to settle the case. The legal advisers are not sure as to the outcome of the case. In this case, disclosure of a contingent liability in the notes to the financial statements should be made.
Contingent Assets Contingent assets should only ever be recognised if it is virtually certain that an entity will realise the contingent asset.
Summary Contingent Liabilities
There is a present obligation that probably requires a transfer of economic benefits to settle.
There is a possible obligation or a present obligation that may, but may not, require a transfer of economic benefits to settle.
There is a possible obligation or a present obligation where the likelihood of a transfer of economic benefits is remote.
A provision is required and disclosures are required for the provision.
No provision is recognised but disclosure as a contingent liability is required.
No provision is recognised and no disclosure is required.
Inflow of economic benefits is virtually certain.
Inflow of economic benefits is probable but not virtually certain.
Inflow is not probable.
The asset is not contingent, thus provision should be made.
No asset is recognised but disclosures are made in the notes.
No asset is recognised and no disclosure is made.
Dividends and Bonus Provisions (UK Only) Where dividends and bonus provisions are concerned, confusion often lies in when it is appropriate to recognise them. HMRC are also particularly keen on practitioners applying the accounting standards in this area correctly because where the standards have been correctly applied, tax relief is granted on the bonus plus the employers national insurance contributions. FRS 21 ‘Events After the Balance Sheet Date’ was issued on 20 May 2004 and replaced SSAP 17 ‘Accounting for Post Balance Sheet Events’. FRS 21 removes the requirement to recognise dividends proposed after the balance sheet date. The international equivalent, IAS 10 ‘Events After the Reporting Date’ is identical in nature.
Figure 3 Lucas Limited is the parent of a group. Gabriella Limited is a wholly owned subsidiary of Lucas Limited and the board of Gabriella Ltd announced on 4 January 2010 that it will pay dividends in relation to the year ended 31 December 2009 on 11 January 2010. In applying FRS 21 (IAS 10), Lucas Limited should not recognise a debtor in its financial statements
for the year ended 31 December 2009 because the dividend has been declared subsequent to the year end. In addition, Gabriella Limited did not have an obligation (legal or constructive) to pay the dividend (FRS 12 / IAS 37). It is often the case that the board of directors of a company will pay profit-related bonuses to its directors/staff. Clearly in many cases the profits of a company will not be ascertained until some time after the year end and in many cases, companies will have a prescribed formula for calculating the bonuses.
Figure 4 Over the years, Company B has paid profit-related bonuses to its directors based on a percentage of pre tax profits. The financial statements for the year ended 31 December 2009 have been completed on 28 February 2010 and the directors have made a provision for bonuses. Company B has a constructive obligation to pay the bonuses in accordance with FRS 12 (IAS 37) because past practice has always been to pay profit-related bonuses and therefore the directors ‘expect’
to be paid a profit-related bonus. It is this ‘expectation’ and past practice which allows Company B to provide for the bonus. Had Company B not paid profitrelated bonuses at the year end in previous years, thus not giving rise to an expectation on the part of the directors, then they should not provide for the bonuses because they would not have a constructive obligation.
Steve Collings is the audit and technical partner at Leavitt Walmsley Associates Ltd and the author of:
‘The Interpretation and Application of International Standards on Auditing’.
SEC Under Fire for Ethical Lapse The U.S. securities regulator has been criticised for allowing an ex-top lawyer to handle cases involving Bernard Madoff despite having inherited money linked to the convicted swindler.
Mary Schapiro, chairwoman of the Securities and Exchange Commission, said she regretted the way she handled the case of former SEC general counsel, David Becker, who was sued in February by victims of Madoff’s US$65 billion Ponzi scheme.
Madoff’s admission of fraud in 2008 was a major embarrassment to the SEC, which said last month it will scrutinise hedge funds that constantly beat market indexes for any indications of fraud.
“Knowing those things now, I wish that Becker had recused himself,” Schapiro told Congress. In 2004, Becker and his brothers inherited US$2 million from their mother, who had invested with Madoff. They liquidated the investments in 2005, three years before Madoff’s crimes were uncovered. Irving Picard, the court-appointed trustee trying to recover money for the victims, demanded the brothers return US$1.5 million.
SEC enforcement has boosted investors’ bargaining power in class-action lawsuits, according to a study by Cornerstone Research released last month. It found that SEC enforcement led to a 30 percent jump in the average size of settlements for investors. Last year, investors won US$601.5 million from Bank of America Corp. and KPMG LLP over a securities fraud case–one of the biggest settlements so far linked to the 2008 financial crisis.
Becker resigned from the SEC in February before Schapiro ordered an investigation. The House Committee on Oversight and Government Reform and the Senate Judiciary Committee announced their own inquiries. Becker said he informed the SEC about the source of his inheritance and was granted clearance by its ethics counsel.
In a separate development, the SEC blamed a lack of investment in technology for problems found in its financial statements last year. The U.S. Government Accountability Office, which audits government agencies, found weaknesses in the SEC’s control over its information systems and its financial reporting and accounting process.
A Plus the official magazine of HKICPA, March 2011, “SEC under fire for ethical lapse”
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Fraudulent Reporting doesn’t pay
Proof that fraudulent financial reporting by US public companies has significant negative consequences for investors and executives can be found in a study of financial statement fraud allegations investigated by the US Securities and Exchange Commission (SEC) over a ten year period.
PwC, March 2001, “Fraudulent reporting doesn’t pay”
The study, Fraudulent financial reporting, was undertaken by the Committee of Sponsoring Organisations of the Treadway Committee (COSO). It looked at nearly 350 alleged accounting fraud cases and provides helpful insights into new and ongoing issues that need to be addressed. “All parties involved in the financial reporting process need to continue to focus on ways to prevent, deter, and detect fraudulent financial reporting,” commented COSO chairman David Landsittel. “COSO plans to sponsor additional research on fraudulent financial reporting, as well as the development of further internal control- related guidance to assist those involved in the financial reporting process.” The COSO study found: • Initial news in the press of an alleged fraud resulted in an average 16.7% abnormal stock price decline in the two days surrounding the announcement. • Companies engaged in fraud often experienced bankruptcy, delisting from a stock exchange, or material asset sales.
Business English Business English section is provided to help in-
termediate and upper-intermediate learners of business English, improve their financial vocabulary and perhaps their knowledge of finance.
After bookkeepers complete their accounts and accountants prepare their financial statements, these are checked by internal auditors. An internal audit is an examination of a company’s accounts by its own internal auditors or controllers. They evaluate the accuracy or correctness of the accounts, and check for errors. They make sure the accounts comply with, or follow, established policies, procedures, standards, laws and regulations.
In a nutshell, public companies have to submit their financial statements to external auditors / allow their inspection, auditors who do not work for the company. The auditors then after the inspection process give an opinion about whether the financial statements represent a true and fair view of the company’s financial situation and results.
The internal auditors also check the company’s systems of control, related to recording transactions, valuing assets and so on. They check to see that these are adequate or sufficient and, if necessary, recommend changes to existing policies and procedures.
Auditing Auditing means examining a company’s systems of control and the accuracy or exactness of its records, looking for errors or possibly fraud: where the company may have deliberately given false information. There is always more than one way of presenting accounts [although international accounting standards are trying to eliminate this]. The accounts of British companies must give a true and fair view, where accounting activity is based on principles rather than law. This means statements must give a correct and reasonable picture of the company’s current condition.
During the audit, the external auditors examine the company’s systems of internal control, top see whether transactions have been recorded correctly. It is not economical nor logical to go through all the transactions of the company, therefore the external auditors carry out their work by sampling. This is a process where the external auditor will take samples i.e 3 out of 10 documents that may represent material values then start their examination on such documents.
AGM’s Public companies have to hold an Annual General Meeting (AGM), and most private ones do too. At this meeting the shareholders can question the directors about the content of the annual report and financial statements, vote to accept or reject the dividend recommended by the directors, and vote on replacements for retiring members of the board. The meeting can also carry out any other business stated in the company’s Memorandum of Association or Articles of Association or Bylaws.
Why do you need covering letters? • A covering letter is essential whenever sending a CV to an employer, whether responding to a job advertisement or applying speculatively. • If there are further points you wish to make or areas of your experience you wish to emphasise, particularly explaining why you match the requirements in the advert, the cover letter is the place to do this. • A good covering letter introduces you to the employer and stimulates interest in the attached CV. • In some cases you may wish to attach a brief covering letter to an application form - unless you are specifically asked not to do so.
Covering Letter Guidelines Structure • Keep the letter brief - no more than 1 side of A4 paper. • If the style is formal, the letter should be addressed “Dear Sir / Madam” and ended “Yours Faithfully”. • Wherever possible it is preferable to write to a named person e.g. “Dear Ms. Parker”, in which case you should end with “Yours Sincerely”. • Print your name underneath your signature. • Don’t forget to enclose your CV (or application form). • Check Spelling - Employers are quick to notice mistakes, computer spell check an also let
you down, get someone to read your letter for you; you will be surprised!
Content • Specify the job for which you are applying and mention the source of your information. • Say why you are interested in working for this particular company (“...it pays good” will definitely not impress the employer). • Emphasise points of special relevance to the job e.g. previous work experience, volunteer work, skills, achievements, interest, degree content, topic of your project to illustrate why the
employer should consider you. • Convey your interest in that area of work. Show enthusiasm and motivation, particularly if your degree subject is unrelated to the job. Do your research about the company and know some useful facts to mention try to relate them to past experience is possible. • Add any relevant information not included in your CV. • Don’t repeat facts specified in your CV. The covering letter should illustrate and expand on points already made. • Mention when you will be available for an interview. • Date the cover letter.
Strategic Thinking The following article is about strategic thinking. It explains what strategic thinking is and what makes a good strategic thinker. The article concludes with some tips on how to develop strategic thinking at work. Below the article, there is a comprehension, grammar and vocabulary activity that you can try. What is strategic thinking?
able to do two main things: to look
Strategic thinking is a way of
ahead and see where the business
thinking about an organisation or
is going and, at the same time, to
business. The best way of explain-
focus on what is happening around
planning committee or a task
ing the main principles of strategic
him. He needs to be prepared to
force so that you have a chance
thinking is to compare them with
change direction quickly and com-
to get involved in strategic
the principles of non-strategic think-
bine planning with good business
ing. Strategic thinking focuses on
management. The best strategic
the long term rather than the short-
thinkers are constantly reviewing
the organisation that requires
term. It focuses on the big picture
the latest trends. They know what
a long-term plan. Create the
and the small picture, as opposed
their competitors are doing and
plan and specify a date when
to just focusing on the small picture.
are continuously adapting. They
you intend to complete it. Add
Strategic thinking is both analytical
see opportunities because they
interim objectives and measure
and creative, while non-strategic
are looking out for them. The best
your progress by reviewing
thinking tends to be one or the
strategic thinkers are in two places
these objectives at regular
other. A key principle of strategic
at once: the future and the ‘here
thinking is that it takes a critical ap-
focus on how they can use what
Some practical tips for developing strategic thinking at work.
they already have to their maximum
• Identify your goals or the goals
suggest changes. Strategic thinkers
available on the internet. • Volunteer to take part in a
planning. • Choose an objective within
• Regularly review the goals in your long-term plan and do not
proach to current practices within the business and is not afraid to
other organisations. Many are
be afraid of changing them if they become unrealistic. • Identify colleagues who seem to be good strategic thinkers
advantage. Finally, strategic thinkers
of the business and have a
with well-defined plans. Ask
treat their conclusions as hypoth-
brainstorming session with col-
them for advice on how to
eses because their findings are
leagues to identify the possible
meet your objectives.
always partly based on inaccurate
obstacles to and opportunities
information or predictions.
for achieving these goals. • Build your goals and objectives
What makes a good strategic thinker? Good strategic thinkers have to be
around a strategic plan. Make sure they are realistic. • Review the strategic plans of
REFERENCE This article first appeared at www.britishcouncil.org/learnenglish and is reprinted with the permission of the British Council
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