Accountancy Cyprus - No. 138 - March 2022

NO. 138 / March 2022

ACCOUNTANCY CYPRUS PRESIDENT OF ICPAC

Our goal is to create opportunities for the growth of the economy

DISTRICT POST OFFICE CY-1901 NICOSIA, CYPRUS POSTAGE PAID LICENCE no.33 SEALED UNDER PERMIT no. 133

ΠΕΡΙΟΔΙΚΟ ΤΑΧΥΔΟΡΜΙΚΟ ΤΕΛΟΣ ΠΛΗΡΩΜΕΝΟ ΑΔΕΙΑ ΑΡ.239

ΚΛΕΙΣΤΟ ΕΝΤΥΠΟ ΑΔΕΙΑ ΑΡ. 133

MARCH 1982, No. 1

The Journal of the Institute of Certified Public Accountants of Cyprus

Το 1ο τεύχος του περιοδικού του ΣΕΛΚ Από το 1982 ενημερώνουμε τα μέλη μας

Τρεις από τις σελίδες που δημοσιεύθηκαν στο 1ο περιοδικό του ΣΕΛΚ που εκδόθηκε τον Μάρτιο του 1982

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THE INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS OF CYPRUS 11 Byron Avenue, 1096 Nicosia P.O.Box 24935, 1355 Nicosia, Cyprus Telephone: +357 22 870030, Fax: +357 22 766360 info@icpac.org.cy www.icpac.org.cy

| Forward thoughts By the General Manager

New Year, New Challenges, New Hopes!

Dear colleagues and friends

Kyriakos Iordanou General Manager

2022 was highly anticipated by everybody, with the hope that the predicament caused by the two-year long covid 19 pandemic would come to a containment and eventually we could all return to a gradual “normality”.

Regrettably, this was not what actually happened. Russia’s invasion to Ukraine, the military and economic warfare with all emerging consequences, stirred waters of the political, business and economic foundations.

Although the warfare is happening many miles away, it looks as if the hostilities take place in our own back yard here in Cyprus, given the long business and trading relations between Cyprus and both of these countries.

This is also a proof of how volatile and liquid the international business and economic scenery is and how imperative is to install solid, robust and adaptive economic models, with widely enriched portfolio of activities and associates, whilst remaining compliance friendly. We need to keep in mind that Cyprus has a small but open economy, hence it is susceptible to the ups and downs of the international business affairs and challenges.

This new sad and tragic development has an impact on many countries, entering into a new era for doing business, international collaborations and trading. It is also an acid test in the geo- political scenery, probably leading to a new reallocation of energy and other resources, political and military alliances and influences, international trade, investments and generally business. The declaration of economic sanctions on Russia coupled by the issue of countermeasures by the Russian government repaint the canvas of the international economic activity, setting up thus new norms, practices and regulations.

Our profession living side by side with the

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business community will inevitably be affected by these new challenges. At the same time, the challenges imposed by advancing technology and the lessons learned, or still learned, from the covid 19 experience will also need to be carefully addressed. So, there is a tall mountain for all of us to climb!

So, this is not a period either be complacent nor crying over spilt milk… As a country, the political establishment and the business sectors, we should summon all our resources and brains to firstly, administer to the best of our ability the current situation, and secondly, to unfold our sleeves and start preparing for the next day, in all fields, social, economic, governmental, political.

All of the current events and challenges suggest that time has come for the country to do the obvious: that is, to unglue ourselves form an obsolete and probably bust governmental, administrative and planning framework, and to adopt a new, modern, viable, sustainable and resilient operational model.

In plain words, all stakeholders of the country ought to collectively work on reconsidering the country’s modus operandi and rethinking its economic and business model, aligning it to the international driving forces and realities.

It’s about time to think a bid more radically and outside the box, possibly away from our comfort zones, in order to create lasting value, positive perception and competitive advantages for the country. This is a perfect opportunity to learn from the best practices of other jurisdictions, rather than continue walking along the same path over and over, hoping that “luck” will be on our side again.

This is not the start of the new year we all wished for, the stakes are high and the odds appear not to be favourable. Let’s grasp the opportunities that challenges give rise to, be proactive and daring by taking our fate in our hands.

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ACCOUNTANCYCYPRUS ISSN 1450-2380 The Institute Council Pieris Markou – President Nicos Chimarides - Vice President Members Andreas Andreou, Demetris S. Vakis, Christos Vasiliou, Kyriacos (Karlos) Zangoulos, Gabriel Onisiforou, Stavros Pantzaris, Maria Pastellopoulou, Petros Petrakis, Demetris Shacallis, Spyros Spyrou, Demetris Taxitaris, Odysseas Christodoulou

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ICPAC NEWS • Presentation for members and students with open discussion on all current issues and news in Nicosia and Limassol.

09 10 TOP STORY

Signing of a Memorandum of Understanding between the Institute of Certified Public Accountants of Cyprus (“ICPAC”) and the Cyprus Police.

ICPAC is concerned about the developments of the war in Ukraine • Russian Sanctions! Have we caught your attention yet? Amalia Hadjimichael Head of Monitoring & Compliance of ICPAC

Eleni Pyrgou Secretary General Manager Kyriakos Iordanou Address 11 Byron Avenue, 1096 Nicosia, Cyprus Mailing Address P.O.Box 24935, 1355, Nicosia, Cyprus Tel.: +357 22870030 Fax: + 357 22766360 e-mail: info@icpac.org.cy www.icpac.org.cy The publication is prepared by FMW Financial Media Way 23B Armenias Street, Office 101 Strovolos, 2003, Nicosia Tel.: 22342005 Fax: 22342006 e-mail: info@fmw.com.cy www.fmw.com.cy Design and Pagination: Christiana Loizou Accountancy Cyprus is published quarterly by the Institute of Certified Public Accountants of Cyprus and is send free to all members of the Institute as well as to a large number of other persons, companies and organisations.

The Institute can accept no responsibility fot the accuracy of contributed statements or articles appearing in this publication and any views or opinions expressed are not necessarily endorsed by the Institute, its Council or by the Editors.

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14 INTERVIEW

PRESIDENT OF ICPAC PIERIS MARKOU Our goal is to create opportunities for the growth of the economy

18 AUDIT & ACCOUNTING

• Preparing for the New Quality Management Standards Eleni Ashioti Head of Technical and Professional Matters, The Institute of Certified Public Accountants of Cyprus • Internal Audit functions have a critical role in bolstering the healthy growth of the market Dr George Theocharides Chairman of the Cyprus Securities and Exchange Commission • Has IFRS 9 met its objective?

Pantelis Pavlou Director and a member of the Central, Eastern and South-eastern Europe & Central Asia (CESA) IFRS team at EY

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BUSINESS & ECONOMY • Recognising intra-group loans following the OECD’s FTTP guidance Yiannis Leonidou Partner and A&A Hospitality Industry Leader, Deloitte Christos Theodoulou Senior Manager, Audit & Assurance, Deloitte • Man and Machine: The Impact of Technological Hyper-growth on the Accounting Profession Phil Demetriou Chief Technology Officer, Positive Group

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TAXATION • INSIGHT: Corporate Residence Post-BEPS and Global Mobility Christos Theophilou Tax Partner at Taxand Cyprus • EU Commission recommendation on Business Taxation for the 21st Century Demetris Nicolaides Partner at Sagehill Partners • Should IASB reintroduce amortisation of goodwill? A discussion of pros and cons of the amortisation and impairment only models for goodwill Evita Livera BFP, FCA Special Teaching Staff Department of Accounting and Finance University of Cyprus

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FROM ABROAD...

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IFAC NEWS

• FCM – Fédération des Experts Comptables Mediterranéens Federation of the Mediterranean Accountants Giorgio De Giorgi President of Fédération des Experts Comptables Mediterranéens / Federation of Mediterranean Accountants (FCM)

• IFAC Latest Activity

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| ICPAC NEWS UP COMING EVENTS

Presentation for members and students with open discussion on all current issues and news in Nicosia and Limassol.

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Formal meeting with the President of the House of Representatives, Ms. Annita Demetriou, during which we exchanged views and ideas, among others, on current issues of the Economy, Tax Reform, Corruption and Declaration Pothen Esches.

Signing of a Memorandum of Understanding between the Institute of Certified Public Accountants of Cyprus (“ICPAC”) and the Cyprus Police.

The Cyprus Association of Chartered Accountants and the Cyprus Police signed a Memorandum of Understanding for the most effective exercise of their responsibilities in terms of dealing mainly with financial crime.

The protocol was signed, at the Police Headquarters, by the General Manager of ICPAC Mr. Kyriakos Iordanou and the Assistant Chief (E) Mr. Dimitris Dimitriou.

Establishment of a new Committee for Sustainability The Council of the Institute, recognizing that the field of Sustainable Development is now one of the most important with the aim of economic development efficient, socially just and environmentally sustainable, decided to establish a specialized Committee as Sustainable Development, as was done with other specialized areas. In the field of Sustainable Development, many members of ICPAC are employed at different levels and with different specialties, a fact that underlines the need to support the sector through this new Committee, especially in the current, extremely difficult time.

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| TOP STORY

The Institute of Certified Public Accountants of Cyprus is following closely the war in Ukraine and its subsequent effects on the Cyprus Economy.

ICPAC was mobilised on the first days of the war, examining and analysing the different potential effects on our economy.

ICPAC’s concern is attributed to Cyprus’ close financial, commercial and touristic relations with Russia and Ukraine, as well as to the anticipated disruptions to the international economy due to the sanctions against Russia.

In this context, on 28 February ICPAC

issued the following announcement: “ICPAC is raising its concern regarding the potential impact of the dramatic developments in Ukraine on Cyprus economy and, in particular, on the sector of professional services.

Sectors such as tourism, investments, services, grain, commerce and financial transactions are expected to be heavily affected by the conflict in Ukraine, since Cyprus has close financial and commercial relations with both countries involved.

Yet, the war in Ukraine is expected to cause even further turbulence in European and

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global markets.

ICPAC is following the developments, as well as the economic implications of the crisis, in cooperation with governmental and other organisations, in an attempt to safeguard the interests of the Republic of Cyprus and of its members, remaining completely aligned with the political decisions of the government.

ICPAC hopes that the conflict will soon come to an end, in order for life and economy to return to normality.”

Moreover, ICPAC has been in close contact with the government and other relevant

ICPAC is concerned about the developments of the war in Ukraine The pandemic, the war and inflation are the new pack of challenges for Cyprus organisations, proposing ways to deal with the impending consequences in Cyprus.

Since the initial stages of the crisis, ICPAC has foreseen that the war would impact financial services, tourism and grain imports. These sectors have already experienced the first blows of the developments in Ukraine.

ICPAC has also come to the conclusion that if the war ends soon, Cyprus will be able to keep the economic effects to a minimum.

However, if the fights between Russia and Ukraine continue for a longer period of time, the impact will be more severe.

Hence, the government might have to apply certain measures to tackle the challenges.

ICPAC expresses concerns about the high inflation, attributed to the energy crisis caused by the war. In February inflation rose to 6.6%, creating severe problems in the competitiveness of Cyprus economy, on the cost of living, as well as on the standard of living in Cyprus.

It is obvious that our economy is currently facing a combination of challenges (pandemic, war in Ukraine, inflation).

Therefore, it is of great significance to examine all parameters thoroughly and

take careful steps so as to avoid a new economic crisis.

ICPAC also follows the developments in the international energy field. The EU efforts to make Europe independent of Russian fossil fuels (especially natural gas) is a huge matter that requires close monitoring from Cyprus. This development should be followed in relation to the future exploitation of national gas from Cyprus EEZ. ICPAC will keep following all the developments and propose measures against potential negative effects.

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| TOP STORY

Russian Sanctions!

Have we caught your attention yet?

S

anctions and restrictive measures are an essential tool which is used to exert pressure to force change of behaviour, prevent conflict or respond to emerging or current crises.

Sanctions are intended to weaken a country’s economy through economic and business restrictions. The end result of sanctions can only be deemed as successful if they are effectively applied by all persons, both legal and individual, where there is constant exchange of information between national and international authorities and good coordination between the public and private sector.

So, what do we do about it you may ask?

As professionals we have to make sure that we are fully aware of the sanctions and restrictive measures regime, identify the individuals and entities under restrictions and make sure we do not assist them in breaching and or circumventing the sanctions. Moreover, we should be alert for cases of attempted, or actual breaches of sanctions by the designated persons and file appropriate reports to the relevant authorities without delay.

Amalia Hadjimichael Head of Monitoring & Compliance of ICPAC

A practical guide to the steps that need to be followed by a firm should include at least the following: i. study the list of designated persons and the type of restrictive measured imposed and assess the extent to which these measures affect a firm and its clients, ii. background check the clients by using the internet and reliable client screening platforms as well as check any transactions, including funds, assets and goods iii. assess the risks attached to their direct or indirect involvement in the processing of transactions, iv. assess the validity of any changes in

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the business activities and transactions of the clients and consider whether they are suspicious, v. assess whether any of their clients have activities that are captured under the sanctions regime, e.g., sanctions for agriculture activities. vi. ensure that the employees keep an open communication line with the firm’s Compliance Officer, and in the eventuality of a suspicious transaction or behaviour of the client, proceed to file an STR or a SAR accordingly to MOKAS and be careful not to alert the client of this to avoid tipping-off. vii. in case of a business relationship with sanctioned individuals or entities, each firm and its clients should freeze those individuals’ assets and stop providing any kind of services to the listed entities and individuals. viii. report any true matches to ICPAC based on paragraph 5.2.5. of Directive for compliance with the provisions of UN Security Council Resolutions (Sanctions) and the Decisions/ Regulations of the Council of the European Union (Restrictive Measures) as well as any identified breaches to the restrictive measures

What we need to understand is that the notion of sanctions/ restrictive measures is not something new and will not suddenly go away when the current crisis is over It should be stressed that a holistic and effective sanctions compliance program safeguards the firm against possible breaches of the sanctions and subsequent administrative or criminal prosecutions.

What we need to understand is that the notion of sanctions/restrictive measures is not something new and will not suddenly go away when the current crisis is over.

Professionals need to be aware of the requirements governing the national legal framework which cover the UN Sanctions and the EU Restrictive Measures, as well as the local sanctions regimes applicable

in jurisdictions where their clients are established/trade with/operate in.

In an effort to support its members, ICPAC has a dedicated ‘Sanctions/Restrictive Measures’ section in the Members section of its website that uploads immediately new listings and has created a Russian Sanctions Hub as a central point of reference for relevant resources. The hub includes accumulated information provided by the European Commission in relation to new listings/opinions and best practices, announcements issued by other authorities/ bodies, a FAQ section as well as the circulars issued by the Institute.

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| INTERVIEW PRESIDENT OF ICPAC

Pieris Markou ICPAC has always been in the forefront of developments, continuously making recommendations for improvements and more recently is pushing for a transformation of our tax system to take into account the increasing demands both from the EU and the international arena. Our next steps and how we transform our tax system can have a tremendous impact on our country’s image internationally and we consider this as one of our main priorities of our goals, to ensure we, in the field of professional services, rise to the challenges faced.

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Our goal is to create opportunities for the growth of the economy ICPAC always works around a strategic plan which is updated bi-annually and on an ad-hoc basis having regard to current and future developments What are your main goals as the new President of ICPAC? During the past two years our economy and the business environment in general had to deal with unprecedented challenges arising not only from the effects of the Covid-19 but also from international developments. We are pleased to see that at least the pandemic is now gradually coming under control and businesses can plan the next day.

Our main goals are centered around managing the gradual return to normality but at the same time creating opportunities for growth in the economy. This requires the continued collaboration between Government-Parliament and private sector in ensuring the relevant reforms and transformations which will take us to the next level are implemented.

At the same time, we recognise that technology has played an important role not only in ensuring continuity but also transforming the way we go about our day to day business. The future of our economy relies heavily on our ability to embrace

technology and innovation and as such we at ICPAC have placed priority in ensuring the government and businesses are ready to face the challenges of the future of work.

In the field of taxation, ICPAC has always been in the forefront of developments, continuously making recommendations for improvements and more recently is pushing for a transformation of our tax system to take into account the increasing demands both from the EU and the international arena. Our next steps and how we transform our tax system can have a tremendous impact on our country’s image internationally and we consider this as one of our main priorities of our goals, to ensure we, in the field of professional services, rise to the challenges faced.

In what areas will ICPAC focus on the coming years?

ICPAC always works around a strategic plan which is updated bi-annually and on an adhoc basis having regard to current and future developments. Our Strategic Plan for the

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| COVER STORY

coming years is based on the following pillars: • The strengthening of the role, image and the credibility of our Institute • Enhancement of the accounting profession, in Cyprus and abroad • Supporting and strengthening the country's economy and positioning the country as a reliable business center.

• The strengthening of the organizational structure and efficiency of the operation of our Institute, with the continuous upgrade of the organizational structure and its staff, with the adoption of continuously improved governance procedures, and implementation of automation and digitization of our work and procedures • The continuous and further recognition of ICPAC by the State and society as the competent professional body for the accounting profession.

What new initiatives will you develop to increase the influence of SELK in the government, in the Parliament and in general in the economic events of Cyprus?

The next day of the pandemic will be very different for all of us. We are seeing new challenges in the world economy, new methodologies, new ways of doing business, and new ways of thinking by societies around the world. All these, coupled with the technological revolution at the forefront, will form a new basis for the future.

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Cyprus, being small and vulnerable to external influences, cannot remain untouched by the changes that are taking place internationally. After all, as a full member of the European Union, Cyprus will unavoidably follow pan-European and global developments. For this reason, it is imperative that we proceed in a coordinated manner and without delay to further prepare our economy, so that, on the one hand, it can adapt to the new environment and on the other hand, it can meet the challenges that it will be called upon to manage.

As a first step, there is a need to quickly deal with the wounds left by the pandemic and the gradual return of the economy and society to normality. Following this, the emphasis should be on developing the economy and creating new opportunities for the future. The prerequisites for success would include: • Close cooperation between the GovernmentParliament-Private sector to accelerate the reform program, around the public service sector, the justice system, local government, and digital governance.

• Strict adherence to fiscal policies so as to ensure minimum deviation in fiscal indicators.

• Restoring the country's reputation in the international business environment.

• Completion of the work for the elaboration of the new long-term strategic planning for the country's economy.

• Focus on technology and digital transformation.

• Focus on the opportunities and prospects created by the green and sustainable environmental initiatives.

• Tax transformation in the context of the countries long-term strategic plans.

• Continuous promotion of the comparative and competitive advantages of Cyprus at the international level.

• Investing in new infrastructure, reducing bureaucracy, and enhancing the services offered to international investors and large organizations wishing to operate in or from Cyprus.

• Coexistence of the economic development model with the corresponding social policy model.

How optimistic are you about the future of professional services in Cyprus?

At this moment, we are all trying to get the economy back to normality, but the scars left by the pandemic are many. As a general observation, the economy is being reorganized and reshaped and substantial interventions and subversive ideas are needed to restore balance and gradually growth. There is no doubt that the financial assistance from European Union plans and programs that Cyprus has received over the last 15 months has been a catalyst for providing a satisfactory and decent level of protection to businesses and individuals.

But regardless of European aid, the state was forced to take out new loans totaling 6.5 billion euros, boosting public debt to 120% of GDP. The size of the budget

deficit also shows a large negative deviation. These two parameters are of concern to us, as they unfortunately bring back the fiscal problems in our economy.

It is of paramount importance that new measures and interventions are initiated so as to restore the economy’s main indicators to a manageable state.

Despite the problems and the uphill road ahead, we are moderately optimistic about the course of the economy for the remainder of 2022 and beyond. According to the estimates of both the government and the European Union, the economy is expected to grow at a pace around 4.00% of GDP in 2022 and in the range of 3,3%-3,4% in the years that follow. This forecast is encouraging, provided that no other negative developments occur.

The Recovery and Sustainability Plan, which provides financial resources for Cyprus of 1.2 billion euros, is expected to contribute to the significant boost of the economy. It is extremely important to be able to absorb these resources.

A necessary condition, of course, is the implementation of the commitments of the Republic of Cyprus towards the Plan, implementing the reforms contained therein.

This is undoubtably the first time we have the unique opportunity to fix and reform the economy, and to have an immediate financial benefit for it! ICPAC declares its readiness to assist towards the successful outcome of the provisions of the Plan.

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| INTERNAL AUDIT

Internal Audit functions have a critical role in bolstering the healthy growth of the market

Τ

he financial services sector is gradually expanding, while digital advancement and increased financial technology is rapidly transforming the sector. As a result, the regulatory landscape is changing, as it moves to strengthen investor protection. In view of the continued advancement of the financial services industry and the ensuing challenges it is facing, the role of the internal auditor becomes increasingly more important in terms of maintaining a functioning capital market.

Dr George Theocharides Chairman of the Cyprus Securities and Exchange Commission

INTERNAL AUDITS Internal Audits (IA) are fundamental for the healthy growth of the regulated entities, while they underpin investor protection.

The Internal Auditor’s role is to provide independent assurance that an organisation's risk management, governance and internal control processes are operating effectively.

Regarding the Internal Auditors’ reports that must be submitted annually to the senior management.

The Investment Firms should take into consideration the nature, scale and complexity of their business and the nature and scope of the investment services, the activities undertaken as part of that business and assess whether the frequency of these reports should be increased so that any deficiencies are swiftly identified, and appropriate remedial measures are taken.

In this context, CySEC expects the relevant follow-up reports to include, inter alia, information about the work performed, the person(s) in charge and whether actions were taken before a deadline.

A GOOD INTERNAL AUDIT REPORT Furthermore, an effective exchange of information should exist between the internal audit and other control functions as well as the internal and the external auditors. CySEC has identified cases where the exchange of information between the Internal Auditor and the Compliance Officer or between the Auditors of the Investment Firms was

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very limited. Also, in some cases, the audit plan which should be followed – in order to examine and evaluate the adequacy and effectiveness of the investment firm's systems, internal control mechanisms and processes – is applied too little or too late.

In some other cases, the Internal Auditor has based their findings largely on representations provided by management.

Given that the Internal Audit should be a separate and independent function within the investment firm, this is not sufficient. CySEC expects such representations to be taken into consideration only in very limited cases, where other independent evidence cannot be obtained. In general, a good internal audit report is one that clearly indicates key findings, while explicitly reporting relevant issues and recommendations and stating whether the investment firm has complied with the auditor’s recommendations.

THE AML ASPECT Moreover, every Internal Audit Department should review and evaluate, at least on an annual basis, the appropriateness, effectiveness and adequacy of the policy, practices, measures, procedures and control mechanisms applied for the prevention of money laundering and terrorist financing.

The findings and observations of the IA should be submitted, in a written report form, to the Board of Directors of every obligated entity, which should decide, and take the necessary measures to correct

We expect

any weaknesses/deficiencies identified, as well set out the timeframe within which these measures will be implemented. The measures and timeframe must be included in the relevant BoD Minutes submitted to CySEC. The most common and recurring weakness identified by CySEC in relation to IA Reports, is that the BoD Minutes do not include specific corrective measures to address the weaknesses identified in the IA Reports, neither do they provide a specific timeframe. CySEC assesses, on an annual basis, the IA Reports on the prevention of money laundering and terrorist financing and the relevant BoD minutes submitted by all obliged entities (CIFs, ASPs, Internally Managed Investment Funds and External Investment Fund Managers) according to CySEC’s risk-based supervision framework.

CySEC also publishes on its website details of common weaknesses/deficiencies and highlights the good practices that it has

identified and expects all regulated entities to duly consider and immediately implement corrective measures where they fall short. It is worth noting that the publication of these materials has had a positive impact on the market.

Not only has it focused its attention to AML/ CFT requirements, but it has also assisted obliged entities, and Internal Auditors to better understand their current level of compliance towards their AML/CFT obligations.

In conclusion, we expect that Internal Audits in Cyprus will be improved, by increasing their technical expertise and demonstrating far more independence and transparency.

It is paramount to safeguard and strengthen the structures that render Internal Auditors independent, impartial and unbiased in their judgment, and avoid any conflict of interest that would prejudice their ability to perform their duties objectively.

that Internal Audits in Cyprus will be improved, by increasing their technical expertise and demonstrating far more independence and transparency

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| ACCOUNTING & AUDIT

Eleni Ashioti Head of Technical and Professional Matters, The Institute of Certified Public Accountants of Cyprus IFAC published in December 2020 the suite of new and revised quality management standards . These standards strengthen the overall proficiency of audit firms and the engagements they perform by promoting a robust, proactive, and scalable risk-based approach to quality management.

The standards: • deal with the increasingly complex audit environment, including growing stakeholder expectations and a need for quality management systems that are proactive and adaptable; • point to a progression from a traditional, more linear approach for quality control to an integrated quality management approach; and • recognize the importance of firm governance and leadership, with quality embedded in the firm’s culture, strategic and operational decisions, and leadership’s actions and behavior.

ISQM 1 ISQM 1 deals with the firm’s responsibility for having a system of quality management (SOQM). The SOQM is the mechanism that creates an environment that enables and supports engagement teams in performing quality engagements. It helps the firm in achieving consistent engagement quality because it is focused on how the firm manages the quality of engagements performed.

ISQM 1 replaces the existing standard ISQC 1. It applies to all firms performing audits or reviews of financial statements, or other assurance or related services engagements.

ISQM 1 has eight components. The components in ISQM 1 are aligned to the elements in extant ISQC 1 and include two new components: • the firm’s risk assessment process (there is a focus on scalability throughout this process which is especially important for small- to mid-

Preparing for the New Quality Management Standards size practitioners (SMPs); and • information and communication.

In particular, ISQM 1 addresses the quality management through a quality system which is to be defined by each firm depending on its own activity, with an approach based on the outset of its specific risks, instead of a quality manual and a series of checklists, as they had been developed so far.

ISQM 1 will become effective on December 15, 2022 – by that date the audit firm should: a) Establish quality objectives b) Identify and assess quality risks c) Design and Implement responses d) Design and Implement monitoring activities ISQM 2 Engagement quality reviews form part of the firm’s SOQM. ISQM 2 builds upon ISQM 1 by including specific requirements for: (a) The appointment and eligibility of the engagement quality reviewer; and (b) The engagement quality reviewer’s responsibilities relating to the performance and documentation of an engagement quality review.

The requirements have been enhanced from extant ISQC 1 by increasing the focus on selecting engagements based on quality risks.

ISQM 2 is effective for: • Audits and reviews of financial statements for periods beginning on or after December 15, 2022; and • Other assurance and related services engagements beginning on or after December 15, 2022.

When the new standard becomes effective, ISQM 2 replaces the extant provisions relating to engagement quality reviews in ISQC 1 and ISA 220.

ISA 220 (Revised) ISA 220 (Revised) deals with the

responsibilities of the auditor regarding quality management at the engagement level, and the related responsibilities of the engagement partner.

This standard applies to audits of financial statements.

Key changes include increased responsibilities on the engagement partner for managing and achieving quality and enhancements to: • direction, • resources and • engagement partner being sufficiently and appropriately involved throughout the audit.

ISA 220 is effective for audits or reviews of financial statements for periods beginning on or after December 15, 2022. Early adoption is permitted.

Conclusion While the concept of quality is not new, the new and revised standards require a different approach. Audit firms should thus start preparing now, if not already done so, to be able to comply on a timely basis.

Additional Resources • IAASB ISQM 1 First-time Implementation Guide • IAASB ISQM 2; First-time Implementation Guide • IFAC dedicated Quality Management webpage

1 The suite of Quality Management Standards is comprised of International Standard on Quality Management (ISQM) 1, Quality Management for Firms that Perform Audits or Reviews of Financial Statements, or Other Assurance or Related Services Engagements; ISQM 2, Engagement Quality Reviews; and ISA 220 (Revised), Quality Management for an Audit of Financial Statements. These standards replace International Standard of Quality Control (ISQC) 1, Quality Control for Firms that Perform Audits and Reviews of Financial Statements, and Other Assurance and Related Services Engagements and ISA 220, Quality Control for an Audit of Financial Statements.

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| ACCOUNTING & AUDIT

Has IFRS 9 met its objective?

T

his is the question that the International Accounting Standards Board (IASB) asks when it publishes a Post Implementation Review (PIR) of an International Financial Reporting Standard (IFRS). The PIR is part of the IASB’s due process, where the Board gets the views of its constituents on newly implemented standards, normally after three years of their initial application, and assesses whether standard setting activities are necessary.

For IFRS 9 – Financial Instruments, the IASB decided to launch the PIR in phases.

In September 2021, it published the part on the classification and measurement. In a paper titled: “Request for Information”, the standard setter introduced different topics and asked several questions to the public .

Off course, views and comments can also cover topics other than the ones mentioned by the IASB.

Pantelis Pavlou Director and a member of the Central, Eastern and South-eastern Europe & Central Asia (CESA) IFRS team at EY

CLASSIFICATION AND MEASUREMENT Before discussing the points in the PIR, it is worth summarising the classification and measurement principles of IFRS 9.

The standard introduced some changes in accounting for financial instruments in 2018, however key fundamentals, in the scope of this PIR, remained unchanged.

In short, financial assets are measured either at amortised cost or at fair value.

This depends on two conditions: i) on the characteristics of the contractual cash flows and ii) on the business model in which the financial assets are held.

Financial assets are measured at amortised cost, if both criteria are met: (i) their contractual cash flows represent solely the payment of principal and interest (the so called SPPI) and (ii) they are held in a “hold to collect the contractual cash flows” business model.

In case that the financial assets are held in a “hold to collect or sell” business model, then they are measured using current values

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(i.e., fair value) with the changes in fair value being recorded in the Other Comprehensive Income.

Financial assets held in other business models, or whose contractual cash flows do not meet the SPPI criterion, are measured at fair value with the changes to their fair value reflected directly in profit or loss. One exception to this rule applies to investment in equity instruments not held for trading, for which an entity could make an irrevocable election to account for them at fair value through Other Comprehensive Income, but any gains/losses (including impairment losses) will not subsequently pass-through profit or loss, not even upon derecognition (no recycling). This option is available on an instrument-by-instrument basis.

Re financial liabilities, IFRS 9 mainly rolled over the requirements of IAS 39 with the only exception being the accounting for the fair value changes due to own credit risk. To eliminate the counterintuitive impact, IFRS 9 requires that these changes are recorded in Other Comprehensive Income rather than in profit or loss.

TOPICS IN THE PIR THAT REQUIRE ATTENTION Overall, constituents feel that the classification and measurement requirements of IFRS 9 work well and as intended by the Board. There are, though, some areas that have been flagged for

further attention, of these I would highlight: financial assets with Environment, Social or Governance (ESG) targets, derecognition of financial assets, accounting for equity instruments, and clarification around some aspects of the business model.

The IASB is expected to issue a PIR on the subsequent measurement (including impairment) of financial instruments and one on hedge accounting later in 2022.

Any themes linked to these areas are not discussed in this article.

FINANCIAL ASSETS WITH ENVIRONMENTAL, SOCIAL AND GOVERNANCE TARGETS Due to, among others, changes in society, expectations of investors, regulatory pressure, we see that ESG targets are now more frequently attached to loans, credits, and other financing arrangements.

Sometimes they are called as “ESG loans”.

Simply speaking, these loans include terms that trigger a variability to the interest rates or other changes to the contractual cash flows, which cannot always be traced back to the basic lending arrangements (as required by IFRS 9 which would enable the financial asset to meet the conditions for the SPPI). Unless the variability could be directly linked to credit risk or it is not significant (de minimis), the financial assets would, most likely, fail the SPPI test and therefore they should be accounted at fair value through profit or loss. An outcome that is

not attractive for the holder of the financial asset, which could result in a decrease of the market share of such loans.

Accounting considerations should not prevent genuine business and policy decisions and rationale; therefore, this issue needs to be immediately addressed. The IASB is seeking as much input on this topic as it can get, therefore, I would urge all who have interest on this topic to provide their thoughts with the Board. EY, as other interested parties, will provide comments and insights via its comment letter on the PIR. The European Financial Reporting Advisory Group (EFRAG) also drafted its comment letter aiming at consolidating some of the prominent European views. The Europe Union, being the front-runner in the Environmental policy, has an increasing interest on the discussions around this topic.

The principles of IFRS 9 on the derecognition of financial assets remain at a high level, allowing room for interpretation.

This has led to some divergence in practice, especially among financial institutions

DERECOGNITION OF FINANCIAL ASSETS Currently there is an asymmetry on the clarity around the principles for derecognition of financial assets on one hand and financial liabilities on the other hand. The latter is clearer resulting to more consistency in practice.

The principles of IFRS 9 on the derecognition of financial assets remain at a high level, allowing room for interpretation.

This has led to some divergence in practice, especially among financial institutions. Each

ACCOUNTANCYCYPRUS | MARCH 2022 |

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institution, developed its derecognition policy that applies to all financial assets, including instances of loan modifications.

The accounting consequences of the dividing line between modification and derecognition are quite material, resulting, sometimes, to impaired comparability.

The European prudential supervisors of financial institutions flagged this point in their recent reports, where they mentioned their intentions to raise it to the IASB in the context of this PIR. It is important to note that clarity on this point would also impact the subsequent measurement, which as stated above will be dealt in a different consultation, and this is one of the reasons that some constituents, while they understand the reasons that the IASB opted for a phased approach, are calling for an additional comprehensive review of the whole standard. By this, they argue, the risk that issues remain unattended because they “fall between the cracks” decreases.

ACCOUNTING FOR EQUITY INSTRUMENTS This was heavily debated in 2017, when the EU endorsement of the new standard was a hot topic. IFRS 9, introduced changes, compared to its predecessor (IAS 39) with regards to accounting for investments in equity instruments. The most notably change was the fair value through other comprehensive income irrevocable option (as briefly explained above). Despite that the experience over the past few years with IFRS 9 has shown little evidence that a revision is needed, some vocal opposition exists on the fact that profit or loss will not depict the cumulative gains or losses upon derecognition (mainly concentrated in certain industries).

Another issue around this topic that has been raised by different constituents (including a question from EFRAG) is whether “investment in equity instruments” is too narrowly defined. On one hand, the term “equity instrument” is clearly defined in the literature, but on the other hand, there are some “equity like” instruments, that even though they do not meet the strict definition of equity, they respond to movements in market variables in a similar way. Some are contemplating the idea to consider extending the scope of this

irrevocable election to include equity-like instruments, for example units of funds and puttable instruments that invest in equity instruments, associated derivatives, and necessary cash holdings.

CLARIFICATIONS TO ELIMINATE DIVERGENCE Finally, a few clarifications in the standard would achieve more convergence in practice. While acknowledging and appreciating the fact that IFRS are principle based, several areas remain widely interpretable. For example, IFRS 9 does not have strict rules on assessing the business model of an entity. It also states that infrequent and insignificant sales from a portfolio held in a model “hold to collect”, would not raise questions on the business model. However, IFRS 9 does not define key terms like “infrequent” and “insignificant”.

This has led to different application across entities. Addressing these issues, the IASB will do a great service to all involved in the financial reporting chain, including preparers, auditors, users, and supervisors.

Connect with the author via LI: www. linkedin.com/in/ppantelis

CONCLUDING THIS ARTICLE I reiterate the overall conclusion, that despite some drawbacks and areas of improvement, the classification and measurement part of IFRS 9 works as intended by the Board. Based on the overall feedback from comment letters, the Board should consider some limited scope improvements addressing the concerns on the areas mentioned above.

Accounting for financial instruments is, indeed, a complex topic. At EY, we are committed to maintaining a leadingedge understanding of the changes that may affect the business environment.

Our tool, EY Atlas Client Edition (here) is available for free to everyone and offers access to EY interpretations and thought leadership content.

The views expressed in this article represent the personal opinions of the author and not necessarily the official position of EY IFRS - Request for Information and comment letters: Post-implementation Review of IFRS 9—Classification and Measurement 3 IFRS 9 Financial Instruments - Post Implementation Review - EFRAG 1

2

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| BUSINESS & ECONOMY

Is the future of Retail in consumers’ hands?

Welcome to the era of consumer-to-business.

W

hen we think about the COVID-19 pandemic’s impact on how people shop in Cyprus and across the world — and how retailers cater to their needs — it is important to recognise that recent consumer preferences are not simply short-term shifts. The current period of “buy online, pick up in store” and taking advantage of other digitally enabled solutions, is more likely a tipping point in the digitisation of retail and in the shifting power dynamics between buyer and seller.

Yiannis Leonidou Partner and A&A Hospitality Industry Leader, Deloitte

Christos Theodoulou Senior Manager, Audit & Assurance, Deloitte

It’s evident that COVID-19 has accelerated a push toward a new era of consumer-to-business retail model. In this new model, consumers are acting as merchants in their own right; they’re buying from a wide range of retail channels, even promoting their own selection of products through their social media, they are reselling used goods, as well as defining how to receive their goods.

Consumers no longer rely on retailers in the same way they did in the past. Rather than trusting the same retailer for the best prices and the broadest selection, consumers are more likely to skip from source to source, driven by peer recommendations and comparing prices as they go. Retailers have realised that their role in the customer journey has changed, and even though their profit margins were already squeezed, many have invested heavily in expanding digital experiences and increasing convenience for consumers, by developing more partnerships with thirdparty providers of data-driven services .These strategies however, can lead to a profitability paradox in which they struggle to capture value in return. Retailers can no longer rely on improving margins just by cutting costs.

To thrive in this new era, retailers need to reinvent both how to go to market and how to leverage their own customers along the way.

WELCOME TO AN ERA OF CONSUMER-TOBUSINESS. In April 2021, Deloitte conducted a financial and strategic analysis of 100 retailers from 11 retail subsectors.

The analysis demonstrates how recent customers experience trends – including an individualised, increasingly digitised and complexified shopping experience led by the buyer rather than the seller – are

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intensifying a margin crisis that was already playing out before the pandemic.

Notes: 1. Analysis considers data of ~100 companies over the analysis period.

2. Department/specialty/discount/off-price also includes other discretionary items such as apparel and accessory stores, building materials, hardware, garden supply, home furniture and furnishing.

3. COGS% and SG&A% refer to median COGS as a percentage of revenue and median SG&A as a percentage of revenue, respectively.

If margins continue on the same path, the future of retail will be one of online platforms, mass merchants, and a handful of companies with unique value propositions. As part of the analysis, Deloitte investigated how retailers above the median EBITDA margin and those below the median, were strategising to ensure their sustained success.

Leading companies are pursuing two approaches: (a) exploring new revenue streams and monetising existing assets, and (b) embracing a consumer-to-business mentality.

While innovative new services and partnerships can support retailers’ profitability, the shift to the consumer-to-business mentality offers a more holistic retail reinvention. As retailers approach this new era of retailing, how should they adapt?

1. Remove friction. Make shopping easier by offering various purchasing formats, such as text, livestream, social media and web, as well as fulfilments options like “buy online, pick up in store”.

2. Redefine service. Treat consumers like merchants in their own right; offer more thorough product descriptions. Expand return options, potentially including other retail partners.

3. Organise operations by customer segment. Design a designated customer management team for each segment, charged with owning that segment’s data and smoothing their experience across touch points.

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| BUSINESS & ECONOMY

Man and Machine: The Impact of Technological Hyper-growth on the Accounting Profession Phil Demetriou Chief Technology Officer, Positive Group

As software continues “eating the world”, in the words of venture capitalist Marc Andreessen, its effects on accountancy could be profound and are of interest to many. This is a question that we frequently study in our quest to improve our own digital platforms. Based on this experience, we expect that three key developments will shape the future of accounting over the coming decade.

Throughout the business world, Cloud computing has experienced phenomenal growth over the past 15 years and has become both the primary and preferred mechanism of software delivery across many industries; accounting firms are not an exception. At the most fundamental level, Cloud computing enables division of labour, allowing firms to focus on their core competencies by outsourcing supporting functions to domain specialists.

In the context of accounting, Cloud computing gives rise to accounting platforms that match or exceed the capabilities of desktop accounting software, but delivered through a web browser. Behind this seemingly subtle

O

ver the past few decades, the rapid progress of information technology has made it synonymous with “technology” itself. Accelerated by a historically exponential increase in computing power, major developments in Cloud Computing, Deep Learning, Cryptography and Software Engineering, and factors such as the COVID-19 pandemic of late, it has become clear that this progress is not slowing down, it is accelerating.

difference lie major advantages: while desktop accounting software is typically only accessible from a small number of devices within a network, Cloud-based accounting platforms can be accessed from any device, anywhere in the world; and because these platforms are delivered over the web, they are always up to date and typically exhibit significantly better uptime and reliability compared to desktop substitutes.

Internationally, leading financial software firms such as Intuit and Sage have begun adopting the Cloud computing paradigm to shape their service portfolio.

Over the coming decade we expect that desktop accounting software will be replaced by web-based accounting platforms both domestically and internationally. Our belief in this future is also reflected in our own next-generation accounting platform, Ledger (https:// ledger.positive.cy).

A side effect of the shift to Cloud platforms has been a newfound ability to execute intensive workloads that require high performance computing and specialised hardware. At the same

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time, unprecedented developments in Deep Learning and Artificial Intelligence (AI) have allowed computers to perform tasks that seem distinctly human, subject to the availability of massive computing resources. These two streams of events coincided and enable a level and ease of access to advanced AI models that mere years prior would have been unthinkable.

The applications of AI to accounting are numerous, spanning low-level tasks such as the digital recognition and entry of paper invoices and receipts into accounting software, to high-level tasks such as the automated detection of anomalous entries in accounting ledgers.

At the cutting edge, advanced AI can perform high-level functions by interacting with its users through natural language exclusively and in an end-to-end fashion.

Some of these capabilities have been claimed previously but could often only perform well in narrowly defined tasks and under ideal conditions. What contemporary AI developments begin to allow is the ability to perform tasks in the general case and with a degree of accuracy that matches or exceeds human

baselines. Having developed and deployed state-of-the-art proprietary AI for both Ledger and our tax research platform, Veritas (https://veritas.positive.cy), we can attest to the productivity benefits of these capabilities.

As a case study, since the introduction of “SOVOC AI” (a Deep Learning system that allows practitioners to search large databases of information on the basis of meaning and concepts instead of just keywords) we have observed a real-world 430% increase in the number of relevant matches returned through search, and confirmed that this increase has persisted through time.

Simultaneously, we recognise that creating and serving AI of this calibre is only possible at monumental effort, expense and engineering complexity.

Even for the small array of software firms that have both the in-house expertise

and budget to tackle these challenges, some of the costs associated with these endeavours will inevitably be passed down to consumers. As a result, accounting firms may have to choose between expensive automation with lower labour costs and manual functions with higher labour costs.

Our belief is that automation will prevail as the superior alternative, and firms that embrace these changes and adapt their business model will unlock unprecedented productivity benefits which will materialise in their bottom line.

In light of increasingly strict IFRS and AML requirements, there is a pressing need not only to use computing to enhance human productivity but also to assure the integrity of accounting ledgers. Blockchain technology is best known for its role in underpinning cryptocurrencies and related tokens. While the properties and utility of cryptocurrencies is a controversial subject deserving of separate discussion, the underlying technology has applications in verticals outside digital mediums of exchange.

In an accounting context, blockchain technology can be used to provide an append-only log of accounting entries; that is, a list where entries can be added, but not changed once included, only modulated by new entries. In other

words, history is preserved and can’t be changed without auditors noticing. Based on this novel type of ledger, cryptographic “proofs” can be created to efficiently ensure that the state of the ledger is coherent, verifiable and end-to-end auditable even at intermediate states.

While the utility of the cryptographic append-only ledger paradigm is notable, it also necessitates large-scale changes to the way accounting entries are conventionally stored and therefore might be unable to reach critical mass within the decade.

Nonetheless we remain hopeful and encourage financial software firms to adopt the principles behind this technology.

Ultimately it is impossible to predict future developments with certainty, but we know that these developments will be novel, yet rooted in the needs of today’s world. In this article we make an educated guess that three technologies are likely to impact the accounting profession over the coming decade: the rise of Cloud accounting platforms, the proliferation of advanced Artificial Intelligence technology, and the adoption of principles based on blockchain technology to capture the evolution of accounting ledgers and ensure their consistency and auditability. From our viewpoint, the outlook is certainly positive.

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| TAXATION

INSIGHT: Corporate Residence Post-BEPS and Global Mobility

P

olicymakers around the globe introduced corporate residency criteria in order to tax their legal persons typically on their worldwide income, wherever arising. Unlike physical persons, where identifying where an individual resides is a straightforward process, corporate tax residency criteria are more problematic because legal persons, such as companies, are artificial persons and therefore determining where an artificial person resides is an oxymoron.

Christos Theophilou Tax Partner at Taxand Cyprus

In particular, with the current technology environment, most board of directors’ meetings take place in an electronic form and decisions are often taken centrally by large corporate groups. In this context, countries use different criteria to tax their corporate residents, thereby leading to double taxation.

Double taxation could be eliminated if two states have concluded a tax treaty that includes a tie-breaker rule similar with the pre-2014 Organization for Economic Cooperation and Development (OECD) Model Article 4(3). Such a rule would solve the problem by providing for a single residency.

Following the BEPS project, however, the new tie-breaker rule proposed by the OECD seems not to be a tie-breaker rule but rather a tax treaty anti-avoidance rule and thereby single tax residency may not be achieved.

CORPORATE TAX RESIDENCY UNDER DOMESTIC LAW Internationally, there are two types of test used by tax policymakers to determine when a company is resident under their domestic law. The first is the place of incorporation test and the second is the place of management test. From a policy perspective, the place of incorporation is an objective test as it is simple, straightforward and difficult to manipulate, whereas the place of management is a subjective test and therefore does not provide tax certainty to taxpayers.

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It is worth mentioning that countries, to a broad extent, use both tests under their domestic law in order to be able to exercise jurisdiction to tax on the corporations formed under their laws, as well as on foreign corporations that are managed and controlled from their country. It should be noted that just a few countries use solely one test under their domestic law. For example, Finland and the U.S. use the incorporation test solely and Singapore and Cyprus use the management and control test solely.

Consequently, there are at least four tax planning opportunities.

First, companies can structure their activities in such a way in order for tax purpose to be “stateless” and therefore being taxed nowhere, for example, a company incorporated in Cyprus that has its management and control in the U.S. Second, a multinational enterprise (MNE) can use corporate inversions to shift profits from a country that uses the incorporation test solely in its internal law, so that such a country does not have jurisdiction to tax according to the place of management test.

Third, an MNE could have access to the legal system of a reputable jurisdiction by incorporating a company there and at the same time not being taxed in that country, for example, by incorporating a company in Cyprus or Singapore and having its management and control elsewhere typically in a country with no or low tax.

Fourth and finally, as MNEs have the ability

to make decisions using electronic means of communication, the place of management test can be easily manipulated. Thus, MNEs have the ability to transfer profits from a high tax jurisdiction to a low tax jurisdiction. in light of this, we need to focus on the subjective test (i.e. place of management test), and the critical question here is where the place of management can be determined.

There are at least two views. First, the common law countries, to a large extent, adopt the “central management and control” or “management and control” test. Such a test was articulated in the leading case of De Beers (De Beers Consolidated Mines v. Howe [1906] AC 455 (HL): “In applying the conception of residence to a company we ought, I think, to proceed as nearly as we can upon the analogy of an individual. A company cannot eat or sleep, but it can keep house and do business. We ought, therefore, to see where it really keeps house and does business … [A] company resides for purposes of income tax where its real business is carried on … I regard that as the true rule, and the real business is carried on where the central management and control actually abides.”

As a result, the incorporation of a company is not decisive but rather the central management and control. The heart of the central management and control lies on the higher level of decision-making of the company. Normally, this would not be the day-to-day activities (as this is the case

with civil law jurisdictions noted below).

Instead, this would be the board of director’s decisions, and in case there is more than one board of directors then corporate residence will be assigned to the board of directors that effectively takes the higher decisions.

A case on this point is New Zealand Shipping Co (New Zealand Shipping Co Ltd v. Thew (1922) 8 TC 208 (HL), where a company formed under the laws of New Zealand had one board of directors in New Zealand and one in the U.K. The court decided that the U.K. board was effectively taking the decisions and not the New Zealand board as the latter was subject to the powers of the former. Consequently, it may be possible to find the central management and control in two countries.

Finally, a more recent and interesting case is the Australian case—Bywater. In this case, it was decided that the decisions were not taken where the board of directors’ meetings were held (i.e. in Switzerland), but rather in Australia, because the board of directors simply followed the advice of an individual, namely Mr Goul, based in Australia. The main finding of the court was: “a board of directors abrogates its decisionmaking power in favor of an outsider and operates as a puppet or cypher, effectively doing no more than noting and implementing decisions made by the outsider as if they were in truth decisions of the board.”

Turning to the civil law jurisdictions, in contrast to common law jurisdictions

The heart of the central management and control lies on the higher level of decisionmaking of the company

ACCOUNTANCYCYPRUS | MARCH 2022 |

31

noted above, apart from the board of directors’ decisions one would typically adopt a day-to-day management test as well. Examples would be Switzerland and Germany. As a consequence, the difference in meaning between the common law and civil jurisdictions—and sometimes between common law jurisdictions themselves for example, the case noted above New Zealand Shipping Co—can lead to dual residence companies. The result would be that such a dual resident company is going to be taxed twice on its worldwide income, wherever arising.

This issue not only leads to international double taxation, but also to the unwanted scenario of increased international double taxation. To solve this issue, both the OECD and the UN Model provide a tie-breaker rule for non-individuals under Article 4 “Resident.”

Corporate Residence Under Tax Treaties In order to be able to apply the tie-breaker rule, a taxpayer needs first be considered a resident under Article 4 paragraph 1.

The importance of Article 4—in both the OECD and the UN model—is found in the personal scope of Article 1. That is, for a taxpayer to have access to a tax treaty, such taxpayer needs to be a “resident of one or both of the contracting states.” Further, the residency of the taxpayer is also important as it is used, to a large extent, in the all income article allocation rules. The first sentence of the positive definition of Article 4 paragraph 1 of the OECD reads as follows: “[T]erm ‘resident of a Contracting State’ means any person who, under the laws of that state, is liable to tax therein by reason of his domicile, residence, place of management or any other criterion of a similar nature…”

It can be argued that the OECD accepts that there is not an international consensus on what the residency criteria should be and therefore leaves this to be determined under the domestic law (i.e. “under the laws of that state”).

Countries are free to use any of the criteria provided, and further, the OECD provides with a swiping up provision for “any other criteria in similar nature.” Also, for a company to be considered resident, such company needs to be “liable to tax therein.” Unlike “subject to tax” that in general means that a taxpayer needs to effectively pay taxes, the term “liable to tax” is regularly understood to mean that generally a company falls within the scope of a state’s taxation.

The view of the OECD under the Commentary

of Article 4 paragraph 8.13 is that fiscally transparent vehicles such as partnerships are not considered to be liable to tax and therefore cannot be considered a resident for tax treaty purposes. For example, a fiscally transparent entity such as a U.K. partnership or a Cyprus trust would typically not be regarded as liable to tax as they are not a tax subject. Further, with respect to “liable to tax” from an international perspective, there are at least two views: • in accordance with the 2017 OECD Commentary of Article 4 paragraph 8.11, that in many states, a person is considered liable to comprehensive taxation, even if the Contracting State does not, in fact, impose a tax; and • in accordance with 2017 OECD Commentary of Article 4 paragraph 8.12, in some states, however, these entities are not considered liable to tax, if they are exempt from tax under domestic tax laws.

In practice, in order for countries to provide a tax treaty benefit, they request from their foreign tax taxpayers a tax residency certificate. Typically, such tax residency certificate is issued by the tax authorities of the other contracting state, provided that they meet the corporate residency criteria of that state.

However, the country that would provide the tax treaty benefit and therefore give up its taxing right, remains at its discretion to accept or reject such a tax residency

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certificate. For example, the Netherlands provides a list of minimum criteria that taxpayers should meet in order to provide them with a tax residency certificate. In case the Dutch tax authorities noticed that a taxpayer who received such tax residency certificate for obtaining a tax treaty benefit failed subsequently to meet such criteria, then the Dutch tax authorities would normally inform their tax treaty partner in order to deny such a tax treaty benefit.

THE “OLD” TIE-BREAKER RULE FOR NON-INDIVIDUALS Paragraph 4 of Article 3 of both the OECD and the UN Model include a “tie-breaker” clause for dual resident companies, that is the place of effective management (POEM). From the first draft of the OECD Model in 1963 until 2014, Article 4 paragraph 3 reads as follows: “Where by reason of the provisions of paragraph 1 a person other than an individual is a resident of both Contracting States, then it shall be deemed to be a resident only of the state in which its place of effective management is situated.”

It is worth noting that for the tie-breaker rule to apply the taxpayer needs to meet the definition of residence of Article 4(1), noted above, in both states.

Further, such clause is not limited to companies but instead it generally applies to all types of legal persons, such as partnerships and trusts. This is because it

applies to persons other than an individual and according to OECD Model Article 3(1)(a) that would be a company and any other body of persons.

Turning to the interpretation of the POEM, this test would not typically be interpreted according to the domestic law meaning but rather needs to be interpreted autonomously, i.e. independently of domestic law because the tax treaty POEM purpose is to assign single residency and thereby resolves the bilateral issue of dual residence. It is worth mentioning that the POEM does not solve the issue if the POEM is found in a third state. According to the pre-2014 OECD Commentary of Article 4 there is only one POEM at any one time.

Further, to determine the POEM one must examine all relevant facts and circumstances, and it would be the place where key management and commercial decisions that are necessary for the conduct of the entity’s business as a whole are in substance made.

Importantly, the POEM is not determined only where the high-level decisions are made.

Instead, one must also look at the day-today management. Thus, the OECD approach could be argued to resemble the civil law jurisdiction approach as compared to the common law approach noted above.

THE “NEW” TIE-BREAKER RULE FOR NON-INDIVIDUALS The OECD position is that it is possible for a legal person to be found to be dual resident (e.g. one state attaches importance to the registration and the other state to the POEM) although this would be rare in practice.

However, taxpayers are structuring their

activities with the purpose of being a dual residence in order to reduce their tax paid.

For example, a dual resident start-up company that is facing losses in the early years of incorporation, would typically, under certain circumstances, be able to use such losses twice (so-called double-dip). As a result, the OECD decided to replace Article 4 paragraph 3 and adopt a new tie-breaker rule that effectively single residency may be assigned by the tax authorities at their discretion. Article 4 paragraph 3 reads as follows: “Where by reason of the provisions of paragraph 1 a person other than an individual is a resident of both Contracting States, the competent authorities of the Contracting States shall endeavor to determine by mutual agreement the Contracting State of which such person shall be deemed to be a resident for the purposes of the Convention, having regard to its place of effective management, the place where it is incorporated or otherwise constituted and any other relevant factors. In the absence of such agreement, such person shall not be entitled to any relief or exemption from tax provided by this Convention except to the extent and in such manner as may be agreed upon by the competent authorities of the Contracting States.”

Notably, the competent authorities (normally the tax authorities) are obliged to endeavor, i.e. seek to resolve the case in a fair and objective manner but not to achieve a result.

Accordingly, the OECD moves to a new case-by-case solution that the tax authorities are only required to do their best to find a solution, and if they are unable to resolve

the dual residence issue this is explicitly acceptable. In other words, a taxpayer is left at the discretion of the tax authorities to resolve the problem without being obliged to assign single residency. Such issues, however, were resolved by the POEM. As a consequence, increased double taxation is likely to arise and would therefore not be eliminated.

One is left wondering whether this rule is a tie-breaker rule that follows the purpose of a tax treaty, that is to eliminate double taxation. Interestingly, this is arguably an anti-avoidance provision in order to deter taxpayers or their tax advisers from planning their activities by using dual-residence companies. This “tax treaty threat” rule can be seen as a weapon in the arsenal of the tax authorities against abusive tax planning.

However, not all tax treaties include such a provision, as this new rule was included in the OECD Model in the 2017 update.

Nevertheless, the OECD is trying to speed up the process as it has included this provision in the multilateral instrument (MLI).

As of today, the MLI covers 94 jurisdictions and entered into force on July 1, 2018.

However, numerous countries did not opt into this provision as it is not a minimum standard. It is worth mentioning that the US is more aggressive on this area as the 2016 U.S. Model does not provide any tie-breaker rule for companies. As a result, a dual resident company would not be able to claim a tax treaty benefit as it would automatically be considered as not resident for both contracting states.

PRACTICAL APPLICATION AND PLANNING POINTS In light of the above, taxpayers doing cross-border business should revisit their structures and ensure that their tax burden is not at risk.

First and foremost, taxpayers should ensure that they comply with the domestic tax law criteria in order to be able to obtain a tax residence certificate if they would need a tax treaty benefit. Failing to do so, countries will not be inclined to provide them with a tax residency certificate and the source state (that would normally provide for the tax treaty benefit) may not accept such a certificate and eventually deny the tax treaty benefit.

Second, they need to ensure that their business structure would not trigger any corporate tax residency criteria of another country.

Consequently, when designing their substance requirements, care should not only be taken by taxpayers on the jurisdiction where the company is a resident. Taxpayers should also consider the jurisdiction that such a company has connecting factors via its business there.

Finally, taxpayers should ensure that they avoid entering into tax planning schemes by using dual resident companies as the new tie-breaker rule is effectively an anti-avoidance rule in this regard.

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| TAXATION

EU Commission recommendation on Business Taxation for the 21st Century

T

he European Commission has published on 22 December 2021 the legislative proposal for a Directive laying down rules to prevent the misuse of shell entities for tax purposes.

The Unshell proposal (commonly referred to as ATAD III) is part of the Communication on Business Taxation for the 21st century adopted by the European Commission on 18 May 2021 which aims to promote a robust, efficient and fair business tax system in the EU (see article here).

Demetris Nicolaides Partner at Sagehill Partners

While important progress has been made in the taxation area in the last years, especially with the adoption of the antitax avoidance directive (ATAD) and the expansions of scope of the directive on administrative cooperation (DAC), the EU Commission sees that legal entities with no minimal substance and economic activity continue to pose a risk of being used improperly for tax evasion and avoidance.

This proposal will tighten the screws on shell companies, establishing transparency standards so that the misuse of such entities for tax purposes can more easily be detected. Our proposal establishes objective indicators to help national tax authorities detect firms that exist merely on paper: when that is the case, the company will be subject to new tax reporting obligations and will lose access to tax benefits. This is another important step in our fight against tax avoidance and evasion in the European Union.

Commissioner for Economy, Paolo Gentiloni, The proposed new rules will establish transparency standards around the use of shell entities so that their abuse can more easily be detected by tax authorities. Three levels of indicators coined as “gateways” will be used and if a company crosses all three gateways, it will be required to annually report more information to the tax authorities through its tax return.

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GATEWAY 1 The first level of indicators looks at the activities of the entities based on the income they receive. The gateway is met if more than 75% of an entity’s overall revenue in the previous two tax years does not derive from the entity’s business activity or if more than 75% of its assets are real estate property or other private property of particularly high value.

GATEWAY 2 The second gateway requires a crossborder element. If the company receives the majority of its relevant income through transactions linked to another jurisdiction or passes this relevant income on to other companies situated abroad, the company crosses to the next gateway.

GATEWAY 3 The third gateway focuses on whether corporate management and administration services are performed in-house or are outsourced.

CROSSING ALL 3 GATEWAYS If an entity crosses all 3 gateways it will have to report to its tax authorities through the tax return, the “substance indicators” which include the premises of the company, its bank account, the tax residency of its directors and that of its employees. The declarations made will

have to be accompanied by supporting documentation. If an entity fails at least one of the substance indicators, it will be deemed to be a “shell“.

SHELL ENTITY TREATMENT If an entity is deemed to be a shell entity, it will not be able to access tax relief and the benefits of the tax treaty network of its Member State and/or qualify for the treatment under the Parent-Subsidiary and Interest and Royalties Directives.

The resident MS will either deny a tax residency certificate or the certificate will specify that the company has been deemed to be a shell. Moreover, payments to third countries will not be treated as flowing through the shell entity and will be subject to withholding tax at the level of the entity that paid to the shell.

CONTENTION OF SHELL ENTITY STATUS Entities deemed to be shell will still have the right to rebut the presumption by providing additional evidence, such as

detailed information about the commercial, non-taxation reason of their establishment, the profiles of their employees and the fact that the decision-making takes place in the resident MS. EXCHANGE OF INFORMATION OF INSCOPE COMPANIES The Tax Authorities will automatically exchange information on all companies that fall within the scope of the Directive, regardless of whether these have been deemed to be shell companies or not.

EFFECTIVE DATE The proposal will now go into the negotiation stage with the aim of completing the round in 30 June 2023 and the proposal to be ratified by Member States by 30 June 2023 and take effect on 1 January 2024.

In 2022 the EU Commission will also present another initiative to address the issues associated with non-EU shell entities

CONCLUSION The Unshell directive may have a direct effect to current corporate structures and given the positive momentum that we have seen in recent years with tax initiatives at the EU level it may be reasonable to expect that the directive will go through the EU approval phase.

The team at SAGEHILL PARTNERS is available to help you out in your assessment of the impact of these draft proposals may have on your corporate structure and operations

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| TAXATION

Should IASB reintroduce amortisation of goodwill?

A discussion of pros and cons of the amortisation and impairment only models for goodwill

A

t its December 2021 and January 2022 meetings the International Accounting Standards Board (IASB) discussed the feedback on the proposals in the Discussion Paper Business Combinations—Disclosures, Goodwill and Impairment1. Specifically, IASB in its discussion paper is revisiting the accounting treatment of goodwill and has asked for users’ opinions on whether amortization for goodwill model should be reconsidered replacing the impairment only model that currently applies for goodwill. This feedback will help the IASB decide whether and, if so, how to develop detailed proposals based on the preliminary views in the Discussion Paper. The IASB discussed feedback on how an entity should subsequently account for goodwill, and the related disclosures an entity should be required to make. The IASB will consider the project’s direction at a future meeting and act accordingly.

Evita Livera BFP, FCA Special Teaching Staff Department of Accounting and Finance University of Cyprus

Mergers and acquisitions – referred to as business combinations- are often large transactions for the companies involved. The costs of acquisition and implications of failure are often considered material. IASB’s objective is to explore whether more useful information can be disclosed to the users about mergers and acquisitions at a reasonable cost. The question lies as to how companies should account for goodwill after the business combination.

Based on the discussion that follows, I present the case that investors need to know the subsequent performance of the acquired companies, need to be able to assess management’s stewardship regarding those acquisitions and hold management accountable for acquisition decisions. How did the acquired company perform subsequently? Is the acquisition considered a success? How well is the acquisition performing against management’s expectations for it? Are there any synergies? Has the company been integrated in existing business?

Which acquisitions does the management monitor, and how? Consideration must be placed as to whether information subsequently disclosed to users is sufficient and whether disclosures are provided on a timely basis.

Providing useful information about subsequent performance may be

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challenging. Acquired businesses are often integrated soon after acquisition, which makes it hard to isolate the impact of the acquisition. Disclosures may be useful to users only for a limited time period. They become less relevant after a short period.

Some information may be commercially sensitive or forward looking, making its preparation even more challenging.

Disclosure of forward looking information may even create legal implications.

The purpose of this article is to summarise the concerns raised in the Discussion Paper Business Combinations-Disclosures, Goodwill and Impairment1 , discuss the pros and cons of the two accounting models and to offer an opinion on what the way forward should be.

1. POSSIBLE ACCOUNTING TREATMENTS IAS 36 requires goodwill acquired in a business combination to be tested annually for impairment, irrespective of whether there is any indication of impairment.

That requirement was introduced in 2004.

Until then, IAS 22 Business Combinations had required acquired goodwill to be amortised over its useful life with a rebuttable presumption that its useful life did not exceed twenty years. If that presumption was rebutted, acquired goodwill was required to be tested for impairment at least at each financial yearend, even if there was no indication that it

was impaired2 . Should IASB reintroduce amortisation? Currently IASB favours the impairment model, as there is no compelling evidence to justify once again changing the accounting for goodwill, but the majority for this decision was small: only 8 out of 14 Board members voted in favour of the impairment model. As a fact, there are inherent limitations for both the impairment only model and the amortisation model for goodwill.

2. THE IMPAIRMENT TREATMENT METHOD Goodwill is currently annually tested for impairment, in conjunction with other assets, as part of a cash-generating unita timely and costly exercise. It requires professional judgment and discretion to be exercised by preparers, therefore introduces opportunities for managerial interpretation and bias. Goodwill does not generate independent cash flows and cannot be sold separately or measured directly. It contributes to the cash flows of several group of assets. The impairment test of goodwill compares the carrying amount of the group of assets containing the goodwill, to the recoverable amount of that group of assets that are expected to benefit from the synergies of the business combination. As a result, the size of any goodwill impairment depends on the recognition and measurement of the other

assets in the cash-generating unit. In effect, goodwill is allowed to be overstated as long as other assets are understated by at least as much. This is why an acquisition can fail and goodwill may be lost, but no actual goodwill impairment may be recognized.

This is the so-called shielding effect.

Impairment losses may often not be recognized on a timely basis and this may be attributed to two main factors: The shielding effect and the fact that impairment testing contains assumptions, and assumptions placed by management may often be over-optimistic. An acquisition may perform poorly but no impairment loss may be recognised if goodwill is shielded.

The performance of the acquisition may fail to meet management’s expectations and users are not often informed in a timely manner. Impairment losses are often recognized too late, long after the events that caused the losses, and in that case doesn’t provide users with relevant information.

On the other hand, the impairment only model ensures if losses have occurred, management will be held accountable for the acquisition decision, even if such information is delayed. Stakeholders can assess management’s stewardship.

Holding management to account for the results of their decision making, is one of the key objectives of financial reporting and of great interest to investors and

The performance of the acquisition may fail to meet management’s expectations and users are not often informed in a timely manner.

Impairment losses are often recognized too late, long after the events that caused the losses, and in that case doesn’t provide users with relevant information

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capital markets. Also, a record of past goodwill impairments may help assess the investment risks an entity is undertaking and the success of its acquisitions strategy.

3. THE AMORTIZATION TREATMENT METHOD Reintroducing amortisation could provide a single mechanism for reducing the carrying amount of acquired goodwill, therefore reducing the risk of potential overstatement. It would therefore reduce the frequency of impairment losses and decrease volatility in profit or loss. The mere appearance of an impairment loss would hence become more relevant information to investors. It would also improve comparability between companies that grow organically, without acquisitions, and companies that grow through acquisitions, since non-amortisation of goodwill discriminates companies that grow organically2.Users who favour reintroduction of amortisation, suggest that the value of the impairment test is of limited use, goodwill impairments relate to a sunk cost, and can only provide confirmatory information rather than predictive information regarding future cash flows. They suggest that goodwill is a wasting asset with a finite useful life for example the acquired workforce will leave or retire over time. Reintroducing amortisation will illustrate how goodwill is being consumed and how the benefits from the acquisition are realised. Estimating the useful life of goodwill is possible and is not more difficult than estimating the useful life of other intangible assets. The acquired goodwill is continually consumed and replaced by internally generated goodwill.

4. OVERALL ASSESSMENT Based on the above, even though impairment testing contains estimates, I believe that if the test is well applied then the objective can be met, which is to ensure that the combined assets, including goodwill will not be carried at a higher value than their recoverable amount. The information provided by the impairment test is useful, even if it only has confirmatory value. Although the impairment test contains unavoidable inherent limitations, I believe it provides users with more useful and relevant information than the amortisation model. The impairment model better reflects the underlying economic value of goodwill compared to amortisation.

It holds management accountable for its acquisition decisions and, as per the conceptual framework, stewardship is now acknowledged as one of the two roles of financial reporting. Goodwill is not a wasting asset with finite useful life, it is more likely to have an indefinite useful life, as, for example, cost savings are expected to be recurring and the knowledge and processes that generate future returns will remain in the business. In any case, estimating the useful economic life and the pattern in which it diminishes would again require judgement and rely on some of the same estimates of future cash flows used in testing goodwill for impairment.

Reintroducing amortisation would not save significant costs, as the need for impairment testing will still remain, especially in the first few years after the acquisition. Companies would still need to test whether goodwill is impaired. The underlying problem is to improve the way the impairment test is applied to ensure that impairments of goodwill are being properly recognised. Amortisation could

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reduce the likelihood of an impairment loss being recognised as the carrying amount would be reduced and goodwill would become more likely recoverable, but this could further shield acquired goodwill against impairment losses by mislabelling some or all impairment losses as consumption. By reducing the likelihood of any impairment loss, some of the current information about impairment would be lost.

Having an amortisation expense is quite arbitrary. It is difficult to estimate the useful economic life of goodwill and the pattern in which it diminishes. Having an arbitrary straight-line amortisation expense in profit or loss may lead to investors ignoring the expense. In such a case, how would the amortisation of goodwill significantly improve the relevance of information provided to investors? Imperfect impairments are better than unhelpful amortisation.

Removing the requirement for an annual impairment test, and introducing impairment tests only when there is

indication for impairment is a current option the IASB is considering. They suggest this because the benefits of the impairment test are limited and not always justify its cost. This proposal will certainly reduce costs, but simultaneously impairment tests would become less robust. This may also result in loss of disclosures linked to the impairment test. Therefore, I do not believe IASB should provide relief to companies from the mandatory annual impairment test.

The success of an acquisition should not be solely judged from the accounting of goodwill. Informing users whether a business combination has been a success is not the intended purpose of an impairment test. The absence of a signal that an acquired business is not meeting the expectations does not mean the test has failed. A reported impairment is likely to mean value has been lost, but a lack of

1 2

impairment can be a false positive. The outcome of an impairment test cannot determine the extent of success or failure of an acquisition because the carrying amount of goodwill does not necessarily depict how much of the originally expected benefits from the acquisition still remain.

Impairment losses can also occur due to external market factors that affect the whole company. Thus an impairment loss does not always indicate an acquisition has failed.

To provide users with the information about success, disclosures on the subsequent performance of an acquisition should be made, even if costly.

The expected synergies should be described, when the synergies are expected to be realised and estimations of costs needed to achieve those synergies.

Disclosures should include the strategic rationale for an acquisition and whether

the acquisition is meeting those objectives.

Unfortunately, disclosures can be onerous, particularly for companies making many acquisitions. Disclosures need to also be timely since they become less relevant after a short period. When integration occurs, the acquired business eventually becomes difficult to distinguish. Improving the existing disclosure requirements might also reduce the risk of management overoptimism. In order to mitigate commercial sensitivity of information qualitative, more prescriptive, disclosures should be provided.

With respect to the difficulties of preparing forward looking information, maybe IASB can provide users with an illustrative set of disclosures, demonstrating how the information can be provided in a more factual and historical way.

IFRS Standards Discussion Paper DP/2020/1 IFRS Staff Paper IASB Agenda ref 18A

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| FROM ABROAD…

FCM – Fédération des Experts Comptables Mediterranéens

Federation of the Mediterranean Accountants

H

aving been elected at the end of 2021 President of FCM for 2022 and 2023, I started my activity with a proactive look at the Federation, that was founded at the end of 1999 in a totally different political and economic scenario.

Giorgio De Giorgi President of Fédération des Experts Comptables Mediterranéens / Federation of Mediterranean Accountants (FCM)

FCM - Fédération des Experts Comptables Mediterranéens - is a not-for-profit association headquartered in Rome that includes several professional institutes of accountants from the Mediterranean area and as of today it is the only representative organisation of the accountancy profession in such part of the world.

Its membership consists of 16 professional Institutes of Accountants from 12 Mediterranean countries (Albania, Bulgaria, Cyprus, France, Greece, Italy, Kosovo, Morocco, Portugal, Spain, Tunisia, Turkey), plus one associate member, ACCA GLOBAL (Association of Chartered Certified Accountants).

Although there is a good coverage of the enlarged Mediterranean region, there are several countries geographically belonging to the region who are still not members.

I intend to start looking for new members since the ultimate goal of FCM is to

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contribute to the economic developments of the region and to the implementation of a more integrated and competitive market between the Mediterranean countries.

This can be better achieved if more countries are added to the list of the existing members.

During the 22 years of its life many things have changed and these changes have obviously impacted the Mediterranean area, the countries thereof, the economic background and the administrative profession as well as its activity.

Last but not least the Covid pandemic that has triggered many challenges both in the private and working life of people and has changed many day-to-day habits introducing the so-called remote work, now a constant fact everywhere.

My idea is that FCM should represent its members in this new world taking care of the changes occurred and its image

should be that of a modern Federation that is well aware of the needs of its members and that is working hard in order to assist membership by contributing to the economic developments of the region: promoting co-operation among the professional accountancy bodies in the region, both in the private and in the public sector, to share knowledge and provide technical assistance to members to help them achieve and maintain high professional and quality assurance standards as well as international harmonisation in the fields of auditing and accounting.

The economic attractiveness of the Mediterranean region is confirmed by the number of accounting and economic entities that operate in the area and – since we all pursue a common key objective, that is enhancing the cooperation and partnership between countries in order to achieve prosperity, one of my top priorities is partnering and coordinating with such entities.

Among the existing and like-minded accounting bodies I like to mention AMA – Arc Mediterrani d’ Auditors, that covers a geographical area including accounting institutes from Italy, France and Spain; PAFA (Pan African Federation of Accountants) that includes 56 professional accounting bodies from 45 countries, totalling a respectable 125.000 accountants;

FIDEF, the Fédération Internationale Des Experts-comptables et Commissaires aux Comptes Francophones (‘FIDEF’), created in 1981, an international federation that regroups most accounting institutes in French-speaking countries around the world and as of today 37 countries, representing 52 organizations, are members of FIDEF. Additionally, there is a number of other entities interested and actively working in the Mediterranean area, not strictly in the accounting area, such as the Euro Mediterranean partnership, the Union for the Mediterranean and others.

My mission is to identify all interested bodies, to contact them and to establish a suitable way for them to cooperate with FCM in order to enhance the Federation’s contribute to development of the accountancy professions as well as the economic development of the region.

With the help of prestigious and active and members such as ICPAC I am pretty sure that the goal will be achieved soon.

My mission is to identify all interested bodies, to contact them and to establish a suitable way for them to cooperate with FCM in order to enhance the Federation’s contribute to development of the accountancy professions as well as the economic development of the region

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| IFAC NEWS

IFAC Latest Activity • New Platform from IFAC Offers Digital Access to International Accountancy Standards – eIS: IFAC unveiled a new online resource providing unprecedented access to the international standards that support and distinguish the accountancy profession. eIS, short for e-International Standards, provides direct access to the standards developed by the International Audit and Assurance Standards Board (IAASB), the International Ethics Standards Board for Accountants (IESBA), and the International Public Sector Accounting Standards Board (IPSASB), alongside key support, reference, and guidance materials, available to contextualize the language and provide enhanced transparency. Visit the platform today!

• The Latest on Sustainability Reporting & Assurance: Visit IFAC’s dedicated Sustainability Standards and Sustainability Assurance webpages.

• Enhancing Trust & Confidence in Sustainability Disclosure: IFAC published its vision for high-quality assurance of sustainability information—calling out best practices identified during its year-long, global engagement campaign related to the State of Play in Sustainability Assurance.

This vision addresses the importance of global standards, regulation that supports decision-useful disclosure, and the value of an interconnected approach to sustainability and financial information reporting and assurance.

• IFAC Publication Highlights Opportunities in Sustainability Information for Small Businesses and Their Advisers: IFAC released a publication, “Sustainability Information for Small Businesses: The Opportunity for Practitioners,” exploring the diverse benefits of embracing sustainability information. Small businesses make up more than 90 percent of businesses worldwide; they are critical to achieving sustainable outcomes for economies, the environment and society. This publication was developed with advice and guidance from the IFAC Small and Medium Practices (SMP) Advisory Group and builds on the Advisory Group’s work on practice transformation.

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• New PAIB Advisory Group report explores key global trends impacting the future readiness of the accountancy profession: IFAC’s Professional Accountants in Business (PAIB) Advisory Group has compiled insights on how accountants are contributing to value creation and sustainability in their organizations in both the private and public sectors in a new report, The Role of Accountants in Mainstreaming Sustainability.

• IFAC published a framework for implementing global sustainability standards at the local level, focusing on the building blocks approach previously published. IFAC believes that jurisdictions must begin examining how global standards that the International Sustainability Standards Board (ISSB) intends to develop, starting with climate, can fit together with sustainabilityrelated reporting requirements set at the jurisdictional level. An ISSB climate standard is expected to be completed around June 2022.

New On the IFAC Gateway: • The Demand for Assurance Engagements on Sustainability and ESG Reporting Is High. Here is How the IAASB Is Responding — In the past the IAASB has devoted significant energy to creating standards to govern assurance of non-financial information. We have a well-established umbrella standard, International Standard on Assurance Engagements (ISAE) 3000 (Revised), Assurance Engagements Other than Audits or Reviews of Historical Financial Information, and subject-matter specific standards such as, ISAE 3410, Assurance Engagements on Greenhouse

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| IFAC NEWS

IFAC Latest Activity Gas Statements. In April of this year, we published guidance aimed at helping assurance professionals apply our umbrella standard to sustainability and other nonfinancial (or extended external reporting) assurance engagements. We know that our work is only the beginning, a solid foundation to build upon. This is why we committed to do more work to enhance the assurance of sustainability/ESG reporting when we approved our new 2022-2023 work plan. The March 2022 IAASB meeting will the first opportunity to provide feedback, share views and discuss next steps (you can listen to our discussions via YouTube).

• Global Engagement Against Corruption: IFAC at the UNCAC CoSP9 — IFAC participated as an official observer at the UNCAC CoSP9, or more formally the Ninth session of the Conference of the States Parties (CoSP) to the United Nations Convention against Corruption (UNCAC).

IFAC had the opportunity to deliver, in person, a statement highlighting the accountancy profession’s important role in fighting corruption (text in full below).

The agenda also included an official side event hosted by IFAC and the International Bar Association (IBA) on the role of our professions in fighting corruption.

• Climate Summit Spotlights Business and Accountants — The UN Framework Convention on Climate Change (UNFCCC) Conference of the Parties (COP) is a crucial international mechanism for politicians and other key stakeholders to make progress in dealing with climate change. And progress is what happened in Glasgow in November. More is expected of business as a result of COP26 particularly in terms of turning net zero commitments into plans and actions. A spotlight on greenwashing and misleading reporting will also mean that boards and CEOs will be turning to their CFOs and accountants to ensure an integrated and connected approach to sustainability in strategy and resource allocation, and greater accountability and transparency. Auditors also need to be alert to climate-related events or conditions that may contribute to the susceptibility of certain accounts and disclosures in a company’s financial statements to be misstated.

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• So, You Want to be a Non-Executive Director? — Many businesspeople, and indeed executive directors, start to think towards the end of their careers, that being a non-exec could be a next step. Finance people are in a privileged position when it comes to becoming a board director. That finance experience can smooth your path onto the board, both as an executive and a non-exec director. Think hard about how your experience can be useful to a board, be it from finance, sector, board or even difficult situations. The key things are to present yourself as someone who can build on and learn from their experience, and to show how a board would benefit from it.

• ‘Talking Power’: How WeCAN Has Advanced Gender Equality at ICAZ — The Institute of Chartered Accountants of Zimbabwe (ICAZ) is committed to demonstrating how PAOs can advance the SDGs. One of the ways is through the Women Chartered Accountants Network (WeCAN), which was created in 2016 and officially launched in 2017. ICAZ is proud of the contributions and impact that WeCAN has made since it was first launched, just four years ago. It is equally fulfilling to see that ICAZ and IFAC are moving in sync toward gender parity in Board membership and IFAC’s continuous calls to action for the profession to champion diversity and gender equality.

• Don’t Forget! IAASB’s Revised AUP Standard Becomes Effective as of January 1, 2022 — Agreed-upon procedure (AUP) engagements are widely used in many jurisdictions. Demand for AUP engagements continues to grow, particularly related to needing increased accountability around funding and grants. The revised ISRS will be effective for AUP engagements for which the terms of engagement are agreed on or after January 1, 2022. For engagements covering multiple years, practitioners may wish to update the terms of engagement so that the AUP engagements will be conducted in accordance with the revised standard.

• Preparing for the New Quality Management Standards: ISQM 1 Risk

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| IFAC NEWS

IFAC Latest Activity Responses — ISQM 1 sets out three steps to the risk assessment process. The first step is establishing quality objectives, followed by the second step, identifying and assessing quality risks. These steps were addressed in the first article in this three-part series on the new suite of quality management standards. The third step is designing and implementing responses to identified quality risks. For practitioners working in public practice, ISQM 1 risk responses will be crucial to your compliance with the new standards. This article, the second in the three-part series, includes examples that will help support small- to mid-sized practitioners (SMPs).

• Also see: Preparing for the New Quality Management Standards: ISQM 1 Quality Objectives and Quality Risks — ISQM 1 sets out three steps to the risk assessment process. The first step is establishing quality objectives, followed by identifying and assessing quality risks, which provide the basis for the design and implementation of responses, the final step. The first article of the series will focus on the first two steps of the risk assessment process.

• Every ‘Cloud’ Has a Silver Lining — ICAP’s Push for Online Examinations — The advent of Covid-19, which has cast a dark shadow around the world for last two years, actually acted as a catalyst and accelerated ICAP’s journey towards online testing and remote proctoring. What had been a lofty goal of the ICAP Council for at least a decade was suddenly ushered in with great urgency.

• PAO Digital Readiness: Explore IFAC’s PAO Digital Transformation Series webpage which is regularly updated with additional articles, videos, and resources!

Did you know you can observe the independent standard-setting board meetings via YouTube? IAASB | IESBA | IPSASB

• 2021 Handbook of the International Code of Ethics for Professional Accountants is now available! This 2021 edition contains recently approved revisions to the Code, including: the revisions to Part 4B to align terms and concepts used in the Code to

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those in the International Auditing and Assurance Standards Board’s (IAASB) International Standard on Assurance Engagements (ISAE) 3000 (Revised). Those revisions became effective in June 2021.

It also contains the revisions to Parts 1 and 2 to promote the role and mindset expected of professional accountants. Those revisions will become effective in December 2021. Early adoption is encouraged.

The back of the handbook also includes approved revisions which become effective in December 2022, such as revisions addressing the objectivity of an engagement quality reviewer and other appropriate reviewers; non-assurance services; and feerelated provisions.

• New Report on Ethics and Digital Change!

As the world becomes more complex, maintaining ethical standards becomes both more challenging and increasingly important. To help guide financial professionals, the Chartered Professional Accountants of Canada (CPA Canada), the Institute of Chartered Accountants of Scotland (ICAS), and IFAC released Technology is a double-edged sword with both opportunities and challenges for the accountancy profession: Paper 2, the second in a four part publication series. The publication examines the impact of rapid technological change and the importance of ethical leadership from the lens of the professional accountant. It also provides practical guidance to both professional accountants and professional accountancy organizations.

• Find the first paper here: Complexity and the professional accountant: Practical guidance for ethical decisionmaking • New IESBA Measures to Strengthen Auditor Independence: IESBA released revisions to the Non-Assurance Services (NAS) and fee-related provisions of the International Code of Ethics for Professional Accountants (including International Independence Standards) (the Code). The revised NAS and fee-related provisions significantly strengthen the guardrails around auditor independence in two important areas that have the potential to create incentives influencing auditor behavior—non-assurance services provided to audit clients and fees. The revised

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| IFAC NEWS

IFAC Latest Activity NAS and fee-related provisions become effective for audits of financial statements for periods beginning on or after December 15, 2022. Early adoption is permitted and encouraged—visit the dedicated webpage here.

• Watch: IESBA webinars on NAS and Fees • New Technology-Focused FAQ Available — The Technology Working Group of the IAASB released non-authoritative support material to help auditors understand how to plan an audit under International Standard on Auditing (ISA) 300, Planning an Audit of Financial Statements, when using automated tools and techniques (ATT).

• Quality Management Standards: • Video message from IAASB Chair Tom Seidenstein— IAASB Chair provides a general overview of the standards, and the opportunities for professional accountancy organizations to be agents of change and audit quality champions.

We encourage you to watch the video and then share it with your staff, membership, and stakeholders to help harness their support for the necessary education and change management efforts that will be needed.

• New! Implementation Guides for Firsttime Implementation of ISQM 1 and ISQM 2.

• Webinar Series on Quality Management presented by IFAC & IAASB – the recordings are available here!

• 2020 Handbook of International Quality Control, Auditing, Review, Other Assurance, and Related Services Pronouncements is now available!

Education • 2021 IFAC EdExchange Summit: Leading Sustainability: Keynotes and session recordings are now available via IFAC’s YouTube – including translations in French, Russian, and Spanish!

• IFAC EdExchange Video Series — The IFAC EdExchange video series presents the sessions and speakers’ discussions to consider the impact for developing skills and competencies, or acquiring knowledge, for

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the accounting profession. We believe this will help arm our profession with further knowledge. We are keen to encourage an exchange of views to further enhance the profession’s understanding of some of these new questions we face.

• Conversations with Experts | Advancing Accountancy Education — on-demand videos with experts talking about the future of accountancy education & on sustainability reporting!

• Revisions to IES 2, 3, 4, and 8 are now effective, as of January 1, 2021. The revisions to these standards reflect the increasing demand for accountants skilled in information and communications technologies and place further emphasis on the professional skepticism skills and behaviors. These apply to both aspiring and professional accountants.

Public Sector • New Q&A Publication: Public Sector Specific Financial Instruments Under IPSAS — This Questions and Answers (Q&A) publication is issued by the staff of the International Public Sector Accounting Standards Board (IPSASB) provides information on accounting for certain public sector specific financial instrument transactions. This publication highlights IPSAS guidance included to aid constituents in accounting for certain public sector specific transactions.

• AMENDMENTS TO IPSAS 5, BORROWING COSTS - NON-AUTHORITATIVE GUIDANCE Issued — This pronouncement adds of nonauthoritative guidance to IPSAS 5, Borrowing Costs. The non-authoritative guidance adds implementation guidance and illustrative examples to IPSAS 5. The new material in ED 74 illustrates how the existing principles for when borrowing costs can be capitalized are applied in various regularly encountered public sector scenarios. No amendments are proposed to the authoritative material in IPSAS 5.

• 2021 Handbook of International Public Sector Accounting Standards, published as of January 31, 2021, is now available.

ACCOUNTANCYCYPRUS | MARCH 2022 |

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50 | ACCOUNTANCYCYPRUS | MARCH 2022

ICPAC is excited to invite you to join us for the first ICPAC Mediterranean Finance Summit on 5-6 May 2022 at the Parklane Hotel, Limassol, Cyprus.

Take a seat next to international finance leaders to explore the evolving role of the CFO, digital transformation, risk management, the volatile regulatory landscape, customer centricity, and much more. This interactive Summit will include various Keynote sessions, workshops, and roundtable discussions.

VISION “A model professional body, recognized by the state and the society as the primary stakeholder for the accountancy profession and the economy in general, instilling confidence, credibility and value”

11 Byron Avenue 1096 Nicosia, Cyprus Tel.: +357 22870030 Fax: + 357 22766360 e-mail: info@icpac.org.cy www.icpac.org.cy