Professionals' Magazine - English Ver.1

Professionals’ Magazine 6TH EDITION- JAN 2020

SUMMARY

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THE RULE OF 70%

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SEVEN COMMUNICATION KEYS TO GREATER ENGAGEMENT

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KRESTON CEO INTERVIEW

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GENERAL ELECTRIC SUFFERS WORST ONE DAY IN 10 YEARS

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WILL 5G BE THE PLATFORM FOR TOMORROW’S SMART CITIES?

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SPORTS DIRECT URGENTLY SEEKS NEW AUDITOR

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IASB TO PROPOSE TO AMEND KEY ASPECTS OF IFRS 17

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IFAC URGES G20 TO FOCUS ON REBUILDING PUBLIC TRUST

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BIG FOUR UNDER THE SPOTLIGHT IN AUSTRALIA

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AN OPPORTUNITY FOR CHANGE IN THE ACCOUNTING SECTOR – A NEED FOR REINVENTION

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A NEW ACCOUNTING RULE ON LOAN LOSSES COULD BE DISASTROUS FOR THE ECONOMY

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CECL AND IFRS 9: HOW ARE THEY DIFFERENT?

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IAASB REVISES STANDARD FOR AUDITING ACCOUNTING ESTIMATES

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ISLAMIC FINANCIAL CORNER

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CORPORATE LAW: 10 COMMON BUSINESS LEGAL ISSUES

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QUICK NEWS

Professionals’ Magazine

an independent electronic magazine published by Juboori & Co. consulting@aljuboori.net www.aljuboori.net Editing team: Mahdi Al-Juboori - Founder of Al-Juboori Ahmed Al-Juboori - accounting Firm managing Partner Ayman Al-Juboori - legal Firm managing Partner Shehab Al-Hitti - Partner Inas Al-Qaissi - Partner Muthana Al-Juboori - Partner Suhaib Sinan - Senior Auditor Athraa Raheem - Senior Auditor

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Translation: Muhammed Al-Saad Designing: Salwa Mahmoud

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70 % THE RULE OF

Mahdi Saleh Al-Juboori AL-JUBOORI & CO. Founder

When you see the list of the largest companies in the world, you should notice that information and knowledge companies are starting to push the power of giant companies historically in the field of oil and gas, for example, or old car companies, and even giant banks.

In professional consultations, as in any other economic activity, knowledge and information began to be a valuable commodity, and information and automation entered all corners and corners.

For example, any legal adviser can, with a single click of a button, be able to see all cases that are similar to his case and are easily classified so that it can even link it to personal opinion or the views of a geographical area from another geographical area to reach the best advice he can provide to the beneficiary.

This has greatly facilitated the work of legal advisers, but it is never a matter of the strength of these programs, and whatever information university across the world cannot replace the natural person the legal advisor?

Advanced universities in the field of professional consulting began with a focus on acquiring knowledge in how to use a large amount of information in the best possible way and saving time and effort to reach appropriate decisions that suit the customer and the beneficiary, as these automated programs certainly do a great job compared to traditional manual work, but they certainly cannot It replaces the decisionmaking process and the process of inferring information or inferring the appropriate decision.

In the midst of this large amount of information, some research has begun to distinguish how Asan is successful in his professional work, as the vast amount of information is now available to everyone, but how to use this large amount of information for the benefit of prestigious professional work is now the goal.

And one of the institutions reported in the process of scientific investigation with the most successful professional figures about how many skills they got and from where they got them to reach the degree of success in which they are, for the answers come that university studies and professional certificates provided them with approximately 10% of the information that works with it and 20% From the information they got from social media, software and the web? As for the remaining 70%, it was obtained from the personal experiences of people who worked with them previously, and therefore the work of the former official in reaching the results for a period of work of up to 30 or 40 years reaches the new employee within 3 or 4 years and he completes the professional development in the survey of information and access to Results that are distinct from others.

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EDITORIAL

Seven Communication Keys to Greater Engagement

W Follow Up: Ahmed Al-Juboori CPA, Managing Partner

e’re living and working in an amazing time. Continual improvements in technology are nothing short of mind-blowing. But we’re also living and working in a time that is mind-disturbing, because we are more connected but less engaged than ever before.

Indeed, numerous studies over the last couple of decades keep on sounding the same bell…

That two-thirds or more of our workforce is disengaged. In other words, much of our workforce has lost their passion or their pursuit of excellence,and is content to do just enough to get by.

In a word, this lack of full, willing and enthusiastic engagement is unsustainable, for two reasons: First, you can’t afford it. When you pay someone $30 an hour, for example, and that person only delivers $10 worth of effort and results, your overhead goes up and your profits go down. Not good!

Second, disengaged employees are contagious. Their negativity spreads to others and can easily destroy the morale in your organization.

Fortunately, there are 7 communication keys you can use right now to get and keep your people more engaged. Some of them might seem like common sense, but let me tell you as a speaker and consultant to more than 2000 organizations over the years, that these 7 communication keys are not common practice.

1. Make people feel welcome When a colleague enters the building or jumps on a conference call, his first need is to feel welcome, that his presence and his input are welcome.

And he needs to hear it in your words and in your tone of voice. It’s never good enough to cop out and tell yourself. “I don’t have to say anything because he already knows he’s welcome.”

Try the 4-minute rule. Instead of spending the first few minutes of your work daychecking your email or responding to voice mail, spend the first 4 minutes of your day connecting with your people.

Countless managers have told me it has made a dramatic and positive difference in their workplace.

2. Make time for conversation

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Nobody wants to feel like a function... or a body that shows up for a job, puts in some hours, heads home, and then repeats the cycle for the next 40 years. No! Your people need to feel like they’re people, which only happens when you communicate with them. That’s why business leader Richard A. Moran says: “Treating people like numbers will prevent the company from meeting its numbers.”

Again, don’t cop out. Don’t ever tell yourself: “I’m not a people person... I’ve got work to do” or “I don’t have time for all that communication stuff.”

You either make time for conversation or live with a disengaged workforce. It’s that simple.

Start with some occasional small talk. Over time ask braver questions. Then listen intently to what is being said and pausing before you add anything else.

3. Make people feel comfortable Whether you know it or not, you’re either drawing people towards you or pushing them away. Do you know which one you are doing? Do you make people feel comfortable or uncomfortable? A highly engaged workplace is one where the people feel at ease instead of on edge. So, ask yourself: “Do you come across as a person of patience and encouragement, or are you known for having a short fuse?”

Do people feel safe to say what they really think and feel at your meetings? Or do they say one thing at a staff meeting and something else in the hallway after the meeting?

Does your office appear as though everything is in order and under control? Or does your prospective customer feel nervous, thinking she’ll probably be lost in the shuffle of your messy organization?

If you don’t know if you’re making people feel comfortable or uncomfortable, start asking around. Believe me, your people know the answer.

And if you don’t like what you hear, do at least one thing every day that will make your workplace a safer, friendlier, and more engaging place to work.

4. Avoid communication killers In a sense, this is the opposite of points 2 and 3, but it needs to be stated in thereverse.

Avoid conversational turnoffs. The whole pur-

pose of communication is to engage the other person. So, refrain from such behaviors as interrupting the other person when she is speaking, over-explaining an answer to the point of boring your listener to death, offering unsolicited advice, being evasive when answering a question, or being closed-minded and overly-opinionated. Those behaviors disengage the people around you.

Avoid arrogance. If you use big-sounding, pretentious words that make you feel smarter and the other person feel dumber, you’re bound to create some emotion, but it won’t be engagement. The same goes for bragging and one-upmanship. Don’t do it!

5. Make people feel important The leaders who do the best job in engaging others use the inspiring power of importance. They tell their people that they’re important and their work is important. And they tell them over and over again.

Fred Smith, the founder of Federal Express, put it this way: “You have to communicate with your workers and make sure they understand that what they’re doing means something. We still tell our employees what we always told them: ‘You’re delivering the most important commerce in the history of the world. You’re not delivering sand and gravel. You’re delivering someone’s pacemaker, chemotherapy treatment for cancer drugs, the part that keeps the F-18s flying, or the legal brief that decides the case.” To make people feel important, use the Language of Validation. Tell people such things as: “I respect… I admire… I celebrate… I value… or …I am thankful for.” And then finish the sentence with a specific behavior you’ve observed in the other person.

6. Make people feel appreciated Yes, engaged people feel welcome, comfortable, understood and important, but the most engaged people also feel appreciated. In fact, it’s so critical that Dr. William James, the father of American psychology said, “The deepest craving in human nature is the craving to feel appreciated.”

Are you out there making your employees and customers feel appreciated? I hope so. You’ll never be able to give your employees all the money they want and you’ll never be able to give your customers all the discounts they want. But you can extend appreciation over and over again. It costs you nothing but gains you everything.

So tell your employees how much you appreciate their hard work, going the extra mile, being flexible in times of change, or just bringing a smile to the job site. Tell your coworkers how much you appreciate their positive attitude, how much you value their support, and how much you enjoy working with them. It will bring out the full and willing cooperation of the people around you.

7. Ask for what you need If you want and need more engagement, ask for it. People don’t want to be told to “buckle up, to get with it, to show more enthusiasm, and to get more engaged”. And people don’t want their engagement to be taken for granted; they want to be asked.

So, be direct. Don’t hint. Don’t say, “It would sure be nice if we could start on time.” That’s not asking. That’s begging. A direct request would be: “Can I count on you being here at 8:00 a.m. sharp for our meeting on Tuesday?”

Second, be specific. The more specific you are about the behavior you want, the more likely you are to get it. Instead of saying: “We need to show a little more enthusiasm around here,” ask: “Will you please respond to your customer’s request by saying, ‘It would be my pleasure to help you?”

Third, be positive. In other words, expect the other person to say yes to your request. As strange as it sounds, people sense your state of mind.

If you ask for more engagement, thinking “they’re going to say no”, they probably will say no. But if you approach someone with the expectation of a positive response, you will get a lot more yes respons

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CAREER

CEO Interview

- High light of your professional History before been CEO of Kreston LR: I started my career in publishing, firstly in lifestyle publishing (Dennis Publishing and Conde Nast) and then in business publishing (Pearson Professional and Thomson Reuters). I then moved to a media and branding consultancy (Cision), where, as the person responsible for greenfield operations, I became a client of the mid-tier accountancy market. When the role at Morison International (global accountancy association) appeared, advertising for an accountant to be the CEO, I replied advising that I thought it would be better for Morison International to employ a client as the CEO, and they agreed! My whole career has been focused on business development, sales and marketing – I love building business!

- What mean ((Kreston)) and from were came this name?

LR: The word Kreston is ancient Greek for Trust.

Trust is vital when handing transnational business – we trust each Kreston member firm to handle the client matters with the high technical and service quality. Kreston was formed in 1971 when a German and UK member firm decided to formalise a relationship.

- What Kreston position in Market in 2018? and were you plan to be after 5 years?

LR: As the 12th largest global accounting network, Kreston has a very strong position in the market. In the next 5 years, we will have maintained our strong position, but also have grown our brand recognition, have stronger representation especially in developing countries, have launched new working groups, and most importantly have continually increased the volume of global business on which we advise.

- In media now start new distraction that there id now Big 2 (Deloitte and PWC ) and there second big 2 ( EY and KPMG ) because of big GAP between them. do you think that will be future of description of big 4?

Whilst Deloitte $43bn and PWC$41bn are pulling away from EY $35bn and KPMG $29bn – there will continue to be referred to as the Big 4 because they are significantly larger and different to the rest of the accounting profession in terms of structure, customer base and services offered.

The next largest network – BDO is not even a third of the size of KPMG and whilst it seeks to portray itself as having similar qualities to the Big 4 – it simply does not have the resource or capability to handle major MNCs handled by the Big 4 e.g. major global banks, listed entities- Shell, Apple.

The Big 4 are simply in a different world!

The mid-tier networks are focused on SME and entrepreneurial business – this is a sector that the Big 4 simply cannot handle well. In recent years the Big 4 have attempted to move into this market but it has been quickly recognised that, whilst they can support global MNCs which have in-house financial expertise, they are not suited to providing the vital trusted advisory services which are so valued by the SME and entrepreneurial business sector.

- Kreston very close to be one of Big 10, should we expect merge with another network next few years so KRESTON been officially in Big 10 ? or KRESTON will continue by merge with local firm each country by country?

LR: Kreston is currently ranked 12th globally with revenues of $2.4bn. The network ranked 10th has revenues of $3.6bn so Kreston would need to grow by 50% to reach the Top 10.

For Kreston – our focus is not on growing revenues by merger simply to gain global ranking. Size doesn’t necessarily mean greater quality or service offering. Our focus is to ensure that we have outstanding member firms providing the highest quality both technically and terms of service in each of the major markets throughout the world. We will grow, in terms of our share of international clients.

- Most of the international accounting firm (Big 4 + BDO ) have sub-network for legal sector , IT sector, ISO services ? should we expected that sub-network will see it in KRESTON soon ?

LR: We currently have excellent contacts throughout the world with firms in the legal, IT (including cybersecurity) and specialist consultancy sectors able to provide local and transnational services to our clients when required. The advantage we offer to clients by having strategic partnership for these services is that we can introduce the most appropriate team to address the particular needs.

- I wonder of there is any plan for know to accept any member from Iraq and see KRESTON officially in Iraq ??

LR: Kreston remains keen to recruit a member firm of appropriate capability and quality in Iraq.

We have identified Al Juboori & Co as meeting our criteria and should there be a future occasion when the firm may consider moving from RSM, we should be delighted to welcome them to Kreston!

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- What’s KRESTON position and Rank in ME what change in Ranking in last year?

LR: The last published IAB survey ranked Kreston as 14th in the Middle East with aggregate revenues of $26m. We have since added the significant firm Kreston Menon www.krestonmenon. com in the UAE. Growing our Middle East region is a priority for 2019 and 2020, so expect to see further growth.

O U R L E A R N I N G PA R T N E R S

About ICAEW

There are over 1.8m chartered accountants and students around the world − talented, ethical and committed professionals who use their expertise to ensure we have a successful and sustainable future. are sustainable, accountable and fair. We share our knowledge and insight with governments, regulators and business leaders worldwide as we believe accountancy is a force for positive economic change across the world.

About IASCA

The International Arab Society of Certified Accountants (IASCA) was established on January 12, 1984 as a non-profit professional accounting association in London, UK. It was formally registered in Amman on February 24, 1994 under the name “The Arab Society of Certified Accountants”.

About AAOIFI

The Accounting and Auditing Organization for Islamic Financial Institutions(AAOIFI) is an Islamic international autonomous non-for-profit corporate body that prepares accounting, auditing, governance, ethics and Shari’a standards for Islamic financial institutions and the industry. Professional qualification programs (notably CIPA, the Shari’a Adviser and Auditor “CSAA”, and the corporate compliance program) are presented now by AAOIFI in its efforts to enhance the industry’s human resources base and governance structures.

About CIBAFI

CIBAFI is an international organization established in 2001 and Headquartered in the Kingdom of Bahrain. CIBAFI is affiliated with the Organization of Islamic Cooperation (OIC).

CIBAFI represents the Islamic financial services industry globally, defending and promoting its role, consolidating cooperation among its members, and with other institutions with similar interests and objectives.

About Pearson Vue

Each year millions of people around the world take an exam with Pearson VUE. Chances are you, or someone you know, has recently tested with us. Your neighbor, the computer programmer ... your dad’s nurse, children’s teacher, real estate agent or college grad who wants to go to business school ... all demonstrate their knowledge, skill and commitment when they test with Pearson VUE.

About Kryterion

Kryterion strives to use leading edge technology to be a global leader in testing.

We partner with organizations to build and deliver everything from skills tests and simple online assessments to comprehensive high-stakes worldwide certification programs.

With Webassessor™ our clients can author test questions, create test forms, deliver tests through a variety of delivery formats and manage data from anywhere.

About IIoD

The Iraqi Institute of Directors ( IIoD) is a non-profit organization established in 2016 sponsored by the Federation of Chambers of Commerce and Industry( KFCCI) ,IIoD is the only institute in Iraq which provide services in corporate governance ,our strategic partner is the International Finance Corporation(IFC).

About GAFM

We are the Super-National Body that confers the accredited program certifications for GAFM Global Academy of Finance and Management®.

Our Global Board Advisors™ and Certification Body regulates the standards for certification and accredited education criteria for qualified business programs that are a path to our certifications. The Board of Standards awards designations and board certifications in the finance, accounting, and management consulting areas.

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GENERAL ELECTRIC SUFFERS

G

eneral Electric shares lost more than 11% of their value on 15 August 2019.The previous day’s close was $9.03. During hectic trading, with more than 400m shares changing hands (more than four times the previous day’s volume), GE touched a low of $7.65 (a drop of more than 15%) before closing at $8.01, registering its biggest one-day loss since 2008.

GE CEO Larry Culp responded by investing. He’s already been buying shares. He picked up 332,000 shares at an average of $9.04 on 12 August, taking his stake to more than 940,000 shares. Culp evidently saw the share price slump in the wake of Markopolos’ allegations as another buying opportunity. He purchased 252,200 shares for an average of $7.93 on 15 August.

Culp able?

Looking at some of the specific claims made by Harry Markopolos we outline below GE’s statement (italics) and Markopolos’ allegations: GE Insurance: We believe that our current reserves are well-supported for our portfolio characteristics, and we undertake rigorous reserve adequacy testing every year. The future implementation of the GAAP insurance accounting standard does not align GAAP and statutory reserves as Mr. Markopolos alleges, but rather will be dependent on a number of variables that will not affect statutory accounting, which drives our funding requirements.

Markopolos alleges GE is ‘hiding massive loss ratios, the highest ever seen in the LTC insurance industry’. He adds: “According to industry data, approximately 86% of GE’s LTC claims are ahead of them and the accompanying losses are growing at an exponential and un-survivable rate. Of the $29 Billion in new LTC reserves that GE needs, $18.5 Billion requires cash immediately while the remaining $10.5 Billion is a non-cash GAAP charge which accounting rules require to be taken no later than 1QTR 2021. These impending losses will destroy GE’s balance sheet, debt ratios and likely also violate debt covenants.”

BHGE accounting: As a majority shareholder of BHGE, we are required to report BHGE on a consolidated basis under US GAAP, contrary to what Mr. Markopolos alleges. Further, consolidation of BHGE by GE includes additional disclosure of BHGE’s results made through BHGE segment results reporting in the notes to GE’s consolidated financial statements. BHGE is also a stand-alone SEC registrant with its own separate SEC filings under Form 10-Q and 10-K as a separate company. In the most recent 10Q, GE disclosed the loss upon deconsolidation of BHGE from a sale of our interest (taking us below our current majority position) would be approximately $7.4bn as of July 26, 2019.

Markopolos notes that GE sold 101.2m shares in BHGE in November 2018 which left it with 50.4% ownership and a $2.2bn pre-tax loss on the sale. He says: GE improperly continued to account for its shares in BHGE as a Non-Controlling Interest in 2018, despite the fact that the substance of GE’s BHGE’s holdings was now strictly an investment, a clear violation of FASB Accounting Standards Codification 810-10-25-38A “Recognition – Variable Interest Entities” and FASB SFAC No. 8, BC3.26’s “Substance over Form” Concept. However, if GE had treated it as an Investment, as accounting rules require, it would have incurred a $9.1 billion loss. Maintaining a 50.4% interest (non-controlling interest threshold) in BHGE is a sham transaction with no business purpose done solely so that GE can create the false impression that GE has a reason to keep $9.1 billion in losses off of its books in 2018.”

GE’s liquidity: Contrary to Mr. Markopolos’ allegations, GE continues to maintain a strong liquidity position, committed credit lines, and several executable options to monetize assets. The Company ended the second quarter with $16.9bn of Industrial Cash excluding BHGE, $12.5bn of liquidity at GE Capital and access to $35bn of credit facilities. As it relates to GE’s leverage targets, as the Company has previously stated during 2Q earnings, it expects to make significant progress towards these goals by the end of 2020.

Markopolos claims: “GE’s 2018 year-ending working capital was minus $14.3B with BHGE and minus $20.3B without!Knowing this was critical information for investors, lenders, vendors, retirees, and regulators it was a willful “Do a word search on ‘working capital’ and you will see GE spreads out its discussion of working capital over numerous pages of their 10-K and only discusses changes in working capital, but never gives you a true picture of how dire their financial position is.

“There are three key risks to GE’s survival. First, a stiff recession after ten years of domestic economic growth, will see that the next chapter in GE’s history is Chapter 11. Second, in 2021 there isn’t going to be any positive cash flow, which is the fairy tale that GE’s new management team is pitching because an accounting rule change for insurance liabilities and significant under-reserving is going to cause GE to take $29 Billion in additional reserve hits for its Long-Term Care (LTC) liabilities. Third, assuming GE can avoid a recession and somehow borrow enough to fund its LTC liabilities, it will next face repaying its $107 Billion in debt and also covering its $27 Billion in pension liabilities. How is GE, a company that has almost no cash and which earned a total of only $14.9 Billion over the last seven years, going to out-earn over $160 Billion in liabilities with the operating business units it hasn’t already sold to stay afloat?

WORST

10 ONE DAY IN

YEARS

ON FRAUD ALLEGATIONS

“Our final three questions are for KPMG, GE’s auditors for the past 110 years dating back to 1909: 1) What did you know? 2) When did you know it? and 3) Where’s your ‘Going Concern Opinio

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Some of Courses held in our company.

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Will 5G Be the Platform for Tomorrow’s Smart Cities?

C

onnectivity is one of the main pillars that are defining life in the 21st Century. The level of depth that connectivity defines our routines in this Century is truly astonishing.

With a particular boost after the first decade of the century, we have developed not only habits, but entirely new jobs, industries, lifestyles and daily tasks which either revolve around the internet fast connection, or are born precisely because of these developments in connectivity.

Having a small device in your hands (which, is still unsuitably called a “phone”) with exponentially more processing power than the entire Apollo 11 mission, which provides you the world’s knowledge in the palm of your hands, and with instant and either free or very cheap video calls at your fingertips (or even cooler, with your voice commands), was pure sci-fi not that long ago! If you are reading this article and still remember chat rooms, or MSN as one of the first instant messaging platforms, you know exactly what we mean.

The name “5G”, following its predecessors, stands for “5th generation of mobile telecommunications technology,” and it has been a long way since what one can imagine was once “1G”. For those of you who can remember, 1G was the analog connection used by those big bumpy cellular phones – the first of their kind that could be carried and used without a cord. Fast forward to 2G (because there were several technologies that replaced the 1G radio waves before 2G) which enabled us to send text messages, and the real revolution started not that long ago with 3G, which made possible for a

cellular phone to connect to the web faster.

Even though it marked a huge step in the development of connectivity as we know it today, 3G was still not the best with a speed of 8Mbit/s to a maximum of 42Mbit/s with the DC-HSPA+ technology, but the common user rarely got to this speed. This meant that we were slightly limited in what we could watch and not every streaming was flawless. Until the upgrade to the 4G! With a maximum of around 100 Mbps (in normal conditions), and at a lowest of around 5 Mbps, users can watch all the videos, movies and shows they want.

However, numbers show that the leap from 3G to 4G is a far cry from the difference between 4G and 5G. This technology promises a 20 Gbps top speed connection! That’s right – at its best, it’s 100 times faster than the 4G connection we use today. Just to give you an idea, that means that we will be able to download a 90 minutes movie in 1-2 seconds. This promises uninterrupted streaming of 4k movies, and the complete eradication of latencies.

The main difference between 4G and the upcoming 5G, in technical terms, is the wavelength that 5G utilizes. They are previously inaccessible highfrequency millimeter radio waves between 30 and 300 GHz. Known as “mmWaves”, they have not been used in the past due to high costs, a lack of practicality and strict government regulation. Millimeter waves are grouped tighter, at a significantly more compact capacity than the standard sub-5 GHz radio waves used currently. However, the downside of using these new network waves, which allow for great speed, is that their higher frequencies have more difficulty to penetrate objects. 2.4 GHz

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WiFi is best for a home environment, while 5 GHz is best to operate in high speeds in an optimal network environment.

Will 5G be the key to building smart cities? Many believe that 5G will be the key to smart cities, because for the idea of the smart city to reach its true potential, the crucial element is 5G. With an ability to support up to 1 million devices per square kilometer, it will provide considerable improvements in speed, production capability, traffic capacity, latency and spectrum efficiency required by the smart city ecosystem.

As 4G technology enabled the explosion of smartphones, mobile apps, and m-commerce, the advancement to 5G will support fastgrowing, different services for both human and machine communications. In the future, the movement for smart cities may be the most transformative step in the history of urbanization. According to the Global Commission on Economy & Climate, smart cities may save the world as much as $22 trillion by 2050.

According to a report from the International Data Corporation (IDC), smart city technology spending reached $80 billion in 2016, and investments are expected to rise to $135 billion by 2021. According to the Ernst & Young report about the megatrends, based on current rates of urbanization, it is forecasted that more than 66% of the world’s population will reside in cities by 2050. Over the next 40 years, urban centers will see a surprising 1 million new residents arriving each week. As the urban population increases, cities must find means to decrease resource consumption and diminish carbon emissions.

Smart city technology among other benefits can help cities function more efficiently, while enhancing services to businesses and citizens, sustainability and economic development. It will benefit city governance, education, transportation, healthcare, building management and more.

As Artificial Intelligence and machine learning abilities become common, possibly data analytics will substantially impact the 5G/smart city development. However, one of the biggest challenges can be considered security. The great increase in connected devices will intensify security threats and widen the attack surface.

However, apart from the security challenge 5G technology delivers multiple benefits for the cities such as: • Broadband everywhere – 5G offers better coverage and performance both indoors and outdoors • High speed – The 20Gbps top 5G speed will allow consumers to download an HD movie in seconds; TV reporters can stream real-time broadcasts etc.

• Energy efficient – IoT devices battery life will reach up to 10 years lifecycles. This will diminish the replacement costs of the battery and will reduce maintenance • Enhanced experience – 5G culminates into greater reliability, enhancing the overall experience for the individual or the machine • Reduced environmental footprint – Smart cities are fighting the negative effects caused by humans on the environment by using renewable energy sources, energy-efficient buildings, air quality controllers, and so on How does a Smart City look like?

A smart city gathers and analyzes data from IoT sensors and video cameras. This information

then is used by the city operator to decide how and when to take action (even though some actions can be performed automatically). An example is the public waste bin, which can contact the city for service when it is near capacity instead of waiting for a scheduled pickup. Another example is the smart automobiles communication with other cars to anticipate traffic conditions.

The smartphones of pedestrians, as well as cars would also be able to communicate with the street lighting in the area they’re driving or walking, so the lights will be turned only on those roads where there is active traffic. These activities will result in money and city power savings while keeping drivers safe.

Are ISO Standards the starting point?

ISO standards provide an overall framework of the things that a city should address to become a smart city through environmental management, responsible use of resources, energy efficiency etc. There are multiple standards that play a key role in helping urban areas become more connected and sustainable, improve the citizens’ quality of life, and cope with a growing population.

Some of the standards include ISO 26000 for Social Responsibility, which contributes to sustainable development, ISO 50001 for Energy Management, considering the importance of meeting energy needs in a sustainable manner of the growing populations. Another important standard is ISO 39001, Road Traffic Safety (RTS) Management Systems, which supports efficient road transport and the safe movement of people while reducing pollution.

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Additionally, as our global connectivity increases, so does the risk of security breaches and their associated threats. As such, standards like ISO/ IEC 27001 and ISO/IEC 27002 for Information Security Management Systems support organizations in addressing security and privacy issues, while ISO/IEC 38500 on the governance of information technology provides a framework for the efficient and effective use of IT within organizations.

Also one of the goals of the agenda of the United Nations Sustainable Development Goals is improved “health and well-being.” For that, ISO has more than 1300 standards and standardtype documents dedicated to all aspects of health and well-being. One of them is ISO 45001, Occupational Health and Safety Management Systems, which helps bring safety in the workplace.

The 5G evolution, which will create the advanced infrastructure needed for smart cities, has reached a very promising stage. In the nottoo-distant future, our cities will be smarter, cleaner, and safer places to live. Many cities are now becoming smarter and implementing strategies to address and explore the efforts to improve mobility, healthcare, public safety, and productivity. It’s no surprise that the move to 5G is accelerating, but certainly, 5G can’t exist alone, so other technologies introduced both before and after 5G, will make the smart cities possible.

Cities and towns which are first to embrace this development will see the ultimate benefit, while slow adopters will be less competitive.

ECONOMY

SPORTS DIRECT URGENTLY SEEKS NEW AUDITOR

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ollowing confirmation that Grant Thornton is throwing in the towel as Sports Direct’s auditor, the company released a joint statement from the two which reiterated Sports Direct’s desire to seek a Big 4 auditor.

The statement said: “As referred to in the Chief Executive’s Report and Business Review in SD’s Annual Report and Accounts for the period ended 28 April 2019, SD has a longer term aim of looking to engage a Big 4 auditor in the future. In line with the audit profession as a whole reviewing their client portfolios for, amongst other reasons, audit profitability, during a period of increased regulatory scrutiny, GT’s review of its client portfolio alongside SD’s future intentions on engagement of a Big 4 auditor has led to a decision by GT to not seek reappointment as SD’s auditor.”

The company also added that the board was ‘comfortable with SD’s accounts for the period ended 28 April 2019 and believe a fully robust audit was carried out of SD’s financial statements’.

Nevertheless, it appears Sports Direct is having difficulty in fulfilling its ambition of landing a Big 4 auditor. Shares have slumped in the wake of Grant Thornton’s withdrawal and the clock is ticking. The company has barely a month to find a replacement in time for its AGM. In the company’s annual report, CEO Mike Ashley said: “We do not believe a firm outside of the Big 4 will potentially be able to cope with such an audit in the future.”

However, he also noted: “Our early discussions with the Big 4 have thrown up some barriers; Deloitte who do our tax compliance and advisory work cannot perform audit work at the same time

Follow Up: Shehab al-Hitti CPA, Partner

and thus would currently be unable to tender.

KPMG have indicated conflicts of interest based on an existing portfolio of clients, however we do not believe based on our understanding of Big 4 independence procedures that this is insurmountable. EY had some reluctance based on their close proximity to the House of Fraser administration which they ran, however as time has passed we do not believe this should be a barrier when a tender process is run. PwC have had some widely publicised fines in recent years and we understand there is a reluctance to engage based on our ownership structure.” Ashley went on to be critical, saying ‘… the big 4 have been more than happy to audit’ the likes of Carillion.

The company now faces the prospect of breaking London Stock Exchange regulations if it has no official auditor in place and has, according to The Financial Times, approached the government regarding its options. Andrea Leadsom MP, Secretary of State for Business, Energy and Industrial Strategy, has the power to appoint an auditor to a public company if it cannot do so itself.

Cynthia Holder, a former Public Company Accounting Oversight Board (PCAOB) inspections leader and director at KPMG has been sentenced to eight months in Federal prison. This is the first custodial sentence to be handed to one of the five former KPMG executives indicted over a scheme to steal inspection information from the PCAOB. Holder also faces two years of supervised release and restitution of an as yet unspecified sum.

She had pleaded guilty to one count of conspiracy to defraud the United States, one count of conspiracy to commit wire fraud, and two counts of wire fraud on 16 October 2018. The SEC had settled with KPMG itself on 17 June 2019, fining the

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firm $50 million and requiring ‘significant remedial actions’ Geoffrey S. Berman, the US Attorney for the Southern District of New York, issued a statement following Holder’s sentencing that said: “As a former employee of the PCAOB, Cynthia Holder understood the importance of the organization’s work: to protect investors and the public by overseeing the audits of public companies. But she undermined the Board’s and the SEC’s regulatory missions when she stole confidential inspection information and provided it to KPMG, her new employer. KPMG, in turn, used this confidential information to cheat on PCAOB inspections. Holder’s sentence should be an example to others that stealing confidential information and corrupting regulatory processes are crimes that this Office takes very seriously.”

KPMG had fared poorly in PCAOB inspections and in 2014 received approximately twice as many comments as its competitor firms. By 2015, KPMG was engaged in efforts to improve its performance in PCAOB inspections, including but not limited to recruiting and hiring former PCAOB personnel such as Holder and her co-conspirator, Brian Sweet.

KPMG’s efforts to improve inspection results, however, were not limited to legitimate means.

Instead, between 2015 and 2017, Holder, David Middendorf, Thomas Whittle, Jeffrey Wada, Sweet, and others worked to illicitly acquire valuable confidential PCAOB information concerning which KPMG audits would be inspected, in an effort to game the system and improve inspection results.

While still employed by the PCAOB, Holder fed Sweet confidential information about certain pending inspections. She did so while simultaneously

seeking employment at KPMG. In March 2016, Holder obtained the PCAOB’s confidential 2016 inspection selections for KPMG from Wada, who was still working at the PCAOB but who had recently been passed over for a promotion. Wada – who was not responsible for KPMG inspections at the PCAOB – accessed and stole valuable confidential information from the PCAOB and passed it on.

Middendorf, Whittle, Sweet, and others then agreed to launch a stealth program to ‘re-review’ the audits that had been selected. In order to cover up their illicit conduct, the KPMG engagement partners were given a false explanation for the re-reviews. The stealth re-review programme allowed KPMG to double-check its audit work, strengthen its work papers, and, in some cases, identify deficiencies or perform new audit work that had not been done during the live audit.

In January 2017, Wada, who had again been passed over for promotion at the PCAOB, again stole valuable confidential PCAOB information, misappropriating a preliminary list of confidential 2017 inspection selections for KPMG audits and passing it on to Holder. At the same time, Wada provided Holder with his resume and sought her assistance in helping him to acquire employment at KPMG. Sweet shared the preliminary inspection selections provided by Wada with Whittle and Britt, while noting that the information was only preliminary. Whittle’s response was to ask Sweet to confirm that they would get the final list as well.

In February 2017, Wada texted Holder saying, “I have the grocery list. . . . All the things you’ll need for this year.” Wada then spoke to Holder and provided her with the full confidential 2017 final inspection selections. Holder again shared the stolen information with Sweet, who shared it with Middendorf, Whittle, and others. Middendorf, Whittle, and Sweet agreed to inform engagement partners on the list so that extra attention could be paid to these audits in light of the forthcoming PCAOB inspections.

In 2017, a KPMG partner who received early notice that her engagement was on the confidential 2017 inspection list reported the matter, as a result of which KPMG’s Office of General Counsel launched an internal investigation. Thereafter, Holder and Sweet took a number of steps to destroy or fabricate evidence relevant to the investigation. For example, Holder deleted a number of relevant text messages, emails, and documents, and said she was going to purchase a “burner phone” so her conversations could not be monitored.

Similarly, Sweet burned evidence of the 2017 inspection list and provided a falsified version of the list to KPMG counsel.

Thomas Whittle, David Middendorf, Brian Sweet and Jeffrey Wada have also either pled guilty or been convicted for their roles in the affair.

David Britt, former co-leader of KPMG’s banking and capital markets group is expected to face trial in September 2019.

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ECONOMY

IASB to Propose to Amend Key Aspects of IFRS 17, Insurance Contracts Following Industry Feedback Follow Up: Inas Al-Qaissi CPA, Partner

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he International Accounting Standards Board (IASB) has recently met and proposed amending key aspects of IFRS 17 Insurance Contracts.

In late 2018, the Board agreed to re-open certain aspects of IFRS 17 Insurance Contracts as one of its highest priority activities, following concerns raised by the insurance industry and other key stakeholders. As a result, the IASB agreed to propose a one-year delay to the effective date of IFRS 17 to January 1, 2022.

At the January meeting, reflecting insurance industry feedback, the IASB agreed by a significant majority to propose four key IFRS 17 amendments: -Change the accounting of proportionate reinsurance held in respect of onerous insurance contracts, to better match and enable a more economic net outcome.

-Where reinsurance is held to mitigate financial risk in contracts measured using the general measurement model, to remove the accounting mismatch found in the original IFRS 17 standard related to the impact of financial movements over time.

-Enable deferral of some insurance acquisition cash flows for newly issued contracts, where there are related expected contract renewals.

-For insurance contracts containing both an insurance and investment component and measured using the general measurement model, recognize both the insurance and investment components in setting the profit recognition patterns to help avoid distortions.

Kamran Foroughi, senior director at Willis Towers Watson, comments, “We welcome the IASB’s pragmatism. The reinsurance decisions will help ensure reinsurance remains attractive as a risk mitigation/funding activity and avoid unintended consequences such as raising barriers for new entrants.”

In papers prepared for the meeting, the IASB indicated that: -It plans to issue a limited scope Exposure Draft on proposed IFRS 17 amendments by this summer.

-It was planning on bringing a number of topics to the February or March meetings, including transition, comparative information, level of aggregation and the scope of IFRS. “In supporting these changes, the IASB has tried to avoid an overly prescriptive approach, referring in its proposals to the exercise of judgement and ‘a systematic and rational’ basis,” added Foroughi. “The Board acknowledged that in making these changes there may be a resulting

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increase in complexity, albeit outweighed by the benefits arising from reflecting the economic substance. As a result, preparers will need to consider carefully how to interpret the standard. In some cases, this may require significant additional analysis to be performed.

It is clear from the latest IASB meeting that insurers should keep going with projects ensuring they are on track for a 2022 implementation, with the direction from the IASB becoming much clearer and only a small number of topics outstanding.

Although these proposed changes largely stem from industry feedback, the effort required to understand and assess their impact should not be underestimated.”

IFAC Urges G20 to Focus on Rebuilding Public Trust The International Federation of Accountants (IFAC) has called upon G20 countries to pursue smart regulation, heightened transparency, and inclusive growth to rebuild trust in institutions and advance global economic progress.

‘Low levels of public trust threaten both economic and political stability,’ said IFAC CEO Fayezul Choudhury. ‘Leaders in government and business must work together to bolster good governance and collaborate for effective public policies that inspire confidence in the institutions supporting the global economy.’

G20 countries play a crucial role in fostering institutions and governance models that can anticipate, respond to, and mitigate future crises.

In advance of the 2018 G20 Summit in Buenos Aires, Argentina, IFAC issues 10 actionable recommendations for G20 countries to support the global economy.

Develop smarter regulation Regulation must effectively support the public interest through well-targeted conception, effective design and committed implementation.

To achieve smarter regulation, G20 countries must: • Develop and adopt consistent, comprehensive, and high-quality regulation • Create a coherent, transparent global regulatory environment that limits divergence • Implement internationally-accepted standards to enhance confidence and stability in the global financial system • Increase transparency • Robust transparency in the public and private sectors is key to earn public trust, fight corruption, encourage good governance and mote ethical business practices. To increase transparency in the global economy, G20 countries must: • Strengthen governance in the public and private sectors • Embrace integrated reporting • Enhance public sector financial management • Collaborate to tackle corruption • Enable inclusive growth The fruits of a growing global economy must be shared inclusively to inspire confidence in the future. To enable inclusive growth, G20 countries must: • Foster an environment that supports small- and medium-sized entity growth • Create a secure and digital-ready investment environment Collaborate for a coherent international tax system • IFAC is the global organization for the accountancy profession dedicated to serving the public interest by strengthening the profession and contributing to the development of strong international economies.

IFAC is comprised of more than 175 members and associates in more than 130 countries and jurisdictions, representing almost 3 million accountants in public practice, education, government service, industry, and commerce.

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BREAKING NEWS

BIG FOUR UNDER THE SPOTLIGHT IN AUSTRALIA

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N 1 August 2019 the Australian Senate referred an inquiry into the regulation of auditing in Australia to the Parliamentary Joint Committee on Corporations and Financial Services for report by 1 March 2020. Submissions are due to close on 30 September 2019. The Committee’s powers allow it to report to Parliament with recommendations for changes to legislation, regulation and government policy. This is being described as a broad-ranging inquiry looking at the quality, regulation and market for corporate audits; conflicts of interest within the big four firms; and the performance of regulators.

This inquiry follows on from an inconclusive investigation by the Australian Competition and Consumer Commission earlier this year into audit practices and potential anti-competitive behaviour among the big four.

At the same time, the Senate referred a separate inquiry into the impact of changes to service delivery models on the administration and running of government programmes, to the Legal and Constitutional Affairs References Committee for inquiry and report by 16 October 2019. Submissions for this inquiry are due to close on 23 August 2019. Although this inquiry does not directly target the big four in the way that the inquiry into audit practices does it also puts them under the microscope as they are heavily involved as contractors and consultants in a number of the sectors that are the focus of this second investigation.

It is also being reported in the Australian Financial Review that EY is likely to be the subject of a third investigation. This follows on from the hiring in June of former defence minister of Australia Christopher Pyne as a consultant and the recent awarding of a contract worth AUD 2.6m ($1.77m) by the Australian Defence Ministry to EY.

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The Senate has voted to set up a committee to review whether Pyne and former minister for foreign affairs Julie Bishop, who joined the board of international consultancy Palladium in July, are in breach of the ministerial code of conduct which states: “Ministers are required to undertake that, for an eighteen month period after ceasing to be a Minister, they will not lobby, advocate or have business meetings with members of the government, parliament, public service or defence force on any matters on which they have had official dealings as Minister in their last eighteen months in office. Ministers are also required to undertake that, on leaving office, they will not take personal advantage of information to which they have had access as a Minister, where that information is not generally available to the public.”

Research by insolvency specialists Begbies Traynor shows that there are now 484,000 UK businesses in significant financial distress with the property, leisure and tourism sectors particularly badly affected.

The Red Flag Alert data for Q2 2019, which monitors the financial health of UK companies, found that 14% of all UK businesses were experiencing ‘significant’ financial distress at the end of June 2019, with the average debt of insolvent companies more than doubling to £66,226 a year, from £29,872 in 2016. There was also a marked increase in the number of businesses in critical financial distress during the same period – often a precursor to formal insolvency – with a rise of 5% year-on-year.

Businesses reliant on the consumer economy continued to be impacted by falling sales which has affected financial performance across a number of key verticals. The latest Red Flag Alert research highlights rising financial distress in the following sectors; hotels & accommodation (8% rise, 5,095 (Q2 2018) to 5,516 (Q2 2019), sport & health clubs (5% rise, 8,481 (Q2 2018) to 8,940 (Q2 2019) and leisure & cultural activities (4% rise, 12,524 (Q2 2018) to 13,069 (Q2 2019). Additionally the online retail sector (sales via mail order or the internet) experienced a 12% increase in significant financial distress from 5,243 in Q2 2018 to 5,871 in Q2 2019.

Additionally, businesses indirectly reliant on the health of the consumer economy continued to be hit hard with real estate and property companies most affected by the weakest consumer spending since records began in the mid-1990s.

This sector saw a 15% year-on-year increase in the number of companies in significant financial distress, rising from 43,085 in Q2 2018 to 49,342 in Q2 2019. The property/real estate sector also experienced a 2% quarter on quarter increase in significant distress (Q1 2018 - 48,309 to Q2 2019 - 49,342) – the highest quarterly percentage increase across any sectors measured in the Red Flag research.

FINANCIAL SERVICES

The research reveals increasing levels of significant distress within the financial services sector, with 12,666 businesses now affected, an increase of 5% compared to Q2 2018.

Not surprisingly, the increase in significant distress within this sector has negatively impacted the overall performance of London with a substantial 5% year on year rise in significant distress – the highest of any reported region with the Q2 2019 Red Flag Alert research. This deterioration has been exacerbated by the cooling of the real estate sector in the capital, all which has resulted in more than 5,000 London businesses slipping into significant distress in the last year (117,683 in Q2 2018 to 123,196 in Q2 2019).

Even though the sector has shown some recovery in the last quarter, it continues to be affected by the uncertainty surrounding Brexit. Once a final decision has been agreed, then stability should return as the fundamentals of this sector remain reasonably good, subject to the other macro economic influences.

The founder of the now-collapsed telecom network H2O has reported Deloitte to audit regulators.

Elfed Thomas, the founder and former Chief Executive of H2O networks, submitted a report alleging potential negligence by Deloitte during the Big Four firm’s time as auditor in which a £160m financial fraud took place.

Deloitte was appointed in 2003 and has been accused in Thomas’ report, submitted to the FRC, of not being thorough and missing key issues in H2O Network’s 2009 and 2010 accounts.

He claims that a more thorough audit could have uncovered the fraud and prevented the collapse of the company which was once seen as a potential challenger to BT and Virgin Media before it collapsed into administration in 2011.

Thomas, who commissioned a forensic accountant to evaluate the firm’s auditing performance, told the Financial Times that they were supposed to be his “sense checker”, and has reported the firm.

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ECONOMY

An opportunity for change in the accounting sector – a need for reinvention There is usually a silver lining to every dark cloud, and the one hanging over the UK accounting sector is no exception, says Leon Kamhi, Head of Responsibility at Hermes Investment Management.

Over the last 20 years we have worked our way into a crisis of trust in accounting. We have lost faith not only in the institutions that are meant to oversee the process of validating company performance, but the in the process itself. It has become common practice to try and pass the blame around for what has happened to the sector, but the truth of the matter is that we are all partly responsible. Investors, regulators, politicians and bankers all share some fault with companies and accountants in bringing us to where we are today.

That is why we are all now responsible for fixing this sector. What is key to moving on from the blame game is accepting that there are many aspects to the sector’s reinvention, and that we all need to change our ways. The good news is that if we all step up to the plate, it will be a real moment of opportunity for profoundly positive change.

THE CHALLENGE

extensive suite of obscure instruments that purport to inform, but in fact serve only to obscure and confuse.

As investors, we are not alone in demanding change – it will help everyone in the chain, from companies to investors, to function more clearly, cleanly and effectively.

If accounting is to fulfil its potential of being a truly useful activity in supporting sustainable wealth creation by companies, the industry needs to confront how accounts can be put together, audited and regulated in a way that clearly and honestly reflects the performance of the business. Without a firm answer to this, the hope for a reinvention of the accounting sector will never become a reality. Therefore, we must examine the different actors and what they need to do to effect positive change.

T H E C O M PA N I E S

Clearly, companies that are being audited have the greatest responsibility. They have the information that can and should be made available to comply with the rules and most of the time they will provide it. However, in the rules is where we find our first opportunity for reinvention.

For companies, the question around reinvention is; to what extent is the Audit Committee willing to act independently from the management?

In reality, it is very easy to stay inside the relatively wide lines of many accounting standards, and company Audit Committees generally do a good job within these rules. They make every effort to ensure that regarding their accounts, the CFO, the finance department and the auditors comply with the exact letter of the law.

Most Audit Committees have a good range of people – from those with hard accounting skills, to those who are there to ask the “stupid” questions.

For companies, the question around reinvention is; to what extent is the Audit Committee willing to act independently from the management?

Moreover, how determined are they to show not only what they are required to from a regulatory perspective, but what they should in order to help investors and other users understand the true performance and position of the company?

The reinvention of the accounting sector must be based on one key objective: accounts should reflect the real performance of the business. This is what most people outside financial services think they should do, and they are mystified as to why this is not the case. For those of us on the inside, we know that accounts do not always demonstrate a true and fair view of a company because they are often prepared to ensure that they maintain a technical adherence to accounting standards rather than ensuring that they reflect the underlying business performance.

As a consequence, when investors read audited accounts, we are often left wondering whether the profits being reported are “realised” or “unrealised”, and if “unrealised”, will they ever be “realised”? Does “cash” always mean “cash”, and just how is “goodwill” written down?

Why are some new CEOs able to “kitchen sink” by writing off as much as they can when they take up the position? And why do Boards, who signed off previous accounts, let them? Could these write-offs have been made before – and, if so, why wasn’t it done previously? There are issues con- T H E A U D I T O R S cerning the way revenues are recognised and the Auditors have the greatest opportunity to adsame is true for lease payments. There is also an dress current accounting issues. Firstly, they have

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unbeatable knowledge about how companies across every spectrum operate as they interact with so many of them. Secondly, they are able to remunerate staff relatively well, so can attract talented people.

However, there are justifiable concerns around auditors’ incentives and their perception that the regulator sees technical compliance as the primary objective, and a true and fair view of the underlying business performance as a secondary issue for accounts. Unfortunately, the pressure to achieve “profit per partner” has led the auditors to create overly leveraged teams with senior members often not spending enough time with a client. It is also understandable that there is immense focus on the technical side, and one can make a case for the benefit of bringing in a team who are laser-sharp on procedures. However, it should not come at the expense of having an individual with specialist sector experience who truly understands the business.

Audit firms need to develop far greater transparency around their activities and be able to explain how remuneration is not only driven by the profit-per-partner, but also by the quality of the audits they deliver.

There are teams that are competent and capable in the technical skill of auditing, but without visiting a company – or a range of them – and actively engaging with them, how can they really understand the business? Furthermore, if you do not understand the business or sector, it is impossible to carry out an effective assessment and audit of a firm. It would be as if you put a fund manager in charge of running an Asia strategy without taking them to Asia. There is a further issue with auditing firms that needs addressing from a corporate level, if they are to reinvent themselves.

As a partnership, there is no legal requirement to have an independent chair or majority independent Board. However, because of the privilege of limited liability enjoyed by companies and their shareholders, the wider impact of company failure and potential job losses can ripple out to the local economy and society. Consequently, auditors are in effect providing a public service, and this demands stronger governance.

Audit firms need to develop far greater transparency around their activities and be able to explain how remuneration is not only driven by the

profit-per-partner, but also by the quality of the seniority and the knowledge and experience of those who carry the responsibility – but that is audits they deliver. changing. To date, a disproportionate level of inT H E R E G U L AT O R During the FRC review led by Sir John King- vestors’ stewardship efforts have been focused on man, it became clear that the regulator has stru- executive remuneration. Only now is the industry ggled from having a relatively limited talent pool increasing its attention and resource available to from which to draw its staff. It is also our percep- address hugely important environment and social tion that the regulator had been over-focused on issues.

The sad reality is that in 2019 there is very liprocedure rather than on understanding whether mited stewardship that focuses on the quality and the accounts that audit firms were auditing really reflected a business and its underlying perfor- relevance of a company’s accounts nor the memmance. There was an inherent fear that any review bership and activity of the Audit Committee, all of an audit or account that had been flagged as of which are fundamental to the running of the suspect would take such a long time to unravel, business. Yes, we will spot when an audit firm has that the FRC instead focused on whether some- been there too long, or if non-audit fees get too thing would stand up in court, rather than if the high. Equally, when there is a crisis, a fraud or a industry’s general practice could be improved by particularly egregious accounting issue, investors get busy. There is, however, plenty more we can examining, updating or clarifying an issue.

The Kingman Review recommended the creation of a new regulator to replace the FRC – the Accounting Reporting and Governance Authority.

This presents a strong case and opportunity for the reinvention of the regulator to build something that is fit for purpose.

Instead, the new regulator must demand of companies and auditors that they make their highest priority and purpose to be that accounts are prepared on the basis of a prudent approach at the same time as representing a true and fair view of the company’s performance and position.

With the introduction of a new regulator we should hope and expect that these issues will all be addressed as a matter of urgency.

THE INVESTORS

It is imperative that investors put as much emphasis on acting as stewards of capital as they do as stock-pickers. Alongside the auditors, we have a responsibility to society as well as to our clients and beneficiaries. We are taking on the duty of a steward of other people’s capital and ownership of a company that provides a livelihood to many and goods or services to many more.

Unfortunately, across the industry much of fund manager activity is not focused on engagement or on turning poor companies into better ones. Nonetheless, as a group, we need to treat the time between the purchase and disposal of a company stock or bond as equally important as the buy or sell decision.

Stewardship is a growing area, but across the investment management industry it is currently woefully under-resourced, in terms of both the

do before this happens, which may mean we even avoid getting to that stage.

As investors, we must be more systematically engaged with the Audit Committee Chair and the CFO. It is vital that we examine how business performance is being reflected in the accounts and why certain accounting treatments are being used.

To do this, through informed discussion, we need to have the right skills and resources available. Our investment teams may already contain people who fulfil this need, but if not, investors need to consider how to resource the function to carry it out effectively. Rather than lay the blame solely elsewhere, if we as investors fulfilled our stewardship responsibilities, Audit Committee chairs would start listening and put more pressure on their audit firms, too.

The conclusion We have already seen how improvements in this area help investors make better decisions. Viability statements, which were introduced three years ago, provide a clear view of whether a company is in good health or not. According to many of the Audit Chairs we speak to, viability statements generate a Board discussion which leads to better business decisions. Accounting rules are not going to change in a hurry – but we do not need them to do so in order to make the improvements we seek.Instead, when a certain standard does not reflect underlying business performance, an auditor and a company should feel empowered to explain why they are not following the standard and provide additional information that delivers a true and fair. Company accountants, Audit Committees, auditors and investors – we all have our role to play and need to work together much more closely to improve, including the regulator.

We have an opportunity – and necessity – for reinvention, but more importantly, we have a responsibility to get it right.

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ACCOUNTING RULES

Outside the Box News & Commentary

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A New Accounting Rule on Loan Losses Could be Disastrous for the Economy; FASB’s New Rule will Find Losses where None Exist Beginning in 2020, the Financial Accounting Standards Board (FASB) will require large financial institutions and smaller banks to estimate and report loan losses upon origination according to the Current Expected Credit Loss (CECL) standard, commonly referred to as the loanloss rule.

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n recent congressional testimony, JPMorgan Chase CEO Jamie Dimon charged the rule will constrain banks and stymie lending. Even more portentously, CECL does not work: a major conceptual error in FASB’s guidance will cause significant losses to be reported where none exist and could result in a further significant decline in lending, which in turn could exacerbate a potential recession.

The loan-loss rule requires, upon origination, recognition of credit losses using economic forecasts over the contractual lives of loans and held-to-maturity debt securities.

Heroic assumption One can appreciate the salutary transparency the anticipation of losses required by the FASB rule can engender. Financial statements would become less opaque, duly warning investors about impending losses; this was the raison d’être of FASB to revisit the model for estimating loan losses in response

Jamie Dimon to the financial crisis of 2008.

However, the rule would require a heroic assumption: reasonable accuracy in estimating losses over the very long term, such as 30-year residential mortgages and student loans, especially when attempting to predict cyclical turns.

Moreover, CECL goes overboard in requiring the recording of losses where none exist.

This in turn results in an unjustified decrease in regulatory capital, and potentially reduced lending, especially during anticipated economic downturns, with draconian consequences for the economy.

The likely outcome of CECL is a very significant increase in artificial — not economic — loan losses, with corresponding adverse effects on regulatory capital. Applied to the $17 trillion banking industry, and a little above $15 trillion in mortgages alone as of the fourth quarter of 2018, this could spell disaster, leading to detrimental effects on lending and the economy.

The American Bankers Association, in its statement before the Financial Institutions and Consumer Credit Subcommittee of the House Committee on Financial Services, warned against some of the injurious effects of CECL: increased volatility of regulatory capital, the necessity of increased capital at all times, higher interest rates for borrowers and favoring shorter term loans over longer term ones including residential mortgages and student loans.

HOW THE RULE WORKS

That is all true, but more fundamental is the grave conceptual error embedded in CECL: recording accounting losses in the absence of real economic losses.

Simply articulated, the standard ignores that lenders would rationally increase interest rates to compensate for whatever default risk and consequent non-payment of principal and/or interest they anticipate over the lifetime of the loan. Hence, they would expect

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not to incur any economic loss upon loan origination. Further, if over time they forecast a heightened default risk, in many non-fixed rate cases, they would increase interest rates again to make themselves whole. Yet, under the FASB’s guidance, they are required to report accounting losses in the absence of economic losses, decreasing regulatory capital. This perverse outcome is a result of FASB requiring the use of a discount rate that is the same as the stipulated loan interest rate.

To illustrate with a simple example, imagine you lent me $1000 to be repaid by me in a lump sum after three years with annual interest payments. If you anticipate I would not default and pay all amounts as stipulated, you would charge me a 10% interest.

However, if you anticipate I would pay you back the full interest but only $900 at the end of three years on account of principal, you would charge me 13.0213% interest to compensate for the shortfall. Under FASB’s guidance, you would be required to use a discount rate of 13.0213% which would result in a reported loss of $69.27 — a substantial 6.9% of the loan you originated. (Absurdly, were you to apply FASB’s guidance to this example and yet show zero accounting loss, you would have to charge — and use as the discount rate – an interest rate of 4694%, reaping huge economic profits!). Departing from FASB’s guidance, however, a discount rate that equals the original loan rate of 10% would yield an accounting loss that is equivalent to the economic loss: precisely zero.

Clearly, this is a hypothetical scenario, but even if the reported loss were less than the approximately 7% of this example, when CECL is applied to huge amounts of originated loans, it would result in staggering fake losses. Consider the impact this rule would have on the $457 billion in mortgages (not considering other types of loans) originated in the country over just one quarter (the third quarter of 2018).

There is a simple cure to prevent artificial accounting losses: change the guidance so that the rate used to discount expected cash collections (both principal and interest) is not the stipulated loan rate but rather the internal rate of return, i.e., the rate that yields as present value the amount of the loan originally extended without incurring an economic loss. In my simple example, this would be the 10%.

With this cure, prudent lenders who properly price the loan will suffer neither an economic loss nor an accounting loss upon origination. Without this cure, the Alice in Wonderland accounting reflected in FASB’s CECL standard will result in lenders recording billions in non-economic artificial accounting losses impacting regulatory capital with consequent impact on lending and the economy generally. FASB and banking regulators should take note.

QUICK NEWS

CECL and IFRS 9: How are They Different?

Financial institutions around the world are revising how they estimate credit losses, but institutions subject to the International Accounting Standards Board’s standards have gotten a head start on those that will follow the US Financial Accounting Standards Board’s current expected credit loss model, or CECL. Earlier effective dates of IASB’s International Financial Reporting Standard, IFRS 9, aren’t the only substantive differences from CECL. Even though both standards incorporate forward-looking models for estimating credit losses of financial instruments, they have distinct differences of which both domestic and international institutions should be made aware.

In an article from KPMG’s IFRS 9 Institute, the authors discuss the different implementation challenges for domestic and foreign institutions while explaining the high-level differences between the two standards.

EFFECTIVE DATES

IFRS 9 has already been in effect for over half a year. The standard was implemented by financial institutions with annual periods beginning on or after Jan. 1, 2018. CECL goes into effect for financial institutions with annual periods beginning after Dec. 15, 2019 for SEC filers and periods after Dec. 15, 2021 for non-public business entities (PBEs).

CHALLENGES

US financial institutions who are complying with IFRS 9 for their foreign operations may want to leverage some of their existing model work for CECL adoption. KPMG predicted in the article that “US banks will consider IFRS 9’s requirements relative to their expected CECL decisions to limit undue organizational complexity and operational burden for foreign reporting purposes.”

Although the largest impact of CECL and IFRS 9 will be observed in bank and credit unions, alternative lenders may experience challenges given that they are often not regulated as heavily as banks. This means that if an alternative lender holds financial assets, they will most likely have to undergo a larger organizational shift to ensure that their models are compliant.

Measurement of Expected Credit Losses One of the primary differences discussed in the KPMG article was the projection of losses for financial instruments. CECL requires that all instruments are projected over the life of the loan. IFRS 9, however, varies its projection requirement based on whether an asset is classified as stage 1, 2 or 3.

According to BDO UK, stage 1 classification consists of assets where credit risk has not increased significantly since initial recognition, and stage 2 occurs when credit risk has increased. Stage 3 is when a financial asset is considered credit impaired.

Assets classified as stage 1 only need to have their losses projected over 12 months.

Assets classified as stage 2 and 3 are similar to CECL and have a life-of-the-loan requirement. Additionally, stage 3 assets should recognize interest income on a net basis.

Garver Moore, managing director of Sageworks Advisory Group, said of the two standards, “A well-considered modeling regime for CECL can be readily varied by changing modeling assumptions to produce stage results under IASB’s IFRS 9 approach, but translation of stage 1 IFRS 9 results to the lifetime notion is a more difficult direction. Application of stage 2 modeling to stage 1 assets to produce a whole-portfolio lifetime loss expectation is theoretically straightforward, but implementation approaches many not be operationally scalable.” Potential Pros and Cons of Both Models “In our field experience, we have found the impact to capital concerns under CECL to be exaggerated, at least under present economic outlooks,” Moore added.

“A large part of this stems from the banking industry’s tendency to over-reserve under an ‘incurred’ notion through use of post-hoc adjustment. Credit unions and non-depository institutions may find the impact more severe. However, CECL gives institutions extremely broad latitude in presenting investors with a good faith estimate of lifetime credit loss exposure, taking into account reasonable expectations about the future, while the IASB standard at least offers more prescriptive guidance on classification and treatment within those classifications.”

Whether institutions have already implemented IFRS 9 and are preparing for CECL, or if they only need to comply with one of the two models, there are solutions available to assist in making and sustaining practical transitions.

Amanda Rousseau is ALL marketing manager at Sageworks, where she works to educate accountants and bankers on the intricacies of the allowance for loan and leases losses and helps them optimize portfolio risk processes. © 2018 Accounting Today and SourceMedia, Inc. All rights reserved.

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IAASB Revises Standard for Auditing Accounting Estimates The International Auditing and Assurance Standards Board has released a revised standard for auditing accounting estimates and several related disclosures.

International Standard on Auditing (ISA) 540 (Revised) aims to help auditors of banks, insurance companies and other financial services firm deal with new accounting standards from the International Accounting Standards Board, and the Financial Accounting Standards Board for loan provisions and insurance contracts, especially the estimates associated with them.

The revised ISA 540 standard is part of the IAASB’s wider effort to improve audit quality around the world. It’s also the first to be finished in a broader program known as “Addressing the Fundamental Elements of an Audit.”

Some of the main changes in the revised standard include: • An improved risk assessment requires auditors to consider complexity, subjectivity and other factors, along with estimation uncertainty, more thoroughly, thinking more about the risks inherent in accounting estimates.

• There’s a tighter link between the risk assessment and the data, methods and assumptions employed in producing accounting estimates, including the use of complex models.

• Specific material demonstrates how the standard can be applied to all kinds of accounting estimates.

• The standard emphasizes the need to exercise appropriate professional skepticism when auditing accounting estimates, encouraging a more skeptical and independent mindset for auditors.

ISA 540 (Revised) takes effect for financial statement audits for periods starting on or after Dec. 15, 2019.

The IAASB operates with the support of the International Federation of Accountants, Both the IAASB and IFAC have come under pressure in the past year from the Monitoring Group, a group of financial and audit regulators from around the world, to open up the standard-setting process further to people from outside the accounting and auditing profession (see IFAC offers possible solutions to resolve dispute over standard-setting). The IAASB is encouraging other parties in the financial reporting supply chain, especially regulators, national standard-setters and firms, to work together on implementing the revised standard, which could have a far-reaching impact on the audit of financial statements.

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FINANCE ISALMIC CORNER

AAOIFI’S SHARĪ’AH BOARD CONVENES ITS 60TH MEETING IN THE KINGDOM OF BAHRAIN AND REQUESTS THE SECRETARIAT TO PUBLISH THE EXPOSURE DRAFT OF THE SHARĪ’AH STANDARD ON “DEBIT CARD AND CREDIT CARD” TO INVITE OPINION FROM ISLAMIC FINANCE INDUSTRY.

Follow Up: Muthanna Al-Juboori Legal and Sharia’a Advisor

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AOIFI’s Sharī’ah Board Convenes its 60th Meeting in the Kingdom of Bahrain and requests the Secretariat to publish the exposure draft of the Sharī’ah Standard on “Debit Card and Credit Card” to invite opinion from Islamic Finance Industry.

The Sharī’ah Board of the Accounting and Auditing Organization for Islamic Institutions (AAOIFI) held its 60th meeting over a span of three days, from Thursday 10 Rabi Al-Awwal 1441H, corresponding to 7 November 2019 to Saturday 12 Rabi Al-Awwal 1441H, corresponding to 9 November 2019 in the Kingdom of Bahrain. The standard discussion in this meeting continued for more than 25 hours, the members analysed the issues, and reviewed the Sharī’ah and technical reports. Accordingly, the Shari’ah board made several key resolutions in this regard, including: • Approving the exposure draft of the Sharī’ah standard on “Debit Card and Credit Card”. This standard has been issued by the Sharī’ah Board 17 years ago, however, the substantial technical and technological advances in the financial transactions resulted in a vast array of newly emerging matters in this area, which had led the Shari’ah board to make a decision of revising the standard to keep up with the development of the financial transactions. The Shari’ah Board has mandated one of its members –known for expertise and technical excellence in this field- to prepare a detailed study regarding the subject along with an exposure draft of the revised standard. The Sharī’ah Board discussed this exposure draft in a series of long meetings and deliberations.

It is pertinent to note that, before holding

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the Sharī’ah Board last meeting, the Secretariat had arranged two meetings between representatives of Visa Company and some members of the Sharī’ah Board.

These meetings were supported –hosted and generously sponsored by Alinma Bank at the Bank’s Headquarter. The Board and Secretariat would like to take this opportunity to thank Alinma Bank for their support. The objective of these two meetings was to understand the technical characteristics of credit cards.

The Sharī’ah Board in this meeting hosted a senior official from the Visa Company for the same purpose. The meetings had a clear impact on the understanding of the operations and practices of the credit cards. This understanding of the precise procedures assisted in the Shari’ah decision making process.

The Board approved the standard and directed the Secretariat to issue the exposure draft on AAOIFI’s official website and hold public hearings in various countries to obtain comments and suggestions from the industry.

The Board also deliberated on a number of reports prepared by the Secretariat regarding the technical efforts related to the Shari’ah standards and the meetings of Shari’ah board committees. The Shari’ah Board also commended the diligent efforts of the Secretariat • It is worth noting that this was the last meeting before the board completes its “4 years” term.. The Nominations Committee is in the process of selecting and appointing members for the next term. Further details will be announced soon, Allah willing.

ISLAMIC

AAOIFI Accounting Board hold its 16th meeting and approves issuance of FAS on “Ijarah”

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ccounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) held the 16th meeting of its Accounting Board (AAB) on 31 October and 1 November 2019 at its premises in the Kingdom of Bahrain.

need for a FAS on Waqf. This FAS on Waqf aims to establish accountability and transparency of Waqf institutions in a manner suitable and in compliance with Shari’ah principles and rules. This standard constitutes the final output in completion of the AAOIFI Waqf project.

tribution to the global Islamic banking and finance industry and overall achievements made over the past four years. He further added that “the members’ dedication to ensure quality and timely issuance of standards is testament to the Boards’ commitment to the industry that has resulted in the approval of 7 financial accounting standards The Board agenda for this meeting included the The Chairman of the Board Mr. Hamad Al. Oqab in four years”. He requested the members and the finalization of the exposure draft on “Ijarah” and expressed his appreciation, and congratulated industry to maintain their support to AAOIFI for its the approval of issuance of two exposure drafts – the AAB and the AAOIFI Secretariat of their con- continued success.

“Financial reporting for by Waqf institutions” and “Financial reporting for Zakah”.

The finalized version of the exposure draft on FAS (Financial Accounting Standard) on “Ijarah” was presented to the Board with recommendations received from the working group, which deliberated on industry comments received during the multiple public hearing events that where held during the year. The exposure draft will be officially issued as a final standard after incorporation of Board conclusions and a final review by the Secretariat.

The Board discussed the exposure draft on the revised FAS on Zakah “Financial Reporting for Zakah” which aims to establish the principles of financial reporting related to Zakah attributable to different stakeholders of an Islamic financial institution. This was also done keeping in view the additional accounting and computations related matters set out in the Shari’ah standard 35 “Zakah”.

The exposure draft was approved for issuance and will be available for opinions and comments by industry stakeholders.

The Board also deliberated on the exposure draft on “Financial reporting by Waqf institutions” for finalization and issuance. This was the second review of the exposure draft by the Board. The absence of a comprehensive standard and guidelines on accounting for Waqf gave rise to the

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AAOIFI launches the CIPA and CSAA Scholarship Program AAOIFI has recently launched the Scholarship Program for its ‘Certified Islamic Professional Accountant’ (CIPA) and the ‘Certified Shariah Advisor and Auditor’ (CSAA) fellowship programs.

The objective of the AAOIFI scholarship program is to provide need-based, market-based, and merit-based scholarships to students and professionals comprising the global Islamic finance industry so that they may pursue the fellowships of their choosing. In total, 100 scholarships are available ranging from 25% to 75% reduction in total program fees. Those interested in applying for the scholarship are required to submit a completed application form, arrange for maximum of 3 reference letters, and write a maximum 500-word Application Essay. First submission deadline is 15 December 2019 while the second deadline is 21 March 2020. Details and application form are available on the AAOIFI website.

On the occasion, Omar Mustafa Ansari, Secretary General, said that the “initiative for the launching of the AAOIFI Scholarship Program was taken to invest in and develop the current and future leadership potential of the global Islamic finance human resource, especially in the field of Islamic Accountancy as well as Shari’ah Advisory and Auditing.” He also invited the industry stakeholders “to participate in and financially contribute to the AAOIFI Scholarship Fund to ensure its long-term sustainability and growth.”

The decision for the award of scholarship shall be made by the AAOIFI Education Board (AEB) which will be deemed final, binding, and uncontestable. They shall reserve absolute right to grant or refuse request for scholarship.

AAOIFI Governance and Ethics Board approves Basis for Conclusions for two governance standards The Accounting and Auditing Organization for Islamic Financial Institutions’ (AAOIFI’s) Governance and Ethics Board (AGEB) has approved the Basis for conclusions (BoCs) for its governance standards for Islamic financial institutions on (GSIFI) No. 8, Central Shariah Board (CSB) and GSIFI No. 9, Shari’ah Compliance Function (SCF) at its 12th meeting held in Karachi, Pakistan.

BoCs summarize the considerations that were taken during the course of the development of the standard and in reaching the conclusions.

These include reasons for accepting particular views and opinions of the stakeholders and rejecting others, and include major issues as well as to interpret relevant requirements that were under discussion during the working group and board meetings and also during the public hearing for the respective standards. Accordingly, AGEB in its 8th meeting recommended to add the BoCs for all new governance standards that are being / have been issued recently. The BoC will form part of the appendices to the main standard and appended thereto as appendix. As a practise BoCs were initially published for AAOIFI’s Shari’ah and accounting standards.

AAOIFI conducts a Public Hearing session in Kingdom of Saudi Arabia The Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI), held a public hearing session on AAOIFI Financial Accounting Standard (FAS) exposure drafts on “Wa’ad, Khiyar and Tahawwut” and the newly the issued FAS on “First time adoption of AAOIFI financial accounting standards” on 29th October 2019 in Riyadh, Kingdom of Saudi Arabia hosted by the Saudi Organization for Certified Public Accountants (SOCPA) for its exposure drafts on its financial accounting standards (FAS).

The public hearing event was conducted in the presence of Assistance Secretary General of SOCPA, Dr. Abdulrahman Alrazeen. The event attracted participants and members from the Islamic financial industry and from accounting and auditing firms, among others from the kingdom.

AAOIFI expressly acknowledges and appreciates the support of SOCPA and the industry participants who attended physically and online to provide their views and opinions on the standards presented.

Multiple public hearings for AAOIFI accounting and governance and ethics standards are scheduled in different countries to obtain industry feedback on other issued exposure drafts.

Details of upcoming public hearings are scheduled to be held in different parts of the world to obtain industry feedback on other exposure drafts issued by AAOIFI. The details of future public hearings will be announced before the events for participation by the industry stakeholders.

All industry feedback received—in the form of questions, comments, suggestions, and recommendations—during the public hearings will be collated and taken back to the respective working groups and Boards to become subject of further discussion and deliberation before the final issuance of the standards.

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Mr. Omar Mustafa Ansari, Secretary General, AAOIFI stated, “We believe that BoCs form an important part of AAOIFI standards that will guide the stakeholders on reasons for arriving at conclusions on significant topics deliberated.

This also aim to promote transparency in the standards development process. We are glad that these will now form mandatory part of governance standards as well”.

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Follow Up: Ayman Al-Juboori Legal Advisor

LEGAL

CORPORATE LAW: 10 COMMON BUSINESS LEGAL ISSUES

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very industry is unique. Every business is unique. In the life of a corporate lawyer, every day is different. Having said that, there are certain legal issues that, sooner or later, almost every company must address. This article describes that business commonality.

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1. Choose the Type of Entity

A business owner must choose the type of entity he will create for his company.

What form is preferable? Maybe a limited liability company is best suited for a manufacturing or retail company. Maybe a physician group would benefit from a professional limited liability company. Maybe a limited partnership is preferable for a business owner who expects to have investors but needs to firmly control all the operations of the company. How to choose the type of entity.

2. The Business Must Have a Name

Choosing a name is not always as easy as it sounds. First, the name cannot be the same or nearly the same as another entity on file with the office of the secretary of state. Should the name reflect the name of the owner? Or maybe, the name should be the same as the telephone number of the company. Perhaps the name should evoke an image of the products the company sells or the services it performs.

3. Hire Employees or to Use Contract Labor

The company must decide whether to hire employees or to use contract labor.

Although contract labor is very attractive to a lot of companies, the business owner must be very careful to properly categorize all who furnish labor to him.

In addition, he should consider contracts for both employees and independent contractors in order to protect trade secrets and other valuable interests.

4. Office or Warehouse Space

Unless the business is conducted out of a home, companies must have office or warehouse space. That means finding the space, with or without a realtor and negotiating the lease. The space should be large enough to meet the needs of the company but not so large that the company is paying for space it does not need or is not using.

5. Acquire Needed Equipment

The company must acquire the equipment it needs to run the business. That may be office supplies and a computer or two or it could be hundreds of thousands of dollars’ worth of equipment. How should the equipment be acquired?

Should it be purchased outright or leased? Should there be a maintenance contract? If purchased, should the business self-finance the purchase or is it preferable to get a loan?

6. Interests that Need to Be Insured

The company will likely have interests that need to be insured. A professional may need professional liability insurance, while a manufacturer may need products liability insurance. Most leases require specific types of insurance with stated limits of liability. Finding a knowledgeable insurance professional is a must.

7. Employee Incentive

As the company grows, the business will want to retain the employees who are helping the company succeed. That may mean offering key employees an equity ownership interest in the company or an incentive plan such as phantom stock entitlements.

8. Shareholder Agreement

As the company becomes more valuable, the owners have a greater interest in protecting against death, divorce or disability. If there is no shareholder or member interest agreement in place, it is not too late to create one.

9. Business Records

The business owner must keep all business records up to date. Expenses must be thoroughly documented. Corporate records should reflect all major business decisions, how they were made and by whose authority they were carried out. If errors have been made, they should be corrected as soon as they are discovered.

10. Exit Strategy

Finally, the business owner should devise an exit strategy. That may consist of bringing family members into the business, grooming key employees to take over, selling the assets and terminating the company or selling the company as a going concern to an outsider. In any event, it is important to maximize the value of the business and that can be done only through careful planning.

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QUICK NEWS

Impact of New Reporting Standards on Gulf Banks The impact of GCC banks adopting International Financial Reporting Standards 9 has been manageable” in the year since they were implemented, according to a new report from S&P Global Ratings.

Under IFRS 9, banks disclose the breakdown of their portfolio by different stages defined in the standards. All S&P’s rated GCC banks have done so, with the exception of Kuwaiti banks.

According to the report, a less supportive economic environment” has led to slight deterioration in the asset quality indicators of regional banks, particularly in the UAE and Saudi Arabia.

Stage 3 loans comprised 3.1 percent of their total loans at the end of 2018, compared to 2.6 percent at the end of 2017.

Kuwait was found to be the only country where the asset quality indicators of rated banked improved, although S&P attributes this more to write-offs than to a genuine improvement in the underlying asset quality.

Remain stable Over the next 12 to 24 months, S&P expects GCC banks’ stock of problematic loans (those after stage 2 or 3) to remain stable, although some stage 2 loans will migrate to stage 3.

If the GCC manages to maintain its rate of slight economic recovery, the pace of migrations is expected to slow when compared to those of 2018. If oil prices fall significantly past a base scenario of $60 per barrel, that the asset quality indicators will weaken further.

The report also found that the average cost of risk for rated GCC banks fell by 10 basis points compared to 2017, despite an increase in non-performing loans.

S&P attributes this to IFRS 9, where the opening impact is charged to the bank’s equity ad not to its income statement.

Despite that transition and the fact that banks had to take the hit up front, most of the banks decided to maintain a stable charge in their income statement,” the report noted. It is worth noting that cost of risk dropped…in the UAE and was stable in all the other countries.”

Impairment under IFRS 9: A Cross-Functional Challenge The advent of IFRS 9 Financial Instruments has impacted the business world profoundly. One of the most challenging and contentious provisions of the standard is the recognition of expected credit losses (ECL) for the impairment on financial assets. Formerly under IAS 39, credit losses were only recognized to the extent that there was objective evidence of impairment.

In other words, a loss event needed to have occurred, before an impairment loss could be recognized. But IFRS 9 introduces a new impairment model based on ECL, resulting in the recognition of a loss allowance before the loss event occurs. Under this approach, entities require to book ECL based on its historic default rates, adjusting for current conditions with forward-looking macro-economic information. IMPACT ON BANKING SECTOR IFRS 9 prescribes two approaches for recognizing and measuring the ECL, namely, General Approach and Simplified Approach. General Approach is largely applicable to banks and financial institutions.

This approach outlines a ‘three-stage’ model for impairment based on changes in credit quality since initial recognition to compute ‘12-month loss’ or ‘lifetime loss’. Banks for many years have been subject to Basel Accords and have been using credit risk-weighted assets to test capital adequacy. Hence for them the infrastructure to compute the ECL has already been in place.

The data, models and the processes used for risk disclosure can now be used for ECL computation with necessary fine-tuning and be incorporated into the financial statements.

IMPACT ON NON-BANKING SECTOR This is not the case for all other nonbanking businesses, which have to use the Simplified Approach to compute ECL on trade receivables, due from related parties, cash and bank balances. Though the standard prescribes lifetime ECL under the Simplified Approach, it provides neither any model nor methodology to compute the ECL. Unlike the banks, these entities do not have their own models nor any data structure to compute ECL. However, IFRS 9 provides very vaguely that ECL shall reflect an unbiased and probability-weighted amount that is determined by evaluating a range of possible outcomes; time value of money; and forecasts of future economic conditions. Moreover, IFRS 9 does not directly define the term ‘default’. Instead it provides that there is a rebuttable presumption that default does not occur later than when a financial asset is 90 days past due unless an entity has reasonable and supportable information to demonstrate that a more lag-

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ging default criterion is more appropriate.

As entities generally face a huge delay in collection these days, they invariably rebut this presumption to justify a delay as long as one or two years. COMPLEX SIMULATIONS IFRS 9 does not directly prescribe how the simplified approach is to be applied to determine ECL, instead it provides a practical expedient to use a provision matrix.

A provision matrix might specify fixed provision rates depending on the number of days a trade receivable is past due. But IFRS 9 remains silent on how to compute these rates used in the provision matrix.

The standard also requires the estimate of ECL to reflect an unbiased and probability-weighted amount that is determined by evaluating a range of possible outcomes. In practice, this may be a complex exercise involving detailed simulations of multiple scenarios.

Another requirement for ECL computation is the adjustment for forward-looking macroeconomic factors such as property prices, commodity prices, etc. This may involve applying intricate statistical models which fall outside the scope of accounting function. CROSS-FUNCTIONAL APPROACH Thus, the impairment provisions under IFRS 9 require a cross-functional approach synthesizing finance and risk methodologies. Ironically finance function is driven by facts and figure while risk function is driven by stochastic statistics making ECL computation all the more complex.

As the management is bracing itself to meet these challenges for the first time in the preparation of financial statements, they invariably seek the help of external consultants. In the coming years, they should be in a position to build their own models and data structure with in-house skillset to comply with the requirements of ECL under IFRS 9.

QUICK NEWS

ASCA (Jordan) Issues Arabic Version of the Guide to Using ISAs AMMAN- The Arab Society of Certified Accountants (ASCA/Jordan) issued the approved translated Arabic version of the Guide to Using ISAs in the Audits of Small- and Medium-Sized Entities (SMEs), issued by the International Federation of Accountants (IFAC).

HE Dr. Talal Abu-Ghazaleh, ASCA Chairman, stated that the Guide aims at helping practitioners conduct high-quality, cost-effective audits, enabling them to better serve SMEs and, in turn, the wider public interest.

The fourth edition has been updated to reflect the recent changes to the ISAs including the International Audit and Assurance Standards Board (IAASB) projects on Using the Work of Internal Auditors; the Auditor’s Responsibilities Relating to Other Information; Auditor Reporting; Disclosures and Non-Compliance with Laws and Regulations.

Talal Abu-Ghazalah.

This Guide can be used to: • Develop a deeper understanding of an audit conducted in compliance with the ISAs; • Develop a staff manual (supplemented as necessary for local requirements and a firm’s procedure) to be used for day-to-day reference, and as a basis for training sessions and individual study and discussion; and • Help ensure that staff adopt a consistent approach to planning and performing an audit.

The Guide has been organized into two volumes as follows:Volume 1 of the Guide, which provides an overview of the entire audit and a discussion of key audit concepts such as materiality, assertions, internal control, risk assessment procedures, and the use of further audit procedures in responding to assessed risks.

It also includes a summary of ISA requirements with respect to: • Specific areas such as accounting estimates, related parties, subsequent events, going concern, and others; • Documentation requirements; and • Forming an opinion on the financial statements.

Volume 2 of the Guide focuses on how to apply the concepts outlined in Volume 1. It follows the typical stages involved in performing an audit, starting with client acceptance, planning, and risk assessment, and then the risk response, evaluating audit evidence obtained, and forming an appropriate audit opinion.

IASB Consults on Amendments to Aid Implementation of IFRS 17 The International Accounting Standards Board (Board) has proposed amendments to the insurance contracts Standard, IFRS 17, for public consultation. The aim of the amendments is to continue supporting implementation by reducing the costs of implementing the Standard and making it easier for companies to explain their results when they apply the Standard.

IFRS 17 was issued in May 2017. It is the first truly international accounting standard for insurance contracts and addresses the many inadequacies in accounting for such contracts.

Following discussions with those affected by the Standard after it was issued, the Board decided to propose amendments to IFRS 17 to alleviate concerns and challenges raised about implementing the Standard.

The proposed amendments are designed to minimize the risk of disruption to implementation already underway. They do not change the fundamental principles of the Standard or reduce the usefulness of information for investors. In the light of the proposed amendments, the Board has also proposed to defer the effective date of the Standard by one year to 2022.

Hans Hoogervorst, Chair of the International Accounting Standards Board, said:

Moving to IFRS 17 is a big task and this proposed package of targeted amendments will help insurers in their ongoing implementation of the new Standard.

Access the Exposure Draft Amendments to IFRS 17. The comment deadline is September 25, 2019.

To supplement the consultation, the Board will organize stakeholder events around the world.

Available to help stakeholders in the consultation process are a Snapshot, providing an overview of the proposed amendments and a version of the insurance contracts Standard incorporating the proposed amendments.

Project Summaries on IFRS 8 and Discount Rates Published The IFRS Foundation has published two documents summarizing work by the International Accounting Standards Board (IASB) on possible improvements to IFRS 8 Operating Segments and on discount rates in IFRS Standards: The IFRS 8 Project Summary provides an overview of feedback on the Board’s proposals in its Exposure Draft Improvements to IFRS 8 Operating Segments—Proposed amendments to IFRS 8 and IAS 34, published in March 2017. The summary also explains why the Board decided not to proceed with those proposals.

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The Discount Rates Project Summary provides an overview of research considered by the Board from 2014 to 2017 in its project on Discount Rates in IFRS Standards.

Project summaries are overviews of information already available to the public through Board papers. They do not provide any new material and do not form part of IFRS Standards.

Access the Improvements to IFRS 8 Operating Segments—Proposed amendments to IFRS 8 and IAS 34 project summary and the Discount rates in IFRS Standards project summary.

QUICK NEWS

IASB Releases Amendments to Accounting Standard IFRS 3 LONDON - The International Accounting Standards Board (IASB) released amendments to an accounting standard, aligning it closer with its American counterpart.

The London-based IASB said the overhaul to the definition of a business in International Financial Reporting Standard 3 will help companies determine whether an acquisition is made by a business or by a group of assets, the standard setter said in a statement.

Companies reporting under IFRS standards are required to apply

the amended definition of a business for acquisitions that occur on or after Jan. 1, 2020. Earlier application is permitted.

IFRS 3 was the result of a joint project between the IASB and the US Financial Accounting Standards Board, which overhauled its definition of a business last year

Tax Transparency, Complexity, Inequality and Corruption are the Biggest Concerns for the Public in G20 Countries, Finds New Survey The newly published sequel to the 2017 G20 public trust in tax report from ACCA (the Association of Chartered Certified Accountants), CA ANZ and IFAC (the International Federation of Accountants) reveals a high level of distrust among the public in politicians and non-government organizations (NGOs) when it comes to tax systems.

The new report also shows that public trust in professionals, such as accountants and lawyers, remains high by comparison.

When it comes to evaluating their tax systems, respondents across G20 nations are most concerned about transparency, complexity, inequality and corruption in tax systems.

Respondents’ concerns about inequality stem from the perception in English-speaking countries that high-income earners and multinationals are treated better by tax systems than average or low-income earners. Respondents in China, Indonesia and India had high levels of trust in tax authorities, politicians and accountants, reported efficient tax filing, and supported tax competition to attract multinational business.

G20 public trust in tax report is based on an online survey of more than 8,400 members of the general public across G20 countries and New Zealand, revealing that respondents have: a trust deficit amongst politicians and the media; 58 per cent of respondents expressed distrust or strong distrust in politicians, down nine per cent since 2017. Similarly, distrust in the media stands at 37 per cent down four per cent since the last survey; the highest level of trust in professional tax accountants at 55 per cent, down a marginal two percentage points compared to 2017, and professional tax lawyers at 50 per cent, up one per cent; consistent levels of mistrust year-on-year in non-government organizations at 37 per cent, an increase of two percent com-

pared to 2017; divided views of trust in government tax authorities, with 37 per cent saying they trust or highly trust tax authorities and 34 per cent distrusting or highly distrusting them.

Commenting on the second year’s findings, Chas Roy-Chowdhury, global head of tax at ACCA says: ‘Once trust is lost, it’s hard to regain. Tax is a complex issue and one that touches all our lives - so that trust is important. What’s clear from this research is the need for all significant players – from politicians to tax experts - to work together to build and sustain the public’s trust in tax. And while the accountancy profession fares the best again in this year’s results, we cannot be complacent about these findings.’

Kevin Dancey, IFAC CEO adds: ‘Given that accountants adhere to a strong ethical code that supports their public interest obligations, it’s vital that we actually understand what the public thinks of tax systems and who they go to for trusted advice. This research gives everyone working in tax, including policy makers, politicians, media and accountants, a powerful insight in what the public really think. By understanding their views, professionals can better work to inspire confidence in the system as a whole.’

Michael Croker from CA ANZ concludes: ‘Our research shows that people say they broadly trust and want to hear more from experts and professionals, but scepticism in politicians and the media continues. If transparency is one of the pillars of an effective tax system, then the professionals and experts working in tax need to strive for even more clarity on how tax works nationally and globally. It’s clear there is still much work to be done to sustain this hard earned trust it amongst the tax-paying public.’

New Standard on Leases Now Effective NEW YORK - IFRS 16 Leases was issued in January 2016 and is effective for annual reporting periods starting on or after January 1, 2019. It replaces IAS 17 Leases and related Interpretations.

IFRS 16 changes the accounting substantially for lessees. The new Standard eliminates a lessee’s classification of leases as either operating leases or finance leases. Instead, almost all leases are ‘capitalized’ by recognizing a lease liability and right-of-use asset on the balance sheet. There is little change for lessors.

Leasing is a common form of finance. The Effects Analysis, published alongside the Standard in 2016, described the likely costs

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and benefits of IFRS 16. This analysis estimated that listed companies around the world have around $3 trillion worth of future payments for leases, which were not recognized on the balance sheet applying the previous accounting requirements.

IFRS 16 will increase visibility of companies’ lease commitments and better reflect economic reality. The Standard will also make it easier for users of financial statements to compare companies that lease their assets with companies that borrow money to buy their assets, creating a more level playing field.

QUICK NEWS

International Accounting Standards Board Proposes Annual Improvements to IFRS Standards The International Accounting Standards Board (Board) has published proposed narrow-scope amendments to four IFRS Standards as part of its maintenance and improvements of the Standards.

Annual improvements are limited to changes that either clarify the wording in an IFRS Standard or correct relatively minor unintended consequences, oversights or conflicts between requirements in the Standards.

Matters dealt with through annual improvements often arise from questions submitted to the IFRS Interpretations Committee.

The four proposed amendments included in this year’s annual improvements consultation document are:

Standard

Proposed amendment

IFRS 1 First-time Adoption of International Financial Reporting Standards

Simplify the application of IFRS 1 by a subsidiary that becomes a first-time adopter of IFRS Standards after its parent company has already adopted them. The proposed amendment relates to the measurement of cumulative translation differences.

IFRS 9 Financial Instruments

Clarify the fees a company includes in assessing the terms of a new or modified financial liability to determine whether to derecognize a financial liability.

Illustrative Examples accompanying IFRS 16 Leases

Remove the potential for confusion regarding lease incentives by amending an Illustrative Example accompanying IFRS 16.

IAS 41 Agriculture

Align the fair value measurement requirements in IAS 41 with those in other IFRS Standards.

Board Member Martin Edelmann’s Second Term Extended by One Year The Trustees of the IFRS Foundation, responsible for the oversight and governance of the International Accounting Standards Board (IASB), have extended by one year the second term of Board member Martin Edelmann. Mr. Edelmann served an initial

five-year term and was due to complete his second, three-year term in June 2020. His second term will now expire on June 30, 2021.

New Education Standard Focuses on Professional Development The International Accounting Education Standards Board (IAESB) released the revised International Education Standard (IES) 7, Continuing Professional Development. The Standard clarifies the principles and requirements on how professional accountancy organizations measure, monitor, and enforce their continuing professional development systems. IES 7 (Revised) makes clear that all professional accountants must develop and maintain professional competence to perform their role.

“The transformative impact of new and emerging technologies, changing business models, and the dynamic environment in which we operate place new demands on the global accountancy profession,” according to Anne-Marie Vitale, IAESB Chair. “Continuing professional development is fundamental to addressing and advancing the learning and development that enable professional accountants to provide high-quality services to their clients. These revisions will help enhance the consistency, quality, and relevancy of professional accountants.”

The revised IES 7 places greater emphasis on learning and deve-

lopment needed for professional accountants’ roles and responsibilities rather than focusing on a minimum number of hours.

Significant revisions include: • Requiring professional accountants to record relevant continuing professional development (CPD); • Clarifying the output-based measurement approach, which requires professional accountants to demonstrate competence; • Clarifying the input-based measurement approach, which requires professional accountants to demonstrate competence by completing a specified amount of learning and development; • Promoting the use of a CPD framework to provide an example structure and guidance to help professional accountants identify, undertake, and record relevant development; and • Providing CPD measurement approaches with examples of related verifiable evidence to improve adoption.

Nine Insurance Associations Suggest to IASB A Two-year Delay Needed to Implement IFRS 17 Successfully LONDON - A global group of nine insurance associations has written a joint letter to Hans Hoogervorst, chair of the International Accounting Standards Board (IASB), that highlights the industry’s concerns about the International Financial Reporting Standard (IFRS) 17 for insurance contracts.

Extensive testing, together with insurers’ detailed implementation planning, has confirmed that a number of important issues still need to be resolved in order to ensure the quality and operational practicability of the new standard.

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There is also industry-wide agreement that a delay of two years is needed, both to allow for the necessary improvements to be made to the standard and for adequate time for companies to tackle the significant implementation challenges that IFRS 17 presents.

The fact that so many insurance associations from around the world have signed this letter demonstrates the importance and urgency to have a decision on a delay and for the IASB to move forward on the necessary improvements.