No 47 SPRING 2018
EMBRACING TECHNOLOGY
BIG DATA, AI & THE CLOUD Keeping your business on top of technology
AI VS HUMAN Will robots take your job?
STATE OF THE CLOUD NATION Realise the potential of Cloud Accounting
DIGITAL DISTRACTIONS How to stay on track at work
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2016 Network of the Year BAKER TILLY INTERNATIONAL
DIRECTORS AUCKLAND
David Searle
(09) 373 1128
HAMILTON
David Heald
(07) 834 6801
TAURANGA
Chris Downey (07) 578 2989
HAWKE'S BAY
Dave Sawers
(06) 878 7004
TARANAKI
Chris Lynch
(06) 757 3155
WELLINGTON
Robert Elms
(04) 472 7919
CHRISTCHURCH Dave McCone (03) 343 0599
DISCLAIMER No liability is assumed by Staples Rodway for any losses suffered by any person relying directly or indirectly upon any article within this document. It is recommended that you consult your advisor before acting on this information.
No 47 SPRING 2018
IN THIS ISSUE 2 Accounting for evolving technology The evolution of Accounting in a high-tech world
4 Top 10 tips for financial modelling Build a usable, value-added model for your business
6 Managing digital distraction How to stay on track at work
10 State of the cloud nation Realising the potential of Cloud Accounting
12 Ask an expert Inland Revenue and Artificial Intelligence
14 Will robots take your job? The prerequisites for Artificial Intelligence
16 Technology and the investing world Investing with and in technology
18 Cryptocurrencies When is a currency not a currency?
22 Unlocking your greatest asset Using technology to get the best out of your people
24 Employee share schemes Changes bring taxing times
26 Digital natives Shaping the future of the workplace
28 Staples Rodway snapshot
ACCOUNTING FOR EVOLVING TECHNOLOGY
Article by Tracy Hickman STAPLES RODWAY AUCKLAND tracy.hickman@staplesrodway.co.nz
Our processing, interaction and communication with clients is changing, largely due to advances in technology. We’ll look at how that affects our client relationships, and what further changes we can expect to see in the future.
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OMPARED TO A DECADE AGO, innovations in both software and technology have resulted in significant improvements in how financial statements and tax returns are now prepared. The move towards online accounting software, such as Xero, allows us to maintain a single ledger and process financials in real time. Storing copies of invoices in accounting software enables us to view the details that we need immediately, allowing us to prepare financial statements more quickly. Instead of February and March being hectic months, we’re now finding that May to July are our busiest months, as we strive to present timely annual accounts. The year-round access to accounting software makes it easier for us to help with regular management accounts during the year, or with forecasting, adding true value to our relationship with clients instead of simply helping them comply with reporting requirements. One risk of wide access to online accounting software is that results can be taken at face value, whereas there is still a need for regular checks and reconciliations to be in place to ensure that the results correctly reflect what’s happening in a business. Essentially, we are doing more review and analysis instead of processing, helping to understand and interpret results. From a governance perspective, that enables us to gain a better understanding of the business and highlight potential risk management issues or the need to review goals and strategies. For example, preparing a financial forecast with one of our clients signalled that their banking covenants were likely to be breached in the following year. Knowing this in advance, we were able to work with them to restructure the business and improve the strength of the balance sheet. It’s not just how we are processing accounts that has changed, but also how we communicate. We are now rarely using postal services, more often exchanging information via phone calls, email, texts or directly via client portals. Whatever mode of communication is preferred, ensuring that we keep in touch regularly can help us to maintain a collaborative approach. If we know what changes are planned for a business, we can advise on appropriate structures and avoid the issues faced when trying to unwind a transaction retrospectively. For example, if a business is looking to expand overseas, talking upfront will highlight potential tax issues and how they can be minimised.
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As a business, we are heavily focussed on people skills for our relationships with clients, our staff and fellow professionals such as lawyers and bankers. Our ‘great service’ ethos already puts standards in place for prompt communication, and technology helps us to deliver, with smartphones, laptops and tablets. Remote access to our systems means that we can respond from the office, from home, or halfway up a mountain (I do recall emailing a client from 4000m up Mount Kilimanjaro!). Flexible working practices means that some of our staff are in the office from 6am, and others until 10pm. We would like clients to view us as a partner to grow their business, and that includes us recognising that a working day isn’t necessarily nine to five. The ability to work remotely means that we can also explore other ways of delivering efficiency, including outsourcing work to other geographic areas. With continued skill shortages in New Zealand, we could use our links through the Baker Tilly network to access highly qualified resources. The key drivers will be whether we can maintain our high standards of service and ensure that any security risks are addressed. Robotic process automation is now commonly used to deal with routine tasks in banking, and there is potential for greater use in accounting too. Online accounting software can already automatically reconcile and post bank transactions according to set rules. This could be extended to automating the year end close by gathering, consolidating and reconciling transactions. Further, aggregation and analysis of financial data could be automated, enabling fast and accurate delivery of reports. Regardless of whether we use outsourcing or robotic process automation to help with data processing, the end results still need to be understood by our clients. We need to react rapidly to change and be comfortable with technology, but not lose sight that we are dealing with people. Above all, our role is to support decision making by providing information and advice. While technology can make that process easier and more efficient, the flexibility, accountability and tailored nature of services provide your human advisor with a distinct advantage. If you would like to talk to us about how we can help address issues in your business with improved technology, whether that be with management reports, forecasts, or structuring advice, please call your usual advisor or contact Tracy Hickman. NUMBERS Spring 2018 • 3
TOP 10 TIPS FOR FINANCIAL MODELLING
In a complex world, it pays to have a clear and easy to understand financial model for your business. Staples Rodway’s financial modelling team share ten handy tips on how to build a usable and value-adding model for your business. Article by David Shaw STAPLES RODWAY AUCKLAND david.shaw@staplesrodway.co.nz
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THE EXPERTS USE EXCEL
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CLEARLY SHOW YOUR INPUTS AND ASSUMPTIONS
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SIMPLICITY IS KEY
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MAKE IT A 3-WAY
Every year in a different city around the world, the ModelOff! Financial Modelling World Championship is held. Challengers from around the world compete to show off their Excel skills. That’s right - the world’s top modellers still use Excel and so should you. Some add-ins such as Modano can make constructing a model easier, but the clarity Excel offers and the ability to follow through formulas still makes it the best base tool for building any financial model.
Show your inputs on a separate tab to your outputs and use consistent colour schemes for assumptions and data inputs. Also, don’t mix hard inputs with formulas in the same cell as it can obscure what is driving the model and can make it hard to spot errors. Using one assumption per cell makes it much easier for a user to review and tweak. It also helps to have text explaining each assumption to help reviewers sense check to reality.
100 input assumptions? Good luck with understanding what is driving your business! It is best practice to have a few key assumptions, for example, the rate of customer growth and price increases, that you can review and test the sensitivity of outputs.
The best models show the relationship on a periodic basis between the income statement, balance sheet and cash flow statement. A useful model is one that tells the whole story of your business from all angles.
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HAVE A ‘LIVE’ WORKBOOK
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USE APPROPRIATE PERIODS
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WHAT ARE YOUR KEY METRICS?
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PRESENTATION, PRESENTATION, PRESENTATION!
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DESIGN FOR AN AUDIT
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Every month you will have new management account actual data, and you should be able to insert this into your model seamlessly. You can then show comparisons of actuals versus budgets and forecasts. Also assessing actual trends can help you when you review your assumptions.
If you’re forecasting for 10 years, a monthly model might be overly detailed. Think of your needs and whether a monthly, quarterly or annual model is best for you.
Beyond the 3-way statements output, a model can forecast your key ratios and even alert when, say, for example, bank covenants might be breached, or a certain goal is achieved.
Your model should ideally be printable (and scaled to fit), it should be clean and have consistent colouring, fonts, text size, decimal places and alignments. It should be easy to navigate - every tab should have a clear title or use a table of contents with hyperlinks to navigate for larger models. Sloppy presentation does not inspire confidence to those you’re reporting to.
As well as the fact your model may be audited at some point, it is helpful to have a model that clearly links assumptions and drivers to the outputs. Doing so makes it easier to spot errors and allows others to ‘pick up’ the model if you need to delegate or move on from your role as the model developer.
ERROR ALERTS Balance sheet doesn’t balance? Consolidated balance sheet doesn’t total the same as the separate parts? Chances are when you’re building and updating a model you’ll make mistakes. It pays to have a warning (or a highlighted cell) to show you when something doesn’t add up as it should.
For guidance talk to your usual Staples Rodway advisor. For further advice on modelling, please feel free to contact Tracy Hickman (tracy.hickman@staplesrodway.co.nz) or David Shaw (david.shaw@staplesrodway.co.nz) in our Corporate Advisory Team. www.staplesrodway.co.nz
NUMBERS Spring 2018 • 5
MANAGING DIGITAL DISTRACTION
Article by Andrea Stevenson STAPLES RODWAY HAWKES BAY HR astevenson@stapleshb.co.nz
The impact of digitalisation is apparent for most of us, particularly when we reflect on the effect that mobile phones, email and internet have on us in our daily work.
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OCIAL MEDIA HAS ALSO HAD an effect on our workplace. One study suggests that 30% of people are on social media while at work for one hour every day with 75% accessing social media on their smartphones while at work every day. It is reported that over half of all employees access their Facebook profiles at work, losing on average 15 minutes of productivity per day. And that’s just Facebook alone. Interestingly, a salary.com report indicated that social media is only the second major time waster, with the most common sites accessed during the work day being news sites. The challenge of managing this distraction is very real. However, the news is not all bad. I will be the first to say that digitalisation has aided us. It has revolutionised our workplace allowing us to be more mobile and interactive. There are great benefits in terms of connectivity, as a source for creative ideas, access to information and for marketing purposes. There is also evidence that web surfing can be a good way to relieve stress. However, with the digital world now here, we need to learn how to reap the benefits but also control its power as a distraction. The modern world of technology can be a constant temptation at work, and its impact on employee productivity is a concern. Research now shows that while digitalisation has added benefits to us in our workplace, digital distraction is not only a time stealer but it can significantly impair our ability to think clearly and creatively. In fact, one study found, just by noticing an email coming into your inbox, your IQ reduces by 10 points at that moment. In Dave Coplin’s book, The Rise of the Humans: How to Outsmart the Digital Deluge, he highlights that after an interruption such as checking an email or sending a quick text, it can take people from 15 to 23 minutes to get back to focusing to where they were before. In recognising this, we now need to turn our attention to how we manage the constant interruptions and accessibility. However, most organisations have provided little, if any, guidance as to how to manage these ongoing interruptions and distractions. Most people typically overestimate their ability to multitask and underestimate their ability to evaluate how effectively their own mental processes are operating at any given time – mostly because this is entirely unconscious. However, our minds are simply not wired to simultaneously perform two complex tasks at any one time (Meyer and Schvaneveldt).
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So, let’s take a look at what might be best practice.
RECOGNISE THE PROBLEM We can only get away from digital distraction when we know what is imprisoning our time and then deal with it. This can be specific to individuals. Ask the question: What are the obstacles that are preventing me from being most effective? Some key questions: 1. What am I doing that wastes my time? 2. What other factors encourage or force me to waste my time? 3. What do I do that wastes the time of others? 4. What am I doing that could be handled by someone else, possibly as well, if not better or cheaper? 5. What am I doing that really does not need to be done at all? The answers should give you a list of the most common time wasters in your average day. Keep that list – this is your clue as to where you need to be targeting areas of distraction.
FIRST THINGS FIRST: PRIORITIES To borrow one of Stephen Covey’s habits (The Seven Habits of Highly Effective People), be clear about what your overarching priority is. In that moment, that hour, that meeting etc., what should be your focus. What is my priority? What is the most valuable use of my time right now? The answer to that question will filter out social media and other distractions. From an HR perspective, as an employee, you have been engaged and have agreed legally to work a set number of hours in exchange for a set amount of money. Where we do anything else, it is essentially theft of company time - a thought that doesn’t sit comfortably with most of us. In an ideal world, highest-priority tasks should generally be worked on first, and the lower ones set aside. Refrain from switching among tasks, as it affects focus. Try these simple, common-sense strategies: set clear priorities, set and stick to a schedule, break up projects into smaller tasks, and practice delegation. For low priority tasks – delegate, defer or dump. cntd over
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THE INBOX It is estimated that the average worker receives 121 emails every day. Even if it takes one minute to read and respond to each, that’s two hours in the day already gone. Some research suggests we spend up to one-quarter of our workday answering and reading emails. Added to that, we check our smartphones on average 150 times a day. There is now increasing commentary as to how to best manage emails. Still, many of us flounder our way through the mire of emails every day with no systemised approach or skill in how to manage our out of control inbox. Consider the following: 1. Schedule time – mark your calendar as to when you are going to go through your inbox and respond. Newsflash – not responding to the majority of your emails immediately will not cause harm. 2. Don’t leave your email program open all day. Alerts from incoming messages can interrupt workflow and impact the ability to focus on a task. Block off times throughout the day for checking emails. 3. For particularly focused work, craft an email reply like the one cited by Tim Ferris in ‘The Four Hour Work Week,’ e.g. Due to….. I’m currently checking and responding to emails twice daily ….If you require urgent assistance that can’t wait, please contact me via [e.g. PA/phone number etc.]” 4. When you do check, delete unwanted emails immediately, archive those that don’t need attention and then action emails as required. Set yourself a 48-hour response rate for non-urgent emails. Communicate to the sender if you are unable to respond immediately but that you will touch base shortly. Deadline it and then follow up. Get your house in order; tidy up, plan and organise your inbox with labels, folders and categories. 5. Familiarise yourself with what your email program can do for you. There are all sorts of rules and filing mechanisms that most of us aren’t utilising. 6. Unsubscribe!
THE CELLPHONE Smartphones have revolutionised the way we work, but by simply handing a staff member a work phone, you are immediately adding an additional pressure and increased work interruption to their day. 8 • NUMBERS Spring 2018
While some apps have made us more productive, the multitasking component of a cellphone is most likely having an impact somewhere, somehow. Policing employees can have a negative impact on culture. Compartmentalising time can be good, where we encourage work breaks and educate that switching tasks is better than multitasking. Volkswagen implemented a no-cellphone/checking email policy for non-management staff outside of 30 minutes before or after work to encourage a greater work-life balance for employees. Setting clear expectations with staff is important. When actively avoiding texting and driving, we intentionally put our phone out of reach. The same could apply in the office. Schedule periods where you put your phone on “Do Not Disturb” mode. Also block out time to catch up on calls, texts and other apps. Before you download yet another app, consider its usefulness.
PAUSE An alarming 73% of interruptions are handled right away without any consideration for priority. Once you recognise an interruption, pause. Write down your last thought to help you pick up from where you left off.
HOW TO STRUCTURE YOUR WORK DAY: BREAKING THE CYCLE US president Dwight Eisenhower stated, “I have two kinds of problems, the urgent and the important, The urgent are not important, and the important are never urgent”. These are not the same thing. Important – is how significant the task is in relation to your overall purpose (i.e. the purpose of your job, as a parent etc.). Urgent – is how soon the task must be completed. We often get the two confused, especially in terms of digital disruptions such as emails. The judgement of this categorising is crucial for good time management. He developed a simple 2x2 matrix that is now famously known as the Eisenhower Matrix or the Time Management Quadrant (Important v Urgent). Taking a few minutes to categorise each of your tasks into the appropriate box can be very insightful as to where you typically spend time. More often than not we spend time in
’Urgent but Not Important’, or even the ‘Not Urgent and Not Important’ and for many of us this is where digital disruption occurs. Emails, messages, invites to meetings. These can be time wasters and things that appear to be worth doing, tasks that put us into “reply mode” and distract us from our most important tasks. The ‘Important but Not Urgent' is where most people spend the least time, but it is the most critical area for success, development and proactive self-determination. 'Important but not Urgent', typically lack deadlines, so we press the snooze button on them. Think like a chef. A chef doesn’t just rush in and deal with interruptions and distractions as the day goes on. They take time in the beginning, identify their steps, the right utensils and ingredients, arrange their station. Strategy first, execution second. Take some moments to plan your day and take a focused and considered approach to your work.
DEEP WORK The concept of Deep Work is the ability to focus without distraction on a cognitively demanding task. Deep Work, is about maximising the intensity of work per unit of time. It is the batching of hard, but important intellectual work into long, uninterrupted stretches. You can look at it as a concept of “fixed schedule productivity”, creating and vigorously protecting a schedule that provides the ideal balance for you. One concept of Deep Work is the trademarked Pomodoro Technique. You can find a summary of this technique on YouTube. The Pomodoro Technique (pomodoro is tomato in Italian) is based on a tomato timer that you might set for 25 minutes - repeating cycles of 25-minute bursts of work followed by a short break.
UNDERSTAND YOUR CHEMICAL MAKEUP When considering how we approach our day and dealing with the distractions we are faced with, looking at brain function can give us some interesting insights: 1. The 3-hour window. Cherish the first three hours – according to psychologists they are your most precious and productive. Instead of leaping into emails and voicemails, focus those first hours on work that is most important to you www.staplesrodway.co.nz
and your job and get your toughest work done. Research shows that most adults do their best-focused work in the late morning. Rising body temperature gives concentration, memory and alertness a boost. All of those benefits start to decline around noon – especially after a meal. 2. Cognitive function decreases from morning to afternoon. Message: Don’t put off the tough stuff. 3. Know when your brain and body need a rest. Physiologically, we follow “ultradian rhythms” or cycles that last 90 to 120 minutes. Think of these as attention span cycles. 4. Set an end to your day and stick to it: It is easy to allow a work day to extend indefinitely based on the disruptions we’ve had. Working a longer day doesn’t equate to productivity. Plan to finish. Stick to the plan. 5. Know what works for you! Differences in body chemistry, personality, professional and office culture mean that one person’s ideal day is another’s productivity nightmare.
TIME MANAGEMENT VERSUS SELF-MANAGEMENT The concept of actively and consciously managing our day is foreign to many of us. We all have the same amount of time in any one week. But how often we say…. “If only there were more hours in a day?” Most of us feel rushed, overwhelmed and busy. Time is a resource which begs the question: how well are you actively using this resource?! Time is a choice! We all have the same amount, so it’s not really about how we manage our time, but how we manage ourselves (a scary thought). With only 5% of our brain being conscious at any one time, we need to consciously control our thinking, our disruptions and distractions and harness our thinking to focus on what needs to be done. It’s about being mindful and present in the moment, focusing on what we need to do. Dr Phil has a great saying, “Things are the way they are because you have allowed them to be structured that way”. That means that if we want something to be different, we must be willing to do something different. Instead of letting our mind run away from us and reacting to every distraction, keep hold of your thinking and focus. All things considered, self-awareness is the key. It reportedly takes 21 days to break a habit, so as you make these changes, allow 21 days and notice the difference. NUMBERS Spring 2018 • 9
STATE OF THE
CLOUD
NATION
Article by Mark Kingsford STAPLES RODWAY AUCKLAND mark.kingsford@staplesrodway.co.nz
Cloud technology has been around for a while now, and we thought it an opportune time to take stock of where it has come from and, more importantly, where we think it is going specifically with regards to Cloud Accounting and how it impacts New Zealand businesses.
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HE EMERGENCE OF CLOUD TECHNOLOGY has resulted in a massive change in the way New Zealand businesses manage their financial data and the manner in which accounting software providers sell and deploy the software. From a small to medium enterprise (SME) perspective, cloud accounting has broken down the physical and literal walls between the business and the finance function. Owners and other users of financial data can obtain the information they need anywhere, at any time and from any device. This has also enabled richer discussions with advisors, including accountants, as they can discuss and talk about the same data in real time. Probably the leading architect of this change in the New Zealand accounting space has been Xero (www.xero.com). Their recent annual report for the year to 31 March 2018 indicated over 1.3 million worldwide subscribers, including 301,000 New Zealand subscribers - up from 246,000 a year before. Xero now has a positive EBITDA result, which indicates a business whose historical research and development spend is starting to provide pay-back. With a large part of New Zealand’s GDP flowing through their platform, Xero is also jumping on the “Big Data” bandwagon. Their ‘Small Business Insights” snapshot is drawn from their 300,000 plus subscribers, and the data is anonymised and aggregated to provide metrics – such as days to get paid. With the recent addition of “Projects”, which is a simple time and cost mechanism and with beefed up “Expenses” functionality, Xero is strongly typifying the ability of Software as a Service (SaaS) businesses to continually develop their core product by adding modular functionality. We expect this product broadening to continue. MYOB (www.myob.com) was for a long time the default, “go-to” system for small to medium enterprises (SMEs) in New Zealand. As a result, many NZ businesses are still running the desktop package they bought off the shelf many years ago and, despite the cloud hype, haven’t seen a need to update. This may all be about to change as MYOB recently announced that, from 30th September 2019, they would no longer provide features, patches, compliance updates or product support for their MYOB AccountRight Classic desktop product. This is a key part of their strategy to transition their significant, but non-revenue generating, base into the cloud and onto the SaaS model, creating on-going annual revenue streams. They are aiming for 1 million cloud subscribers by www.staplesrodway.co.nz
2020. While MYOB will be confident that their customers will place value on a perceived seamless transition and similar look and feel of their cloud versions – it may also open the door for customers to reconsider their options. Xero is the obvious possible beneficiary from this, but it may also prove enticing to massive overseas players that currently have smaller Australian and New Zealand footprints, such as Quickbooks Online (www.quickbooks.intuit.com), to increase their market share dramatically.
ADD-ONS As the core cloud accounting platforms continue to grow, so too does the “add-on” or connected application space. Users of Xero and MYOB have the ability to integrate an increasingly bewildering array of applications to drive operational processes, whether it be inventory management, customer relations, procurement, reporting etc. We expect more niche solution sets to be brought to market and the start of a consolidation of the more generic solutions as “industry leaders” gain the greater share of market spend and buy up (or force out) smaller players. We also expect the big players to continue to add additional functionality – whether organically or by acquisition.
THE MID TO LARGER END Beyond the Xero, MYOB and QBOs there are a number of ERP (Enterprise Resource Planning) solutions. These solutions are aimed towards the middle and larger enterprises and manage financials as well as operational processes such as Marketing, CRM, Sales and Procurement, Inventory, Warehouse Management and Manufacturing under one system banner. While the transition to the cloud in this space has not been as pronounced as in the smaller business end we definitely see the same market dynamics in that, ERPs built in the cloud for the cloud tend to be growing faster than traditional on-premise systems. A case in point is Netsuite (www.netsuite.com) which has experienced significant growth to make it one of the world’s biggest cloud ERP platforms and is backed by massive player Oracle. Other systems making strides are Microsoft Dynamics (www.dynamics.microsoft.com), Workday (www.workday.com) and MYOB Advanced - for which Staples Rodway Taranaki is a Business Partner.
NUMBERS Spring 2018 • 11
One of the questions we often receive is “when should a business look to upgrade to an ERP?”. I asked ERP Sales Manager Lisa Nicks from Fusion 5 (www.fusion5.co.nz) who specialises in helping companies move and grow into the right sized ERP solution: “You should look to move to an ERP solution when you have too many systems that you have had to stitch together to run your complete operations. This might include your core Financial Management or ERP solution, something else for Inventory Management, other software to manage your demand planning and replenishment or manufacturing, something to manage CRM and customer engagement and yet again some other piece of software for Marketing and your ECommerce platform. "Companies also need to get a more experienced ERP solution when they grow into multi-company, multi-currency and multi-country and may need various national language support and have the need to manage company consolidation. "Transaction volume can also dictate when it is time to grow into a new ERP, as the smaller solutions can have volume thresholds - so when you need to process 10,000 orders a month or have 100’s of lines of SKUs it is often time to upgrade."
AUTOMATION AND AI In our view we are going to see automation becoming more democratised, that is, being available to the masses, not solely in the domain of large organisations. It will provide businesses with real opportunities to gain efficiencies and cut costs. Whilst many accounting platforms can already largely automate transaction coding and reporting, customer order receipts, delivery of goods, re-order of inventory, etc, it is going to be Artificial Intelligence (AI) which allows the automation to be adjusted and accommodate nuances or irregularities so that the automation “learns” and is effective in all cases. An example of this is taking stock levels of a similar item into consideration when reordering a product that has higher sales than normal. As well as efficiencies this will deliver greater insights and connections with customers as it pulls on and makes sense of enormous amounts of third-party data. Accounting platforms which have their data in the cloud will be the ones better positioned to take advantage of the automation and AI toolsets.
SUMMARY So that completes a round-up of the cloud accounting market in New Zealand, what we see happening and possible impacts on NZ businesses – small and not so small. It is clear things will continue to change at pace. Some change will be welcomed, while other change, for example, a move from MYOB AccountRight Classic, may be forced on you. As always, in times of change it is important you take the time to take stock, talk to your advisers and react strategically. If you wish to discuss the changing face of accounting technology, please contact your usual Staples Rodway advisor. 12 • NUMBERS Spring 2018
ASK AN EXPERT In our regular feature we answer readers' questions on any area in the world of finance, accounting, audit, tax, and other business-related areas. Take advantage of our expertise and send your question to questions@staplesrodway.com and one of our specialists may answer it in a forthcoming issue of NUMBERS.
I own a restaurant, and was told that Inland Revenue is using Artificial Intelligence tools to review people in the hospitality industry. What do I need to do? Answer from Mike Rudd, Tax Director, Staples Rodway Auckland
Inland Revenue has been running a succession of campaigns since late last year, first with 'Every undeclared cash job leaves a trail' for the building sector and now 'Sleep Easy' for the hospitality industry. Inland Revenue is increasingly using AI to identify anomalies, in particular where businesses may be operating in the “hidden economy”. For example, they may compare your business's gross profit against those of a similar size and type and ask for reasons why there is a difference between you and the industry average. The ‘Sleep Easy’ campaign aims to identify businesses failing to record sales, paying wages off the books and discrepancies between supplies bought and sold. The message is that if you keep good business records, are returning all your income and correctly deducting PAYE or withholding tax when required; then you can sleep easy.
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The algorithms used to analyse big data are getting better with time, which is why it is essential to ensure that your bookkeeping is complete, accurate, and timely. If Inland Revenue’s computers suspect that your tax records are not accurate, they are likely to contact you before launching a full investigation. Should the tax man come to visit at your place of business, we recommend that you get in contact with your Staples Rodway advisor immediately. Better yet, we recommend that you ensure that your records and systems have been reviewed by Staples Rodway, before Inland Revenue come knocking, so that you can make sure you are doing the right thing and, importantly, take any necessary steps if there has been non-compliance to minimise exposure to penalties. If you have any concerns that you might not be complying with your tax obligations, we recommend that you get in contact with your advisor to discuss your next steps.
NOTE: The above is general advice only and should not be relied upon as specific circumstances can vary. Please contact your Staples Rodway advisor for specific advice.
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NUMBERS Spring 2018 • 13
WILL ROBOTS TAKE YOUR JOB? THE PREREQUISITES FOR ARTIFICIAL INTELLIGENCE With the rise of automation, careers that we take for granted today may well become obsolete in the future. But is all the scaremongering in the media merely hype? Is it really that easy to replace the human brain?
Article by Rob McEwan STAPLES RODWAY TARANAKI rob.mcewan@staplestaranaki.co.nz
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OR MANY INFORMATION WORKERS, THE media hype surrounding their replacement by artificial intelligence (AI) is disconcerting. However, if you consider what is necessary to take the immense power of the human brain out of the equation, you start to realise just how much information we process, how many assumptions we make and how much risk is taken on by businesses relying on the human computer. Many businesses operate with a lot of uncertainty in decision making. The human computer processes that ambiguity, can fill in the blanks, make decisions and recommendations based on directly relevant knowledge and experiences already held. It can then apply the lessons learned to current situations; it is also wired to take some risk. If you ask an artificial intelligence expert what the goal of AI is, many of them will tell you it is not to replicate the human brain. They say the human brain makes mistakes, that humans make errors of logic, and sometimes we go with our gut, instead of basing our decisions on the facts presented to us. Is artificial intelligence going to displace human intelligence, or is it simply going to be another tool to help humans complete a broader analysis of the data they are presented, leading to better business decisions? Whichever way it turns out, the one thing that needs to be recognised about any information processing system comes back to the adage, “garbage in, garbage out”. Let’s take the example of a global liquid pipeline. The liquid is produced in one country, transported by pipeline to portbased storage tanks where it is loaded onto container ships and transported to distant lands. The ships drop off various volumes of the liquid at different ports to satisfy the orders placed by international customers. Liquid may be then transported by either pipeline or truck to its final destination, where it is consumed. Logistics require careful coordination to ensure production volumes can be maintained; tanks don’t overflow, there is sufficient product within the tanks to ship when the ship arrives in port, that the customer tanks never run dry, and that customers are continuously satisfied. The logistics specialists who perform all this coordination will use a variety of tools to help them manage the information they need, and then they will combine that with their own personal experience to ensure the best possible outcomes to the business. The types of subjective information that affects this pipeline might include political influences, competition, weather events and even the tides and the draught of the ships carrying the product. Logistics companies often deploy decision support systems to run multiple scenarios as quickly as possible to determine the most cost-effective routing of a ship. But the final routing is often determined by a human who takes into consideration inputs that are (currently) not possible to include in decision support models. This example highlights a key issue around data quality “fitness for purpose”. Many characteristics can be ascribed to www.staplesrodway.co.nz
data: accurate, complete, reliable, relevant, timely, verifiable, accessible and secure being the most common. In any given business situation, the quality of the data is determined by how it is used. Using the shipping analogy, tide and draught are well known and predicted with certainty. Arrival and departure times are planned for but can be changed for any number of reasons during a trip. The weather is mostly predictable close to an event but can change completely while cargo is en route. If all of these factors are used in a decision support system, then timeliness, accuracy and reliability of weather information become significantly more important. To ensure that decisions are made using the best information available at the time, logistics companies procure the most advanced meteorological services available. It just wouldn’t work glancing out of the office window and predicting the weather yourself. To prevent “rubbish in”, it seems probable that a logistics company moving ships around the world will pay for the most timely and accurate weather information. When looking at the potential for automation, apply the same principles to your own business and try to identify which data inputs currently operate at a quality level that you’re happy with, and which don’t. Is the data made available to decision-makers quickly enough? Is it timely? Is your data consistent? Do your staff trust the data they are presented with? Do you often hear disparaging comments regarding the reliability of information presented in your reports? Do your staff make decisions based on poor quality information? If any of those questions above seem familiar, it is unlikely that the implementation of any form of AI project will be successful until they are resolved. Often the first step in resolving these issues is to create enterprise data models. An enterprise data model is an integrated view of the data produced and consumed across the company. The model provides a strategic view of data and is independent of the existing systems. It represents what is important to the organisation and the rules that govern them. An enterprise data model is essential for data quality because it exposes discrepancies in the data and identifies quality metrics that are important to the organisation. When you’re considering a project, it pays to recognise the amount of data that an AI solution is able to consume and that data quality is a significant project consideration. You can choose to remedy your data quality concerns during your AI implementation project, or you can start now, and begin working on data quality initiatives in preparation for the day that an opportunity to leverage AI presents itself. In the meantime, perhaps the human brain's ability to process data that is not perfect and make good decisions is still one of our biggest strengths.
NUMBERS Spring 2018 • 15
TECHNOLOGY AND THE
INVESTING WORLD
Article by Will Roberts STAPLES RODWAY ASSET MANAGEMENT will.roberts@sram.co.nz
Technology is an inescapable factor in the investment world. Whether that be the investment opportunity it creates, or the disruption to traditional business models, technology impacts on every sector of the modern economy.
I
T IS SOMETHING OF A cliché, but Kodak invented the digital camera; however, they failed to appreciate its significance. Hindsight is a wonderful thing, but Kodak is now a shadow of its former self! For an investment specialist, an appreciation of how the world is changing is vital, and indeed we use technology more and more to help identify investment opportunities and trends. This is exemplified by the rise of artificial intelligence and machine learning and a whole new breed of investment options, based on data analysed almost solely by machines. Computer-based investment programmes do of course have their advantages and disadvantages. A computer reduces staff costs and can operate from anywhere. It can also react more quickly to events and news flow and make decisions in fractions of a second. You could say a computer’s lack of emotion is a strong positive attribute when it comes to investment decisions, however understanding emotions and human nature can be essential to investment success, and these are hard things for a computer to model. Let’s look at some specific issues of today’s market. We all know electric vehicles are going to play a much more significant role in meeting our future transport needs. But how does a company like Tesla, who manufacture only a fraction of the number of cars of any other leading brand, justify a valuation far greater than its competitors. Can they fill their potential and maintain a technological edge over the likes of Volkswagen or Ford? How vulnerable is the Tesla brand to Elon Musk’s image? On the opposite side, is the oil industry now so vulnerable that peak oil (the theoretical point when production declines because there is little left to find) is irrelevant?! These questions really base their answers on assumptions and the forward thinking of investors. Something a machine will struggle with. The Tesla example is a story about valuing growth aspirations; however there are a multitude of investment selec-
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tion processes that are driven by historical data. In these scenarios, a computer can have a major role to the point that human intervention is hardly required. In part, the recent rise of Exchange Traded Funds (ETF’s) has been driven by something called factor investing. Principally factor investing uses data to identify sectors of a market that have historically grown faster than the leading indices. For example, research shows that mid-sized companies have tended to grow faster (albeit with higher risk) than large capitalisation companies. Companies can also be found that clearly have strong earnings momentum or are undervalued by historical standards (note there might be good reason – technology changes!). It might be that a recent dip in share price created an opportunity and it takes a computer to find that opportunity quickly enough to profit from it. In summary, technology is changing the investment landscape dramatically. It can help lower the cost of your investment choices and broaden the opportunities you have available. It should not though, be the only approach to follow, as it is unlikely to respond to short/medium term economic changes. Understanding how an economic cycle works and how we react in different circumstances is where your investment specialist will add value to your portfolio. We at Staples Rodway Asset Management are experts in negotiating changing market conditions and finding great outcomes for our clients. We take pride in finding a personalised quality investment solution for your circumstances. Staples Rodway Asset Management is a boutique investment advisory service that specialises in providing personalised and impartial investment solutions for individuals and trusts. To arrange a no-obligation appointment with an adviser phone 0508 220 022 or email enquiries@sraminvest.co.nz
NUMBERS Spring 2018 • 17
WHEN A CURRENCY ISN’T A CURRENCY
CRYPTOCURRENCY Cryptocurrencies may sound like a thing of the future, along with robot cleaners and Jetson-like cars. However, they can now be used to pay for your morning coffee.
Article by Aniela Tkacz, Nicola Hankinson & Matt Bonner aniela.tkacz@staplesrodway.co.nz nicola.hankinson@stapleswellington.co.nz matt.bonner@stapleswellington.co.nz
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N AUGUST 2018, CRYPTOCURRENCIES EXCEEDED US$212 billion in market capitalisation. At present, there are over 1,800 cryptocurrencies. There is significant volatility in the market – in the six months from January to June 2018, market capitalisation has decreased by US$365 billion which equates to US$2 billion per day. Bitcoin is the most wellknown and accounts for over 50% of the market capitalisation of cryptocurrencies. Cryptocurrencies may prove valuable to those in developing countries without access to stable financial systems and have the potential to provide greater supply chain integrity by using Blockchain encryption. However, without a central regulatory system, cryptocurrencies may be manipulated to traffic illegal drugs or approve fraudulent transaction.
HOW DO WE ACCOUNT FOR THEM? Accounting for cryptocurrencies is complex. Considerations include whether cryptocurrencies meet the definition of an intangible asset and whether they should be measured at cost or fair value. At this stage, a universal accounting policy is unlikely given the varying uses of cryptocurrencies and the blockchain technology that underlies these. Some, but not all, can be used as a medium of exchange. For example, Democracy Earth, a nonprofit, has designed an app to enable voting using blockchain technology in order to eliminate or minimise electoral fraud. "The blockchain is incorruptible; no one can modify or subvert how the votes are stored, and that's vital for democracy." Santiago Siri, Democracy Earth’s co-founder
WHAT IS A 'CRYPTOCURRENCY'?
IS A CRYPTOCURRENCY AN ASSET?
HOW ARE CRYPTOCURRENCIES ‘MINED’?
The definition of an asset in the IASB’s Conceptual Framework is: “A present economic resource controlled by the entity as a result of past events.” An economic resource is defined as “a right that has the potential to produce economic benefits.” Would cryptocurrencies meet this definition? We think the answer to this is "yes". Assuming cryptocurrencies meet the definition of an asset, the following standards provide guidance to address items with characteristics of cryptocurrencies: 1. Cash (IAS 7 Statement of Cash Flows; IFRS 9 Financial Instruments) 2. Non-cash financial assets (IAS 32 Financial Instruments: Presentation, IFRS 9 Financial Instruments)
� A buyer may choose to pay for a good or service using a cryptocurrency, such as Bitcoin. � The transaction is electronically placed in a ‘block’ for processing. � Miners solve complicated mathematical problems that are associated with a block containing the transaction data. Miners are responsible for ensuring the authenticity of information and updating the blockchain with the transaction. � The transaction is approved, or ‘confirmed’, and funds are distributed to recipients. � The miner is rewarded with cryptocurrency for processing the ‘block’.
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A cryptocurrency is a digital or virtual currency that uses cryptography for security. A cryptocurrency is difficult to counterfeit because of this security feature. Cryptocurrencies are organic in nature; they are not issued by any central authority, rendering them theoretically immune to government regulation
NUMBERS Spring 2018 • 19
3. Investment properties (IAS 40 Investment Property) 4. Intangible assets (IAS 38 Intangible Assets) 5. Inventory (IAS 2 Inventories) Exploring the intangible assets argument further, International Accounting Standard (IAS) 38.8 defines intangible assets as “an identifiable non-monetary asset without physical substance.” It is likely that cryptocurrencies would meet this definition as well. Cryptocurrencies are identifiable (these can be sold, exchanged or transferred individually); are not cash and have no physical form. Given there is no expiry date on cryptocurrencies, cryptocurrencies would generally qualify as indefinite life intangibles. The following table helps illustrate how cryptocurrencies would be valued using existing accounting standards:
If there is an active market for the cryptocurrency and if the revaluation method is elected as a policy, the statement of financial position would then reflect the fair value of the cryptocurrency at the end of the financial period, rather than what it cost to purchase.
IS A CRYPTOCURRENCY INVENTORY? IAS 38 does not apply to intangible assets held for sale in the normal course of business. Such intangible assets should be accounted for in accordance with IAS 2 Inventories. Inventories are measured by the lower of cost and net realisable value. As a result, decreases in net realisable value would be recorded in the statement of profit or loss while increases in net realisable value in excess of previously recorded decreases would not be recorded.
WHAT IF I’M A COMMODITY TRADER?
It's been a wild ride for cryptocurrency investors. At it's peak in early 2018, the market cap for all cryptocurrencies was on track to break the US$1 trillion barrier by the end of this year. Only 8 months since it's peak, the market cap is languishing at the US$200 billion mark, with US$12 billion alone wiped off the total in 1 hour in early September 2018.
20 • NUMBERS Spring 2018
In addition to the accounting requirements, there may be securities regulation requirements that need to be considered.
TOTAL MARKET CAPITALIZATION $750B
$500B
$250B
$0 SEP '18
The revaluation method can only be used if there is an active market for the cryptocurrency. An active market is considered to be a “market in which transactions for the asset or liability take place with sufficient frequency and volume to provide pricing information on an ongoing basis.” (IFRS 13 Fair Value Measurement Appendix A) An entity wishing to use the revaluation method will need to confirm that an active market exists for the cryptocurrency.
It depends. You should follow the disclosure requirements of the standard used to account for the cryptocurrency (i.e. IAS 38 Intangibles, IAS 2 Inventories or IFRS 13 Fair Value Measurement). The following disclosures may also be relevant: a description of the cryptocurrency, characteristics and the purpose of holding it (e.g. investing, buying goods and services); the number of units of the cryptocurrency held at year end; how the accounting policy was determined; if the cost model is used, the fair value for the cryptocurrency together with the appropriate IFRS 13 disclosures; and information on the market risk associated with the cryptocurrency (e.g. historical volatility).
JUL '18
IS THERE AN ‘ACTIVE MARKET’ FOR CRYPTOCURRENCIES?
HOW SHOULD I DISCLOSE MY INVESTMENT IN CRYPTOCURRENCIES?
MAY '18
Impairment of an indefinite life intangible
MAR '18
Profit & Loss (per IAS 36 Impairment of Assets)
Revaluation increases are recognised in other comprehensive income except to the extent that they reverse a revaluation decrease previously recognised in profit and loss
JAN '18
Fair value
NOV '17
Cost
SEP '17
Subsequent measurement
JUL '17
Cost
MAY '17
Cost
MAR '17
Initial measurement
JAN '17
(Revaluation Method)
Commodity traders are considered to be “those who buy or sell commodities for others or on their own account, for the purpose of selling in the near future and generating a profit from fluctuations in price.” (IAS 2.5) Commodity traders (also referred to as broker-traders) measure inventories of commodities at fair value less the costs to sell and record changes in value through the statement of profit or loss (IAS 2.3(b)). While this accounting result will seem logical to many, it is available only to those entities that meet the definition of a broker or trader.
MARKET CAP US$
FAIR VALUE
COST
At its heart, blockchain is a technology that promises greater trust and resilience in the recording of transactions and information. These are both essential elements in the system of corporate reporting. While it is not clear whether blockchain is the answer, the current rapid developments in blockchain use mean that it has the potential to have a significant disruptive impact on corporate reporting processes." PHIL FITZ-GERALD, FRC
WHAT IS HAPPENING AROUND THE WORLD? Defining cryptocurrencies within existing IFRSs fits like the woollen jumper your grandmother knitted you a decade ago, but don’t despair, guidance is on the way. At the International Accounting Standards Board (IASB)’s January 2018 meeting, the IASB discussed initiating a research project on cryptocurrencies.
TAX TREATMENT Is Cryptocurrency a currency for tax purposes? No. Thankfully accounting and tax agree! If treated like foreign currency, gains or losses under the financial arrangement rules would potentially be taxed on an unrealised basis, when coins are revalued back to NZD at the end of each income year. Inland Revenue have outlined their view that cryptocurrency should be treated as property and not like foreign currency. This is consistent with Australia and the US where cryptocurrencies are designated as an asset for tax purposes. Are all disposals of cryptocurrency taxable? Cryptocurrency has been compared to gold bullion from a tax point of view. Like gold bullion, there is no opportunity to derive income from cryptocurrency unless they are sold. If a person acquires property for the purpose of disposing of it, then any amount they derive from that disposal is taxable income. Inland Revenue’s recent guidelines, which set out when proceeds from the sale of gold bullion count as income, may be used for further guidance. This notes very limited circumstances when buying and selling gold (or cryptocurrencies) may not be taxable. Given the nature of assets like gold bullion and cryptocurrency, it will be hard to argue that the cryptocurrency is acquired without the purpose of disposal. Contrast this with a share investment, where the dominant goal might be to derive dividend income. Ultimately the tax treatment will depend on the individual’s specific facts and circumstances for acquiring cryptocurrencies. The good news is if a cryptocurrency meets the definition of an intangible asset and is fair valued through OCI, the timing of the tax and accounting impacts on sale should ‘marry’ in the profit and loss.
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INLAND REVENUE'S
Q&A
My business accepts cryptocurrency as payment for goods and services. Do I have to pay income tax on it? Yes, cryptocurrency received as payment for goods or services is business income, which is seen as taxable. This is seen as a barter transaction and you’ll need to calculate the value of the cryptocurrency in NZD at the time it is received. I purchased some cryptocurrency a few years ago. Will there be a taxable gain when I sell it? It depends on your purpose for acquiring the cryptocurrency. Cryptocurrency is considered property for income tax purposes. Where you acquire cryptocurrency for the purpose of disposal (selling or exchanging it) the proceeds you make from selling it are taxable. Bitcoin and similar cryptocurrencies generally don’t produce an income stream or provide any benefits, except when they’re sold or exchanged. This strongly suggests that cryptocurrencies are generally acquired with the purpose to sell or exchange them. Does tax only apply when I ‘cash out’ cryptocurrency into NZD? No. Any disposal that creates a realised gain or loss needs to be recorded at the time it occurs. ‘Disposal’ includes swapping one type of cryptocurrency for another or exchanging cryptocurrency for NZD or another fiat currency such as US dollars or Euros.
CONCLUSION There’s potential for companies to earn incredible returns from cryptocurrencies, but there is also significant risk of volatility as market caps rise and fall spectacularly, imitation “altcoin” currencies are developed and ‘crypto-jacking’ brings the credibility of these currencies into question. What is undeniable, however, is that being able to navigate the complexity of digital currencies provides a potential opportunity for the right kind of business. NUMBERS Spring 2018 • 21
TECHNOLOGY CAN UNLOCK YOUR GREATEST ASSET
Article by Chris O'Reilly CEO, ASK YOUR TEAM chris.oreilly@askyourteam.com
The greatest asset in any business is its people - they’re also almost the most underutilised asset. The key to unlocking the potential of your greatest asset lies in digital technology - and changing your leadership style.
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OST OF US WOULD AGREE that in any business today, the greatest asset is its people. We also recognise that getting the most out of our people is a CEO’s most important job. Precisely how a CEO does that is where the agreement ends. Unlocking the potential of people through shared decision-making and distributed leadership is one potentially valuable method. Many believe most successful businesses are built on cultures that encourage consensus, collaboration and teamwork. But there are those who disagree. There is still a class of traditional business leaders practising old school “command and control” leadership. We’ve moved beyond the days of top-down leadership when the ‘best’ bosses saw their job as making all the most important decisions in the business every day. In 2018 who would want to work for an organisation run by a person like that? Certainly not the most talented people in your industry. A CEO still running their business from the top should get ready to lose their most talented team members as they go looking for a workplace where they can make meaningful decisions for themselves. Top-down leadership is a remnant of the industrial age when communication was slow, and information was transmitted via paper. Modern digital communication technology means that this style of leadership is no longer the most effective. In the age of digital connectivity, companies have become networks where information can be shared instantly with every person, regardless of status or job title. There is no natural centre to these networks; all the nodes operate independently. If one is removed, the others continue, meaning that having a powerful command and control leader at the apex of a hierarchy is no longer so important. In fact, it is a negative. The productivity of a network is determined by the amount of information flowing between its nodes. If everything has to go through one apex point - the boss - it will cause an inevitable bottleneck and be a handbrake on productivity. In a modern network, organisation knowledge is no longer power as it was in the old days. Power doesn’t come from keeping knowledge tight to oneself; it comes from sharing knowledge. The leader who is open and inclusive with information about performance and who is willing to listen to their team is far more powerful than the leader who thinks their power comes from keeping team members in the dark. Technologies that enable organisations to operate with this new model of leadership have exploded in the past five years. In every case, they allow a continuous flow of feedback from all the team members in an organisation back to a leadwww.staplesrodway.co.nz
ership team. Leadership teams use the insights gleaned from the feedback mechanism and act with their teams to improve performance based on their feedback. New Zealand company Ask Your Team seeks continuous improvement systems based on a comprehensive and anonymous survey of attitudes and opinions about how the organisation operates, from every person who works for it. The survey covers 13 different areas of business operation, from communication and operations, through to strategy, and collates a comprehensive dataset that provides an executive team with a to-do list for performance improvement. It provides data that allows an objective comparison between groups within an organisation, explains performance gaps and highlights pinpoint areas where executive attention will have the greatest impact on organisational performance. Importantly, AskYourTeam democratises and distributes leadership. Senior leaders in organisations using Ask Your Team that share their results widely among their teams report that leadership becomes easier the more knowledge they give away. Team members are empowered in direct proportion to the degree of sharing from their leaders. Sharing knowledge helps everyone understand the reasons behind decision making and helps people to begin making leadership decisions for themselves. This takes a huge load off the people in the traditional hierarchical leadership positions as consensus replaces command as the central factor in the organisation’s culture. And people love being asked what they think about the performance of their organisation. Participation rates in any survey can tell you a lot about its value. Recently NZQA moved to using the AskYourTeam survey. They were pleasantly surprised to get a 91% completion rate from their first AskYourTeam survey, more than they’d had ever recorded in any staff survey before. Now they are analysing the results of their first survey and preparing action plans based on what they’ve heard. Once they’ve implemented their action plan, they’ll be able to rerun the survey with small workgroups or across the entire organisation and measure their progress. The change in what they are asking has been instrumental in moving from an old model of top-down leadership and entered the new era of ongoing continuous improvement, through distributed leadership. To find out more about how technology can unlock your greatest asset, visit www.askyourteam.com
NUMBERS Spring 2018 • 23
TAXING TIMES FOR EMPLOYEE SHARE SCHEMES
Article by Jackie Edhouse STAPLES RODWAY AUCKLAND jackie.edhouse@staplesrodway.co.nz
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MPLOYEE SHARE SCHEMES HAVE LONG been a favourite of the technology sector because they allow key employees to be rewarded without a cash cost and allow those employees to be rewarded for helping to build the future value of the business. New tax laws introduced this year include significant changes to the way employee share schemes are taxed.
EXAMPLE 1 Stark Industries transfers shares worth $10,000 to a trustee on trust for its employee, Pepper Potts. If she leaves the company for any reason during the next three years, the shares are forfeited for nil consideration. If, after three years, Pepper is still with the company the shares will transfer to her. Assuming that she does not leave the company, the taxing point will be at the end of the three year period. Pepper will be taxed on the value of the shares at that time. In this example, there is a material risk that Pepper will leave the employment of Stark Industries (e.g. for a better opportunity). The taxing point does not occur while there is a material risk that the beneficial ownership of the shares will change. Under the old rules, Pepper would likely have been taxed on the $10,000 value of the shares when they were transferred to the trust. Assuming the value of the company increases, the effect of the new rules is that the potential taxable benefit to Pepper will be at the highest point when it becomes taxable to her.
TAXING POINT The biggest change in the rules is the point in time that the benefit is calculated. The value of a benefit under an employee share scheme is the amount by which the market value of the shares at the taxing point is more than the amount paid or payable for them. Under the old rules, the taxing point focused on when an interest in the shares was acquired, even if the shares had restricted rights or were unpaid at that date. Under the new rules, the taxing point focuses on the “share scheme taxing date”. The share scheme taxing date is the earlier of: a. The date the benefits are either transferred or cancelled for consideration; or b. The date the employee owns the shares in the same way as any other shareholder Whether an employee owns the shares in the same way as any other shareholder depends on the terms of the scheme. An employee will not own the shares in the same way as any other shareholder if there is a material risk that the shares may be forfeited (i.e. good chance the shares will be forfeited). It is also likely this threshold will not be met if the employee does not have voting rights or entitlement to dividends for a period of time.
The new rules include agreements entered into before a person commences formal employment and covers shareholder-employees (to the extent PAYE is not deducted). However, the new rules do not apply to arrangements that require employees to pay market value for shares or to exempt employee share schemes (generally schemes offered to all or most employees), which have their own specific rules.
APPLICATION ADMINISTRATION & REPORTING
Generally, the new rules apply to benefits where the taxing point is after 29 September 2018. However, where shares were acquired between 12 May 2016 and 29 September 2018, the benefit will be taxable under the new rules if the taxing point is after 1 April 2022.
NEW LAW
E mployers are now required to disclose the value of any employee share scheme benefit when filing their Employer Monthly Schedules. cntd over
EMPLOYMENT INCOME
SHARES
SHARES Employee is not the economic owner, and the shares are still being earned
ENTRY INTO EMPLOYMENT SHARE SCHEME
PREVIOUS LAW
TAXING POINT
TAX-FREE CAPITAL GAINS
TAXING POINT
SHARES Employee has earned the shares, and holds them like any other shareholder
SHARES OWNED BY EMPLOYEE no restrictions
TAX-FREE CAPITAL GAINS
SHARES SOLD
T he employer has the option to withhold PAYE on the benefit provided. If PAYE is withheld, the employee does not need to file an income tax return. If PAYE is not withheld, the employee will need to file a personal income tax return returning the taxable income from the share scheme.
EXAMPLE 2 Stark Industries transfers shares worth $10,000 to a trustee on trust for its employee, Pepper Potts. She is not entitled to the shares unless particular performance hurdles are met. If the hurdle is met in year 1, one-third of the shares will vest. If it is met in year 2, a further one-third of the shares will vest. The same approach applies in year 3. Vested shares are not transferred to Pepper but are held by the trustee until the three years are up. If she leaves before the three years are up, the vested shares will transfer to Pepper except if she is a bad leaver (i.e. leaves because of disciplinary action or misconduct). Assuming that Pepper meets all her performance hurdles and does not leave the company, there will be a taxing point at the end of years 1, 2 and 3. She will be taxed at the end of each year on the value of the shares that vest at that time. The likelihood that Pepper will be a bad leaver is low (i.e. not material) and so this condition will not defer the taxing point. The fact that the shares are held by a trustee until the end of year three will also not, in itself, defer the taxing point.
OTHER CHANGES A n employer is allowed a tax deduction, equal in amount and timing, to the income derived by the employee under the new rules. The available subscribed capital of the company (that is, the amount that can be repaid tax free on winding up the company) is increased by the amount received for the provision of the shares (i.e. the amount the employee pays for the shares) and the amount of its deduction for the provision of the shares (i.e. the amount of the benefit received by the employee). If the amount paid by the employee exceeds the value of the shares at the share scheme taxing date, the difference can be claimed as a tax deduction by the employee. In this case, the employer would need to return the difference as income. The terms of employee share schemes are wide and varied. If you are not sure of the share scheme taxing date under your employee share scheme or if you would like more information, please contact your usual Staples Rodway advisor. 26 • NUMBERS Spring 2018
DIGITAL NATIVES In 7 years digital natives will dominate the workforce. Are you ready?
Article by Tara Dennehy STAPLES RODWAY TARANAKI HR tara.dennehy@staplestaranaki.co.nz
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HE WORKPLACE IS CHANGING. ORGANISATIONS hear every day that their workforce and society are rapidly becoming more digitally savvy, and those that choose to run from new technologies or ignore this transformation will be left behind. The arrival of digital natives in the workplace – the generations that have grown up with technology and their smartphones constantly within reach – is causing disruption to traditional working norms. Technology is embedded in their lives - they communicate online, consume media online, shop and look for recommendations online, they form online-only relationships. Technology offers them flexibility at the click of a button. So it makes sense that the workplace embraces this digital force and learns from it.
WHY DO DIGITAL NATIVES MATTER? Masters of navigating and filtering through the virtual world, this emerging workforce will perform at their peak when they are easily able to access it and encouraged to integrate it with their working life. Digital natives, of which millennials (those born in the early 1980s to the early 2000s) make up the majority, are projected to be 50% of the workforce by 2020, further reaching 75% by 2025 (Forbes). In just seven years they will become the majority of your employees, customers and suppliers. Traditional working methods of being tied to a desk will become less effective and potentially a hindrance.
The use of laptops, mobile phones and online apps mean that we no longer need to work in a static environment, and for digital natives, there is no learning curve. For most businesses, a smartphone is no longer seen as a disruption to work, but as a productivity tool with the ability to perform work tasks, tap into HR systems, access information and data directly; all while on the move or away from the four walls of the office.
THE CHALLENGE TO STAY AHEAD Some more traditional organisations remain stuck, either living in fear of change or unwilling to hire this generation, who may appear lazy and constantly glued to their phones. According to the Yellow SME Digital Readiness Survey, twenty per cent of New Zealand SMEs have no online presence. However we all know technology continually advances around us, and organisations need to keep up to attract the best candidates, so they don’t further fall behind the competition. New technologies for mobile working are already proving their business value – reducing email traffic, coordinating teams, enabling communication across hierarchies and saving time on traditional processes. These tools are creating more opportunity for change, productivity, flexibility, innovation, and employee engagement.
BRIDGING THE TECHNOLOGICAL GAP – A PATH FORWARD The technological gap between generations should be understood, and organisations are now being challenged to create a balanced working environment that attracts both digital natives and older generations. It’s important to continually evaluate the way your workplace is using technology, how you can improve and the ways you could be unlocking the potential of your younger staff members. It’s clear that change has arrived and is rapidly increasing – don’t leave your people’s potential untapped and don’t leave your business behind in the dark ages!
SOME STEPS YOUR BUSINESS CAN TAKE TO ATTRACT DIGITAL NATIVES 1. Embrace the change in your workforce. 2. Review your hiring processes to ensure you’re connecting with the right people. 3. Conduct a culture survey to determine your fit with the changing workforce. 4. Review your company’s approach to technology and the value it could add to your business.
TECH ON TOAST Staples Rodway Taranaki recently become an MYOB Advanced accredited firm and held a breakfast event “Tech on Toast” to discuss the 100% cloud-based ERP software MYOB Advanced and the ever-changing work environment. With more than 20 mid-market businesses in attendance, Rob McEwan and Bryce Gordon from Staples Rodway Taranaki and Steve Victor from MYOB, talked about how cloud-based technology enables competitive advantages for medium to large sized businesses requiring more functionality to meet the complex needs of their operations. For more info about MYOB Advanced, please contact Bryce Gordon – bryce.gordon@staplestaranaki.co.nz
HER THRIVING BUSINESS At Staples Rodway, it's our people that set us apart. Take a look at what our team has been up to lately.
The second year of Her Thriving Business, a collaboration between Staples Rodway Auckland and ASB Bank, is halfway through. With 80 women attending our first two sessions, The State of the Economy and Leadership in Business, these sessions have been a great opportunity to inform, inspire and connect with like-minded women in business. Proceeds from these events have raised over $1,500 for Make A Wish and Auckland City Mission. We have two more events this year, Being Digitally Savvy on 18 September & Creating High Performing Teams on 17 October. All women are welcome, and you can register by visiting www.staplesrodway.co.nz/wib
MILLENNIALS AND THE FUTURE OF WORK Recently the Christchurch office sponsored a panel discussion on millennials and the future of work, which quickly sold out, with 60 people in attendance. Organised by the SYNC Collective the evening discussed how innovation is changing people, workplaces and employment models. Working for 40 hours each week for the benefit of someone else, when it is something they don't enjoy, is less likely to be accepted by millennials. What this might meant for people’s happiness at work and the impact on companies wanting to attract the next generation of talent drew a lot of interesting debate. A key theme of the evening was that many people, particularly millennials, are turning away from traditional employment in business and seeking more purpose-driven work. The motivators of this generation included the desire to have a positive impact on the world and the environment along with being socially responsible, and a demand for flexibility, autonomy and continual growth. New ways of working like freelancing, contracting or remote working offer the opportunity to achieve these things and live a fulfilling life which includes working, not a life driven by a job. Digital platforms are seen as a major contributor to enabling this change, opening a wider conversation about the nature of work.
START PLANNING: JAPAN In mid-August Staples Rodway Auckland held the very successful Start Planning: Japan event. This was the third in our Japan series, leading on from #TrendingInJapan in November 2016 and the popular Start Thinking: Japan event in October 2017. Team Japan partnered with JETRO (Japan External Trade Organization), ATEED (Auckland Tourism, Events & Economic Development) and NZTE (New Zealand Trade and Enterprise) for a highly informative breakfast session, including some experienced speakers & panellists sharing their insights into targeting the Japanese market with 150 guests. Visit staplesrodway.co.nz/actjapan to register your interest for our next event, places are limited. BELOW (L-R): Annette J. Azuma, Takashi Oku, Stephen Jacobi, Ian Kennedy and Brandon Jackson.
ACCESS TO: CAPITAL Access to: Capital, hosted by Staples Rodway Auckland in conjunction with ANZ, received fantastic feedback from an audience of successful business owners and executives. Our speakers and panellists (pictured left, L-R) Sharon Zollner (ANZ), Mary Gordon (Horizon Radiology), Anne Catley (Marstel and The Icehouse), Tracy Hickman (Staples Rodway) and Louisa Zschirnt (ANZ) provided a highly engaging session.
WOMEN IN BUSINESS: ANNAH STRETTON & RAW Everyone needs someone who believes in them In July guests of Staples Rodway Auckland were lucky enough to hear from Annah Stretton and Norefjell (pictured right) about the charity RAW, and the inspiring work they are doing. Working with recidivist female offenders, RAW provides housing, work experience, education opportunities and wrap-around support services to empower each woman to make a difference in their lives, and the lives of their families.
HAWKE'S BAY EVENTS It has been a busy quarter for Staples Rodway Hawke’s Bay with a full house for seminars on Understanding the difference between cash vs profit, HR & Employment Law update and Business Development | Improvement. Their Women Influencing Women group has also been busy, hosting The Three Freedoms – Finance, Time, Mind and An Evening with Taikura’s Principal.
www.staplesrodway.co.nz REGISTER FOR OUR UPCOMING EVENTS AT WWW.STAPLESRODWAY.CO.NZ/EVENTS
AUCKLAND Level 9, 45 Queen St PO Box 3899 Auckland 1140 Phone 64 9 309 0463 Fax 64 9 309 4544 enquiries@staplesrodway.com
WAIKATO 4th Floor, BNZ Building 354 Victoria Street PO Box 9159 Hamilton 3240 Phone 64 7 834 6800 Fax 64 7 838 2881 staples@srw.co.nz
TAURANGA Level 1, 247 Cameron Road PO Box 743 Tauranga 3140 Phone 64 7 578 2989 Fax 64 7 577 6030 info@staplestga.co.nz
HAWKE'S BAY Cnr. Hastings and Eastbourne Streets PO Box 46 Hastings 4156 Phone 64 6 878 7004 Fax 64 6 876 0078 info@stapleshb.co.nz
NEW PLYMOUTH 109–113 Powderham Street PO Box 146 New Plymouth 4340 Phone 64 6 757 3155 Fax 64 6 757 5081 newp@staplestaranaki.co.nz
STRATFORD 78 Miranda Street PO Box 82 Stratford 4352 Phone 64 6 765 6949 Fax 64 6 765 8342 stfd@staplestaranaki.co.nz
WELLINGTON Level 6, 95 Customhouse Quay PO Box 1208 Wellington 6140 Phone 64 4 472 7919 Fax 64 4 473 4720 info@stapleswellington.co.nz
CHRISTCHURCH Level 2, Tavendale Centre 329 Durham Street North PO Box 8039 Christchurch 8440 Phone 64 3 343 0599 Fax 64 3 348 0186 info@srchch.co.nz
www.staplesrodway.co.nz