The Accountant - Autumn 2019

Autumn 2019

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The Future Professional Accountant in Business

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CONTENTS

AUTUMN 2019

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Issued quarterly, The Accountant is published by

MBR Publications Ltd on behalf of The Malta Institute of Accountants EDITOR Pauline Micallef pmicallef@miamalta.org DESIGN MBR Design Marian Rodriguez MIA's Design & Communication Executive SALES MANAGER Margaret Brincat margaret@mbrpublications.net ADVERTISING INQUIRIES Margaret Brincat (+356) 9940 6743 margaret@mbrpublications.net All correspondence, articles for publication and enquiries are to be addressed to: The Editor MIA Services Limited Level 1, Tower Business Centre Tower Street, Swatar BKR 4013 Malta The Institute does not necessarily concur with the views expressed in the articles published in this journal. Articles are published without responsibility on the part of the publishers or authors for loss occasioned in any person acting or refraining from action as a result of any view expressed therein.

The Accountant can also be accessed from the website at www.miamalta.org

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Autumn 2019

Transforming The Finance Function To Be At The Heart Of Decision Making 05 President’s Address

36 IFAC PAIBC Meeting

08 Local New Appointments

40 Coaching for Managers

10 MIA News

42 Are Soft Skills Really Soft?

14 Common Challenges Faced

by Small Businesses

46 How to Treat Variable Consideration in Accordance with IFRS 15 ‘Revenue from Contracts with Customers’

16 Transforming the Finance Function to Be at the Heart of Decision Making 19 The Invoice: The Instrument to Get Paid 24 The European Deposit Insurance Scheme: A Myth or a Fact?

30 Don’t Just Book It, Thomas Cook It 32 Meet the MIA Team: Marian Claire Rodriguez 33 MIA Wordsearch Competition 34 Filing a Suspicious Transaction Report

48 A Playing Field for Businesses: International Trade for a Multinational Entity 52 A VAT Throwback on Some Basic Rules and FAQ’s 54 Raising Funds for Companies Through Capital Markets 56 Becoming Conscious of Unconscious Bias 59 Merging MFA with Biometry 62 Valuation of Inventory 65 An Accountant Playing With Fire: Stephen Caruana

PRESIDENT’S ADDRESS

President’s Address Fabio Axisa

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n my first address as President of the Institute, I had highlighted five core pillars that shall characterise the MIA’s strategy in the coming years.

Going forward, in every address I will highlight the key initiatives within the domain of each of these five pillars. We are determined to execute our programme with resilience and we would like to ensure we are accountable to you, as our members, in respect of the achievement of the Institute’s strategic objectives.

1. MIA as a home to all qualified professional accountants Our market has changed drastically in the last few years. One of the key changes is the presence of a significant number of expatriate accountants practising their profession in Malta. Expatriate accountants are extremely important for our local profession and help us address the supply side challenge that we are facing on a day-to-day basis, apart from sharing skills and experience.

The Institute must take cognisance of this reality and will be widening its membership base by introducing an international affiliate programme. The objective of this programme will be to enrol and involve within the Institute expatriate professional accountants practising as accountants in Malta, who would have qualified as accountants through a route such as overseas university degrees, which would not constitute one of the three routes typically utilised in Malta to attain qualification. We look forward to reaching out to the expatriate community and to involving these colleagues within the structures of the Institute, including its committees. We strongly urge these accountants to contribute to the MIA and would like them to assist the Institute in achieving our objectives.

2. Elevating quality and raising standards within our profession As you all know by now, the much awaited fifth round mutual evaluation report on Malta adopted by the MONEYVAL Committee has been published. Our profession is mentioned in a number of areas within the report. Clearly there are lessons to be learnt and, whilst we remain confident on the overall quality of the profession, it is quite obvious that certain improvements need to be registered and quite fast. We are proud to be one of

the principal gateways to businesses that choose Malta; but this role entails significant responsibilities and implies that we have to do the right thing for the jurisdiction all the time, sometimes even by turning down work and foregoing potential income streams. We are part of the first line of defence, and must take decisions based also on the overall benefits to the market place, rather than solely by reference to individual or monetary objectives. Our profession is the elite; but we need to live up to this reputation by being selective in what business we accept to service and by ensuring that the quality of our work is top quality all the time. We must never relax on our key professional principles: a) we need to understand the economic rationale underlying the business or transactions of our clients or companies with whom we are employed; b) we need to focus on substance of arrangements or transactions and not simply form; we frequently hear or use the expression ‘substance over form’; c) onboarding of clients and engagements requires rigour and critical analysis; it should never be deemed a fait accompli no matter how easy it seems; d) risk management and compliance are an intrinsic part of the day-to-day behaviour of a professional accountant; it should never be construed simply as a burden or cost; e) if something does not make sense, we should stop, think and take the necessary actions – if we are acting to the best of our professional skills and abilities we should not worry about the consequences as our profession will protect individuals doing the right thing.

I expect our profession to live up to these principles, elevate the quality of behaviour in the marketplace and take all corrective measures necessary to keep on demonstrating the quality of professional accountants. In the coming weeks the Institute will be organising a high-profile event, inviting regulators and bankers, to discuss the findings of the report and other matters impacting our profession. I understand that we all have professional pride and that sometimes we struggle to understand www.miamalta.org

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PRESIDENT‘S ADDRESS

why our profession is the recipient of adverse feedback, considering the hard work and overall conscientious effort to act professionally by most accountants, which I personally witness on a daily basis. But we need to embrace this debate on the overall quality of the profession with a positive approach; we will come out of this phase as a stronger profession demonstrating maturity and openness to feedback.

3. Enhancing the education and qualification process We have continued our discussions with relevant stakeholders and plan to increase our efforts in this area. We would like to see all three routes to qualification in Malta being enhanced to take cognisance of today’s realities and expectations in the marketplace. Our interaction with the Accountancy Board is extremely important to us and we will continue to work with our profession’s regulator.

4. Fostering collegiality and comradeship among accountants

Our profession respects the legal profession tremendously; we have worked together as two professions side by side to make our marketplace successful.

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5. Striving to make the Institute’s voice heard, loud and clear Currently the Institute is addressing a number of national or regulatory matters which will potentially have a significant impact on our profession. The Proposed Legal Profession (Advocates) Regulation Act is a key development in this respect. As an Institute we support this proposed legislation as the proposals will elevate the regulation of the legal profession. However, there are a number of proposed measures which will potentially have an impact on the services we provide as a profession and on our profession in general. It seems that the proposed legislation will define the restricted services which members of designated professions (other than the legal profession), including accountants and auditors, can provide in respect of legal and regulatory requirements. Furthermore, it seems that, amongst other measures, the extent of ownership and management of legal firms by members of designated professions will be severely restricted, and that a professional would not be able to be a partner in a legal firm and in an accountancy or audit firm simultaneously. We must continue to assess the impact of these proposals on our profession, but also respect and understand the origin of such proposals.

Our profession respects the legal profession tremendously; we have worked together as two professions side by side to make our marketplace successful. I believe our national success is also partly due to this great collaboration between our two professions. We must treasure this relationship and mutual respect. But each profession clearly has to defend the respective interests of its members

and my responsibility is to defend the interests of the members of the MIA. Rest assured that I will serve the interests of all members, not just those hailing from bigger or mid-tier firms. We will work for your interests, but we also want to do the right thing and place public interest above everything else. We need to defend our interests with utmost respect to the legal profession and also keeping in mind that the quality within both professions, not just ours, needs to be safeguarded to secure a strong marketplace.

The MFSA has published a Consultation Document entitled Raising the Bar for Company Service Providers proposing a number of significant changes to the manner in which CSPs are authorised and regulated, impacting their business model. As an Institute we will be establishing a forum to review these proposals in detail and to contribute with our feedback. I urge you strongly to participate and share your feedback. This is a very important opportunity not only to participate in regulationsetting as a profession, but also to demonstrate how serious and mature our profession is.

It is through such processes that, as a profession, we will demonstrate collegiality and comradeship.

The MIA leads the profession on these matters and strives to defend our members’ interests vigorously and relentlessly. But, in the process, we must always uphold the best interests of the entire profession, public interest and the overall quality in the market-place. Our profession will be successful in the future only if our marketplace is successful and considered robust.

Changing tack, we are taking a number of steps to enhance the financial strength and future viability of the Institute. You will have noticed that, amongst a number of steps, we have decided to cease certain tuition operations within AIM Academy. We believe that our setting up this activity has served the marketplace well, but we also think that times have changed and that the Institute should focus on other matters, considering the number of learning providers which are now active. It was a tough decision, but we represent our members within the Institute to take tough decisions as well. I will provide a more detailed update on our initiatives in this and other related areas within the next address.

On a softer note, the Institute has organised a football tournament with the objective of raising funds for Beating Hearts Malta. It was a great event which was very well attended. I thank all those who attended and contributed to the organisation of this event. We will endeavour to increase our efforts in this area with your help and support; to continue demonstrating what great and generous individuals, accountants are.

MIA NEWS

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LOCAL NEWS APPOINTMENTS

LOCAL NEWS

Appointments Mazars

Audit and advisory firm Mazars Malta has reinforced its management team through the appointment of four of its executives to senior positions in the firm, namely Brunella Bugeja as Indirect Tax Manager, Elaine Marie Debono as Direct Tax Manager, and Stephanie Zahra and Darren Bonnici as Audit Managers

3a

3a Malta has announced that Ms Alison Calvert has been appointed as Head of Operations with effect from 1st August 2019 whilst Mr Tonio Cuschieri has been promoted to Associate Director- Advisory Services.

Ms Alison Calvert

Alison Calvert joined the firm in 2010 as a trainee in 3a Malta’s Business Support Services and over the years took more responsibilities, eventually being appointed as the person in charge of corporate services offered to both local and international clients, as well as managing the support services functions including payroll and fiduciary services. Alison has over 20 years of experience working in the financial services sector and has recently attained an MBA with the University of Derby.

Tonio Cuschieri joined the firm in 2010 as an audit associate whilst studying to obtain his ACCA qualification. In 2012, he was promoted to the role of Accounting Supervisor and eventually moved on to become the Manager of this unit. In 2015, Tonio was assigned to 3a Malta’s advisory unit enabling him to develop the necessary skills and tools for this role, positioning the firm in the advisory services market and managing to secure high level jobs as well as executing them and managing subordinates in this unit.

Mr Tonio Cuschieri

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Autumn 2019

LOCAL NEWS APPOINTMENTS

KPMG

KPMG in Malta has announced the appointment to partner of Hermione Arciola, Clifford Delia, and Claude Ellul with effect from 1st October 2019. In addition, the firm has also appointed six directors, namely Justin Axiaq, Christopher Azzopardi, Sean Azzopardi, Robert Bianco, Thane Micallef, and Russell Mifsud.

EY announces new Transaction Advisory Services Leader and Tax Leader EY is pleased to announce that Grace Camilleri, has been appointed as the Transaction Advisory Services Leader and Dr Robert Attard will be taking up the reigns as Tax Leader, while retaining his role as the HR Partner.

Ronald Attard, EY Country Managing Partner, says: “The firm is pleased to announce these new appointments.

Grace has been instrumental with some of our biggest projects over the past years and her dedication and leadership makes her perfect for the role. Robert certainly brings the right kind of experience that is needed going forward and we look forward to his contribution. I would like to thank Chris Naudi for his invaluable leadership as Tax Leader until now. This change will allow Chris to focus on developing the ACR function and promoting the EY Connect Centre.”

Grace Camilleri – Partner, Transaction Advisory Services Leader Grace has been a key player in EY’s Transaction Advisory Services and has led the Banking Advisory Services in Malta. She has over 20 years of professional experience across a wide range of service lines, including financial audits, transaction advisory and the provision of assistance to various regulatory authorities in financial services, telecommunications, and utilities.

Dr Robert Attard – Partner, Tax Leader Robert is EY Malta’s head of Tax with a long track record in all areas of tax law. He is highly sought after for his interpretation of domestic tax law, tax treaties and EU tax directives and has been published in European Taxation, EC Tax Review and the British Tax Review. He is a tenured senior lecturer at the University of Malta and member of the European Association of Tax Law Professors.

Chris Naudi – Accounting Compliance and Reporting and EY Connect Centre Chris Naudi is a Partner with significant experienced in International Tax Services. Until recently, he was the ITS Markets Leader for the Central and South East Europe sub-area within EMEIA. Chris has substantial international experience in tax matters, including direct and indirect tax compliance, tax due diligence, corporate planning and reorganizations as well as experience with cross-border transactions. Chris is a Chartered Accountant and a Fellow of the Malta Institute of Accountants.

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MIA NEWS

MIANews Over 250 new members join the Malta Institute of Accountants

T

he Malta Institute of Accountants (MIA) welcomed 256 new members during an official ceremony at the Malta Conference Centre on October 24. The new members have acquired their ACCA qualification or ACA qualification or the University of Malta degree.

Mr Fabio Axisa, President, MIA

Addressing the ceremony, the Institute President Mr Fabio Axisa congratulated the New Members on their success and encouraged them to keep improving the level of standards of the Accounting profession. Moreover, the MIA CEO Ms Maria Cauchi Delia said that the Institute promotes a culture of community engagement among professionals and urged new members to “make an impact on the community, to challenge problems and contribute actively to their solution.”

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Ms Maria Cauchi Delia, CEO, MIA

The New Members’ Ceremony was attended by several distinguished guests, including ACCA Director of Professional Education, Mr Reza Ali; ACCA Head of Western Europe, Mr Abdul Goffar; University of Malta Dean of the Faculty of Economics, Management & Accountancy, Prof. Frank Bezzina and ICAEW Head of Cyprus and Greece, Ms Christiana Diola. MIA Council members and former presidents were also among the special guests.

In his address, Mr Ali welcomed the new members to “great profession” citing research showing that Accountancy has a history of more than six millennia. Meanwhile, Ms Diola said that the young professionals are crucial to Malta’s future, as Malta continues to grow into a financial centre.

MIA NEWS n

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Mr Reza Ali, Director of Professional Education, ACCA

Ms Christiana Diola, Head of Cyprus and Greece, ICAEW

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Joseph Falzon received the Malta Overall Performance March 2019 ACCA Top Affiliate Award Dinah Lee Delceppo received the Malta Overall Performance June 2019 ACCA Top Affiliate Award Janice Camilleri was the recipient of the Best University of Malta Accountancy Student Award 2019 Kostas Karagiannis received the ACA Best Student 2019 Award

From left to right: Mr Kostas Karagiannis, Ms Christiana Diola and Mr Fabio Axisa.

Institute member Mr Christopher Cardona was awarded the Kevin Mahoney Award for Altruism for his selfless support to a colleague who was going through a difficult time. The annual prize recognises professionals who distinguish themselves for altruism in the community.

From left to right: Ms Julija Daubaraite, Mr Reza Ali and Mr Fabio Axisa.

Mr Christopher Cardona

From left to right: Mr Reza Ali, Mr Christopher Bugeja and Mr Fabio Axisa.

Prof. Frank Bezzina, Dean of the Faculty of Economics, Management & Accountancy, University of Malta

Prof. Frank Bezzina encouraged new members to become ‘change agents’ who can improve the reputation of the profession by “standing tall and serving clients better.” He reminded the audience that the value that Accountants bring to society, goes beyond their core services.

From left to right: Mr Fabio Axisa, Mr Christopher Cardona and Mr Ryan Mahoney

From left to right: Mr Joseph Falzon, Mr Reza Ali and Mr Fabio Axisa.

Following the ceremony, a reception was held for the new Members and their guests.

During the Ceremony, six new members were awarded individual awards for their achievements:

From left to right: Mr Reza Ali, Ms Dinah Lee Delceppo and Mr Fabio Axisa.

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Julija Daubaraite received the Malta Overall Performance September 2018 ACCA Top Affiliate Award Christopher Bugeja received the Malta Overall Performance December 2018 ACCA Top Affiliate Award

From left to right: Ms Janice Camilleri, Prof. Frank Bezzina and Mr Fabio Axisa.

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MIA NEWS

Conferences attended by the MIA team 2019 World Standard Setters Conference

Every year, the IFRS Foundation organises the World Standard Setters Conference which brings together professionals from different jurisdictions to discuss the IFRS outlook for the following months, including the current exposure drafts and the upcoming consultations.

There were 160 delegates and observers from 70 different jurisdictions at this year’s World Standard Setters Conference, that took place this October 2019 in London, UK. The Malta Institute of Accountants (MIA) was represented by Ms Pauline Micallef (MIA Technical Strategy Manager). The theme of this year’s conference was the preparation of the imminent consultations being issued in 2020.

Participants were encouraged to increase awareness among professionals of the online resources found on the IFRS Foundation website. The website includes different agenda decisions on various topics and current changes. Another item on the agenda was a discussion on the exposure draft for the primary financial statements that is expected this December 2019. The accounting treatment of goodwill and impairment was also included: a complicated subject that poses a risk of misreporting and interpretation. Hence, how we can meet the needs of users, that is the need of correct financial information.

How important is the value of goodwill on the Balance sheet?

The MIA representative participated in the IFRS Taxonomy breakout session. IFRS Taxonomy is the electronic submission of the financial statements that gives a very efficient way of comparing data and also gathering them. The other breakout session attended by the MIA was about disclosure initiatives.

Typically, preparers of financial statements tend to go through a checklist simply to get disclosures done rather than make disclosures to add value. Hence, the board has identified that this information is not relevant and better disclosures are required in order to add value to the users of financial statements.

It was also noted that professionals worldwide need to “work together” and take part in consultations by giving feedback required on time and by supporting the implementation of changes in the respective regions.

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Accountancy Europe Members’ Engagement Day

The MIA attended the Accountancy Europe members assembly held on the 2nd of October and was represented by CEO, Ms Maria Cauchi Delia. This was the first members’ engagement day organised by Accountancy Europe attended by 120 professionals representing various accountancy bodies within the EU. Several areas were discussed, and many speakers highlighted the current challenges being faced by Accountants and Auditors on a daily basis.

It was highlighted that the EU is putting pressure to move towards sustainable finance. The definition of growth needs to be widened to include ESG criteria. The problems faced in this area go beyond the environment, and better reliable corporate information is required to sustain finances.

Each jurisdiction must follow a certain criterion when it comes to tax advice, in order to counteract tax avoidance and tax evasion.

An interesting discussion was included in terms of Taxation and Ethics, that is: Where is the ethical bar on tax services? Should there be relevant ethical guidance specifically to control tax advisors and Accountants? The working group suggested several ways on how to mitigate this through the code.

There is a current debate on the responsibility of the auditor on an audit engagement. The existing auditor expectation gap; that is the gap between what the general public expects the auditor’s role to be and what the auditor’s role actually is.

The attendees shared different views on how this gap can be narrowed in the future and how the role of the auditor can eventually be extended through digitisation improvements and data analytics.

There is a common drive by different bodies to involve young members and to engage them in order to be able to contribute to the Accounting profession. Young members are the future of the profession and, as change is inevitably taking place, we need young member’s energy to be able to maintain these changes.

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SMEs

COMMON CHALLENGES FACED BY

Small Businesses Author: Silvan Mifsud

Introduction – Importance of Small businesses to the Maltese Economy The importance of Small Businesses to the Maltese Economy is clearly outlined in the Policy note “SMEs’ contribution to the Maltese economy and future prospects”, issued by the Central Bank of Malta in October 20181.

“Official data suggests that the contribution of Maltese business economy SMEs was close to half of total value added, which is significantly higher than the proportion of total value added that is generated

by SMEs in the EU (which is around twofifths). Official statistics suggest that SMEs accounted for the lion’s share of growth observed recently in Malta. If one 1

https://www.centralbankmalta.org/file.aspx?f=72222

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excludes Malta’s non-business economy sector, growth in value added was still more than double the increase observed in the EU economy as a whole. This difference in growth was due to Maltese SMEs, as larger business economy firms grew at a slower pace than their counterparts in the EU. In fact, Maltese SMEs in the business economy sector generated nearly two thirds of all growth in value added and half of the rise in employment. This is a healthy development as growing dependence on many SMEs is making the Maltese economy less susceptible to idiosyncratic shocks.”

External difficulties faced by Small Businesses in Malta The policy note mentions that for Maltese SMEs “the three largest major obstacles were skilled staff availability, uncertainty

about the future and the availability of an adequate transport infrastructure.”

While Malta has been going through a period of high economic growth a lot of Maltese SMEs are experiencing that they have reached their capacity limit with their present complement of employees.

Hence, they needed to rely on foreign workers to keep growing the business.

This is however leading to a new set of problems both at a macro and micro level.

Many times, SMEs find themselves facing a high turnover in foreign workers and spiralling costs with regards recruitment and training. Many Maltese SMEs realise, now more than ever, the importance of staff retention, even at the cost of offering more flexibility at the place of work which is still less costly than recruiting new staff.

SMEs

Maltese SMEs are also facing the challenges and extra costs that the limitations of Malta’s infrastructure bring with it. Traffic has a cost for such SMEs as it ends up creating costly inefficiencies. While efforts on a national basis to improve such infrastructure are being made, there are efforts that Maltese SMEs could do to help the situation. These include flexibility on working times and the introduction of teleworking, coupled with privately organised carpooling or transport to and from the office.

Achieving the needed financing in the most cost-effective way is always a challenge for SMEs. The recent economically buoyant years in Malta may have reduced the need for external funding, but this does not mean that access to SME financing has lost its importance. Bank financing remains the most important type of financing for SMEs, with banks fulfilling the role of risk management as part of the financing process. In this context, when certain securities are requested from bank financing, institutions like the Malta Development bank could play a role in aiding the achievement of such financing.

However, there are several cases of SMEs that have reached a particular size which could make them access financing from capital markets. Malta has the SME specific Prospects MTF market which is serving the role for such SMEs to access capital markets whilst reaching a higher level of corporate governance in their business.

Common Internal difficulties faced

by Small Businesses in Malta Usually, Maltese SMEs are family businesses with involving different family members. Some of the challenges that these businesses face include: Complete lack of Corporate Governance: Many SMEs lack proper and formal structures whereby decisions are taken in a structured environment of checks and balances. Many critical and strategic decisions are taken on the fly by whoever feels entitled to take such a decision within the company, without proper debate or analysis on such decisions.

No external consultant: Small Businesses would benefit from the services of an experienced, external business consultant. Such consultant would make sure that adequate structures are implemented and that a level of corporate discipline is maintained.

The three largest major obstacles were skilled staff availability, uncertainty about the future and the availability of an adequate transport infrastructure.

Lack of Strategic Thinking and Comfort Zones: Many times, people leading small businesses get involved in the daily operations and rarely, if ever, have time to focus on future planning and the strategic direction they would like to implement in their business. Many SMEs find themselves happily operating in a comfort zone, only to be negatively surprised when external factors re-shape the market they operate in without them even realising.

Lack of Training: Family members may be promoted to leading positions without proper training of how business is to be managed and how to deal with the different stakeholders involved in the business.

No clear control and reporting mechanism: Many SMEs lose control of the most basic things that any business needs. These include basic reporting mechanisms, updated management and audited accounts, credit management and performance management of their employees. This usually leads to companies hitting a brick wall, with many times, cashflow issues being the first signal of all the underlying problems.

Problem with employee turnover: With a lack of corporate culture, many employees find themselves having to work within the confines of the work culture imposed by

the owner of leader of the SME. Moreover, due to their nature SMEs cannot always offer improving prospects for career advancement for their employees. With regards family owned SMEs, employees usually find themselves out-manoeuvred by family members who progress in the business due to the simple fact that they are family members and not on the merits of their abilities.

Lack of Succession planning: In the case of family owned SMEs, it is usually the case that no proper succession plan has been established. This creates a lot of tension between the old guard which feels it should continue leading and the new guard which feels that the time is ripe to start changing things in the business.

Conflicts usually arise that can be very damaging to the business.

Marketing, Market Positioning and Competitive Analysis seem superuous: Many SMEs think that spending money on market research, marketing their business and positioning it strategically in the market, whilst analysing what competition is doing, is all wasted money. The realisation that this was false economy normally is made when it is too late to make amends. With technology effecting any business venture, some fail to realise that there are very cost-effective channels today to reach your present and future customers in an effective way.

Silvan Mifsud holds a degree in Banking and Finance from the University of Malta and an MBA from the University of Reading, specialising in Corporate Finance and Business Leadership. Silvan has been involved in many sectors of the economy holding various managerial and Director roles. Silvan is presently working as a Director for Advisory Services at EMCS.

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DIGITAL TRANSFORMATION

Transforming the ďŹ nance function to be at the heart of decision making Author: Charles Tilley

U Finance and accounting teams can no longer survive as a backoffice function and others in the business are demanding more from their finance and accounting colleagues.

nderstanding how professional accountants will continue to be relevant in a future shaped by digital transformation and broader perspectives of value creation has been my focus over recent years as chair of the Professional Accountants in Business (PAIB) Committee of The International Federation of Accountants (IFAC), which involves the Malta Institute of Accountants, represented by Stephen Muscat.

business are demanding more from their finance and accounting colleagues. But transforming finance functions to be at the heart of decision making and value creation is challenging and cannot be achieved overnight. While many have made strides toward greater efficiency and reduced costs, they often struggle to transform the finance function into a business-facing function that supports and enables decision making across the organization.

Our work culminated in A Vision for the CFO and Finance Function: From Accounting for the Balance Sheet to Accounting for the Business and Value Creation, which sets out the future desired state for an effective finance function; and CFO and Finance Function Roles for the Next Decade, which looks at the roles that will enable finance and accounting professionals to remain integral to their organizations.

Fewer people are needed to support transactional and reporting tasks. More focus is now needed on areas of opportunity, such as leveraging data and planning a path to long-term value creation through transformed business models.

To develop this future-fit series, we have interacted with various business and finance function leaders on exciting change journeys with a common destination – at the heart of decision making.

Finance and accounting teams can no longer survive as a back-office function and others in the

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The challenge for finance and accounting professionals is that the financials only tell part of the value creation story. Value is created and destroyed beyond the balance sheet. Strategic and operational factors, often intangible and difficult to monetize, make up much of total enterprise market value. Drivers of future cash flow that represent key areas of opportunity and risk are varied and include factors such as governance and culture, social license to operate and brand reputation, innovation and intellectual

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DIGITAL TRANSFORMATION

property, talent and human capital, data, operational excellence and quality business processes, and customer and supplier relationships.

Understanding and communicating only the 20 per cent or so of value that is represented on the balance sheet is not a path to continued relevance.

In today’s digital world, the CFO and finance function need to help navigate, measure and communicate what matters to longterm success while meeting expectations from investors and boards for short-term performance. This involves analysing and interpreting information related to all areas of value creation and helping to understand and deal with trade-offs. It also involves providing an objective view (“the sanity test”) in significant decisions and proposals.

To move the finance function from a transactional, reporting and compliance focus to one that guides and enables decisions across an organization requires four enablers of change: a customer focus; the right mix of talent and skills; mindset; and being digital and data-driven.

involves learning and development strategies that enable finance and accounting professionals to deliver business partner and specialist roles. Both big picture thinkers and specialist expertise are needed.

Growth and Change Mindset Involves establishing a culture that encourages behaviours and actions to embrace growth, change and innovation based on continuous improvement, challenging existing practices, agility through experimentation and iteration, curiosity and exploration.

These enablers are essential to the finance function being agile, integrated and customer-led and one that can deliver: n

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Customer-Focused To deliver useful insights to its internal customers, the finance function must be outward looking with a clear understanding of its internal customer needs at board, management and operating levels.

It is also important to understand external customers and their experiences and interaction with the organisation. How value is delivered to customers influences the finance function contribution in terms of information and insights, business case evaluations, back-end processes and systems.

Digital and Data-Driven Digitalisation and technology are reshaping the transactional and reporting environment and taking out cost as headcount reduces. Recent research from the McKinsey Global Institute shows that 40 percent of finance activities can be fully automated, and another 17 percent can be mostly automated.

However, an efficient finance organisation is not enough. To drive growth and value, it needs to enable interconnected and digital end-to-end business processes and systems. It also needs to invest in digital tools to help the organisation to enhance customer value and competitiveness in the marketplace.

Talent and Skills Developing a workforce that can deliver value-added roles 18

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A ctionable insights to support strategic and operational planning and decisions.

Performance analysis to steer the organisation toward achieving objectives, targets and long-term profitability, as well as to ensure alignment between strategy, planning and delivery.

Enterprise risk management to manage uncertainty, opportunities, and risks in the context of business objectives and the external environment.

Effective communication and storytelling on all aspects of an organisation’s business model and value creation.

Trust and confidence in the governance of the organisation, and in quality of data, processes, systems and reporting through adequate control and security.

Integrity and professionalism to encourage ethical behaviour and decision making throughout an organization to ensure sustainable value creation.

To support you have a meaningful discussion on how and where to develop your finance function, we have also developed an accompanying assessment tool. This will help your board and management to review how far the finance function has progressed to business partnership.

The next stage of our journey involves working with IFAC’s International Panel on Accountancy Education to further understand and identify the skills, future career pathways and learning and education needed to support future-ready professional accountants.

Charles Tilley became chair of the IFAC Professional Accountants in Business (PAIB) Committee in January 2014, after being nominated by the Chartered Institute of Management Accountants (CIMA). He is a former member of the IFAC Board and chaired the IFAC Business Reporting Project from 2008 to 2011 and the UK Treasury Best Practice Panel from 2006 to 2007.

CREDIT MANAGEMENT

The Invoice

the instrument to get paid Author: Josef Busuttil

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usinesses compete not only when they are selling but also when they are getting paid. Very often, especially in business-to-business trade, our customers do not owe money only to our firm but also to other suppliers.

Hence, our firms may be one of many suppliers chasing money from the same customer. This means that we are actually competing with other suppliers to get paid requiring us to gain and sustain a competitive advantage just like when we are selling our goods and services to them – we need to convince our customers to prefer us over other suppliers not only when we sell our products and services, but when it comes to payment of invoices, too.

We are all aware that late payments can negatively affect our cash flow. If cash flow is the lifeblood of every business organisation, issuing proper invoices is the recipe that keeps the blood flowing within the business.

Unfortunately, one can identify several mistakes when suppliers issue invoices to their customers which result in late payment, increasing the cost of managing our Accounts Receivable.

Correct invoicing is, therefore, critical that to ensure prompt payment by customers.

But is there any particular art or science in issuing an effective invoice? The answer is, yes.

Simply put, the invoice is the document used by suppliers requesting payment for the goods and services sold to customers; an important task in the business transaction for

every organisation. Customers will not pay unless served with a correct and properly scripted invoice and suppliers should give the necessary attention to how the invoice is drafted while following the invoicing process to ensure sound cash inflow.

Lacking an efficient and accurate invoicing process triggers complaints and disputes between supplier and customer because customers cannot be expected to pay invoices, they believe to be incorrect. Often, suppliers send incorrect or improper invoices because they may not be well aware of what an invoice is, what it should consist of, and when to send it to customers.

What is an invoice?

An invoice is simply a supplier’s request for payment for the goods and/or services purchased by a customer.

The main and sole scope of an invoice is to facilitate the payment for the goods sold or for the services rendered.

Therefore, an invoice should be a straightforward document requesting payment from customers, without advertising clutters or any other unnecessary details and information written or printed on it.

Good credit management practices suggest that suppliers should facilitate timely payments by serving customers with invoices that are simple to read and understand, that accurately describe the products and services purchased by the customer, include all the necessary information and are served to customers promptly. www.miamalta.org

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CREDIT MANAGEMENT

Efficient Collection is all about timing – the sooner you ask for money, the sooner you get paid.

Figure 1. shows the four key elements of an effective invoicing and invoicing process - TACU. Timeliness is important. An invoice should be sent immediately following a sale. A customer can only pay when an invoice is received. Therefore, sending invoices promptly results in more efficient payments. Invoices should also be properly dated.

Accurately written invoices minimise disputes and complaints between the supplier and the customer and customers are not expected to pay if they have a dispute. Exact quantities, good description of goods and services purchased, prices and any discounts should be quantified accurately.

A complete invoice showing all the required details, including payment terms and conditions of sale, help the payment process to run smoothly. Customers will not pay if an invoice is incomplete and will request such invoices to be amended as appropriate by the suppliers, leading to late payment.

Customers should understand fully what is written on the invoice. Easy and simple to understand invoices help customers reconcile the goods and services received and payment will be made accordingly.

Fig 1. Source: Adapted from The Best Kept ProďŹ t Secret, Flood et al., 2009.

The Monthly Statement Following the invoice, it is always commendable to send monthly statements to customers. Monthly statements serve to remind credit customers to pay their dues according to the agreed terms and inform them of the amount owed to the supplier. Monthly statements should be clear, accurate and understandable and they should refer to previous invoices.

Figure 2. illustrates how an invoice should be written keeping the four key TACU elements in mind for better effectiveness.

It is helpful to indicate the age of the debt status, such as Current, 30 days overdue, 60 days overdue, 90 days overdue as shown in the figure 3. below.

What should an invoice consist of?

What should a Monthly Statement consist of?

Fig 2. The Key features of an Invoice

Fig 3. Key Features of a Monthly Statement

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CREDIT MANAGEMENT

References Flood D., Jerralds G., Perez L.E., Sanchez A.W., Tyburski D., The Best Kept Profit Secret: The Executive’s Guide to Transforming a Cost Centre into a Profit Centre, Profit Innercircle, 2009

Josef Busuttil Director General – MACM President - FECMA

Josef is the Director General of MACM - Malta Association of Credit Management and President of FECMA - Federation of European Credit Management Associations.

He obtained his MBA from Henley Management College, a Member of the Chartered Institute of Marketing (UK), and Fellow of the Chartered Institute of Credit Management (UK).

Josef contributed to and delivered a number of intuitive credit management workshops and presentations organised by highly reputable international organisations and business schools. He is a regular contributor of business articles to international business press.

MACM – Malta Association of Credit Management The Malta Association of Credit Management (MACM) is a notfor-profit organisation, providing a central national organisation for the promotion and protection of all credit interest pertaining to Maltese businesses.

MACM represents the credit profession across all economic sectors. It is a centre of expertise for all matters relating to credit management in Malta.

MACM offers a range of services to the local creditors, including, credit management information systems, credit management education, training, conferences, seminars, and lobbying activities. It is the CICM (UK) accredited Training Centre for Malta. MACM is a member of the Federation of European Credit Management Associations – FECMA. MACM is the distributor of Graydon International Credit Reports in Malta.

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Save the date! 27th MARCH 2020 TITLE

MIA PAIB CONFERENCE With the participation of International Federation of Accountants (IFAC) and the Malta Chamber of Commerce, Enterprise and Industry.

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Autumn 2019

Bookings will open soon at www.miamalta.org

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23

DEPOSIT GUARANTEE SCHEME

THE EUROPEAN DEPOSIT INSURANCE SCHEME

A

myth

?

OR A

fact Authors: Mr John Sammut and Dr Jessica Friggieri

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DEPOSIT GUARANTEE SCHEME

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he global financial crisis of the last two decades not only challenged the regulatory and operative framework of the financial services regulation and supervision, but also highlighted the importance of financial consumer protection. Since the Great Depression of over eighty years ago, the banking system continued to witness a series of weaknesses caused by various factors. In fact, the support given to banks by EU in recent years was equivalent to an estimated third of its economic output.

A Deposit Guarantee Scheme (DGS) has the specific task of protecting less financially sophisticated small depositors from the risk of losses they might incur when a member bank fails.

Due to the close bond existing between banks in a financial system, a DGS provides the mechanism which enables depositors to have quick and immediate access to their funds even in the event of a bank’s failure. By participating in this financial system safety net, a DGS helps to keep the financial stability in stressful conditions under control by preventing depositors from engaging in a bank run. In addition to the DGS function to maintain public confidence in the banking system, banks’ risk levels need to be assessed both by a strong prudential supervisory activity through an appropriate regulatory framework and sound accounting and financial reporting regimes.

Credibility is fundamental for a DGS to contribute successfully to the financial system stability. The DGS needs to be adequately designed, correctly implemented and properly understood by the public. A deposit guarantee system has to be able to withstand a systemic crisis by itself or capable of dealing with only a limited number of simultaneous bank failures.

Despite the increased standardisation and coverage in DGSs, there is strong evidence that they may have failed to act as a “line of defence” during periods of crisis, leading to several amendments and proposals in reaction to financial crisis. The way that governments and central banks have responded to the financial crisis in recent decades - through bail-out of failing banks - indicates that DGSs failed in their objective. EU legislation already ensures that all deposits up to €100,000 are protected, through their national deposit guarantee scheme (DGS) in case of a bank failure. However, national DGS can be vulnerable to large local shocks.

For this reason, a European Deposit Insurance Scheme (EDIS) was developed to provide a stronger and more uniform degree of insurance cover for all retail depositors in the Banking Union, ensuring the level of depositor confidence in a bank does not have to depend on the bank’s location.

In 2012, the European Council agreed on a roadmap for completing Economic and Monetary Union (EMU) based on deeper integration and mutual support. Completing the Banking Union is an indispensable step to a full and deep EMU while reinforcing financial stability in the EU. The first pillar of the Banking Union consists of a common framework for supervision of banks to be implemented by the Single Supervisory Mechanism (SSM); the second pillar consists of a www.miamalta.org

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DEPOSIT GUARANTEE SCHEME

A Deposit Guarantee Scheme (DGS) has the specific task of protecting less financially sophisticated small depositors from the risk of losses they might incur when a member bank fails.

common framework for bank resolution to be implemented by the Single Resolution Mechanism (SRM). These two pillars have already been put in place. A third pillar, the EU-deposit insurance scheme, is still required and needs to be put in effect now. In contrast to the situation in 2012, the European banking industry is on a much more solid footing with more stringent capital and liquidity rules and a centralised supervision and resolution in place.

On 24 November 2015, the EU legislative proposal for a European Deposit Insurance Scheme (EDIS) was introduced to further strengthen financial stability and depositors’ trust whilst reducing the dependency of the financial institutions on national governments in times of crisis. The institutional framework for the EU deposit guarantee schemes consists of three main elements (i) the Directive (DGSD), (ii) the national legislations and rules, and (iii) the network of cooperation and information sharing between schemes and supervisory authorities.

The setting up of the EDIS addressed the problems for large cross-borders exposures through banks’ branches and subsidiaries. This helps to remove competitive distortions, deal with administrative burdens, avoid branch/subsidiaries’ consumers confusion and, most importantly, preserve the internal market for retail banking. Given that the premise of a Banking Union breaking the vicious circle between the sovereigns and the banks, a common system is an important element.

The European Deposit Insurance Scheme is being rolled out in three stages, deployed gradually through to its full implementation in 2024: 26

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Reinsurance stage (from 2017 to 2020): national deposit guarantee funds will only be able to access European funds when they have used up their own funds. Funds requested must be justified and in response to a possible moral risk.

Additionally, the deployment of the funds will be closely monitored.

Co-insurance stage (2020 to 2024): during this stage, the national funds will not be obliged to exhaust their own resources before accessing European system funds.

The European system will be responsible for part of the costs from the moment that money has to be returned to deposit holders. The contribution rate will start at 20% and increase gradually over the following four years.

Full insurance (2024 onwards): the participation rate in the European Deposit Insurance System is expected to reach 100% at this date, after which the single resolution fund will have been fully established.

During the first stage, national DGSs were requested to exhaust national funds before making use of European funds (although with a limit). From the second stage of the process, then, risks will be genuinely mutualised as payments are shared from the first cent. European funds are, therefore, used without the requirement for national funds to be used first.

Once EDIS goes into effect, banks will be compared to other EU-wide banks based on a deposits and risks profile. In this case, a local bank might have to pay more under EDIS than it did under its national DGS. This could lead to more discussions and slow down a smooth implementation of EDIS.

DEPOSIT GUARANTEE SCHEME

While the creation of the EDIS introduces fundamental advantages, such as improved credibility, simplified pay-outs and failure resolution and reduction of moral hazard, it could also lead to disadvantages such as: n

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international supervising authorities as a requirement.

The creation of a cross-border deposit insurance scheme is inconceivable before an international supervising institution and regulation are implemented. political obstacles if specific country problems hinder the establishment of such a project. fund management/investment policy may also exist in connection with the management of a large pan-European deposit insurance fund. administrative and operative complexities (IT systems, controls mechanisms) needed to run the scheme.

A national DGS is obliged to inform the EDIS if there is the possibility of a bank failure. Should compensation to depositors be necessary, EDIS would have 24 hours to decide the amount of funding to be provided on its part immediately.

In the case of a systemic bank failure where the EDIS fund would not be sufficient to cover all compensations required, pro-rata funding would be provided.

Article 12 of the DGS Directive, which allows borrowing between DGSs, may be considered as a step towards a common EU-wide fund. The Directive allows for borrowing between funds on a voluntary basis and on condition that this does not exceed 0.5% of covered deposits of the borrowing DGS, and subject to repayment within five years. Article 14 titled “Cooperation within the Union” covers the problem of treatment of depositors at branches set up by credit institutions in another Member State (MS). The home MS of the bank will have the financial responsibility of the branch, but any compensation payment will take place through the DGS in the host member state, acting as a ‘single point of contact’ on behalf of the DGS in the home member state.

Unlike the supervision of significant banks and resolution required by the Single Supervisory Mechanism (SSM), EU depositor protection remains, to date, decentralised. The crucial issue for DGSs remains the link with resolutions, particularly in the event of a cross-border banking crisis. Article 11 of the DGS Directive allows member states to use its funds for resolution as a last measure to prevent bank failures when conditions imposed on the credit institution are met. There is a possibility that different decisions could be taken by the Member States, according to their financial stability concerns, in cases where cross-border banks face financial difficulties.

The EDIS dossier was also discussed during Malta’s EU Presidency in 2017 where Malta’s stance on the EDIS proposal emerged very close to that of the EU Parliament: prioritising the achievement of risk reduction while limiting risk mutualisation.

Extensive debate is still needed to bring the EDIS in line with the EU’s planned reforms on financial supervision. Work on 28

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the draft proposal to align EDIS with all the requirements of the 2016 roadmap is ongoing; progress, however, has been slow following disagreement between member states that are ready to implement EDIS immediately and those that want significant conditions on the introduction of EDIS. The gradual implementation of EDIS should be linked to the progress made on the other parts of the Banking Union and to the progress made in addressing legacy risks.

Currently, the discussions are still ongoing at Working Party level. In time, we will know if the DGSs would need to be revised again to ensure achievement of their role in coping with a systemic banking crisis. This is especially relevant in view of the 2024 target transition period, by which year it is expected that the DGS and resolutions fund may not have been fully funded. Only time will tell if the EDIS proposals being made now will become a reality or remain a myth.

This disclaimer informs readers that the views, thoughts, and opinions expressed in the text belong solely to the authors, and not necessarily to the author’s employer, organization, committee or other group or individual.

John Sammut MA Fin Serv, MA Risk, BA (Hons) Accty ACIB, CPA

John Sammut is a certified public accountant, graduated from the University of Malta and presently works as Head – Internal Audit at the Malta Financial Services Authority. He carried out a thesis title “A Study of the Role and Sustainability of the Depositor Guarantee Scheme in the EU and Malta.”

Jessica Friggieri LL.D MA Laws

Jessica Friggieri is a Lawyer graduated from the University of Malta. She is former Lawyer of the Malta Depositor and Investor Compensation Schemes, and now Legal Analyst for the Financial Crime Compliance Unit. Also, Secretary of the Malta Protection and Compensation Fund.

ONLINE TRAVEL BOOKINGS

Don’t just book it,

Author: Pauline Micallef

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revealing that there had been too many “exceptional items” recorded in the past few years. These items included payments to directors and meeting bank liabilities, which posed a threat and raised questions on the going concern of the company.

Thomas Cook started off as a family business and grew into a large corporation over the years. It has been in business for the last 178 years, selling the “holiday experience” to families.

Their slogan “Don’t just book it, Thomas Cook it” communicated that holiday packages took care of everything from flights and accommodation to excursions and meals, targeting middle class travellers. Over the years Thomas Cook grew exponentially through a number of mergers and acquisitions offering diversified services and growth opportunities.

In May 2019 the audit committee approved an impairment of £1.1bn on the goodwill that was acquired during the merger with MyTravel in 2007. Although this write down only affects the balance sheet, it put pressure on the company’s reputation and raised concern in the capital market where investors were reluctant to continue financing.

here are a number of factors that may kill and grow a business; however, some failures follow similar routes.

Both Nokia and Kodak experienced a major turmoil because they failed to understand the changing customer demands. Although this is not the only underlying cause in the collapse of Thomas Cook, analysts are saying that one of the major reasons for its downfall is the management’s hesitation in addressing technological changes allowing travellers to book their holidays online rather than buying packages from the local travel agent.

Many business analysts are speculating the reasons for Thomas Cook’s collapse, stemming from a series of internal and external events.

At the end of the 20th century, the airline business was founded through a series of mergers and acquisitions. These acquisitions were funded through debt, hence the additional financial pressure. The company’s debt accumulated over ten years following a series of rapid decisions. In order to sustain this level of debt, “it had to sell three million holidays a year just to cover its interest payments.” (Holton & Faulconbridge, 2019)

The External Context We are living in a time when people are more inclined to travel than before, so how come demand for Thomas Cook decreased?

The Internal Context Several management decisions have negatively impacted the business, including the lack of change management and unstable restructuring plans that took long to be implemented, lack of innovation, the shift into the digital age, inefficiencies in capacity management and overall mismanagement of the company’s profits and assets.

The demand for holidays is increasing, however demand for packages is not the same thing. With the rise of the internet and low-cost airlines, Thomas Cook’s bottom line continued to struggle. Although package holidays are attractive, customers are still very price elastic, thus highly sensitive to price (Prescott & Gillett, 2019). Holidaymakers prefer to make their own travel arrangements online where it tends to be cheaper than visit the local travel agent.

During the last two years top management such as the Chief Financial Officer (CFO) changed three times, the last of whom

Management failed to listen to what travellers were demanding and persisted with the outdated strategy of opening more high

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ONLINE TRAVEL BOOKINGS

street stores in different locations worldwide. The running expenses of these shops was expensive and maintaining these costs together with the other sunk costs from the airline, was making Thomas Cook vulnerable for adverse demand fluctuations.

In peak seasons, all airlines struggle with air traffic control challenges, whereas during low-peak seasons they struggle to manage the idle capacity of their resources, mainly the aircrafts.

Therefore, if one season goes bust, there might be a significant impact on the cashflow of the business. This seasonal variation continued to defeat Thomas Cook and it always was a Winter’s tale for Thomas Cook which needed additional financing during the low season. On the other hand, in 2018 UK travellers were highly impacted by the Europe-wide heatwave that continued to discourage holidaymakers.

The Thomas Cook lesson will undoubtedly find its place in business textbooks, together with other business failures. In order to sustain your business and make it to the top of the stock exchange, management must respond to change efficiently and listen to the ongoing changing market needs. This holds even if it means the original strategy driver needs changing, because change is inevitable and failure to listen and act fast will be the beginning of a business’s demise.

References n

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rescott, K & Gillett, F (2019) Thomas Cook: The much-loved travel brand with humble roots P [Accessed 22 Oct 2019 https://www.bbc.com/news/business-49789073] olton, K & Faulconbridge, G (2019) Thomas Cook collapses: Why and what happens now?

H [Accessed 22 Oct 2019 https://www.reuters.com/article/us-thomas-cook-grp-investment-explainer/thomas-cookcollapses-why-and-what-happens-now-idUSKBN1W804O]

Several political issues also affected the demand for holidays in general. The Turkish coup attempt in 2016 and the recent Brexit saga have cause Europeans, especially the Brits to postpone holidays to a later, clearer period. This market uncertainty added pressure on the costs of the airline, due to the fact that currency fluctuation affects fuel prices and other material sunk costs.

Thomas Cook was buying its fuel in USD, which was being varied in comparison with the Sterling.

Now what?

Now there are 20,000 unemployed personnel, 600,000 affected travellers seeking compensation, a liquidation process and a series of unanswered questions.

Among stranded travellers the question is mainly whether the EU Package Travel Directive of 2015 will be able to cover for all their repatriation costs. This directive provides refunds to travellers who book holiday packages in case a company becomes insolvent. Nevertheless, how will this affect customers who only booked flights? Is the fund enough to cover for all expenses incurred? How will this affect the future of such fund?

Other questions are now being raised on the onus of the auditors in such cases. Have the auditors reported this as a going concern on time? There have been discussions, even at EU level, on the auditor expectation gap: the gap between what is expected of the auditor as perceived by the public versus the actual responsibility of the auditor in terms of detecting going concern risk.

Pauline Micallef is an ACCA Qualified Accountant and acquired her MBA from the University of Reading – Henley Business School.

She has recently joined the Malta Institute of Accountants as the Technical Strategy Manager heading the Technical Department. She comes from industry with an experience of 10 years at Teva Pharmaceuticals, the largest generic pharmaceutical company in the world.

www.miamalta.org

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MEET THE MIA TEAM

self-improvement, I constantly perceive everything in a positive way, and I see negativity as an opportunity to be better.

Transforming Internal Audit into an Insightful Catalyst for Change

What does the Accounting profession mean to you?

If you had asked me this question two years ago I would not have known what to say, but I have been surrounded by accountants during the past years, and today I can honestly say that I really admire the constant effort that accountants are required to make in order to cover the requirements of every business. They put everything in order so it can keep up with changes over time, and that is just admirable.

Meet the MIA team:

Marian Claire Rodriguez Who are you and where do you come from? What are your qualifications?

I am Marian, a cheeky designer who came from Venezuela to live in this lovely country in the summer of 2017.

I graduated in 2016 with a bachelor’s degree in Integral Design; now I started qualifications to specialise more into the Digital Marketing world.

I know you are wondering “Why Malta?”, (this is the most common question I get) so, Malta is a growing and productive country full of opportunities for young professionals and, at 24, all I wanted to do was grow up professionally. After two years, I am still here and feel that I have made the right choice. At the moment my country is not in its best times, especially 32

Autumn 2019

if you want to develop a professional career; when I think of that and of all the things I have been through, I feel truly grateful for all the opportunities that Malta, and also the MIA, have given me.

What is your role at the MIA? I am the face behind every MIA’s communication channel, I am MIA’s Design and Communications Executive.

I participate in the creation of designs and marketing strategies to increase and promote value by the Institute to its members through all the digital media.

What motivates you to do your job effectively?

My main motivation is the passion I feel for design since I love what I do. So, I always have this feeling of constant

Sometimes I can relate it with my industry because, just like in the digital world, accountants must be under constant training and up-to-date with everything related to the changing financial world.

This might be challenging, because there is a lot to cover (I know this because I am the one promoting the CPE events and conferences), but I know that being passionate about their job, drives them to give the best and, for this, I really appreciate the profession’s efforts.

What is your life motto?

It is from a song actually, and I have it tattooed: “there’s no need to complicate because our time is short”. I think life is too short not to do what you love; surround yourself with things and people that inspire you and make you feel happy; life might bring some hard times, but there’s always something awesome coming after that.

What do you like to do in your free time?

I spend most of my time with my dog; I love nature; I paint and sometimes I like to write about life; I enjoy travelling; I am a cinema and music lover, and I also like videogames; I am a geek! A chic one, though.

How do you contribute to the MIA’s mission?

Apart from the job duties I do on a daily basis, I put my efforts on spreading happiness and joy among my colleagues.

We have become a very close team and I am constantly making jokes and telling fun stories. Sometimes I just say my favourite Maltese words just to make them laugh, because let’s face it: Maltese people are the best and the MIA will always have a special place in my heart.

www.miamalta.org

33

MONEY LAUNDERING

Filing a Suspicious Transaction Report (STR) Author: Victor Rizzo

T

he FIAU Annual Report for 2018 reported that the number of Suspicious Transaction Reports by subject persons that year stood at 1679. This means that the number of reports more than doubled since 2017, when it was 778. A closer analysis reveals that credit institutions reported 724 (in 2017 they reported 398), while remote gaming reported 700 (in 2017 they reported 218). This means that 85% of total reports are originating from two sectors. Credit institutions remain in pole position of the list of subject persons that file STRs. Filing a Suspicious Transaction Report can be quite a challenging task for a Money Laundering Reporting Officer (MLRO).

Regulation 15 (3) of the Prevention of Money Laundering and Funding of Terrorism Regulations (PMLFTR) states that a subject person shall file a report ‘as soon as is reasonably practicable, but not later than five working days from when the knowledge or suspicion first arose’.

The question that arises is: When does the five-day window start?

Let us consider this hypothetical case. A notary publishes a contract of sale of property. Six months later he notices that on the day of the contract, the seller had a court freezing order. Is the five-day period triggered on the date when Notary becomes aware of the freezing order – that is six months after publication of contract – or from the date of publication of the deed? To answer this question, I am making reference to a penalty applied by the FIAU on a subject person on 18th May 2018. The FIAU commented as follows: ‘The Company failed to submit a suspicious transaction report (STR) to the FIAU even though, on the basis of the information it held in its possession together with publicly information, it had reasonable grounds to suspect that the transactions and/or its clients may be linked to proceeds of crime, money laundering or the funding of terrorism’.

A fine was imposed by the FIAU. The case clearly shows that publicly available information was seemingly ignored by the subject person. Such public 34

Autumn 2019

information was sufficient to raise suspicion. This means that even when an internal report is not filed, the subject person would still be liable. In other words, the MLRO claiming that he/ she was unable to lodge a report because no internal report was received is no defence.

Evidently, the subject person must have robust structures in place to be able to detect any signs of suspicious activity at the very early stages in order for a report to be filed within the regulatory time frame. A welcome initiative in the new FIAU Implementing Procedures is that the designated employee, in the absence of the MLRO, can now file an STR. The designated employee must be approved by the MLRO and can effectively take the role of a substitute MLRO. Consider a situation where a designated employee is not appointed, and an internal report is filed to the MLRO who happens to be on a two-week vacation.

Can the subject person safely argue that the five-day window will only start after the return of the MLRO? This would hardly be the case. The new responsibility of a designated employee is intended to provide the necessary mechanism for subject persons to ensure that reports are filed in a timely manner.

Needless to say, the MLRO and the designated employee should consult each other in their leave planning.

Victor Rizzo is a co-founder and director of Inscope Limited, an AML-CFT software development company.

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More information is available from www.bov.com or contact 2131 2020.

Issued by Bank of Valletta p.l.c., 58, Triq San Ĺťakkarija, Il-Belt Valletta VLT 1130 All loans are subject to normal bank lending criteria and final approval from the Bank. Bank of Valletta p.l.c. is a public limited company regulated by the MFSA and is licensed to carry out the business of banking in terms of the Banking Act (Cap. 371 of the Laws of Malta).

IFAC PAIBC

Professional Accountants in Business Commitee (PAIBC) MEETING 24 & 25 SEPTEMBER 2019, New York Author: Stephen L. Muscat PAIB Key Outputs Since 2014

Agenda Item 1.2

Valuing data will result in informed and better investment decisions. The value or cost of such data is not normally seen on balance sheets, but it is important for the valuation of businesses. When Microsoft bought LinkedIn, the data LinkedIn had was considered an important element in the amount Microsoft paid for its acquisition.

Mr Heyns elaborated that the CFO has the responsibility to take on the role for data management since s/he is seen as the custodian, increasing the importance and relevance of the accountant’s function.

The CFO has the critical role to point out the value of this data asset to the business, how to improve on it, and how to invest in it. This is not a technology investment but a business investment.

Introduction Kevin Dancey, CEO of IFAC, welcomed all the participants and started by thanking Charles Tilley, the outgoing chair for his valid contribution since he took over the chair in 2014, outlining what was achieved since then.

Kevin said that the emphasis was on the future of accountants and the need to invest in education and devise the correct skill set for future accountants. The future will create a huge demand for value added services for accountants to take a lead on, such as technology.

Leveraging and Assessing the value of Data Presentation by Herman Heyns, CEO of Anmut Datactivism Mr Heyns explained the importance and value of data to a business. He quoted Peter Ducker who said, “you can’t manage what you cannot measure”.

He also spoke about the increase in intangible assets that the value of data was creating for businesses, as well as the non-accountability of such data.

Companies were not doing enough on data management, even going as far as 36

Autumn 2019

spending huge amounts with little success.

Data has become an increasingly valuable asset: it powers the new economy.

Mr Heyns explained that over the last 10 years Anmut have surveyed large organisations and found that 97% acknowledged that the measurement of their business data was a problem. It is important to not just delegate this to the IT Department, but to take a strategic point of view. Businesses need to look at their data and create a value and portfolio for their different data types, such as that which can be shared, that which needs protection, and so on. It is crucial to apply management discipline where data is concerned. Furthermore, data needs to be treated as a strategic asset.

During the discussion, a point was raised regarding investment in the finance team for the necessary skills to step into this role, and the importance of analytical skills.

Integrated Value Creation Presentation by Simon Theeuwes, Senior Manager, Corporate Treasury, Schiphol Group Mr Theeuwes introduced his organisation which has the management of Schiphol airport as one of its main businesses.

He highlighted the key figures for the group (destinations, number of travellers, tonnes of cargo, revenue, etc.) as well as the sustainability of the group (sustainable aviation, circular economy, energy positive and well-being).

Mr Theeuwes said that Schiphol Group’s vision for Integrated Thinking for 2050 is holistic and centres around creating long-term value with clear objectives for improved quality of life, quality of network and quality of service. This resulted in the implementation of KPIs with Top Performance indicators, including employee promoter score, on-time airline performance, safety index, CO2 emissions, and reputation score from residents.

IFAC PAIBC

The Integrated Reporting must haves that Schiphol identified include: n n n n n n

Stakeholder dialogue Materiality Analysis Value Creation Model Multidisciplinary teams and integration across departments Clear reporting processes Commitment from CEO/CFO and Management Board

This, Mr Theeuwes explained, will result in balanced reporting, transparency, and reliability.

Stathis Gould, Deputy Director of IFAC then presented IFAC’s Integrated Value Creation mode, highlighting the different elements of defining, creating, delivering, and sustaining this value.

A debate arose when one of the members quoted an intervention during a round table with top USA CEOs that “profit was not the ultimate objective”. The majority of participants endorsed the statement. This underlines integrated value creation that encompasses other areas of importance and relevance, apart from profit.

A workshop on the roles of board and management for value creation followed, discussing the information needed to fulfil their roles. Members spoke about strategies that management needs to recommend and discuss with the board, including any resources required.

The board needs to define what value creation is for the organisation, and in terms of information this typically includes industry data, company data, bench marking analysis, any and tailored information required, as well as risks to the value. This information would be common to both board and management, with just the level of detail being different between the two.

Metrics and Methodologies for Long-Term Investor Decision-Making Presentation by Sarah Williamson from FCLT Global (Focusing Capital on the Long Term, a non-profit organisation).

FCLT have come up with a document, identifying 17 pre-financial metrics (traditionally known as non-financial indicators) targeted at investors, using quantitative methods. These metrics must be material (to investors), assurable (by auditors), uniformly defined, consistently calculated, and universally applicable (across countries, sectors and contexts).

These criteria have been grouped into: Talent n Governance n Innovation n Capital allocation n Environmental footprint n

A selection of pre-financial dashboard metrics was shown as an example, including:

Metric

Rationale

Leadership diversity

If diverse boards create long-term % of named executive officers in the value, perhaps diverse management proxy statements that are female and teams do too male

Example Methodology

Gender pay gap

• Mean & median gender pay gap in hourly pay & median bonus gender pay gap Gender diversity can be an indicator •• Mean % of males and females receiving a of long-term performance bonus payment • Proportion of males and females in each pay quartile

Employee health and safety

Conforms to spirit of employee health and safety standards for numerous industries

(i) Total recordable incident rate (TRIR), (ii) fatality rate for (a) FTEs and (b) contract employees

Employee training

Investing in employees continued education is an indicator of human capital development

Total spend on training per employee or per hour

Maintaining norms, standards, and international law

Norms-based screening is one of Management attestation of no the 3 common types of ESG screens compulsory labour and no child labour

Vitality index

Share of revenue from new products can show evolution

Percentage of gross revenue from product lines added in last 5 years

R&D spending

Innovation is one of the pillars of long-term value creation

R&D expense/total expenses

Total amounts paid to governments including taxes and equivalent paid

Measures contribution to society through government support

Total income taxes, payroll taxes, property taxes, fees, duties, royalties etc. paid to governments

Three Lines of Defence Model Institute of Internal Auditors This session was held by the Professional Accountants in Business Committee to give feedback to the Institute of Internal Auditors (IAA) on the Three Lines of Defence Model that had been discussed

in the previous meeting. This model was created to assist the internal audit function in their line of duty, highlighting the different steps, and tools needed for an effective internal audit.

The Three Lines of Defence Model

Graphics taken from The IIA Position Paper The Tree Lines of Defence in Effective Risk Management and Control published in 2013, adapted from ECIIA/FERMA Guidance on the 8th EU Company Law Directive, article 41

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IFAC PAIBC

Professional Ethics IFAC PAIBC Discussion re IESBA Draft A discussion of the IESBA Exposure Draft on the Role and Mindset Expected of Professional Accountants took place. Laura Leka (IFAC PAIBC Technical Manager) outlined the exchange between IESBA and IFAC where the former confirmed that, while the draft is actually reserved for auditors, it still needed to describe the mindset and behavioural characteristics of all professional accountants.

The key proposed changes that were up for consultation were: n Highlight the wide-ranging role of Professional Accountants because of their skills and values; n Highlight the relationship between compliance with the Code and Professional Accountants’ responsibility to act in the public interest. n Increase the robustness of the Fundamental Principles, of integrity objectivity, and professional behaviour. n Introduce the concept of determination to act appropriately in difficult situations. n Require all Professional Accountants to have an inquiring mind when applying the Conceptual Framework. n Emphasise the importance of being aware of bias and having the right organisational structure.

Small and Medium Sized Entities – A Presentation by Jonathan Shaw, FD of Deltex Medical Group, Mark Farrar, CEO of the Association of Accounting Technicians (AAT), and Iftikhar Taj from the Pakistan association of accountants (and IFAC PAIBC Member) Mr Shaw gave an introduction of the company and overview of the finance function. He spoke about the issues regarding the finance function in a small business, the accounting and business software, and the small team of finance people in the business. Mr Shaw discussed the challenges of working for a small business, mainly around costs reduction, consultancy fees, and the reality of being “alone” since the company is small and there no other senior accountant with whom to discuss issues.

Mr Farrar explained what his role at AAT was and the function of the association. He gave an overview of the AAT members who are evenly employed in large as well as SME organisations, as well as mix of commercial, public practice and public service entities. Mr Farrar explained the importance of accounting technicians within the accountancy profession as a major support to Professional Accountants in Business.

Mr Taj then spoke about the role of PAIBs working in SME and family-owned businesses in Pakistan, which make up about 5 million businesses. The Pakistan Accountants Association was involved in a push to introduce Corporate Governance in Family Owned Businesses (FOBs), including training for family business owners in the role of Directors.

Accountants’ and Businesses’ Contribution to the Sustainable Development Goals Presentation by Paul Druckman, Chair of the World Benchmarking Alliance Mr Druckman spoke about sustainability and the issues facing the world today, from a business and accountancy point of view.

He also mentioned the initiatives being taken by companies 38

Autumn 2019

Anyone who believes in indefinite growth on a physically finite planet is either mad, or an economist.

– David Attenborough

to make a better profit as against just making a profit, as well as the future of corporate reporting, promoting brevity, comprehensibility and usefulness in corporate reporting.

Mr Druckman quoted the famous English broadcaster and natural historian, who said “Anyone who believes in indefinite growth on a physically finite plant is either mad, or an economist”, suggesting that accountants should be included along with economists.

The World Benchmarking Alliance came up with seven transformation and development goals (benchmarks) namely: n n n n n n n

Social Agriculture and Food System Decarbonisation and Energy Circular Digital Urban Financial System

On a final note Mr Druckman urged Accountants to take the lead and transform into Creation of Chief Value Officers (CVO), stating that a good CFO has to be a good CVO.

Stephen L. Muscat, FIA CPA Stephen L. Muscat is a Fellow of the Malta Institute of Accountants (MIA), and a Certified Public Accountant (CPA). He is also the Chairman of the Professional Accountants in Business (PAIB) Committee of the MIA, as well as a member of the PAIB Committee of IFAC, the International Federation of Accountants.

Mr Muscat is the Chief Financial Officer and Company Secretary of Liquigas Malta Limited, operating in the energy market in Malta, a company he joined in 2009 after fourteen years working within the Manufacturing Industry in Malta.

Mr Muscat is currently also the Deputy President of the Malta Employers’ Association, a position he has held for the last six years, following that of Honorary Secretary and Honorary Treasurer.

Highlight Your Career

At KSi Malta we are always on the lookout for recent graduates and experienced professionals in the audit, accounts, tax and legal sector. Give your career a boost and join our dynamic team.

Send us an email on recruitment@ksimalta.com for more information.

KSi Malta is a corporate and private client advisory, accounting, audit and tax firm providing a full range of financial, legal, and business advisory services to a diversified client base. The firm is a member of Morison KSi, a global association of leading professional service firms, established to meet the cross-border accounting, auditing, tax and business consulting needs of clients with members present in more than 80 countries, generating a turnover in excess of $1 Billion.

6, Villa Gauci, Mdina Road, Balzan BZN 9031, Malta T: +356 2122 6176 | F: +356 2122 6019 | www.ksimalta.com

COACHING SKILLS

Coaching Skills for Managers Author: Carolin Zeitler

T

he job of a manager has changed over the last few decades. Being a manager in the knowledge economy is less about telling people what to do, more about making sure that the talent you have in your team is leveraged optimally and that the team members complement each other with their unique skills and experience.

That is why coaching skills have become increasingly important for managers.

Being a manager in the knowledge economy is less about telling people what to do, more about making sure that the talent you have in your team is leveraged optimally.

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Autumn 2019

Let us have a look at a few of them here: n n n n

L istening Empathy Activating the Neutral Observer Asking the Right Questions

Listening First and foremost, listening is about really taking an interest in what the other person is saying and trying to understand it. This is quite different from just waiting for your turn to speak, which is what most people unfortunately do when they are ‘listening’.

They are already forming their reply in their head while the other person is still speaking. They often get so wrapped up in this that they do not even really hear what the other person is saying to them.

When we really listen, we need to put our thoughts on ‘mute’ for a moment. We need to just take in what the other person is saying, try to understand their point of view: What are they trying to convey? What is the message here?

Listen first. Trust that you will come up with an answer on the spot when it is your time to talk.

Trust that you will remember important points and that you don’t need to repeat them over and over in your head.

Empathy As already mentioned in the listening section, in order to really listen, we need to put ourselves in the other person’s shoes. We need to try and see the situation from their point of view, so we can understand the point they are making.

But empathy goes far beyond that. When we truly try to put ourselves in the other person’s position, we do so by leaving our own interest out of the picture as much as possible. We try to think of what they have experienced in their lives (or might have experienced) to get them to this point.

We remember how hard it is at times to express ourselves properly, to put something into words, especially feelings of frustration.

COACHING SKILLS

Empathy means checking my own assumptions by asking the other person before I make decisions that affect them. We need to be in communication to be truly empathetic, otherwise we are just making assumptions, ending up in a situation where we say something like: “I thought that you thought that I thought…”

Not a good place to be.

Activating the Neutral Observer Again, this is a natural follow-on from the section above. In order to be truly empathetic, we need to be able to go beyond our perceptions, to look at things in a way that is not affected by our own emotions. I call this ‘activating the neutral observer’.

William Ury, in his excellent book on self-management Getting to Yes with Yourself, calls it ‘going to the balcony’.

The idea is the same: instead of staying emotionally involved, we step out onto the balcony and take an observer’s perspective.

We consider the situation from the viewpoint of what best serves the greater good. Rather than acting on personal motivation, we act on the motivation to do what is best for everyone involved in and is affected by the situation.

Asking the right questions Finally, much of a coach’s work is about asking the right questions to allow the client to find their own answers and solutions to the challenge they are facing.

Questions starting with ‘how’ and ‘what’ are generally most helpful. I usually discourage ‘why’ questions and recommend replacing them with ‘what are the reasons…’, as ‘why’ can lead us down a path of beliefs rather than actual reality.

How to acquire and apply these skills Developing these skills is primarily a matter of practice. First, I need to become aware that I need to learn them, of course, then I need to get access to an introduction to them. But once I have taken these first two steps, the main part of the work is practice, practice, practice.

It can be extremely helpful to get honest feedback from your reports along the way.

My tip, though: focus on one thing at a time. Start with listening, for example. Just ask your reports and peers to give you feedback on your listening skills. Whenever they feel you are not really listening, ask them to draw your attention to it (afterwards in private, of course, not on the spot).

That way you are not only getting help in discovering your blind spots, but you are also making it easier for your reports to notice your transformation into a better listener.

If you catch yourself planning your response while the other person is speaking, remember to just listen. Turn your own thoughts down. Tune them out. Give your full attention to your report. If you are not sure what they are saying, ask clarifying questions. Do not jump to conclusions, refrain from making assumptions and just ask for clarification.

Let me give you another example: asking the right questions. As you see, these skills are all intertwined. In order to listen well, you need to switch on the neutral observer and ask the right questions if something is not 100% clear.

So, if your report seems distressed or frustrated about a proposal you have just put forward, try not to make assumptions about the cause, but rather ask: “What might be the potential downsides of this proposal for you? How might it affect your job? How might it affect your life?”

If you would like to learn more coaching skills for managers, join my workshops at MIA in 2020. I look forward to seeing you there.

Carolin Zeitler is a business coach and writer, she believes in businesses that are built to be sustainable and do good.

VAT “QUICK FIXES” applicable as from 1 January 2020 On the 4th October Legal Notices implementing the VAT ‘Quick Fixes’ in Maltese law where published. These new VAT amendments, which apply to the B2B cross border supply of goods will come into force on the 1 January 2020. This week the VAT Department published guidelines supporting the new law and we expect that the European Commission will be publishing its explanatory notes in the coming days.

What will change?

Call off stock arrangements – amendments to facilitate cross border trade of goods when the transport is paid by the supplier. VAT maybe paid directly by the buyer in the country

of consumption at the time when the goods are acquired by the buyer.

Chain transactions – legislating principles established by the CJEU in relation to the attribution of ‘transport’ in a crossborder chain transaction of goods to one of the supplies.

Proof of transport – an important element for the exemptions to apply.

Valid VAT number – a condition for the exemptions to apply together with information provided in the recapitulative statement.

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SOFT SKILLS

Are Soft Skills really

‘soft’?

Author: Rachel Falzon

As the rate of skills change accelerates across both old and new roles in all industries, proactive and innovative skillbuilding and talent management is an urgent issue. What this requires is a [talent development] function that is rapidly becoming more strategic and has a seat at the table.

— World Economic Forum

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Autumn 2019

The skills gap It feels a bit cliché to state that we are living in an era of unprecedented digital disruption. We read reports by numerous reputable organisations about the looming threat to thousands of jobs, we know that the Future of Work is already here and that available human capital is increasingly limited, keeping recruitment and retention among of CEOs’ top priorities.

An IBM study entitled ‘The Skills Gap is Not a Myth, But Can Be Addressed with Real Solutions’1, published on 6th September 2019, collates data from 5,670 global executives in 48 countries.

According to the findings, in the next 3 years, around 120 million workers in the world’s largest economies may require retraining or upskilling in the wake of

SOFT SKILLS

skills and ability to prioritise. In fact, all 4000 professionals surveyed globally in the 2018 LinkedIn Workplace Learning Report agreed that the number one priority for talent development is training for soft skills.4 What is so ‘soft’ about Soft skills?

Recent thought leadership agrees that the term ‘soft ’ (as opposed to ‘hard’, technical job or function-specific skills) undermines the importance of this skills family in the workforce. In fact, ‘soft ’ skills are instead increasingly being referred to as ‘core’ or ‘21st century’ skills. Whilst the hard, technical skills have an increasingly short lifespan (estimated at 5 years) because of continuous innovation and development, Core skills are timeless and are more easily transferrable across industries and functions. In fact, because they are necessary for futureproofing organisations, they are frequently sought after by employers and recruiters. These human skills collectively contribute to an adaptive and growth-wired mindset that enables a workforce to be retrained and upskilled for new careers as they evolve.

disruption caused by AI and intelligent automation. It is also reported that, whereas it took approximately three days to close an employee’s skills gap in 2014, today it will take almost ten times as long (36 days). The increasing challenges in the current VUCA2 business landscape demand a shift in thinking when it comes to managing future workforce needs.

Meanwhile, new skillsets are emerging as priority areas. For instance, just three years ago, executives rated technical core competences for STEM3 and basic computer and software application skills as two of the most critical skills. By contrast, in 2018, while the digital and technical skills gap was still an area of concern, the most sought skills were behavioural in nature: flexibility, adaptability, time management

Thought leadership articles list different Soft or Core skills but most will include critical thinking, creativity, adaptability, Emotional Intelligence, communication, collaboration and interpersonal skills.

These skills enable individuals to engage in, interact with and adapt to the continuously evolving business landscape. Whilst hard skills are teachable and easily measurable (the ability to code, for example), measuring the development of Soft or Core skills is more challenging. It is more difficult to assess these skills because they are nurtured over a longer time-dimension and require self-reflection, continuous coaching, mentoring and feedback.

According to the World Economic Forum Future of Jobs Survey 20185, the top ten Core skills trending for 2022 are: 1. Analytical thinking and innovation 2. Active learning and learning strategies 3. Creativity, originality and initiative 4. Technology design and programming 5. Critical thinking and analysis 6. Complex problem-solving

7. Leadership and social influence 8. Emotional intelligence 9. Reasoning, problem-solving and ideation 10. Systems analysis and evaluation The Learning & Development function has never been so important Around half of executives interviewed in the IBM survey admitted that despite being aware of its urgency they did not have a skills development strategy in place to bridge the skills gap. To bring it home (literally) the 2018 Foundation for Human Resources Development (FHRD) Pulse Survey6 carried out with PWC Malta reports that most Maltese companies surveyed (57%) equip employees with new skills through continuous professional development courses.

However, questioned about the actual amount of hourly training time provided to employees, 37% of organisations claimed that they provide their employees between 1 – 8 hours of training per year, followed by 29% of organisations that provide between 9-24 hours of training annually. Considering the current landscape, changes to the future of work, priority skillsets areas and need for upskilling and retraining initiatives, the amount of training provided to employees locally is alarmingly low.

Digital transformation encompasses a lot more than digital and requires the ‘human’ side for successful implementation. In this context, the importance of ‘Soft ’ skills becomes obvious. Just how adaptable and prepared is your workforce for the digital future and new ways of working?

Will employees take up digital solutions and collaborate with the new machines easily? Will employees trust the new technologies that will replace manual processes? Has enough training on how to use the tools been provided? Does your organisation have the right expertise to implement new technologies? Is there follow-up and positive reinforcement for the small steps in the right direction?

The role of HR In a business-as-unusual scenario organisations need the right mix of skills

References n 1 https:// https://newsroom.ibm.com/2019-09-06-IBM-Study-The-Skills-Gap-is-Not-a-Myth-But-Can-Be-Addressed-with-Real-Solutions n 2 VUCA: volatile, uncertain, complex and ambiguous n 3 STEM: Science, Technology, Engineering and Mathematics n 4 https://learning.linkedin.com/resources/workplace-learning-report-2018 n 5 https://www.weforum.org/reports/the-future-of-jobs-report-2018 n 6 http://fhrd.org/fleximanager/Uploads/Ftp/HR%20SURVEY%202019-pages.pdf

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43

SOFT SKILLS

and adaptive mindset. These skills are underpinned by an organisational culture that is conducive to learning, growth and innovation and that is led by a modern, growth-mindset type of leadership. Unless you have a Chief Learning Officer (unlikely) or Learning and Development Manager in-house, HR will have to stretch its remit a little further. Routine and administrative tasks may have already been automated, and HR should be focusing on upskilling to be able to deal with today’s diverse workforce (spanning up to 5 different generations and embracing more freelance and contract workers who form part of the growing gig economy), anticipating technological breakthroughs and their impact on the workforce (job displacement and the creation of new jobs, for example) and nurturing a ‘switched on’ learning organisation. Additionally, change management skills, use of data analytics for more effective decisionmaking, the ability to carry out strategic workforce planning and identify future skills gaps and being able to make a strong business case to the CEO for a L&D budget, are also important.

Given the current scarcity of talent it is unlikely that candidates with the required skills will be available, so some serious L&D considerations need to be made to reskill and upskill existing employees to add value and drive an organisation’s strategy towards business goals.

The key to developing 21st Century skills The more digital we become the more critical human skills will become to the success of an organisation. Apart from right skilling and diversifying capabilities for your organisation, Soft or Core skills development will improve employee engagement and retention rates. Any sound L&D programme will be learnercentric, will personalise your employees’ learning pathway, take into account learner preferences as well as professional and personal development goals in both hard (read technical) and soft (core or 21st century) skills. There are varying training modalities available to suit your workforce (think online tech-

driven, trainer-lead and face-to-face, blended, micro learning, self-directed, or modular) but recent studies show that a L&D programme that is integrated into the flow of work and that allows a degree of autonomy, is likely to be more successful in terms of expected ROI. It is no longer business as usual. Leaders are expected to hone leadership skills including communication, collaboration, Emotional Intelligence, the ability to inspire and challenge the status quo, and making the necessary cultural changes to be able to nurture the right organisational capabilities such as innovation and adaptability. The question is how to futureproof your workforce? We need to have adaptive skillsets, the flexibility to adjust to new ways of working and a curious and growth mindset reinforced by a culture of learning. In short, we need to develop the not-so-soft Core skills of the 21st Century sort.

Rachel Falzon (MBA) is a Management Consultant with a passion for developing people and challenging mindsets, change management and futureproofing organisations.

BOV Studies Plus+ #succeed Higher education is no longer for the few. However one of the challenges faced by prospective students is the high costs of their tuition, and accommodation and sustenance if studying abroad.

Bank loans are a solution however these need to be repaid along with a hefty interest rate and typically within a few years placing a strain on one’s limited finances.

Banking financing, backed by the European Social Fund, are an ideal solution offering low interest rates, an attractive moratorium, a long repayment term while requiring no collateral, this being provided by the Malta Development Bank.

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Autumn 2019

Reminder: Get your dream job.

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Our strength lies in employing high-calibre human resources who endorse our passion in providing excellent service to our clients.

We are constantly looking for people who enjoy working within a specialised team in a forward-looking organisation servicing a diverse portfolio of mostly foreign clients.

If you are a qualified or partly qualified accountant, this is your time to fast forward your prospects. Our HR partner will be more than happy to meet you in confidence to explore a possible career at MGI Malta.

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Zebbug ZBG 9015, Malta.

Tel: +356 2180 2044 (4 lines) Fax: +356 2167 5418 Email: info@mgimalta.com www.mgimalta.com

ACCOUNTING STANDARDS

HOW TO TREAT VARIABLE CONSIDERATION IN ACCORDANCE WITH IFRS 15 ‘REVENUE FROM CONTRACTS WITH CUSTOMERS’ Author: John Debattista and Paul Zammit

O

ne of the major criticisms of the defunct revenue standards IAS 11 ‘Construction Contracts’ and IAS 18 ‘Revenue’ was the absence of guidance in dealing with contracts with variable terms for the consideration paid by the customer. ‘Variable consideration’ principles in IFRS 15 cover several situations, such as discounts, refunds, penalties, credits, rebates, price concessions, performance bonuses and incentives.

consideration attached to them, which is where the IFRS 15 guidance for variable consideration becomes relevant.

IFRS 15 has the merits of giving comprehensive guidance to tackle all such situations – either with specific guidance or general principles that can be applied to varying situations.

n

Variable consideration must be understood in the context of IFRS 15 before tackling specific situations. One needs to keep in mind that IFRS 15 prescribes a five-step process for every identified contract with a customer within the scope of the standard. It is during the third step that variable consideration matters come into play. Step 3 - ‘Determine the Transaction Price’ – requires the accountant to decide about the monetary amount that represents the total compensation that the company will receive for performing its obligations to the customer.

IFRS 15 distinguishes between fixed and variable consideration.

When contracts include a transaction price that is certain, the aspect of variable consideration can be ignored. However, numerous contracts have an element of uncertainty of 46

Autumn 2019

IFRS 15 states that if a contract includes variable consideration, an entity is obliged to estimate the amount of consideration to which it will be entitled.

IFRS 15 prescribes two methods for estimating variable consideration, namely:

n

Expected value method (possibly more appropriate for contracts with more than two outcomes).

Most likely amount method (possibly more appropriate for contracts with two outcomes).

Suppose a 2018 contract for a building project includes €1,000,000 fixed consideration and a further performance bonus: OUTCOME

COMPLETION PERIOD

PROBABILITY

BONUS

1

Before Q1 2020

50%

€50,000

2

During Q1 2020

30%

€10,000

3

After Q1 2020

20%

€0

Under the expected value method, the variable consideration amounts to €28,000 as per below, whilst the transaction price is €1,028,000:

ACCOUNTING STANDARDS

50% of €50,000 = €25,000 30% of €10,000 = €3,000 20% of €0 = €0 IFRS 15 recommends the most likely amount method for situations with two outcomes. However, it is not prohibited from applying it when there are more outcomes, such as in the case of this scenario, which has three outcomes. What IFRS 15 imposes is that the method chosen at the start is applied consistently throughout the lifetime of the contract.

Under the most likely amount method, the variable consideration would amount to €50,000 (since the most likely scenario triggers a performance bonus of that amount), whilst the transaction price would amount to €1,050,000.

The recognition of resulting variable consideration is always subject to a condition: for such revenue to be recognised, there must be a high probability that cumulative revenue recognised will not be reversed in a subsequent period. This is key for fair revenue recognition and is largely tied to the amount of confidence that management has in the estimate of variable consideration being made. Revenue reversals are undesirable when following IFRS 15: it is much more acceptable to delay revenue in situations of uncertainties, rather than to recognise revenue and then reverse that revenue in case the estimated amount does not materialise.

Factors that may make management not sufficiently confident to recognise revenue from variable consideration are referred to as constraining estimates. These factors could possibly appear in the following situations: n

n

n

n

IFRS 15 has the merits of giving comprehensive guidance to tackle all situations – either with specific guidance or general principles that can be applied to varying situations. the expected value method or the most likely amount method.

In this case, management would need to determine the better predictor of the amount of consideration to which the entity shall be entitled.

The obligation to estimate outcomes for contracts with customers where consideration is not entirely fixed can be challenging in practice. However, it can be argued that the provisions allow for a fairer recognition of revenue, especially if there is collaboration between an accountant with a strong understanding of IFRS 15, and a management team who know their business (and therefore their contracts with customers) well. Businesses finding it difficult to comply with IFRS 15 should work smarter by finding ways to devise contracts with customers that are more suitable to the new standard – a more complicated standard, perhaps, but one with more benefits for users of financial reports.

The consideration is highly susceptible to factors outside the entity’s control, like third party actions.

The uncertainty will not be resolved soon. For instance, a performance bonus will be resolved in 5 years’ time.

The entity is inexperienced. For example, it launched a new product and is unsure of customers’ first response.

The contract has a large number and broad range of possible consideration amounts. An example of such circumstance would be an entity whose practice is the frequent, significant change in payment terms and conditions.

An example of a constraining estimate is a new product is launched where customers have a 60-day right of return. In this case, since the product is new, the entity is unable to rely on historical information to set confidence about the number of goods that will not be returned. Therefore, management would need to be very prudent in relation to how many goods will not be returned. As an example, management might be confident that 40% of goods will not be returned but might not be so confident that 50% will not be returned. In this situation, nothing more than 40% should be recognised.

This contrasts with a possible picture five years from the launch of the product. If over 5 years, average returns turn out to be consistently around 5%, the entity can recognise 95% in revenue, and there would not be a constraining estimate, since management confidence in such return rates is high.

An estimate of expected returns should reflect the amount that the entity expects to refund customers with, using either

John Debattista is one of the founding partners at Zampa Debattista. He heads the assurance and IFRS functions of the office.

Paul Zammit is the technical leader at Zampa Debattista, currently specialising in financial reporting, including IFRS and GAPSME.

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47

INTERNATIONAL TRADE

A PLAYING FIELD FOR BUSINESS:

International Trade for a Multinational Entity My personal experience as a CFO of a trading company engaged in international trade.

Author: Noel Camilleri

O One must keep abreast of local, European and international factors that are in continuous development.

These include the economic environment of countries in which the entity is involved.

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n the eve of my tenth working anniversary at the Finance and Accounting unit of a trading company engaged in international trade, I have been approached by the Institute to share personal experiences on this journey. The scope of this article is, therefore, sharing my personal understanding, rather than providing a detailed study on what the role of a CFO within an international trading company offers.

From a young age, I gained experience in a small family business; whereby the owner established a good personal touch in all aspects of the business, with rather centralised decision making. It is an environment where, even before analysing the management accounts, the owner would already have a good grasp on the performance of various aspects of the business. International trade might be present, but unless the business grows significantly this is generally limited in volume and frequency.

Meanwhile, the contact by the owner with all employees is personal and on an ongoing basis.

Moving to a trading hub which is mainly engaged in international trade has been a completely different experience on various fronts.

First of all, there are the external legislative, regulatory and political factors. These affect any business, but a trading hub actively engaged in international trade has more to deal with.

One must keep abreast of local, European and international factors that are continuously developing. These include the economic environment of countries in which the entity is involved, currency devaluations and sanctions. As well as specific agendas or initiatives that various organisations could have, such as; implications of proposals towards tax harmonisation, BEPS, the implications of Brexit, developments in VAT law in which the entity might be registered (such as the real time reporting implemented by certain European jurisdictions), the social and political situation in certain countries, including any civil wars or social unrest like those experienced in the Northern African region over the past years.

Moreover, international trade within the same group of companies brings other challenges, such as the need of a structured approach towards transfer pricing, including adequate documentation of the transfer pricing policies, from both the perspective of the group, as well as its local subsidiaries.

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INTERNATIONAL TRADE

International trade is also subject to customs and import regulations.

Whilst trade within the EU is facilitated by the freedom of movement of goods, other customs authorities around the globe adopt varying requirements.

The geographical distance involved in international trade is not a valid reason for reducing ethical and legislative responsibilities related to anti-money laundering. Tight and sound due diligence procedures on the trading partner are essential whether by the company’s own processes or through consultants.

International trade is also subject to customs and import regulations. Whilst trade within the EU is facilitated by the freedom of movement of goods, other customs authorities around the globe adopt varying requirements. This is apart from the additional ‘bureaucratic’ procedures or restrictions that might be imposed between countries. The slightest error, such as the original contract not being sent, or the contract being sent without an official company seal, could mean that goods remain in the customs, not only affecting the duration of shipment with potential repercussions on lost customer satisfaction, but also potential damage in the goods themselves depending on the industry. Other challenges, especially transactions which involve more than two entities, include defining who the exporter of records is in the exporting country; and who the importer in the receiving country is.

The terms and conditions of trade for the sale of goods, known as the Incoterms®1 as published by the International Chamber of Commerce, is another important area. During my accountancy studies the concept was never mentioned and little literature is available on the accounting 1

https://iccwbo.org/resources-for-business/incoterms-rules/ incoterms-2020/

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implications of such terms of trade – also proved when recently I consulted with a Big Four firm on this matter, and the only literature found was dated a couple of years back. However, terms of trade have a daily effect on the work of accountants who work on international trade.

Incoterms® define the place along the supply chain in which the responsibilities of the seller are exhausted, and the point at which responsibility is transferred to the customer. There are three main aspects; the responsibility to organise freight, who bears the cost for such freight, and related insurance costs, and – perhaps even more important from an accounting perspective due to revenue recognition purposes – where the risk of the goods transfers. One can encounter a

situation where transport documentation still refers to the seller of the goods when the risk of the goods would have been transferred to the customer days or weeks before. In the case of entities registered for VAT in multiple jurisdictions, Incoterms® might also affect which VAT registration is applicable to a particular transaction of goods.

Other factors might be applicable to large multi-national entities (MNEs).

The ultimate parent company might be required to prepare its financial statements in accordance with accounting standards that are not IFRSs, such as US GAAPs. Consequently, all subsidiaries of that Group have to be prepared using other standards, apart from IFRS-compliant financial statements for statutory purposes. Other legislative requirements might affect the work of the accountant, for example requirements imposed by the US Sarbanes-Oxley Act where the group is listed on a US Stock Exchange. The geographical distance between where the group departments are based might also turn cross-function coordination into a challenge, especially in the case of conflicting goals and objectives and in the case of a decentralised management style like that of a matrix organisation. On the other hand, working in a large MNE gives access to high volumes of transactions, which enables IT automation, such as automatic processing of invoices, robotics in posting routine accounting transactions and automation in warehousing which reduces wastage and risk of errors.

Noel Camilleri is the Finance Director of the trading hub of the largest generics pharmaceutical company worldwide, and the Managing Director of an Icelandic holding company which also owns Intellectual Property within the same Group. Previously he worked in a Big 4 firm, mostly involved in Internal Audit and Advisory engagements. Noel is a PAIB Committee Member within the MIA.

VAT

Article 12, which is suitable for non-taxable legal persons or taxable persons not registered under Article 10 carrying out intra-community acquisitions exceeding €10,000. Persons under this form of registration are required to pay Maltese VAT on acquisitions deemed to take place in Malta.

A VAT throwback on some basic rules and FAQ’s Author: Karen Spiteri Bailey

The hardest thing in the world to understand is income tax.

– Albert Einstein

T

he remark by Albert Einstein flatters many us who work in the taxation field. This quote, I believe, is more than justified in relation to both direct and indirect tax.

Although VAT legislation was first introduced in Malta in 1995, there are still many misconceptions, misinterpretations and difficulties in its application. This probably impinges on the harmonisation of the VAT legislation with other EU countries, classifying the law as dynamic in nature.

I recently had the opportunity to meet a passionate and highly respected VAT official who although starting his career with the VAT Department by chance, moved up the ranks thanks to his keen interest in his work and, more importantly, in researching the legislation before meetings.

The comment hit home because mistaken beliefs and the most common questions around VAT are generally the result of a lack of knowledge. However, legislation is always subject to interpretation, and enquires are usually justified.

A frequent question is whether a VAT registration is always required in order 52

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to carry out a business. Until few years ago, through LN 524 of 2010, taxpayers carrying out an economic activity with a turnover of up to €7,000 were not required to obtain a VAT registration number. This threshold was later removed, but taxpayers still inquire about it. Currently, any person carrying out an economic activity is required to apply for a VAT registration number, unless of course, the activity undertaken qualifies as ‘exempt without credit’, in which case the VAT Department will not even allow a registration.

Another frequent point directly linked to the above is the type of registration required. Taxpayers always know that VAT may be recouped but are unaware of the different registrations and the requirements under each one. There are 3 categories of registration: Article 10, surely the most popular, where the taxpayer is allowed to recoup VAT incurred on the purchases/ expenses which is then offset against the VAT charged on the taxable revenue generated; Article 11, where the taxpayer is defined as a small undertaking exempt from charging VAT; and

Under both Article 10 and Article 12, the VAT registration number is attributed an MT prefix which allows the taxable person to make intra-community transactions.

While under Article 10 returns are generally filed in quarterly, taxpayers registered under Article 11 submit an annual declaration. Article 12 registrations have perhaps more tricky reporting obligations because taxpayers must remember to submit a declaration every time an intra-community acquisition takes place or the place of supply of a service is deemed to be Malta. In my experience, taxpayers fail to comply with the latter as often there is little awareness of the liability of the payment of VAT in Malta when such transactions occur.

During my professional career I have also come across taxpayers who, to avoid the cost of compliance and by underestimating their business growth, prefer to register under Article 11, thereby filing in an annual declaration. Unfortunately, the threshold limitation requiring a change in registration to Article 10 is often ignored.

Unless a tax practitioner brings this to the attention of the taxpayer, it is the VAT Department that breaks the news, often leaving taxpayers confused.

A frequent mistake I see under the widespread Article 10 registration is that all VAT input may be offset against VAT output. Taxpayers are often baffled by VAT legislation that outlines particular expenses for which VAT input cannot be claimed (Tenth Schedule). Confusion also arises because taxpayers fail to distinguish between VAT and Income Tax and, although VAT input cannot be claimed on such expenses, the same cost may still allowable as a deduction for income tax purposes as the expense has been incurred during the production of the income. A common expense causing confusion is hospitality and entertainment expenses, wherein VAT incurred cannot be recouped unless, of course, the taxpayer is in the hospitality or entertainment industry.

VAT

As accountants, we are accustomed with the Accruals Concept and we deal with this concept on a daily basis. From a VAT perspective, however, this concept may be ‘manipulated’ by taxpayers. Many a time, there is resistance to pay VAT on sales invoices which remain unpaid during the VAT quarter being declared. However, taxpayers generally do not realise that a claim would have been made for VAT incurred on purchase invoices not yet paid. This one-sided argument often occurs when cash flow is sensitive. The VAT certificate issued by the Department clearly states the accounting basis to be followed and there should be no departure from the indicated basis. It is only in very specific cases that the cash basis is allowed.

A favourite question is about the difference between tax invoice and fiscal receipt. A fiscal receipt is issued by a registered person to a non-registered person, for example when we purchase goods for our own personal use or when services are provided to a Government Department. On the other hand, a tax invoice is issued in B2B transactions. In

both cases, the specifics of the law must be followed in the layout of the fiscal receipt or tax invoice.

The complexity of the VAT legislation is under-estimated, as evidenced by the frequent and repetitive nature of the questions raised. Tax practitioners have

the opportunity to become experts in the field and encourage the correct VAT reporting. After all, paying VAT may not be the wrong thing to do.

‘A fine is a tax for doing something wrong.

A tax is a fine for doing the right thing’ – Anonymous

Karen Spiteri Bailey graduated from the University of Malta with a B.A. Hons. (Accountancy) degree in 1991 .In 2007 she received her Diploma in Taxation issued by the Malta Institute of Taxation. Karen commenced her experience with PriceWaterhouse (Malta) . In January 1994, she took up the position of Financial Controller with one of the leading textile and carpet centres in Malta. Between January 2002 and December 2015 she was a Partner in Spiteri Bailey and Co., in charge of the Accounting and Taxation Department. In January 2016, Spiteri Bailey &Co., merged with RSM and currently is the Partner in the Outsourcing Department.

She was appointed and formed part of the Board of Directors of the Malta Stock Exchange between 2006 and 2013 and also Chaired the Finance SubCommittee of the Exchange between 2010 and 2013. Karen was also a Board member of Malta Air Traffic Services Limited between 2004 and 2013.

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53

RAISING FUNDS THROUGH CAPITAL MARKET

Raising Funds for Companies Through the Capital Market Author: Doreanne Caruana

A

company that requires additional financing for its strategic objectives has two ways of raising funds; increasing the company’s equity base, or taking on debt. This article briefly discusses these two options from the perspective of what happens on the local capital market by public limited liability companies1.

An increase in equity requires that a company issues additional ordinary shares. Company law in Malta preserves the concept of ‘pre-emption rights’ whereby existing shareholders are afforded the right of first refusal over new shares being issued by the company, safeguarding the shareholding structure of the existing shareholders is not altered. As such, existing shareholders would be offered a pro-rata entitlement in the 1

This article refers to admissibility to listing of securities on the Official List of the Malta Stock Exchange (MSE), which admissibility authorisation falls within the remit of the MFSA. Listing on the Official List is a listing on the Regulated or Main Market and listings on this market are comparable to international main market listings of the likes of the London Stock Exchange. Another venue for the trading of securities on a multilateral trading facility (MTF) is Prospects. The latter option does not provide a listing and the authorisation to trade the securities is provided by the MSE.

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participation of the new shares in issue, ensuring that their shareholding in the company is not diluted through an offering of the shares to third parties. The pro-rata offering of new shares to existing shareholders is known as a rights issue, a transaction in which the shareholders are given the right to participate in the issue of new shares. On the main market, we had recent experiences of these kind of corporate actions

by Medserv plc, Bank of Valletta plc, FIMBank plc and a more recent one, of Trident Estates plc.

There are instances where the existing shareholders acknowledge the need or importance to allow new shareholders in, and existing shareholders agree to waive their pre-emption rights making available a share offer for subscription to new shareholders.

On the capital market, this is typically seen in initial public offerings (IPOs) where new shares are offered to new incoming shareholders (this offer must satisfy the regulatory minimum of 25% of the aggregate issued share capital of the company for such IPO to be authorised to proceed with a listing on the main market).

RAISING FUNDS THROUGH CAPITAL MARKET

(subject to some exceptions where companies may be allowed a moratorium on payment of capital, generally up to two years), meaning that companies are susceptible to rising interest rates for the duration of the loan and that they would probably have a strain on their cashflows when servicing principal and interest on a monthly basis. The latter benefits companies that generate significant cash through their operations, but it would not suit companies with projects having medium to long completion terms, as cashflows may be required for the purposes of the project.

The capital market, when tapped by companies for borrowing purposes (for example through bond issues), could offer the right structure to provide the required funding with a certain level of flexibility in terms of debt servicing. A bond would require the servicing of the interest (which is typically fixed for the duration of the bond) on an annual basis but not of the principal amount, and as such, the strains on cashflow that a company would otherwise have with bank financing is eased for a while. In fact, when planning a bond issue, the projections that a company is expected to prepare and present to the authority2 test and assess by when the company would be in a position to start generating sufficient cashflows to build up reserves to pay back the bonds. This will effectively assist the advisory team in designing a debt issue instrument with a term and structure that will take into consideration any cashflow constraints and particularities to adapt it to the requirements of the investors and the issuer alike.

I would like to conclude with this reference – “adapt [the instrument] to the requirements of the investors and the issuer alike”. I must admit that this has been the key behind the successful bond and equity issues that we have seen on the local capital market – a balance between satisfying the requirements of the company and those of the various stakeholders, including the investors. A company turning to the capital market as a source for additional finance is one of the reasons why companies take this major and important step in their lifecycle.

In Malta, the authority responsible for the authorisation (or otherwise) of securities as admissible to listing on the main market of the Malta Stock Exchange and offered to the general public is the Listing Authority, which is composed of the Board of Governors of the Malta Financial Services Authority. A public offer would necessitate a prospectus to be drawn in line with European regulation and reports on the financial due diligence of the issuing company and its group to be presented to the Listing Authority in satisfaction of the local Listing Rules and Listing Policies.

2

There are instances where the IPO is used as an exit strategy for existing shareholders and the offer of shares is done by the existing or founding shareholders and not the company. In this case the company does not benefit from fresh sources of finance from the offer but will have new shareholders through its listing on the stock exchange. Similar recent transactions are those of PG plc and BMIT Technologies plc, where the existing shareholders made a public offer of 25% and 49%, respectively, of the shares in the company and listed the respective companies on the stock exchange. While the sale of shares did not generate new funds for the companies, the listing status of the companies provides more visibility, governance structures and transparency on the management and finances of the company, making it easier for the company to tap other sources of finance, both through the capital market and other sources.

When it comes to raising funds through debt, companies typically seek debt financing from banks, which generally attracts a rate of interest calculated as a margin over the applicable base rate.

Such debt requires immediate servicing following drawdown

Doreanne Caruana heads the Corporate Advisory Unit at Rizzo, Farrugia & Co (Stockbrokers) Ltd, having assisted several companies to list debt and equity instruments on the main market.

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55

UNCONSCIOUS BIAS

Becoming conscious OF unconscious

bias Author: Kim Spiteri

I

am sure you have been on a recruitment panel seeking to recruit the next member to join your team. I would like to pose a question to you interviewers. Picture this scenario and ask yourself whether you have ever been in this situation: A job candidate enters the interviewing room and sits down in front of you. Within a few seconds, you know that they are not a good fit for the position. You have never met this person before, and they have merely uttered two sentences. You do not have any factual evidence to sustain your quick decision, yet you know you’re right about your conclusion. Sounds familiar? We’ve all been there, and we’ve all experienced it – it’s unconscious bias. As an occupational psychologist, I am very intrigued by the subject and will be delving into more detail in this piece.

What is unconscious bias?

Unconscious bias is pre-set social labels we have about particular groups of individuals. Even though these are formed outside our own conscious awareness (hence the term unconscious), they impact our judgment and interpretation of other people. It is believed that implicit biases can also be construed as primary and innate instincts that humans have developed for survival purposes (for example, fearing that a person across the street wearing a hoodie might be suspicious or even dangerous and taking steps for our own safety). Such presumptions can stem from as early as childhood and may continue to develop and be reinforced through outside influences, such as media and/or personal experiences. Unconscious bias can also be understood as shortcuts in our brains that aim to help us be quick and efficient in our decisions, although failing to allow us to see the bigger picture and analyze the detail.

Why is unconscious bias detrimental?

Experiencing unconscious bias is in itself unharmful. What is detrimental is the fact that we are prone to letting it affect our decision-making, often make incorrect deductions based on 56

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flawed information – whether during a job interview, watching an advert for a particular product or merely interacting in informal social environments.

Who is affected by unconscious bias?

The awful news is that we have all been bitten by this nasty “virus”.

We all hold unconscious beliefs about various social groups and these biases stem from our tendency to categorize social worlds in order to facilitate interpretation: a means for the brain to facilitate decision-making and make us more efficient. Unfortunately, we cannot get immunised against unconscious bias, but by becoming aware of its existence, we can reduce its effects.

What are the most common types of unconscious biases during the hiring process?

Confirmation bias – this is when we actively look for minor details in the candidate’s behavior to support our original preconception. The problem with this bias is that we tend to stop gathering further information when we think we have confirmed our original unfounded prejudice. For example, interpreting the fact that the candidate turned up early for the interview as them being also great at meeting tight deadlines.

Affinity/Mirroring bias – this is when we unconsciously favour people who have something in common with us or someone we are fond of. Interviewers often end up hiring copies of

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UNCONSCIOUS BIAS

We are only as blind as we want to be.

Maya Angelou

References n

themselves (for example, candidates who attended the same school, grew up in the same town, or who remind them of someone they know and like). When this bias comes into play, we might also fall into the trap of replacing the person who resigned as opposed to filling the actual vacancy. All this prevents us from really hiring the best candidate and fail to fill the team skills gap. Resist hiring copies of you or your team members. As much as culture fit seems to be a buzz word, diversity is always good for the business.

Horns/Cloven hoof effect – this bias occurs when we interpret one negative aspect we notice in a candidate and generalize it to their overall behavior. For instance, when interviewing someone we might be put off by the fact that they speak with an accent and automatically assume that they are unintelligent.

Halo effect – on the contrary to the previous one, this bias revolves around something positive about the other person. It is when we see one good thing about a person and let that affect our opinion about everything else about that person does. For example, noticing on a CV that a candidate has obtained an outstanding grade in a school subject pushes us to assume that s/he will be an outstanding performer on the job.

So how can we combat unconscious bias?

1. Learn more about how biases work.

Do not underestimate the power of research and knowledge. Finding out more on biases and spotting instances that can activate them can minimize their risk. You could watch related videos, like 58

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a satirical one by management consulting firm McKinsey & Company, which reveals how women face unconscious biases at work.

2. Self-evaluation Identify your own biases. Despite good intentions, biases may interfere with our hiring processes. I invite you to take one of the quick Harvard’s Implicit Association Tests to discover your hidden racial, religious or sexual orientation biases.

Believe me, you’ll be surprised!

3. De-biasing the stages of the recruitment process Discard “noise” and focus on job-related characteristics when interviewing. Ask yourself whether certain characteristics really affect a candidate’s job performance or are simply irrelevant information. For instance, how candidates dress may matter for customer-facing roles, but not so much for back-office positions.

Asking which school, they attended may not be as demonstrative of their skills but more about their social class.

Try evaluating candidates with a brain mapping psychological test instead, or present case studies to assess their onthe-job skills.

4. Slow down Do not fall into the trap of making snap judgments. Most interviewers often come to a final decision about a candidate too early in an interview. Take your time and consult your notes afterward to form an opinion on candidates.

Written by Kim Spiteri (Warranted & Registered Occupational Psychologist ID MPPB147 and Senior Human Resources Consultant at StreetHR)

n

n

n

n

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https://www.hudson.cn/en-gb/insights/infographics/4-typesof-unconscious-bias-in-the-workplace https://qz.com/406976/heres-how-quickly-interviewersdecide-whether-or-not-to-hire-you/ https://www.theguardian.com/small-business-network/2016/ may/25/hiring-mini-mes-unconcious-bias-discriminate http://curt-rice.com/2013/10/01/what-the-worlds-bestorchestras-can-teach-us-about-gender-discrimination/ https://study.com/academy/lesson/implicit-bias-in-theworkplace-definition-examples-impact.html https://diversity.ucsf.edu/resources/unconscious-bias

Kim Spiteri is a senior Human Resources practitioner and a qualified occupational psychologist with over ten years of well-rounded HR expertise. Her career started off after graduating with a Bachelor in Psychology (Hons) at the University of Malta. After successfully completing her Masters of Science in Occupational Psychology at Birkbeck College University of London, she obtained her warrant and became a registered occupational psychologist in Malta.

Kim has extensive experience in managing HR departments in large corporate international companies across various industries namely pharmaceuticals, aviation, food chains and semiconductors. Her work experience and psychology background enable her to strengthen her career in business partnering and change management.

CYBER SECURITY

Merging MFA with

Biometry Author: Keith Cutajar

W

e constantly speak about the ongoing digitisation of our legacy business processes, introducing new ways of how to do business in a smarter and faster way; increasing our return for the same time we spend working. New business processes are turned magically into a software project, increasing our dependency on digital mediums. But are we considering security in our techupgrades? Are we making sure that our new investment is properly vetted by a security professional who can, through experience and knowledge, provide feedback on the security features implemented or lacking?

We often witness and hear reports about victims of compromised accounts. New and unusual incidents occur on a daily basis, both locally and abroad, some of which are reported to law enforcement agencies and other not, giving us something to talk about during our office breaks.

Interestingly, rather than criminals using dictionary attacks (attempts to guess our passwords using gargantuan public keyword lists) to access our accounts, attack trends have changed to a more intelligent and efficient mechanism which involves the resetting of passwords via different recovery channels. One may argue that these security mechanisms are indeed safe, but experience has thought us an important lesson: security is as strong as its weakest link. Thanks to social engineering techniques (defined by Oxford Dictionary as “the use of deception to manipulate individuals into divulging confidential or personal information that may be used for fraudulent purposes�), access can be granted in a very short time.

Within the local scene, we are seeing an increase in cyber incidents targeting white collar personnel, especially c-level executives who because of their busy agenda many times fail to observe basic information security practices. Needless

to say, the introduction of digital wallets (both FIAT and crypto-based), drastically increases the need to gear-up our defences in the digital sphere.

What really astonishes everyone in this technical field is that although there is a considerable raise in international standards which require entities and individuals to keep their security levels up, the uptake of this pro-active attitude is still low. Most would decide that the cost of obtaining information security certification is too high to justify the need for a security upgrade. But cybercriminals do not only attack entities certified by such standards.

The question which frequently comes-up in conferences, awareness sessions, and meetings is whether there are any quick and reliable methods of securing online accounts from perpetrators. If there is a quick fix that achieves an excellent return of investment. One of the replies www.miamalta.org

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still never be certain if the stolen digital asset was disclosed to a third-party. And with cross-boarding crime rates increasing, it is getting tougher serve justice when investigations spread over three to six jurisdictions instead than only your own.

We need to be pro-active in our day-to-day management of data. Once stolen, unlike physical artefacts, data cannot be returned.

I typically give is the use of two legacy security mechanisms combined together: Multi-factor authentication (MFA) and biometric technology.

Both technologies have been with us for quite a while, especially MFA which was used even in pre-Roman times (access codes were split by having, for example, one part written in a restricted location and the other part known only to a highranking official). Reinventing the wheel is a last resort in information security, and by looking at how legacy threats were tackled in the past, one can easily see new ways to upgrade traditional defence mechanisms into cutting-edge techniques. Biometry (define by Oxford Dictionary as “the application of statistical analysis to biological data”) is on the other hand a more modern technology which enables the user’s naturally unique attributes to be distinguished amongst other users. Some examples include fingerprint, facial recognition, iris and retina scanning, voice, and heat imagery.

Major investments were made during the past recent years on the technological advancements and accuracy of biometric sensor used in multiple devices, especially portable ones.

Speaking about good practices, various International Information Security Standards require the adoption of MFA (ISO 27001 – A.9.1.1/A.10.1.1, PCI-DSS – 8.3.1, NERC – Multi-Factor Authentication, NIST SP 800-63B) and of biometric (ISO 27001 – A.9.4.2, PCI-DSS – 12.4.1, NERC – CIP-0065, NIST – SP 800-76-2). Introducing these 60

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pro-active security measures together raises considerably the difficulty level for cybercriminals.

It is vital that the multi-factor mechanism is spread on as many devices as possible. A practical example is to approve payments using both a traditional username and password on your laptop’s web-browser and then the secondary authentication is done using a push notification on your personal phone where a fingerprint input is requested. Or accessing your email account from a new device by requesting, apart from the appropriate credentials entered, a secondary authentication which is a code sent you via a messaging medium on your personal phone that can only be accessed with your biometric input. It is critical for any good security design that MFA is spread on different of mediums, both hardware and software variants.

And for those who are thinking about systems that do not support at least MFA, I suggest upgrading to newer alternatives.

One of the critical ingredients of any start-up software venture or new software project is that during all stages of the development cycle, such basic information security requirements are observed. Everyone has witnessed, unfortunately, new interesting IT ventures which kick off but do not manage to even close-off that financial year or the next.

We need to be pro-active in our day-today management of data. Once stolen, unlike physical artefacts, data cannot be just returned and end of story. Even when successfully catching the culprit, you will

Some concluding suggestions following this read: n Create appropriately secure passwords.

Invent mechanisms whereby you can generate easily new codes for each different system, making it easy for you to remember what the password of that system was. n Change your passwords routinely. Yes, passwords should have an expiry date. n Enable multi-factor authentication (MFA). n Secure your portable devices using both an input code as well as a biometric code (if your phone does not support biometric input and you are handling sensitive data on your phone, an upgrade is definitely recommended).

Business laptops come with biometric sensors for a reason. n Handle email alerts of failed logins with appropriate attention. n Frequently consult with your information security person about new methods of data security. This field is constantly evolving, and you should be evolving with it.

Keith Cutajar is a Cyber-Security specialist, focusing in the fields of Cybercrime, Digital Forensics and Cyber-Terrorism. He is an IT Technical Expert in the Courts in Malta and consultant to a number of entities locally. Apart from being involved in a number of international assignments, Keith also is a visiting lecturer at various academic institutions, both locally and abroad.

Corporate International Banking International Settlements Ability to settle in major currencies such as USD is enabled through our excellent correspondent banking relationships.

Cash & Credit Management FIMBank is strongly positioned to deliver an enhanced banking service to corporate customers. We offer both cash and credit management products to satisfy the needs of our clients.

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Contact our Cash Management business development team FIMBank p.l.c., Mercury Tower, The Exchange Financial & Business Centre, Elia Zammit Street, St. Julian’s STJ 3155 FIMBank p.l.c. is a licensed credit institution regulated by the Malta Financial Services Authority and is listed on the Malta Stock Exchange.

VALUATION OF INVENTORY

VALUATION OF

Inventory Author: Matthew Spiteri

Inventory valuation is the assigning of a monetary value to an entity’s inventory at the end of a reporting period. It is a key element of an enterprise’s financial statements, forms part of the current assets and cost of goods sold of a business.

Fundamental Principles of Valuation of Inventories The fundamental principle in the valuation of inventory is that inventories are required to be measured at the lower of cost and net realisable value (NRV).

The term ‘cost’ refers to the historical cost and is the sum of the purchase price net of trade discounts received along with all expenditures and charges incurred in bringing the inventories to their present location and condition. In the case of materials, the purchase price including transport and handling represent their cost; whereas in the case of work in progress being produced and finished goods produced, the cost represents the summation of direct material, direct wages and direct expenses including manufacturing and factory overheads. Any administrative or selling costs should not be included in the cost of inventory.

The NRV is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale. Estimates of NRV are based on the most reliable evidence at the time the estimates are made, of the amount the inventories are expected to realise, and a new assessment of NRV is made in each subsequent reporting period. The value of inventories which was previously written down below cost and where such circumstances no longer exist, or there is clear evidence of an increase in NRV due 62

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to a change economic circumstances, would need to be adjusted by reversing the write down amount so that the new carrying amount is in line with the fundamental principle. This reversal is limited to the amount of the original write down. NRV is likely to be less than cost, but not limited to, where there has been: n n

An increase in costs or a fall in selling price; A physical deterioration in the condition of inventory; and / or obsolescence of products.

Methods of Valuation of Inventories The three most popular methods of inventory valuation are first-in first-out (FIFO), last-in first-out (LIFO) and the weighted average cost methods. An entity shall use the same method for all inventories having a similar nature and use to that entity.

Different methods may be justified for inventories with a different nature or use, such as operating segments inventory.

Both the FIFO and the LIFO method are similar in their calculations. Under FIFO the pricing of the issue of the first lot is at the cost at which that lot was acquired, whereas LIFO assumes that inventory is valued at recent purchase prices.

FIFO is a logical method where the entity utilises those inventories which were acquired, purchased or manufactured first. The inventory valuation is likely to approximate the current

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VALUATION OF INVENTORY

n

n

n

n

When a suitable inventory valuation method is adopted and inventory control is efficient and effective, an entity can operate proactively by adjusting its logistics network with accurate financial systems and methodologies.

market values and purchases at the end of a reporting period have no effect on cost of goods sold or net income. The cost attached to the unit sold is always the oldest cost.

LIFO represents and charges jobs with the current market prices. During conditions of rising prices this method shows the largest cost of goods sold of any of the costing methods, given that the newest costs charged to the cost of goods sold are also the highest costs. During such circumstances inventory will be undervalued.

T he International Financial Reporting Standards (IFRS) states that inventory valuation should be assigned using FIFO or the weighted average cost methods. IAS 2 prohibits the use of LIFO and lays out both the required accounting treatment for inventories while providing guidance on the cost formulas that are used to assign costs to inventory. On the contrary the Generally Accepted Accounting Principles (GAAP) allows the use of LIFO. The General Accounting Principles for Small and Medium entities (GAPSME) refers to FIFO, weighted average or a method reflecting generally accepted best practice. hich method provides the most effective inventory figure for W the end of reporting period balance sheet? hat method provides the most useful figures for sales and W operation planning? hich method provides the most useful types of cost of W production and cost of sales figures for internal control management purposes?

Issues with Over or Under Statement The proper valuation or measurement of inventory cannot be disregarded. Overstatements or understatements to the net profit of a company can be caused without accurate inventory valuation methods which will also impact the amount of tax payment. Financial ratios of an organisation can also be affected and have significant impact if such ratios are included in loan or finance sanction letters. The lender may include a restriction on the allowable proportions of current assets to current liabilities which an entity might not meet given that, many times, the largest component within the current assets is inventory.

Most enterprise resource planning (ERP) systems have strong capabilities for inventory valuation. Once an ERP system is properly configured together with the use Radio Frequency Identification (RFID) tags, the valuation of inventory is automatically produced, and valuations can be shown at any point in time.

When a suitable inventory valuation method is adopted and inventory control is efficient and effective, an entity can operate proactively by adjusting its logistics network with accurate financial systems and methodologies.

The weighted average method is calculated by taking into consideration both the prices and quantities acquired at such prices. In order to obtain the weighted average rate, the total value of materials in stock at the time of issue is divided by the total quantity of material in stock. This method is particularly useful where there is heavy fluctuation in prices of inventories as it tends to smoothen out fluctuation in prices by taking the average cost of different purchases at different times. When a company uses this method during periods of inflation its cost of goods sold is less than that obtained under LIFO but more than that obtained under FIFO. This method takes the middle road approach.

Advantages and Disadvantages There are advantages and disadvantages with each method.

No single method is the correct one: an entity must adopt the method which is most suitable to its business activity. These valuation methods are not applicable in all cases. Before making a decision, an organisation should also consider and analyse the following points: 64

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Matthew Spiteri is a certified public accountant. He is an assistant manager at RSM Malta, leading a portfolio of clients in their accounting assignments operating in different fields.

WORK-LIFE BALANCE

An accountant playing with fire

STEPHEN CARUANA

T

he accounting profession is known for long working hours, hardly leaving any time for other pursuits. Nevertheless, I somehow manage to balance the demands of the profession with those of my passion: pyrotechnics.

Pyrotechnics is a time-consuming activity with strict timetables and processes, in fact it is quite a rare interest among accounting professionals.

I was practically born into the art of fire, although no one in my family really encouraged me to take it up. I first got involved without my parents’ knowledge as soon as I finished my O Levels, making paper tubes because I was not of legal age to produce fireworks.

Today I am the holder of a Licence A in pyrotechnics at the 12th May Fireworks Factory in Ħaż-Żebbuġ which makes fireworks for the parish feast of Saint Philip. My certification is the highest grade in the field making me responsible for the supervision of other pyrotechnicians.

Since becoming a father four years ago I spend much less time than I used to, but pyrotechnics

remain a year-round activity. Preparations for the fireworks events start as soon the feast is over, the year before. It often means waking up earlier to visit the factory before going to the office and returning there at night after spending time with the family. With limited working hours available, the success of our factory depends on the teamwork between members.

Everyone is expected to respect timeframes and deadlines for jobs; failing to do so would increase risks exponentially. Many people believe that fireworks factories are dangerous, but that is only the case if you are not careful.

Pyrotechnics is an art and the production of the Maltese traditional firework is no mean feat. It takes a lot of experience to create them; techniques are normally passed down from one pyrotechnician to another and many trade secrets are unfortunately lost when makers pass away.

Life at the factory is not only about fireworks – we are like a family and the site is our home. We laugh together and we cry together, we help each other out like brothers and sisters. Sisters, yes, because

Pyrotechnics is a time-consuming activity with strict timetables and processes, in fact it is quite a rare interest among accounting professionals.

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WORK-LIFE BALANCE

there are women pyrotechnicians, too. My wife and I ourselves met at the factory and, although she left the art since the birth of our daughter, she still gives her support in other ways. This passion robs me of precious family time, especially in the period leading up to the feast, but I am thankful to my wife for her constant backing.

Fireworks are a spectacular activity, but you do not get the satisfaction every time because they do not always produce the planned result. The work of an entire year goes up in a few minutes of flame and smoke. Our priority, however, is

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that there are no accidents and we are always perfecting our methods to reduce risks. Today, with sufficient data and less dangerous chemicals firework making is much safer than it used to be.

Apart from my pyrotechnical skills, working at the factory also contributed to my personal development. I have always been a shy person but collaborating with different people helped me to overcome my limitations and become more confident.

Many people tend to look down on activities related to village feasts and

consider them lowbrow interests. But band clubs, for example, are made up of a diversity of members: doctors, tile layers, lawyers, mechanics, architects, labourers, as well as accountants like us. This rich experience helped me in my profession because I grew up knowing how to treat people equally irrespective of their situation or background.

Stephen is a Financial Controller with Topchoice by day and a pyrotechnics artist in his free time. He currently serves as the treasurer of the 12th May Fireworks Factory.

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