AB CN (China edition) – November/December 2012

all changeACCA forum on finAnCe

trAnsformAtion in guAngzhou

dim sum bonds why they’re hot right now

technical hedge ACCountingbanking fsteP’s Lee Khee Joo

opinion the wAr for tALent

cPdget verifiable cpd units by reading technical articles

safe handsernst & young’s ALbert ng, ChAirmAn ChinA, mAnAging PArtner, greAter ChinA

shared services why the future is in ChinA

euro whAt hAPPens if greeCe exits?reporting A guide for the PerPLexedfraud Auditors fight bACK

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the mAgAzine for business And finAnCe ProfessionALs accounting and business ChinA 11/2012

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A&B NovDec 2012 (Generic) ol_output.pdf 1 27/9/12 2:35 PM

-Lexis AB Asia adverts1-Nov12.indd 3 08/10/2012 12:35

BIG AMBITIONS?For your next move, go to www.accacareers.com/china-hong-kong

CRIME FIGHTERSThe latest set of revised global recommendations means that accountants have an even greater role to play in the battle against fiscal crimePage 40

HEDGE TRIMMINGA draft by the IASB is seeking improved links between the rationale for hedging and its impact on financial statements Page 48

TECHNICALLY BRILLIANT?There are over a hundred technical articles with multiple-choice questions on the ACCA website –

demonstrate your understanding and get verifiable CPDwww.accaglobal.com/cpd

Ernst & Young’s Albert Ng, chairman, China, and managing partner, Greater China, called on 25 years’ experience in the Asia-Pacifi c region to help steer the company through the recent fi nancial turmoil – and one lesson he learned was to treasure people. See page 12

A SERVICE SHARED…At the end of September, Chinese premier Wen Jiabao said in an announcement that China would continue to promote and support the burgeoning services industry in order to encourage private and foreign investment in the sector.

His comments echoed those of Wang Chao, vice-minister of commerce, speaking at the recent fourth China Sourcing Summit, who stressed the importance of the outsourcing sector to the Chinese economy. ‘Service outsourcing contributes to the shift in China’s economic growth model and the upgrading of China’s foreign trade in an innovation-led economy,’ said Wang in a press report.

Shared services and outsourcing (SS&O) has certainly come a long way since the basic call-centre outfits with which they are associated. Today, shared services is where parent organisations create central hubs into which the tasks of business units are relocated and then provided to the group on behalf of the parent. While outsourcing sees a third party contractually take on some of those tasks.

It’s an area that has seen growth over the last decade and China is seeking to emerge as a competitive destination for SS&O, thanks to a slew of incentives and tax breaks from the government. In our feature on page 16, we speak with experts for their views on the future of SS&O. Also, on page 62, we report on a recent ACCA Employer Forum in Guangzhou on Finance Transformation: shared services centre management at which finance experts offered their insights on how finance transformation might create value for business.

Finance transformation has been on the radar for some time at ACCA. If you haven’t already, you might like to read ACCA’s recent global survey, Finance transformation: expert insights on shared services and outsourcing, which looks at how CFOs and business leaders are changing finance to drive operational excellence and make finance a strategic partner to the business. You can find the report at www.accaglobal.com/transformation

Colette Steckel, [email protected]

3Editor’s choice

CN_B_Edletter.indd 3 12/10/2012 16:34

Audit period July 2009 to June 2010138,255

Asia editor Colette [email protected] +44 (0)20 7059 5896

Editor-in-chief Chris [email protected] +44 (0)20 7059 5966

International editor Lesley [email protected] +44 (0)20 7059 5965

Sub-editors Dean Gurden, Eva Peaty, Vivienne Riddoch

Design manager Jackie Dollar

Designers Robert Mills, Zack Starkey

Production manager Anthony Kay

Advertising Jennifer [email protected] +852 2965 1432

Head of publishing Adam Williams

Printing Times Printers

Pictures Corbis

Editorial board Rosanna Choi, Jimmy Chung, Andy Lam, Arthur Lee, Derek Poon, Anthony Tyen, Fergus Wong, Davy Yun

ACCAPresident Barry Cooper FCCADeputy president Martin Turner FCCAVice president Anthony Harbinson FCCAChief executive Helen Brand OBE

ACCA [email protected] +44 (0)141 582 2000

Features12 The long view Ernst & Young managing partner Albert Ng has seen China transformed over 25 years

16 On the up The shared services and outsourcing industry is making its mark in China

20 Exit strategy What are the implications of Greece leaving the eurozone?

23 Dismantling the euro Capital Economics’ Roger Bootle offers some practical suggestions

26 Future vision Sustainability and fi nancial results can go hand in hand, says KPMG’s Yvo de Boer, a former UN climate chief

28 Cloud control Remote technology will revolutionise the boardroom

VOLUME 15 ISSUE 10

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Accounting and Business is published 10 times per year. All views expressed within the title are those of the contributors.

The Council of ACCA and the publishers do not guarantee the accuracy of statements by contributors or advertisers, or accept responsibility for any statement that they may express in this publication.

Copyright ACCA 2012 Accounting and Business. No part of this publication may be reproduced, stored or distributed without the express written permission of ACCA.

Accounting and Business is published by Certifi ed Accountant (Publications) Ltd, a subsidiary of the Association of Chartered Certifi ed Accountants.

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AB CHINA EDITIONCONTENTSNOVEMBER/DECEMBER 2012

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BRIEFING06 News in pictures A different view of recent headlines

08 News in graphicsWe show a story as well as tell it using innovative graphs

10 News round-upA digest of all the latest news and developments

VIEWPOINT30 Cesar Bacani ASEAN is set to become a regional driver for growth

31 Errol Oh Audit employees at large fi rms are voicing their concerns

32 Barry Cooper Accounting for the Future was a valuable event for members, says the ACCA president

Regulars

CPDAccounting and Business is a rich source of CPD. If you read it to keep yourself up to date, it will contribute to your non-verifi able CPD. If you read an article, learn something new and apply that learning in some way, it will contribute to your verifi able CPD. Each month, we also publish an article or two with related questions to answer. If they are relevant to your development needs, they can also contribute to your verifi able CPD. One hour of learning equates to one unit of CPD. For more, go to www.accaglobal.com/members/cpd

WorldwideThere are six different versions of Accounting and Business: China, Ireland, International, Malaysia, Singapore and UK. See them all at www.accaglobal.com/ab

TECHNICAL42 Update The latest from the standard-setters

45 Accounting solutions PwC experts answer questions on employee incentive plans and agent versus principal

46 A guide for the perplexed The fi rst of a two-part series examines recent innovations in corporate reporting

48 CPD: hedge accounting A look at the rationale for hedging and its impact on fi nancial statements

51 CPD: strategy The second part of our series encourages you to explore the nature of your business

54 Dim sum bonds More clarity on tax issues is needed

ACCA NEWS56 CPD Annual CPD declarations are now due for submission

60 Compact considerations ACCA has signed up to the UN Global Compact

62 ACCA Employer Forum Finance transformation through shared services came under the spotlight at the Guangzhou event

64 News ACCA Hong Kong elects 2012/13 committee; Beijing career day is a success; CFO roundtable discusses challenges

65 Council ACCA holds its 107th AGM in London

66 News Barry Cooper formally elected as ACCA president; ACCA students and affi liates often earn above average, new survey reveals

Your sector33 CORPORATE33 The view from Douglas Young of Goods of Desire, plus news in brief

34 A passion for learning FSTEP’s Lee Khee Joo is helping to nurture Malaysia’s future accountants

38 Reporting for duty Our new series looks at how companies can improve their corporate reporting

39 PRACTICE39 The view from Tan Siow Ming of PwC Malaysia, plus news in brief

40 Fraud fi ghters Accountants have an increased role to play in the global crackdown

CN_B_Contents.indd 5 12/10/2012 16:40

01 A ceremony in Taipei, Taiwan,

commemorates the anniversary of the birth of Chinese philosopher, Confucius, whose teachings focused on charity, justice, propriety, wisdom and loyalty

02 Zong Qinghou, of drinks company

Wahaha, has topped the Hurun Rich List as China’s richest man, worth US$12.6bn

03 Legoland Malaysia,

constructed using more than 50 million bricks, opens. Models include the Petronas Towers and the Great Wall of China

News in pictures6

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04 Imelda Marcos, pictured

celebrating the birthday of her late husband and president Ferdinand Marcos, is seeking re-election to a second term as congresswoman, continuing her family’s political comeback

05 Singapore has agreed a deal

with Formula One to extend the country’s Grand Prix contract until 2017. Its night race has been a highlight of the Formula One calendar since the event came to Singapore in 2008

06 Malaysian Prime Minister

Najib Razak, pictured at Independence Day celebrations, has announced a voter-friendly 2013 Budget ahead of next April’s general election

07 Two new art museums have

opened on the site of the 2010 Shanghai World Expo. The China Art Museum and the Power Station of Art began trial operations during the National Day holiday

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SINGAPORE SOARS ABOVE HONG KONG ON CORPORATE GOVERNANCESingapore came out ahead of Hong Kong again in a corporate governance survey by the Asian Corporate Governance Association and CLSA Asia-Pacific Markets that examined 11 markets and more than 800 listed companies. Singapore ranked 69th (67th in 2010) and Hong Kong came 66th (65th in 2010).

Singapore Hong Kong Thailand Japan Malaysia Taiwan India South Korea China

251The number of Chinese US dollar billionaires in 2012 (2011: 271; 2006: 15), according to the Hurun Report.

78%Uptake of smartphones across South-East Asia over the past year.

92%The number who say China’s slowdown is affecting their business, according to a Retail in Asia poll.

80%The number of staff who plan to stay with their current employer in the next year, according to Deloitte’s Talent 2020 report.

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34SouthKorea

61Thailand

FREE AS A BIRD?Malaysia has fallen two places since last year in the Washington-based thinktank Freedom House’s latest Freedom on the Net (FOTN) report, which measures internet freedom in 47 countries. This places Malaysia on the 23rd spot, in the same league as Libya and Jordon, and maintains its ‘partly free’ label in the thinktank’s FOTN status. In the region, Malaysia ranks behind the Philippines (7th place) and Indonesia (21st) but is ahead of Thailand (35th), Vietnam (40th) and Burma (41st).

KEYFree (0-30)Partly free (31-60)Not free (61-100)

News in graphics8

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SUSTAINABILITY ATTITUDES IN TRANSITION CFOs are investing more in videoconferencing equipment, datacentre efficiency kit and electric vehicles, according to Deloitte’s 2012 Sustainability and the CFO Study. Some 250 CFOs took part, from companies with more than US$1bn in revenue each.

KEYHong KongSingaporeNew ZealandSwitzerlandAustraliaCanadaMauritiusIrelandUK

KEYHong KongSingaporeNew ZealandSwitzerlandAustraliaCanadaMauritiusIrelandUK

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1212 UKUK1212

UK LAGS IN ECONOMIC FREEDOMThe UK has been overtaken in the latest economic freedom table published by Canadian thinktank the Fraser Institute. The key ingredients of economic freedom are: personal choice; voluntary exchange coordinated by markets; freedom to enter and compete in markets; and protection of persons and their property from aggression by others.

EMERGING MARKETS OFFER TASTY TAX INCENTIVES Emerging markets offer some of the lowest tax costs as well as growth potential, according to KPMG’s Competitive Alternatives 2012: Focus on Tax. Companies in India pay about 50% less in tax costs than their peers in the US.

India Canada China Mexico Russia UK Netherlands US

45

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42%

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VAT ROLL OUT MOVES UP A GEARChina’s roll out of value-added tax (VAT) for service industries has stepped up, with implementation in Beijing in September, followed by Jiangsu and Anhui last month. Shanghai was the first city to roll out the tax in January. ‘The ultimate scenario is for the VAT system to be implemented nationwide – and across all industries,’ Peter Law, senior manager, tax advisory services at international audit and advisory firm Mazars told China Daily. ‘It is anticipated that this will occur before the end of the 12th Five-year Plan, which is 2015.’ He noted that while in the past, large amounts of tax in China were collected from land sales, the future seems to focus on VAT collection, ‘which promises to be the richest source of revenue in the world once the programme is implemented in all cities’.

MIND THE GAPMid-tier management salaries in Malaysia are about 10% to 30% lower than those of their counterparts in Singapore, Hong Kong and Australia, according to a survey by Kelly Services. Drawing on the findings of Kelly Services Asia Pacific Professional

and Technical Salary Guide 2012, Melissa Norman, Kelly Services managing director in Malaysia, told The Star that while new graduates in Singapore are commanding a starting salary of around S$2,500 (RM6,200), many Malaysian graduates are ‘still hovering between RM1,800 and RM2,000’. She added: ‘You need to go one step further and ask: “Why are [Singaporeans] getting paid a little more, and why are we paid a little less?” This brings you to the quality of the students. The majority of graduates here come out lacking in skills.’

INDUSTRIAL PROFITS FLAGChinese industrial companies’ profits fell for the fifth consecutive month in August, indicating that the economic downturn is set to continue, Bloomberg reported. Quoting the National Bureau of Statistics, it found company profits dropped 6.2%, a decline accelerating since the 5.4% drop in July, and a 1.7% fall in June. The figures, based on a survey of 41 industries, suggest that China is heading towards its weakest annual expansion in 22 years.

RICH GET POORERThe number of super-rich in China has fallen over the past year, with fewer US

dollar-billionaires for the first time in seven years. According to the Hurun Rich List’s latest annual report, there are now 251 Chinese billionaires, down 20 on a year ago, and 37 of the richest 1,000 saw a 50% drop in their wealth. Rupert Hoogewerf, Hurun Report chairman and chief researcher, said that although this year has seen ‘some significant wealth bloodletting, it is worth remembering that these entrepreneurs are still up 40% on two years ago and almost 10 times 10 years ago.’ Solar, textiles and retail have been the hardest hit this year, while entertainment, IT, natural gas and property developers with large landbanks have had a good year.

HUNGRY FOR GROWTHUS food giant Kellogg is tapping China’s growing appetite for Western-style cereals and snacks. The company has announced a joint venture with Singapore-based Wilmar to further the distribution of its Kellogg’s and Pringles brands. Kellogg chief executive John Bryant said that the project positions the company’s China business for growth ‘and fundamentally changes our game in China’. China’s snack-food market is expected to reach an estimated US$12bn by year-end, up 44% from 2008.

ASIA DRIVES LUXURY SALESSales of luxury goods in Asia continue to drive growth for top-end European brands. Italian label Prada has reported a nearly 60% growth in first-half earnings, with Asia-Pacific’s share accounting for nearly 36%. Sales in the region for Miu Miu brand – also owned by Prada – rose 34.7%. Group-wide, revenues from Asia Pacific recorded the highest growth of all markets, up 43.9%. Paris-based luxury house Hermès is also cashing in, reporting a 25% rise in sales in mainland China, Hong Kong and Singapore, compared with 21% globally.

HK AND CHILE SIGN AGREEMENTHong Kong and Chile have signed a historic free trade agreement, the first

STANDARDS STILL IMPROVINGCorporate governance standards are improving in Asia, according to the Asian Corporate Governance Association-CLSA Asia-Pacific Markets’ Corporate Governance Watch 2012. However, the report found that some standards have slipped since the last report in 2010, the scope ranging from ‘relatively minor corporate transgressions to growing concerns about the reliability of financial statements and, at the extreme, outright fraud’. Singapore topped the rankings, followed by Hong Kong and Thailand, all with improved scores. China dropped four percentage points, and Japan and Taiwan by two. Indonesia was placed at the bottom, with The Philippines second from last.

Singapore ranks highest in Asia for corporate governance standards

10 News round-up

AP_newsroundup.indd 10 11/10/2012 11:16

P20

between the special administrative region and a Latin American country. Inked at the Asia-Pacific Economic Cooperation leaders’ summit in Vladivostok, Russia, in September, the agreement will markedly improve the business environment for entities involved in economic activity between the two territories. The resultant liberalised access to services is expected to boost Hong Kong’s financial services industry and may potentially serve as a gateway to the Central and South American markets. Currently, Chile ranks 29th among Hong Kong's worldwide goods trading partners, and 32nd for services.

CFOS CONFIDENT IN ASIACFOs working across Asia Pacific are more confident about market conditions and career opportunities compared with their global counterparts, according to the Michael Page International Global CFO Barometer 2012. When surveyed, 83% of Asia-Pacific respondents believed that economic conditions in their country were either satisfactory or good, compared with 59% globally. And 88% of respondents based in Asia Pacific rated the region as the most attractive for business in 2012. The survey also found that Asia-based CFOs are focused on career opportunities, with 59% looking to broaden the scope of their current role in the next two years. Salary continues to play a key factor in career choice, as indicated by 59% of Asia Pacific and 51% of global respondents.

IPOS ‘ON ICE’Hong Kong is having its worst year for initial public offerings (IPOs) in a decade, the South China Morning Post reported in an article describing the much-hyped market as currently being ‘on ice’. Disappointing outcomes of listings, the eurozone crisis and slowing growth in the mainland have all taken their toll, compounded by the bad experience of investors who lost money in Hong Kong listings in 2011. Peter

Burnett, Asian global capital markets chairman at UBS, was quoted as saying: ‘There is plenty of cash, there is a history of great deals, but investor confidence is thin on the ground at the moment. Once that is restored there will be no shortage of attractive IPOs’ Only 32 IPOs were completed in Hong Kong in the first six months of 2012, according to Deloitte.

Cooperation summit meeting in Vladivostok, Russia, in September.

R&D RAMPS UPEmerging Asia is starting to produce significant amounts of its own innovation after years of playing research and development (R&D) ‘catch-up’, according to Coming of Age: Asia’s Evolving R&D Landscape, a new report

STRESS LEVELS SOARWorkers in Hong Kong and China are becoming more stressed, according to the latest global survey by flexible workspace provider Regus. From Distressed to De-stressed revealed that 75% of workers in China say their stress levels have risen in the past

year – the highest increase among the world’s top 50 economies. In Hong Kong, the figure was lower, at 55%, but still higher than the global average of 48%.

Respondents identified work as the biggest trigger of stress, with half

of Hong Kong respondents and 55% of those in mainland China wanting more flexibility in their jobs. In response, Robin Bishop, chief operating officer at Community Business – which promotes community social responsibility in Asia – said that

companies cannot ignore the impact of poor work-life balance

on their bottom lines.

CONFIDENCE TAKES A KNOCKEconomic disruption, including possible recession in the US, the eurozone crisis and China’s slowing economy have taken a toll on the confidence of CEOs in the Asia Pacific region, according to PwC. Just 36% of executives surveyed by the firm say they are ‘very confident’ of business growth over the next 12 months. Their prospects, however, improve in the longer term, with more than half (54%) expressing a high level of confidence for the next three to five years. Asia Pacific CEOs also believe that the region is on track to achieve greater economic integration, a top priority of the Asia Pacific Economic

from the Economist Intelligence Unit, commissioned by Mercer. For 50 years, Asia’s emerging markets have largely adopted ideas developed elsewhere in the world, but this is now changing, the report found. ‘As Asia and the emerging markets become increasingly important growth engines for the global economy, R&D and innovation in Asia have taken on increasing prominence. Global technology companies investing in R&D in the region do so not only to tap the growth markets but the disruptive innovation coming from the region,’ said Joon Tan, principal consultant, information product solutions, at Mercer.

11AnalysisGOODBYE GREECE?A Greek exit – dubbed ‘Grexit’ – from the eurozone is considered more likely than not by some commentators. With the implications for Greece almost beyond comprehension, could other countries also follow suit?

AP_newsroundup.indd 11 11/10/2012 11:17

When Albert Ng joined Ernst & Young in 2007, he did not know he would soon be steering the company

through one of the rockiest patches global finance has seen for a decade. Five years on, and though the world’s markets are still scrambling for a foothold, the bird’s-eye view from Ng’s office in the Shanghai World Financial Centre seems an appropriate backdrop for the managing partner’s sure-footed demeanour.

For Ng, who has over 25 years of experience in the Asia-Pacific region, returning to the fundamental principles of accountancy was key to riding out the global slump. ‘What we learned from the crisis was to treasure people,’ says Ng. ‘In a financial crisis the biggest challenge for firms is how to motivate and retain talent. From 2009 to today we have seen huge improvement in our people resources. We know people are our greatest asset, and we’ve acted accordingly.’

Ng’s level-headedness is perhaps one reason why he presides over one of EY’s most important regions. The ability to stay cool in the face of adversity may also be useful in the near future.

It is not a smooth ride for China’s economy. Though the country experienced double-digit growth throughout 2008-09, while the rest of the world was in recession, momentum finally seems to be slowing. Earlier this year, premier Wen Jiabao announced China’s annual growth target would be 7.5% for 2012 (compared with an average annual 11% growth over the last

The basicsERNST & YOUNG One of the Big Four audit firms, Ernst & Young is one of the largest professional service providers in the world. First established over 100 years ago, the company is the result of a series of mergers. EY’s current structure was founded in 1989; it has its headquarters in London and has more 700 offices in 140 countries.

The company has four main service lines: assurance, tax, advisory and transaction. It was ranked by Forbes magazine as the eighth-largest private company in the US in 2011.

The Asia-Pacific area was established in 2010, bringing together 27 countries across the region. The China office advises a plethora of industries, ranging from clean tech to telecommunications, mining to real estate.

decade. Analysts, meanwhile, debate whether the world’s second largest economy is in for a ‘hard’ or ‘soft’ landing. Coupled with the once-in-a-decade leadership succession due as we went to press, the coming year looks to be a difficult one for Chinese financiers.

Ng, however, is not too rattled. ‘Having worked in China since 1983, I would say there will always be ups and downs,’ he says. ‘This year we’re looking at the slowest growth in China for the past 10 to 15 years, so people have started to be concerned. Is China over-heated? Is inflation a problem? Is social stability a challenge? When I first started, in the 1980s, I went around the world giving seminars about investing in China. At that time people were very concerned about the political stability of China, they were concerned about the well-being of the export markets.

Changing environment‘The recent economic turmoil doesn’t exist in China alone, and in other countries things are much worse’, Ng continues. ‘We need to think’ – here he drops in his favourite phrase – ‘longer term.’ While it is important to manage fluctuations, thinking about his firm’s future is Ng’s priority. ‘As things change in China, we need to take note of our changed environment and decide how to work best there’, he says.

Overall, Ng remains upbeat about the investment opportunities in emerging markets. Serving as the representative of emerging markets on EY’s Global Executive Board, these are the markets he knows best, having

THE LONG VIEWHaving observed China go through a quarter-century of change, Ernst & Young managing partner Albert Ng sees a long-term approach as the only way forward

12 Interview

CN_F_Ng.indd 12 12/10/2012 16:42

advised many multinational companies about investing in China over the years. ‘At Ernst & Young a presence in emerging markets is one of the most important strategies in our firm and we’ve been investing carefully’, says Ng, pointing out that capital flow is still shifting from developed markets to developing, and particularly to BRIC (Brazil, Russia, India, China) countries.

‘Each individual country has special challenges and opportunities’, says Ng. ‘Russia has huge natural resources but it may be lacking service industries. China has a huge domestic market but a lack of natural resources. In Brazil

I was looking at the telecom sector, which is still very behind China, yet the Chinese companies are looking to go there. One thing in common is that they all have huge opportunities. We need people with local knowledge to manage them.’

More than moneyFor Ng, ‘investment’ goes beyond money matters. ‘You invest in clients and you develop relationships. You invest in people’, he says. It also means transferring skills. ‘The reason why it is called an emerging market is because it is new. Sometimes you need

specialised skills and knowledge. But most important is how to develop the local talent quickly.’

Finding and retaining talent is a key challenge in China. Multinational firms are experiencing increasing competition from China’s homegrown companies, as international credentials are less attractive than they once were to recent graduates; young accountants increasingly seek the stability and long-term prospects from ‘iron-rice-bowl’ jobs at state-run enterprises. ‘When China first opened, the accountants here were much less exposed to global ways,’ says Ng. ‘But think about how

13

CN_F_Ng.indd 13 12/10/2012 16:42

The CV2009

Chairman, Ernst & Young, China and managing partner, Greater China.

2007Joined Ernst & Young, becoming managing partner of markets, Far East Asia, in 2008.

1998Magnolia Gold Award for contributing to development of Shanghai.

1995Adviser to the International Business Leader’s Advisory Council for the Mayor of Shanghai.

1988MBA, Chinese University of Hong Kong.

1984Joined Hong Kong Society of Accountants. Accredited member of ACCA.

1981BA, Business Administration, Chinese University of Hong Kong.

difficult it is to go to one of the good universities in China today. Today the top students from these universities are nothing less than what we would expect from a US graduate.’

Innovation is keyThough China’s accounting standards are increasingly sophisticated, with regulatory bodies such as ACCA continuing to drive standards, Ng

‘China needs a more sophisticated social security system, so that people don’t need to worry if they become unemployed, if they get ill or old. In China people don’t dare to spend too much; the saving rates are very high. In order to stimulate domestic consumption, longer-term thinking is needed’.

Nicola Davison, journalist

The tips*‘For firms operating in China two key words are very important: long term. This is probably true for all emerging markets. Emerging economies may be more volatile than established markets. If you believe you will get quick returns then maybe the time is not right. You have to have persistence. I’ve seen many multinational companies fail because they don’t have persistence. They go to China expecting fast results, but when they don’t see the result in two years they pull out. Everything goes back to zero and a lot of investment is wasted. What I would suggest is to take a longer-term perspective and be persistent with what you believe is right in your policies.’

*‘The other thing I’d pass on to any international accountant is they need to be humble. When I first came to China, I saw a lot of overseas accountants feeling superior. But then they fail. The reason they are perhaps better accountants is because they have opportunities; they’re not smarter. Recently I’ve seen much more local talent come in. To be successful in China, confidence is needed, but on the other hand they need to be humble. The sense of superiority must go away.’

‘ACCOUNTANTS CAN BE INNOVATIVE! BUT IT REQUIRES CHANGE IN THE EDUCATION SYSTEM AND THE WAY WE TRAIN OUR PEOPLEIN CHINA’

highlights a particular area that needs improvement. ‘If China wants to move to the next level of development, then innovation is key,’ he says. ‘China is very good at copying but must develop its own technology and brands.’ He cites the stereotype that accountants lack innovation. ‘Accountants can be innovative! But it requires change in the education system and the way we train our people in China.’

Ng’s own training was bolstered after obtaining an ACCA Qualification in 1984. ‘ACCA is internationally recognised, so that was an important benefit’, Ng remembers. ‘The world is getting more global, more mobile, so we need to ensure international qualifications that are recognised are worthwhile.’ Like many, Ng calls for a convergence of accounting standards, one that mirrors the globalised setting accountants often find themselves in.

But how optimistic is Ng about the global economy itself? ‘I’ve been looking at the indicators, and everything is pointing to the global economy worsening,’ he says. ‘China is not a stand-alone country. It’s connected to the world, through investment and political relationships. So we must all understand if the world is not well China will not be the only country doing well, it will be impacted.

One area where the new government should act, Ng believes, is stimulating domestic consumption. ‘If China wants to go to the next stages, it needs a bigger middle-income class,’ he says.

14 Interview

CN_F_Ng.indd 14 12/10/2012 16:43

Lexis AB Asia adverts1-Nov12.indd 2 08/10/2012 12:26

If there’s one thing that everyone can agree on, it’s that shared services and outsourcing (SS&O) are not going away. Since the

earliest days of shipping secondary and back-end parts of a business to other organisations – often in lower-cost environments – the world has become increasingly receptive to the benefits of these two phenomena, while their output grows ever more sophisticated and indispensable.

While the terms are complementary, they do in reality represent different but not mutually exclusive practices. Shared services revolve around organisations creating central environments and taking functional work out of business units, relocating them to a central hub – known as a captive – which performs them globally for the parent organisation. Outsourcing, on the other hand, involves taking some of those tasks

and contracting a third party to undertake them on a client’s behalf.

Historically India was a big focus for the creation of captives and outsourcing firms, and gradually the sophistication of the product that these organisations and captives are capable of producing is improving, to the extent that the old, dismissive ‘call-centre’ impression of what Indian outsourcers and captives do is tremendously outdated.

Within the last decade China has also started to emerge and, with a slew of incentives and investment, its second-tier cities, places like Hangzhou, Dalian and Chengdu, are becoming increasingly competitive as destinations for SS&O.

‘Essentially they’re looking around the world, learning from what other countries have done,’ says James O’Callaghan, partner, KPMG China. ‘China’s twelfth five-year plan talks

about sustainable growth and quality growth rather than growth at any cost, and the emergence of the middle classes and a focus on these professional services outside of the historical, traditional manufacturing industry has helped push that, so they’re really focusing on these service centres and this service industry.’

Driving forceBacking up this five-year plan’s goal, the central and provincial governments in China are helping to drive through the services, with training grants, tax incentives, subsidisation of rent, and even the support of salaries for graduates who are coming out of local universities. The creation of province-level funded ‘technology centres’ (see boxout) which are vying for the business of captives and vendors is an attractive one for many companies, both Chinese and foreign, as the

DEFININGAN INDUSTRYShared services and outsourcing are often seen as panaceas by the fi nance and accounting world – but how are they developing in the fastest-growing markets?

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benefits laid on by the government de-risks the whole process – from a capital outlay standpoint firms can build a robust business case.

In 2006, the Ministry of Commerce launched its 1000-100-10 Project to promote the development of 10 Chinese cities as outsourcing bases, with a goal of attracting 100 international firms and 1,000 large and medium-sized providers to assist with business requirements.

‘This [type of incentivisation] is what India did 15 years ago and a lot of [its incentive schemes] have now just run out and China’s now doing it, so there’s a natural transition,’ says O’Callaghan. ‘Everyone had a key reliance risk on India and piled into the country over a number of years. Now they need to de-risk this equation, so they are looking at where else in Asia they can go. Obviously China is the biggest potential resource pool, but you have others, like the Philippines and some of the other emerging markets like Vietnam and Thailand, but China is the main one.’

The appeal of SS&O, particularly in China with its attractive incentives, comes through the consolidation

of operations, enhancing control and, ultimately, the development of performance and maximising efficiency. If all the outsourced processes are happening under one roof and that organisation or captive is repeating these processes enough, ‘you have more transparency and more control and, again, hopefully it drives up quality’, says O’Callaghan.

‘It’s no longer a “maybe” destination,’ he adds. ‘It’s already established and we’re seeing a lot of global players and big multinational organisations creating headquarters in Shanghai and Hong Kong and then having their facilities in places like Dalian and Chengdu. It’s growing massively in China.’

What is being seen, he says, is regional headquarters sitting in Hong Kong and China’s so-called tier one cities – Shanghai and Beijing (although primarily Shanghai still holds the commercial function, whereas Beijing remains the cultural and political capital) – with back-office functions residing in the tier-two cities.

There’s also growth in the non-financial services organisations

such as pharmaceutical and IT industries. ‘Guys like Dell and IBM are establishing massive [presences] – senior executives are now sitting in China and all their support functions are residing there.’

As it grows, both internally and globally, China is in a unique position as both a provider and user of these SS&O services, a ’China for China’ model that ‘seems to be the most likely staging post right now’, says Jamie Lyon, head of corporate sector at ACCA. He predicts a growth of ‘Chinese companies operating shared services and outsourcing for [other] Chinese companies’.

Matter of scaleChina’s ability to in effect grow its own market is ‘what creates an interesting dynamic’, says Mike Ettling, chief executive for NorthgateArinso.

‘China’s state-owned enterprises [SOEs] have a scale in their internal functions that are enormous compared to many Western companies, even when added together. So if they take some of their back-end functions – for example, HR or finance – and they package them into shared services environments, bring in the best technology, process models and efficiency, and use that as an engine to bring work in from other clients, that’s how they’re going to create an

‘EVERYONE PILED INTO INDIA, BUT NOW THEY NEEDTO DE-RISK THIS EQUATION, SO THEY ARE LOOKINGAT WHERE ELSE IN ASIA THEY CAN GO’

17


advantage where [their] scale and price point will be unmatchable by [overseas] competitors. That is China’s big play in the next five to 10 years.

While initially the roles of outsourcing firms were merely to perform the grunt work of firms, more refined services are being developed. Trends include the rise of business process outsourcing (BPO) – while IT and manufacturing have traditionally been outsourced, organisations are now focusing on getting more efficiency out of business practices.

‘One thing that China’s done differently from India, which started with IT outsourcing, went to BPO and now knowledge process outsourcing, is that China’s done all three simultaneously, which is pretty cool,’ says O’Callaghan.

Echoing the pastThis rise of the business process as a service (BPAAS) is a natural progression from the outsourcing developments of the past. Now the business service outsourcing industry is seeing what happened in the software world with the development of software as a service (SASS). ‘Organisations now want to buy processes “by the glass”, so there’s this whole new space emerging as BPAAS, which is going to be a major industry,’ says O’Callaghan.

While countries like the Philippines have taken the lead in developing BPO industries, Ettling believes China has a major opportunity to take the lead. Global demand, he says, is going to exceed any capacity that can be created in the Philippines. China’s SOEs will become the catalyst for building ‘process factories’ at a scale never seen before – they have the capital but lag behind Western multinationals in terms of efficiency – implying lower costs and lower prices for the rest of the world. China’s big opportunity, says Ettling, is to become the process factory of the world.

‘When you look at the stage today and global BPO vendors, there’s probably no Chinese vendor in the top 10. In five years, five of them will be Chinese. It’s that significant a transformation.’

Given China’s probable dominance of the sector in the years to come, ACCA’s Lyon says that ‘ongoing language challenges may prevent a wholesale move by Western companies right now to exploit Chinese offerings’, further putting

the onus on Chinese companies and the increased importance of the ‘China for China’ model.

Change management is considered by many to be the biggest challenge facing companies looking to reinvent themselves as more efficient entities. The difficulties that the uprooting of a corporate culture can entail are often underestimated and insufficient change management capability can lead to dysfunction down the road.

We’re seeing China mould a natural advantage to Western competitors in terms of change management, says Ettling. Western multinationals have years of legacy in their processes so they’re trying to re-engineer processes.

‘The interesting aspect for Chinese multinationals is that they [don’t] have the legacy – they have a blank slate when it comes to designing global HR, finance and IT, so in many ways they have an advantage,’ Ettling says.

‘If they play it right, they can grab the best and the greatest of the technology, thought innovation and process models as they grow their global footprints. They’re not necessarily encumbered by what they’ve built in the past.’

Euan McKirdy, journalist

China’s national ‘Go West’ policy is bringing IT and shared services and outsourcing (SS&O) operations to cities like Chengdu, the provincial capital of Sichuan province.

Last year Dell, the world’s second-largest maker of PCs, opened a major customer service centre in Chengdu’s Tianfu Software Park, the largest operation of its kind in China. The operation is Dell’s third customer service centre in China and the first to expand to the country’s west.

‘Dell plans to spend more than $100bn over 10 years to broaden operations in China,’ said Stephen Felice, president of Dell’s global small and medium business operations. The operations centre in Chengdu provides manufacturing, sales and services to support the rapid growth in business occurring in western China. ‘The expansion is also to support the Western China Development Strategy [commonly known as the ‘Go-West’ policy] aimed at developing the country’s inner-western region for trade and commerce,’ says Felice.

The government’s policy of encouraging development of SS&O in western cities like Sichuan’s Chengdu has been successful in bringing IT and electronics firms to the city in recent years, such as Intel, Texas Instruments, Alcatel-Lucent, Motorola, Sony and Hitachi.

*GO WEST

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Aspectre is haunting Europe: that of a possible Greek default and exit from the euro. A Grexit, as it has

been called, could have catastrophic repercussions for the economies of Europe – and possibly the world too – or it could provide some kind of solution for the troubled eurozone and the heavily indebted country. Amid the uncertainty, one thing seems certain: nobody really knows what such an event will mean.

‘Nobody has ever gone to hell or to paradise and returned to tell us how it was,’ Harilaos Alamanos, president of Greece’s Institute of Certified Public Accountants (SOEL), told Accounting and Business. ‘Nobody knows how an exit will be achieved. And the experience of entering the euro does not help with how an exit from the currency might go.’

For professional accountants, a Greek euro exit could mean an upgrade of their role, according to Alamanos. ‘We will have to assess the implementation of all the changes that will be imposed on businesses or in the wider public sector companies. But while this may be good for the sector, as it will bring more jobs, it is obviously bad for the country.’

Jonathan Loynes, chief European economist and director at London-

based Capital Economics, the company whose Roger Bootle won the Wolfson Economics Prize on the smoothest process by which a member state could exit the eurozone (see pages 23–24), says that his firm’s view is that ‘a Greek exit is more likely than not’.

Exit ‘80% likely’Unlike most other forecasters, Capital Economics has built such an event into its central economic projections. Loynes says: ‘It’s hard to put an exact number on it, but I would estimate something like an 80% chance that Greece will be out by the end of 2013. There are few signs as yet of policymakers taking the steps we mapped out in the Wolfson entry but that is not surprising as the entry dealt with how to manage a country’s exit, which has not yet commenced.’

Much of how a Greek exit might look depends on whether the country defaults in an orderly or disorderly fashion. Dr Vassilis Monastiriotis, senior lecturer at the London School of Economics and affiliate at the Hellenic Observatory, believes that the catastrophe of a disorderly exit would bring upheaval to the markets.

He says: ‘The immediate effect would be that bank accounts would be frozen so the Greek economy would collapse until a new currency was issued. Hyper-

inflation will intensify problems of poverty in the population, destabilising the situation socially and politically. The country will operate basically on a cash economy and foreign investment will stop.

‘Imports will become hugely expensive as importers would have to pay cash in a very devalued currency. All domestic companies would find it impossible to operate in the international market unless they hold liquidity in foreign reserves, which very few companies do. Not many companies would survive this for long.’

This, however, is a scenario that most analysts, including Monastiriotis, consider unlikely. What is expected is an orderly exit where the eurozone

GREXITGRIEFWhat would be the effects of a Greek exit from the eurozone for accountants and Greece’s trading partners?

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partners agree with Greece a procedure to phase the country out of the eurozone. Monastiriotis says he expects the European Central Bank (ECB) to guarantee liquidity in the Greek banking system during a transition period.

‘There will be a combination of measures that control capital movements with a number of guarantees to ease the pressures arising from that,’ he says. ‘Liquidity will be provided to the banking system,

and, I imagine, there would also be measures to provide liquidity directly to large companies through loan guarantees or short-term lending.’

Who gets the reserves?Greece’s foreign reserves would be put in the spotlight. ‘If a country is to exit the eurozone, do they get their initial allocation of foreign reserves? Is the ECB going to keep them as collateral against the Greek debt held by the ECB or other member states? These

are issues that cannot be resolved overnight,’ says Monastiriotis.

Constitutional issues may also arise for the EU about the extent to which a euro exit could be accommodated without breaching the rules that underpin the European single market.

Monastiriotis explains: ‘Legally there are ways to allow for a temporary deviation and non-implementation of specific regulations and we have had examples of that in the EU context before. But of course these may be challenged in court by different companies or individuals that may be affected, and it may not be an easy situation for Greece or the EU.’

Foreign exchange markets are already assessing the possibility of a

‘LIQUIDITY WILL BE PROVIDED TO THE BANKING SYSTEM, AND TO LARGE COMPANIES THROUGH LOAN GUARANTEES OR SHORT-TERM LENDING’

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‘SPAIN, ITALY AND PORTUGAL COULD EASILY FOLLOW THE GREEK PATH. BUT THE REAL QUESTION IS: WHEN WILL IT STOP? WILL FRANCE BE THE NEXT?’

Greek exit and how that would affect the euro and a new Greek currency. In June, Bloomberg shocked foreign exchange dealers by testing on its live exchange rates system a post-euro Greek drachma code (XGD) as part of ‘contingency planning exercises in the normal course of business’.

Igor Drobnjak, director of markets at foreign exchange specialist Tempus UK, part of the Monex Group, says: ‘In some ways the markets have already included the potential Greek default in the price of the euro. Only in 2012 we saw the euro drop against a basketful of currencies. Although this depreciation of the euro makes European goods more competitive on international markets, it is making eurozone debt less attractive. This means that most of the major investors and the banks, especially in the US, are carrying their positions on a Greek debt, which brings additional volatility.

‘Eurozone debt is mainly traded within peripheral countries. You don’t have so much exposure of Greek, Italian or Spanish debt in the global markets. It became more localised and in a way that is a natural hedge for these countries because they can devalue on their own the bonds they have issued. However, European banks – especially those that have the majority of exposure to that debt – will have to take the loss and put it on their balance sheet.’

And the kitchen sink too…A Greek exit would also raise issues of liquidity in other European countries. All the responsibility for providing liquidity in eurozone countries hit by a Greek exit ‘will be held by the ECB, which will likely need to resume bond buying, move rates to 0%, and apply any other non-conventional tool, if not all of them’, says Valeria Bednarik, chief analyst at Barcelona-based independent forex portal Fxstreet.com.

As for the fallout in exchange rates, Bednarik says that ‘among currencies, [US] dollar and yen will be the first beneficiaries probably followed by commodity currencies, Australian and Canadian dollars – the new market safe

havens. The pound, on the other hand, will likely feel the weight of a European crisis and be pressured lower. The most benefited will be the Swiss franc, as the SNB [Swiss National Bank] will regain some air after the recent struggle to control the Swiss strength and establishing the EUR/CHF peg.’

Credit insurance costs have also been affected. A spokesperson for UK Export Finance, Britain’s official export credit agency, says that as market risk

appetite varies for different countries, businesses interested in exporting to Greece have been asked to get in touch for a case-by-case assessment, unlike what happens with other advanced markets. UK Export Finance now accepts ‘applications for short-term cover for export contracts between UK exporters and buyers in Greece’ after the European Commission lifted for Greece a restriction on providing trade credit insurance cover for exports to buyers in the EU where the risk horizon is under two years.

Meanwhile, trade-related insurance provider Euler Hermes says it will stick to a May statement that anticipated Greece remaining in the eurozone. It has, however, reduced its export cover on Greece as continued economic uncertainties make exporting to Greece substantially more risky. The company says it ‘is currently not covering new shipments to Greece, although shipments scheduled for delivery before the end of July remain insured’.

Drobnjak says: ‘The major question now is to see whether the Greek scenario is a separate case or if it endangers [other eurozone] states. A Greek exit could create a vicious spiral endangering the core of the single region; in that case the only countries that could stay in the eurozone would be Germany, the Netherlands, France and Finland – not the best-case scenario for the euro per se.’

Noemí Jansana, head of content at Fxstreet, says the big problem for Spain is that a Greek exit ‘would set a precedent that could favour the exit of other European peripheral countries and Spain, Italy and Portugal could easily follow the Greek path. But the real question is: when is it going to stop? Will France be the next? And then what?’ She believes that European leaders will do whatever it takes to preserve the euro’s integrity.

Monastiriotis says: ‘The transactional cost, the cost in political capital, the reputational cost that will be suffered by the EU, let alone the consequences for Greece itself, will all be huge. This is why all players will try to avoid a Greek exit.’

More power for troika The Greek government, Monastiriotis says, ‘will either find somehow the capacity to implement some of the measures to take forward the remaining reforms, in which case the measures may be softened, or we will move eventually into stricter forms of monitoring, so the troika of lenders [the EU, the ECB and the IMF] will be more involved in decision-making, controlling the government finances to resolve the deadlock’.

Meanwhile Greece is the country feeling the burden the most. Alamanos says: ‘The businesses that are closing are usually the healthy ones, which pay their taxes, salaries, contributions to pension funds, etc. The rogue ones just don’t bother. They pay nothing and they are an unfair competition to the healthy ones.’

Whatever the outcome, an outcome should be reached soon as the euro and Greece itself are paying a heavy price for uncertainty.

Michael Kosmides, journalist based in Athens

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BREAKING UP IS HARD TO DO……but not impossible. Roger Bootle, winner of the Wolfson Economics Prize to create a blueprint for dismantling the euro, has written a meticulous instruction manual

One of the cardinal rules of firefighting is always identify your exit before entering a blaze. Several

eurozone nations must wish they had followed this advice when joining the continent’s bold experiment in currency union. Since the euro was intended to be a club that none could leave, no emergency escape plans were ever made.

Lord Wolfson, a eurosceptic, wants to change that. He issued a challenge to economists to draw up a blueprint on how best to dismantle the currency. The £250,000 prize attracted 400 entries and was won by veteran commentator Roger Bootle, founder of the consultancy Capital Economics

and former chief economic adviser to Deloitte. His winning submission is a meticulous instruction manual on how failing states can extract themselves from the zone in an orderly manner.

Whitewash-freeThe first merit of Bootle’s 156-page handbook is that it doesn’t sugarcoat the risks. Any nation wishing to exit the crumbling structure will confront a huge range of dangers. For a start, all hell would break loose if news of an imminent departure were to leak to the press. Citizens would make a beeline for the bank and immediately withdraw their savings, provoking an instant financial crisis. The replacement currency would plunge on the foreign

exchange markets – in the case of Greece possibly by up to 50%.

Of course, currency devaluation is the ultimate goal of leaving the zone as it would eventually boost exports and promote economic growth. In the short term, however, it would raise the risk of hyperinflation. Rampant price rises would undo any gains in competitiveness and leave the hapless state back where it started.

Then there are the practical issues of printing a new currency. A country could be left without cash in circulation for up to six months.

One ironic effect of leaving the zone would also be to boost the real value of the nation’s foreign debts. So far from solving a debt crisis, leaving the euro

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‘CASH MACHINES WOULD NEED TO SHUT DOWN.OTHERWISE RESIDENTS WOULD TRY TO WITHDRAWAS MANY EUROS AS POSSIBLE FROM ACCOUNTS’

would actually make matters worse – at least in the short term.

‘Our goal in the euro paper was to find a way around some of these perils,’ says Jonathan Loynes, chief European analyst at Capital Economics and one of the co-authors of the plan. ‘We looked to the history of currency break-ups – such as the collapse of the Soviet Union and Czechoslovakia – for clues about how this adjustment could be made with the least possible trauma.’

Keep it under your hatThe first challenge is to keep secession plans secret for as long as possible. Ideally, a momentous decision like leaving the euro should be democratic, taking the pulse of all political parties as well as the public.

Sadly, such an inclusive approach is not practical, Bootle warns. Advanced notice of such plans could precipitate ‘large capital outflows as international investors and domestic residents withdraw their funds’. Bond yields would surge and banks quickly run out of cash. So Bootle’s first tip is to keep the exit plan hush-hush until the last possible moment.

The Czech government, for example, decided to break up its currency union with Slovakia on 19 January 1993, following the dissolution of Czechoslovakia in 1992. It concealed this decision from citizens until 2 February, just six days before the two new states adopted separate national currencies.

In his plan Bootle says the key to making a success of the clandestine approach ‘would be to keep the number of people who knew as small as possible and the delay between the decision and implementation fairly short’. Printing a whole new currency ahead of time is probably out of the question, given the lengthy period that such an operation would require.

Closing the hole in the wallOnce the cat is out of the bag, capital and banking controls would be needed to prevent money fleeing the country. ‘Cash machines… would need to be shut down,’ advises Bootle’s plan. ‘Otherwise, realising that the euro would become more valuable than the drachma, most Greek residents [for example] would attempt to withdraw as many euros as possible from their bank accounts.’

Currency controls could be supplemented by forbidding residents from buying foreign assets overseas or setting up bank accounts outside the country. Foreign businesses in the country might also be barred from repatriating profits back to the home office. Capital Economics argues that such radical steps could be avoided if plans are kept hidden – especially if the transition takes place over a weekend when banks are closed.

The most obvious practical issue in leaving the euro is that of minting new notes and coins. Since this might take months, the departing country would be left in limbo. One stopgap solution would be to stamp existing euro notes with a drachma symbol. This is not an option favoured by Bootle. Instead, the Capital Economics plan argues that a country like Greece could largely do without cash for a while.

A recent survey by the European Central Bank showed that cash

accounted for just 5% of total transactions for the majority of businesses. For the small amounts of cash that are needed, the euro could continue to be used until a new currency was ready, Bootle argues.

Another question is the potentially inflationary threats posed by a new currency. Retailers might take advantage of the changeover to raise prices. Many shoppers suspected this happened when the British shifted to a decimal system in 1971. To avoid such covert hikes, Bootle recommends introducing the new currency at parity to the euro, so an item that used to sell for 1.5 euros would sell for 1.5 drachma, although the new currency’s real value could soon fall sharply.

Most crucially, however, the public would have to be quickly convinced that price rises were not going to get out of hand. A new inflation target would need to be set, to kick in after an initial adjustment phase. The nation could also consider issuing indexed bonds, whose interest payments would rise along with prices. This would reduce a government’s incentive to let inflation rip, Bootle says, and so reassure investors and the public.

Return to growthPoliticians could offer another guarantee of good behaviour by setting up an independent auditor to monitor public borrowing. A departing sovereign should also organise an orderly default on foreign debt, writing down debts to a sustainable level so the nation could resume economic growth.

The Wolfson Economics Prize ended up underlining many of the dangers of a euro split. But thanks to the Tory peer, discussing the practicalities of a breakup is no longer a taboo.

Christopher Alkan, journalist

would actually make matters worse – at

Bootle: euro exit masterplan

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Over the past two decades we have recognised that the way we do business has a serious impact on the world

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unpredictable future and build capacity to anticipate and adapt.

Understand the risksFirst and foremost, businesses need to fully assess and understand future sustainability risks, for example by integrating them into an enterprise risk management tool, defining their responses to deal with them, and analysing opportunities for efficiency, substitution or adaptation.

Integrated strategic planning and strategy development are needed as well; this requires business management to make sustainability central to their corporate strategy and incorporate it at all levels. Put simply, businesses must manage risks and capitalise on opportunities by turning strategic plans and strategies into ambitious targets and actions. One can think of energy and resource efficiency improvements, sustainable supply chain management, and investment into innovation on sustainable products and services, as well as gaining access to new markets for greener products, services and technologies. It is also imperative to explore tax incentives tailored to alternative energy, energy efficiency and other areas related to sustainability.

Another much discussed but less implemented tool for success in this area is measuring performance and

A CLARITYOF VISIONCompanies are starting to see the link between sustainability and fi nancial results, says KPMG special adviser and former UN climate chief Yvo de Boer

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AP_F_Yvo.indd 26 12/10/2012 16:55

reporting on sustainability, as well as the related benefits. The growing trend of integrated reporting is an example of how companies are building frameworks for sustainability reporting processes, stronger information systems and appropriate governance and control mechanisms on a par with those currently used in financial reporting.

Time to talkOrganisations cannot do this alone. Collaboration with partners on sustainability issues is vital to enhance leverage and improve the cost-benefit ratio of action. Business leaders should seek opportunities for genuine dialogue with governments and demonstrate new and innovative approaches to public-private partnerships. Improved dialogue could focus on economic instruments and market barriers that could be reduced to make sustainable business operation easier. Good management used to be about preparing for the expected; now it is just as much about preparing for the unexpected. Without action and strategic planning, risks will multiply and opportunities will be lost.

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Yvo de Boer is KPMG’s special global adviser on climate change and sustainability, responsible for driving the development of the firm’s Sustainability Service. He is former executive secretary to the UN Framework Convention on Climate Change (UNFCCC), and currently chairs the World Economic Forum’s Global Agenda Council on Climate Change. De Boer helped to prepare the position of the European Union in the lead-up to negotiations on the Kyoto Protocol; assisted in the design of the EU’s internal burden sharing; and has led delegations to UNFCCC negotiations.

MEASURING AND REPORTING SUSTAINABILITYACTIVITIES TO STAKEHOLDERS WITH CLEAR,ACCURATE DATA IS QUICKLY BECOMING A PRIORITY

*YVO DE BOER

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SILVER LININGFOR THE BOARD

The cloud is all about computing as a service rather than a product. It supports the sharing of resources – both

hardware and software – through a web browser over the internet. This makes it ideal for companies of all shapes and sizes. By treating IT as a commodity, they can get what they need, when they need it, without heavy investment.

Years ago, the largest part of the IT investment by far was the hardware. This is no longer the case. Software, along with licences, maintenance, upgrades, staff training and technical support, is a significant consideration. But cloud computing and, in particular, software-as-a-service (SaaS) can also take the sting out of the software budget.

The advantages of SaaS range from low cost of entry to global accessibility, but also include ‘softer’ features such as easy administration and collaboration. The choice of applications is growing too, and includes sales tracking, accounting, customer relationship management, enterprise resource planning, invoicing, human resources and more.

Board portalsOne excellent example of cloud-based SaaS is the board portal. This technology, which is increasingly finding favour inside and outside the boardroom, is actually a secure website, which addresses some of the major challenges facing corporate boards: timely compilation, review,

dissection, analysis and approval of corporate information.

Company directors have long been awash with paper, primarily in the form of the board books that are required reading before every full board and many committee meetings, and although some may pigeonhole them as a group of Dickensian technophobes, this stereotype couldn’t be further from the truth.

Today’s directors are not only tech-savvy and fully aware of the efficiencies that notebooks, smartphones and tablets can offer, they are already using these tools in the office, on the road and at home. The idea that technology can streamline board preparation is far from alien.

An organisation’s board materials can run into hundreds of thousands of

Cloud computing is revolutionising business and one particular development is allowing board members to dispense with cumbersome books, explains Eslinda Hamzah

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pages per meeting. Quite apart from the environmental impact of book production, the entire painstaking, time-consuming process is fraught with inefficiency – to say nothing of the stress of a looming deadline by which every director must receive his or her book, wherever in the world they happen to be.

A board portal can be used securely on tablets, such as the iPad, on notebooks or on desktop computers. This enables board members to simply log on to the internet when they want to review and make annotations to board materials.

Because the board portal is a central, single and current repository of the board book, there is no duplication of materials and no opportunity for individual versions to become out of step with each other. Even last-minute revisions can be made in real time, ensuring that books are always up to date.

It’s easy to see why board portals, already considered a boardroom standard by many US and European companies, are finding favour in Asia. Epic Bio, a Singapore-based joint venture formed by Emergent BioSolutions and Temasek Life Sciences Ventures, is a case in point. Although the company is headquartered in Singapore, the directors are located on three continents.

‘Epic Bio decided to streamline the workflow associated with building, approving and publishing board-related material by moving the entire process to a secure, digital, web-based platform,’ says Stephen Lockhart, director of Epic Bio and senior vice president of vaccine development at Emergent BioSolutions.

‘Our directors have busy and demanding travel schedules. Wherever they are they have the correct version of materials, so they can focus on

the business issues rather than the logistics of the board meetings.’

Security and governanceQuite rightly, security and good corporate governance are serious considerations when applications reside in the cloud, and this is usually top of the agenda when companies are considering a board portal.

Collecting and compiling sensitive material and dispatching it to all points of the compass can be fraught with danger – from board books compiled incorrectly, to materials left behind in hotel rooms, in the back of taxis, in

airport lounges or on planes.Directors also know they are being

scrutinised more closely than ever. The Sarbanes-Oxley Act of 2002 reinforced their legal and financial responsibilities and there is heightened pressure to perform their fiduciary duties to shareholders. This has led to an increase in both the number of meetings being held and the amount of information for review. It also requires more frequent communications between meetings.

To be trusted to host sensitive board materials, a board-portal provider must demonstrate that it operates to the very highest security standards at all times and in all locations. Ideally the solution will have been designed to meet the stringent security requirements of, say, the banking, defence and healthcare industries. To avoid any doubt, the service provider should be able to provide a copy of a recent SAS 70 audit.

A recognised auditing standard developed by the American Institute of Certified Public Accountants (AICPA), the SAS 70 audit is a service auditor’s examination performed in accordance with the Statement on Auditing Standards (SAS) No 70, Service Organizations. It signifies that

the application’s security infrastructure has been through an in-depth audit of its control objectives and activities, including those relating to information technology and related processes, and compliance with the requirements of Section 404 of Sarbanes-Oxley. The requirements of Section 404 make SAS 70 audit reports even more important to the process of reporting on the effectiveness of internal control over financial reporting.

At an operational level, a good, web-based portal should be hosted in a totally secure, fail-safe environment that continues to operate, even at a reduced level, rather than failing completely. It will provide a single, centralised view within a standard web browser, and all documents will be encrypted so that only the ‘right’ pair of eyes can read them, and access is restricted to an agreed user group.

While the ultimate purpose of a board portal is to securely support board communications and board workflows, the very fact that it lives in a digital world opens up enormous opportunities to enhance the work of the board in general.

Some portals include calendars, contact information, resource materials and the ability to execute written consents or resolutions. Others have unique areas for committees, and can even be used for gathering and organising documents for the auditors. They can include a resource centre, providing directors with easy access to information and enabling them to add even more value to an organisation.

The goal for many companies is to make the portal the go-to location for directors to access all the material they need to better perform their fiduciary duties.

Whether you are looking to streamline your board, reduce hardware and operations costs, or simply provide productivity applications for your staff, look into the cloud – you should find there’s a silver lining.

Eslinda Hamzah is managing director of Diligent APAC Board Services. www.boardbooks.com

‘OUR DIRECTORS HAVE BUSY AND DEMANDINGTRAVEL SCHEDULES. WHEREVER THEY ARE THEYHAVE THE CORRECT VERSION OF MATERIALS’

29

AP_F_cloud.indd 29 15/10/2012 11:51

Comment

I always enjoy listening to my friend Rajiv Biswas, who is chief Asia-Pacific economist at IHS Global Insight. As usual, he was in fine form at the CFO Innovation Hong Kong Forum in September, where he presented his economic forecasts.

The eurozone crisis and the US ‘fiscal cliff’ – the damaging failure to extend tax concessions due to expire at year-end – took centre stage, along with slowing gross domestic product (GDP) growth in China and India. But unlike other analysts, Biswas also focused on the 10-member Association of Southeast Asian Nations (ASEAN), whose members include Indonesia, Malaysia, Singapore, Thailand and my native Philippines.

Biswas’s thesis is that ASEAN is becoming Emerging Asia’s third growth engine after China and India. ASEAN’s combined GDP is already significantly larger than that of India, he pointed out. By 2028, the South-East Asian bloc’s combined GDP will surpass that of Japan, Rajiv believes.

CFOs everywhere should take note. ASEAN is becoming ‘an increasingly important market for international businesses across a wide spectrum of industries,’ says Biswas, particularly fast-moving consumer goods and luxury products as well as financial services, education, healthcare and tourism services. Significant market opportunities will also be created in infrastructure and the environmental sector.

He’s not talking of just individual markets, either. By 2015, ASEAN will transform itself

Beyond the usual suspects[With ASEAN set to become a major regional driver for growth, CFOs should take note of the signifi cant

market opportunities that countries such as Indonesia and Myanmar may have to offer, says Cesar Bacani

into the ASEAN Economic Community, which will focus initially on integrating trade in services, facilitating investment flows and allowing free movement of certain types of skilled labour –including finance professionals – across 10 markets with a combined population of 600 million increasingly affluent consumers.

First among equals is Indonesia, says

Biswas, because of its strong natural resources base and 250-million predominantly young population. The country won an investment-grade credit rating last year on the back of its solid finances and economic and political reforms; GDP is forecast to exceed US$1 trillion next year and double to US$2 trillion by 2021.

Biswas also expects Malaysia, Thailand and the Philippines to become ‘increasingly important domestic markets for intra-ASEAN trade and investment’. Tiny Singapore

has a role to play, too, as a sophisticated financial, logistics

and knowledge hub.The frontier economies of Vietnam, Laos and Cambodia

will grow rapidly on the back of ASEAN

economic and trade initiatives as well as resumed economic growth

in China. Biswas also sees bluer skies for Myanmar, the fifth most

populous member, as it embarks on political and economic reform after decades of isolation and dictatorship.

‘The unleashing of the Myanmar economy could create a significant boost to ASEAN regional growth as well as intra-ASEAN trade and investment flows,’ says Biswas, who projects GDP growth there of around 6% a year until 2020.

No one can fully foretell the future, of course. But CFOs must help steer company strategy on a three-to-five-year view, if not longer. Given ASEAN’s momentum, its emergence as a

regional driver of growth seems a safe bet even in today’s volatile economic environment.

Cesar Bacani is editor-in-chief of CFO Innovation Asia

30

AP_COM_CB.indd 30 11/10/2012 10:46

Comment

In Malaysia in the late 1980s, when I was a tax assistant fresh out of school, the larger accountancy firms did not seem to have a problem attracting the best and the brightest. This was despite the almost clichéd perception that employees in these firms are often overworked and underpaid. Few things light up a CV more effectively than some years of varied experience at a top-notch accountancy firm.

Things have changed. Not even accountancy firms, including the Big Four, are shielded from the war for talent. The firms have to work harder to position themselves as employers of choice. Visit the careers section of the website of any major firm and you will see that they put in considerable thought and effort so as to become appealing to potential recruits. It is light years away from the take-it-or-leave-it mindset of the past.

But are things so different inside firms today? Not if you go by the findings of Talent Attraction and Retention in Larger Accounting Firms – a recent survey commissioned by Singapore’s Accounting and Corporate Regulatory Authority (ACRA) and conducted by ACCA.

What is fascinating is that employees are still complaining about being overworked and underpaid. Or as the report politely puts it: ‘From the survey results, an obvious source of discontentment was remuneration and benefits, particularly when measured in relation to work efforts.’

The report offers insights into what

When push comes to shove[As a new ACCA/ACRA report highlights the level of discontent among audit employees at larger

fi rms, steps must be taken to prevent unhappy staff from voting with their feet, says Errol Oh

respondents feel about strong push factors. ‘Given that a first-year auditor has to work for about 250 hours a month…the take-home pay is only a mere S$10 an hour. I believe this is perhaps one of the strongest deterrent factors in getting talents to take up an audit career,’ says one audit employee.

Another employee relies on calculations as well to make his point: ‘If we divide our monthly salary by the number of hours we work, the amount may be lower than what our public

bus drivers/taxi drivers are earning.’

And here is a comment from a third

audit staff member: ‘Exponential increase in workload together with an incongruent increase in salary.’

Are these merely the grumblings of the spoilt and demanding Generation Y? Actually, that does not matter. The fact is, these voices of discontent belong to those who perform the bulk of the audit work. If they feel that their work conditions will not improve, they are more than likely to vote with their feet and quit.

The report makes a distinction between audit firm employees who move on to the next phase of their careers after accumulating sufficient experience, and those who walk out

because the firms are not doing enough to retain them.

‘Concerns arise when turnover becomes too fast to the extent that audit engagements become inadequately staffed at each level. The engagement teams may then find themselves not delivering at their optimal level and, as

a result, audit quality suffers,’ it points out.The report is not just

a collection of gripes. It provides the respondents’ thoughts on what needs to change, and a summary of key actionable points for the

firms that have been derived from the survey findings. That ought to be compulsory reading for the

firms’ management.

Errol Oh is executive editor of The Star

For more on the report: http://tinyurl.com/singtalent

31

AP_COM_EO.indd 31 12/10/2012 16:56

Stepping towards sustainability

[ACCA president Barry Cooper refl ects on the Accounting for the Future event and why accountants are key to a strong economy

As someone whose day job is to help prepare future generations of finance professionals, a constant challenge for me is to frequently scan the economic horizon. What will accountants need to know in 10 and 20 years’ time – what will the profession look like? How do we prepare students?

Alongside that is the obligation to ensure that today’s professionals help not only the accountants of the future, but everyone in generations to come, have the opportunities to enjoy career and life opportunities in an ever-changing environment.

This is why I was delighted to see that more than 10,000 ACCA members have participated in the Accounting for the Future online event.

The event, comprising live and pre-recorded webcasts, presentations and workshops, which went live in early October and which is available on demand until the end of this year, explores the role that finance professionals will play in building a stronger and sustainable global economy.

The subjects covered included: the emerging issues related to risk management; the issue of valuation and how trends and developments in social and environmental accounting may lead to changes in the methods used by accountants to evaluate assets and liabilities; global trends and developments in corporate disclosure; the importance of investor engagement; the influence which investors can have on corporations and organisations; and lastly the green economy. Thus this online event covered some contentious and challenging issues.

Having such a large number of participants from around the world not only demonstrates our global strength, but enabled delegates to share experiences and highlight the issues they are facing in meeting the sustainability challenge. Importantly, those views will help ACCA develop member initiatives well into the future. I want to thank everyone who took part in what I am sure will prove to be an extremely influential milestone in our thinking on sustainability issues.

Visit the event at www.accaglobal.com/accountingforthefuture

Professor Barry J Cooper is head of the School of Accounting, Economics and Finance at Deakin University, Australia

Comment32

AP_INT_COM_pres.indd 32 12/10/2012 10:44

33 Corporate The view from Douglas Young of Goods of Desire plus news in brief; Malaysia’s next generation of fi nance professionals are being nurtured; how companies can improve their corporate reporting

39 Practice Tan Siow Ming of PwC Malaysia plus news in brief; getting tough on fi nancial crime

HEINEKEN WINS APBDutch brewer Heineken has gained approval in a S$5.6bn (US$4.5bn) deal to take full control of the maker of Tiger beer, Asia Pacific Breweries (APB). Shareholders of the Singapore conglomerate Fraser and Neave voted to sell the company’s holdings in the beer business to Heineken in late September after Heineken battled with Thai billionaire Charoen Sirivadhanabhakdi for the key Asian brewing asset. The battle for control was prompted in July when companies linked to Sirivadhanabhakdi bid for stakes in Fraser and Neave, as well as APB. In what had been an 81-year joint venture between the two companies, Heineken already had a 55.6% stake in APB while Fraser and Neave held about 40%. APB brews some of the most popular beers in South-East Asia, including Bintang, Anchor and Tiger.

BAKRIE TO REPAY DEBTPT Bakrie & Brothers, the investment arm of Indonesian Bakrie Group, and affiliate Long Haul Holdings have agreed with creditors to a plan to repay US$437m in debts. The company did not say how it would repay the debt, which was arranged by Credit Suisse and has the group’s 23.8% stake in the London-listed coal miner Bumi held as collateral. The Bakrie Group has previously sought new loans to refinance debt. In April, a group of lenders led by Credit Suisse asked Bakrie Group to top up the loan with about US$100m in cash due to a sharp decline in the family’s shares in Bumi.

The view from: Hong Kong: Douglas Young, founder and CEO, Goods of Desire

Q What is Goods of Desire’s business strategy?A We are building the first contemporary brand of Hong Kong that is proud to show its origins.

Q Do you think there is a lot of potential for development for the Hong Kong market?A Yes, there is certainly a lot of

potential, considering the increased tourism into Hong Kong from mainland China. But we are also looking at expanding overseas at the moment. Our new shops will be opening in Singapore and China this year.

Q What are your marketing and business developing strategies for the coming months?A Our unique position is that we are immediately associated as a brand that gives Hong Kong culture a funky spin. Therefore, our current strategy involves collaborating with other brands that also want to share this value with their customers.

Q What do you most enjoy about your work?A I enjoy seeing my concepts come to life.

Q What lessons have you learnt in the past years? Do you have a personal motto?A I have learnt to stay true to my philosophy. My personal motto is: that which doesn’t kill you makes you stronger.

FAST FACTSLocation of headquarters: Hong KongNumber of employees: 120Favourite book: The Art of Travel by Alain de BottonCompany background: Founded in 1996, the retailer Goods of Desire has eight shops in Hong Kong as well as branches in Singapore and China. The company – which offers fashion, gifts, homeware and furniture – strives to preserve Hong Kong’s unique cultural legacy, and it is also involved with the Hong Kong Street Culture Museum.

33Corporate

AP_YCORP_Intro.indd 33 11/10/2012 14:10

The CVCareer banker and FCCA Lee Khee Joo was seconded as head of the Financial Sector Talent Enrichment Programme (FSTEP) by Bank Negara Malaysia (BNM), effective 9 July 2008.

Lee holds an economics degree and a post-graduate accountancy diploma from the University of Malaya and an MBA from the University of Queensland, Australia. He has more than 38 years of experience in the banking and finance industry.

Starting out as a bank auditor, Lee was attached to BNM for 23 years, holding various posi-tions in bank examination and finance and culminating in the post of chief internal auditor. He subsequently held various senior positions in the former Pacific Bank, Malayan Banking and Hong Leong Bank, among others.

In appointing a leader to champion talent development, it’s crucial to choose an individual with a passion for learning. With this in mind, Malaysia’s central bank tapped career banker Lee Khee Joo, whose experience spans 38 years in banking and finance, to run the Financial Sector Talent Enrichment Programme (FSTEP), which seeks to nurture entry-level professionals for the financial services industry.

Lee is definitely an advocate of lifelong learning, with an array of qualifications under his belt, including an economics degree, a post-graduate accountancy diploma, an MBA and a professional accountancy qualification.

Yet, the current head of FSTEP downplays the fruits of his paper chase. ‘My diverse qualifications in economics, accounting and business administration are nothing magical or extraordinary,’ he says. ‘Looking back, I must say that the lifelong learning philosophy is the main contributing factor in achieving most, if not all, of these qualifications.’

Lee is proud that he is a home-grown and pioneering accountant from the 1970s. ‘When I graduated from the University of Malaya with an economics degree in 1974, I joined the Central Bank of Malaysia (Bank Negara Malaysia) as a young bank examiner (loosely termed by bankers as Bank Negara auditors). At that time, there was no accountancy degree offered in any of the Malaysian universities. At best, what I had was an economics degree majoring in accounting.’

Nevertheless, the demands of his job in audit and assurance inspired Lee to strive to become a qualified accountant. Lee says that he owes a great deal to his then boss, Tan Sri Mohamed Basir Ahmad, who encouraged him to return to the University of Malaya to pursue a part-time post-graduate diploma in

accountancy. ‘Upon the completion of the programme, I qualified as a “home-grown” accountant,’ he says. Subsequently, Lee says he was blessed with ‘full pay plus scholarship’ by Bank

Negara Malaysia (BNM) to pursue an MBA degree at the University of Queensland, Australia, in 1981.

But Lee wasn’t done. His vision was to pursue a global accountancy qualification and ‘ACCA was a natural choice’. Lee believes that ACCA was instrumental to his banking career, both in the regulatory and private sectors. ‘I sat the ACCA examinations on a part-time basis while being promoted to various levels of bank supervision at the central bank,’ he recalls. ‘The acquired knowledge from sitting the ACCA examinations helped tremendously in my career progression at Bank Negara Malaysia.

‘By sheer hard work and perseverance, I passed as an ACCA graduate in 1993. I can safely say that by achieving this, I was promoted to become the deputy manager in the Finance Department of Bank Negara Malaysia. After a few years, BNM identified me as the CEO to oversee the management of a problematic merchant bank in Kuala Lumpur. Years later, I moved from the Central Bank to the private sector, working with the former Pacific Bank, Malayan Banking and Hong Leong Bank to gain more commercial banking experience.’

Although Lee is no longer directly involved in the management of financial institutions, he still plays a critical part in the industry. Eager to share his knowledge and backed by a passion for lifelong learning, he’s helping to nurture the nation’s young banking prospects through the Financial Sector Talent Enrichment Programme (FSTEP).

Blue-ocean thinkingEstablished in 2007, FSTEP is an initiative under the auspices of the Institute of Bankers Malaysia (IBBM) to develop and nurture entry-level

Stepping to the foreHaving a strong belief in the need to keep pushing oneself, Lee Khee Joo is well placed to spearhead a programme aimed at nurturing the nation’s next generation of bankers

34 Corporate

AP_YCORP_Lee.indd 34 12/10/2012 16:58

35

AP_YCORP_Lee.indd 35 12/10/2012 16:58

The tips*Lee believes that the ACCA Qualification was pivotal to his career progression as a central bank auditor and, later on, a commercial banker. He passed his ACCA at 43 on a part-time basis, when many younger candidates struggle even on a full-time basis. ‘Without any doubt, the ACCA examination is difficult, but the attainment of the qualification is useful and essential to move up the corporate ladder.’

*Take failures in your stride, leverage your strengths and navigate according to your vision to achieve your desired results, advises Lee. ‘Learn from failures but keep focused on results-driven goals to achieve significance in life.’

*He advocates generous sharing of knowledge and is the author of two books: So You Want to be an Accountant? and Credit Facilities for Small and Medium Industries.

‘I SEE THERE ARE AMPLE OPPORTUNITIES FOR ACCA GRADUATES TO JOIN THE FINANCIAL SERVICES INDUSTRY THROUGH FSTEP’

professionals for banks, and insurance and takaful (Islamic insurance) companies – collectively termed as the financial services industry – in Malaysia.

IBBM is the professional and educational body for the banking and financial services industry in Malaysia. FSTEP is the brainchild of Tan Sri Dr Zeti Akhtar Aziz, the governor of BNM. It recruits diverse talents from multiple disciplines.

‘Apart from accountants, FSTEP uses “blue-ocean thinking” to tap into the non-traditional pool of talents from various disciplines. Graduates and those with not more than three years of working experience who are keen to pursue a career in the financial industry are encouraged to apply,’ explains Lee.

Thanks to this non-traditional strategy, Lee reckons that ‘to date, FSTEP has trained more than 1,000 graduates from different disciplines, including engineers, architects, accountants, mathematicians, biotech scientists, actuaries, lawyers, psychologists and even a doctor!’

But getting a place in FSTEP is hardly easy; competition is stiff. Lee estimates that FSTEP receives more than 1,000 applications per intake for 100-120 places, and there are two intakes every year. Candidates must not be over 30; must achieve a minimum CGPA of 3.25 or its equivalent; must possess a fluent command of English; and must pass an interview by the sponsoring institution. All the selected participants must also secure a sponsor; FSTEP does assist candidates to find sponsors, says Lee.

Since the idea is to produce work-ready graduates, FSTEP’s one-year intensive training programme complements the initial six-month classroom training with a structured six-month internship under a mentor-mentee arrangement with the sponsoring financial institutions.

The comprehensive classroom training includes the transfer of technical knowledge using simulations, workshops and case studies. Since English is extensively used in global banking circles, the six-month classroom training includes an

intensive one-month English-language course which is facilitated by trainers from the British Council. And to develop well-rounded individuals, all participants undergo personal development courses, industrial visits, e-learning and outward-bound school experiences at Lumut, Perak, as well as community service projects.

Given that FSTEP is a fairly nascent programme, the long-term

performance of its graduates is yet to be assessed. However, this industry-led programme enjoys overwhelming support from the Malaysian financial services industry, says Lee. Of course, in the long run, it’s up to the individual to make the most of FSTEP training, he adds. ‘The success of the entire programme will depend on the commitment of the participants.’

ACCA and FSTEPIn future, ACCA graduates are poised to benefit from a recent memorandum of understanding (MoU) signed between ACCA Malaysia and FSTEP. Lee describes the MoU as a ‘win-win which will expand the talent pool for the banking sector while providing ACCA graduates with a unique route to joining the Malaysian financial services industry via FSTEP’.

The MoU also enables ACCA to recognise FSTEP’s credentials as a stepping stone to achieving professional accountancy qualifications. ‘All FSTEP graduates or participants will be given the chance to pursue a global qualification [to improve themselves]. As part of our effort in talent enhancement, ACCA can

36 Corporate

AP_YCORP_Lee.indd 36 12/10/2012 16:59

The basics: FSTEPEstablished in 2007, FSTEP is an initiative to expand the talent pool for the financial industry. The FSTEP training programme syllabus comprises four core streams: conventional banking, Islamic banking, investment banking and insurance and takaful.

Besides providing technical training in banking and insurance, the syllabus is oriented towards the practical and operational aspects of banks and insurance companies. FSTEP training also includes simulations, workshops, case studies and on-the-job-training through structured internships with financial institutions.

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training in banking and insurance, the syllabus is oriented towards the training in banking and insurance, the syllabus is oriented towards the training in banking and insurance, the syllabus is oriented towards the training in banking and insurance, the syllabus is oriented towards the training in banking and insurance, the syllabus is oriented towards the training in banking and insurance, training in banking and insurance, the syllabus is oriented towards the training in banking and insurance, the syllabus is oriented towards the training in banking and insurance, the syllabus is oriented towards the training in banking and insurance, training in banking and insurance, the syllabus is oriented towards the training in banking and insurance, the syllabus is oriented towards the training in banking and insurance, the syllabus is oriented towards the training in banking and insurance, training in banking and insurance, the syllabus is oriented towards the training in banking and insurance, the syllabus is oriented towards the the syllabus is oriented towards the training in banking and insurance, training in banking and insurance, the syllabus is oriented towards the training in banking and insurance, the syllabus is oriented towards the training in banking and insurance, the syllabus is oriented towards the training in banking and insurance, training in banking and insurance, the syllabus is oriented towards the training in banking and insurance, the syllabus is oriented towards the training in banking and insurance, the syllabus is oriented towards the the syllabus is oriented towards the training in banking and insurance, the syllabus is oriented towards the training in banking and insurance, training in banking and insurance, the syllabus is oriented towards the training in banking and insurance, the syllabus is oriented towards the training in banking and insurance, the syllabus is oriented towards the training in banking and insurance, training in banking and insurance, the syllabus is oriented towards the training in banking and insurance, the syllabus is oriented towards the training in banking and insurance, the syllabus is oriented towards the training in banking and insurance, the syllabus is oriented towards the practical and operational aspects of practical and operational aspects of practical and operational aspects of the syllabus is oriented towards the practical and operational aspects of banks and insurance companies.

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studies and on-the-job-training simulations, workshops, case studies and on-the-job-training simulations, workshops, case studies and on-the-job-training

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be a roadmap for professional growth and development for all our graduates in career advancement,’ says Lee.

Currently, the numbers of ACCA graduates enrolling in FSTEP remain negligible, although employment prospects are excellent. Lee estimates that ‘there are not more than 10 ACCA graduates joining the FSTEP training programme. Upon completion of training, all of them were subsequently employed by financial institutions in Malaysia. On the demand side, I see there are ample opportunities for ACCA graduates to join the financial services industry through FSTEP.’

In terms of skillsets, ‘I think all ACCA accountants possess the basic skillsets to work in the finance sector. What accountants require is to supplement their knowledge,” says Lee. To gain the requisite entry-level knowledge to work in banking and finance, the FSTEP training programme incorporates the core and technical competencies required of financial services practitioners in line with the Banking and Finance Industry Competency Framework Model, which is benchmarked against international standards, he adds.

ACCA graduates can expect enormous opportunities once they complete FSTEP training, Lee enthuses. Treasury operations, risk management, product development and wealth management are challenging areas that will always require strong financial and banking skills, says Lee.

‘In addition, there are new development and growth areas in Islamic banking, investment banking as well as insurance and takaful companies waiting to be explored. The potential markets of Islamic banking and takaful remain largely under-tapped compared to conventional markets,’ he adds.

Islamic bondsIn particular, Lee sees enormous potential in sukuk (Islamic bonds) and takaful as Malaysia jockeys for leadership in the Islamic finance race. Currently, Malaysia’s sukuk market is the world’s largest, and Malaysia continues to dominate the global sukuk market. Malaysia remains a top investment destination for Islamic funds, with sukuk issued in Malaysia accounting for 73.2% of global sukuk

issuances in 2011 compared to 72.5% in 2010.

Takaful also has lots of room to grow, according to Lee. According to Bank Negara figures, as at end-2011, total assets of takaful funds increased by 15.8% to RM17bn, while total takaful contribution accounted for just 13% of total premiums and contributions in the insurance and takaful industry.

Bearing these prospects in mind, young ACCA graduates might want to think out of the box and consider a non-traditional career in the relatively blue ocean of Islamic finance and takaful.

Nazatul Izma Abdullah, journalist

37

AP_YCORP_Lee.indd 37 12/10/2012 16:59

How can you improve your communications with the capital markets through your corporate reporting? Our 12 practical reporting tips – based on what investors tell us they would like to see in reporting – are a great place to start.

Have a backboneUse your objectives and strategy to underpin your reporting and provide the context for your activities and performance. Strategic statements set in isolation from the rest of your reporting can appear hollow.

Back to basicsExplain your key capabilities and the key resources and relationships you depend on to create and sustain value. Consider both your key inputs/outputs as well as your own activities, and demonstrate how your business model interacts with other reporting elements. The big picturePut your results in the context of market trends. Provide management’s perspective on the competitive landscape and macro environment to allow the reader to evaluate your strategic choices and actions.

Tell the whole tax storyProvide clear information for stakeholders on the sustainability of current tax rates and how tax impacts your business, looking more broadly at tax strategy, risk management and the wider impact of tax as well as detailed tax performance in the tax note.. Cash is still kingExplain how you make money, generate cash and are funded. Competition for capital is fiercer than ever before, so consider including detailed disclosure about your operating cashflow strategy and performance and consolidating

your debt disclosure. Provide details of your debt maturity schedule and reconciliation of free cashflow to movements in net debt.

Survival of the fittestDemonstrate an understanding of the material sustainability risks and opportunities relevant to you and your key stakeholders and how they’re integrated into your core corporate strategy. Consider the impact of your business across your entire value chain when considering materiality.

Bottom up!Challenge whether the segment analysis is not just compliant but also makes visible the dynamics inherent within the business. Consider including a few additional line items such as working capital, operating cashflow and capital employed for each segment.

Flash in the pan?Explain what is driving financial performance – is growth sustainable? Consider using bridge charts to help investors understand what is driving revenue profit and growth. Ensure non-GAAP measures to support your messaging are clearly identifiable, consistently defined and reconciled to your GAAP numbers.

Not the kitchen sinkHighlight principal risks, not all risks. How might they derail your strategy? How are they managed? How has the risk profile changed during the year and what is the sensitivity of underlying performance to changes in these risks?

What gets measured gets doneIdentify key financial and operational KPIs used to assess progress against strategic priorities. Explain clearly how management are incentivised, highlighting the link between strategy, KPIs and the remuneration package.

Crack the codeGo beyond compliance and bring governance reporting to life by demonstrating the activities of the board, the skills and experiences each board member brings to the table and how they interact.

Join the dotsAvoid silos and present a clear, coherent and integrated picture of how your strategy, governance, performance and prospects lead to long-term value creation.

Alison Thomas is a corporate reporting specialist at PwC. For further details on the tips, go to www.pwc.co.uk/corporatereporting

Top tips for this reporting seasonAs reporting season fast approaches, PwC director Alison Thomas gives us her top tips for making your annual report more effective in communicating with the capital markets

Corporate38

AP_INT_YCORP_PwC.indd 38 11/10/2012 10:52

Suria KLCC retail complex, Kuala Lumpur, Malaysia

Q What is in your inbox at the moment? A Requests for meetings to discuss regional collaboration, talent management and client proposals.

Q Your practice covers five countries: Malaysia, Thailand, Vietnam, Cambodia and Laos. Which currently requires most of your time?A Malaysia. We are seeing lots of opportunities with the government’s Economic Transformation Programme (ETP) and continuing mergers and acquisitions activity, with some private equity interest. The Thai economy is humming along; we see a trend for the larger Thai businesses to explore cross-border deals and investments.

Q While Malaysia’s economic growth has slowed this year, which of the industries you advise has been affected the most?A The plantation sector is a significant component of the Malaysian economy. I would say the downstream business of oil palm refinery is facing a tough time on margins.

Q What challenges do you foresee in the year ahead?A We have grown rapidly in our advisory business over the last four years but we have to avoid being complacent. Our priorities in the year ahead are three-fold. One, build a more client-centric business model to complement our growth from developing value-added solutions. Two, bring the best out of our people. Three, invest in innovation and industry expertise.

FAST FACTSFirm structure: partnershipStaff numbers (at 31 August 2012): 1,968 Favourite book: A Long Obedience in the Same Direction by Eugene H Peterson

CALL TO BROADEN TAX BASEPwC Taxation Services has called for Malaysia to broaden its tax base in order to gain from having a lower fiscal deficit ratio to gross domestic product (GDP) by 2015. With a broader tax base, the accountancy firm believes the Malaysian fiscal deficit of 4.7% of GDP this year can be reduced to 3% in three years.

Jagdev Singh, a PwC senior executive director, says that one way to broaden the tax base is to introduce a goods and services tax as this would capture additional population and help the government increase its revenue in order to manage the country’s deficit level. Less than 10% of the population pays taxes under the country’s current regime, Singh says.

US OBSERVERS TO VISIT CHINAChinese and US authorities have reached a tentative agreement to send US auditor inspectors to China as observers. The plan will be a ‘trust-building exercise’ that could lead to more cooperation, said Lewis Ferguson, a board member of the US Public Company Accounting Oversight Board (PCAOB). Inspectors from the PCAOB, the US audit-industry regulator, will be allowed to observe Chinese authorities examining the work of Chinese accountancy firms. This will be a step towards the potential joint inspections of Chinese firms by both US and Chinese inspectors that the board hopes will begin next year, Ferguson said.

The view from: Kuala Lumpur: Tan Siow Ming, senior executive director and advisory leader, PwC Malaysia

39 Practice Tan Siow Ming of PwC Malaysia plus news in brief; getting tough on fi nancial crime

33 Corporate The view from Douglas Young of Goods of Desire plus news in brief; Malaysia’s next

generation of fi nance professionals

are being nurtured; how companies can improve their corporate reporting

39Practice

AP_YPRAC_Intro.indd 39 11/10/2012 13:10

One of the very tangible ways in which practising accountants serve the public interest is as gatekeepers in relation to financial crime. Many accountants have by now come to accept that the regulatory obligations they have in this area are not only unavoidable but even helpful; first because they reinforce the status of accountants within society as responsible and trusted intermediaries, and second because the obligations act as an active deterrent to clients or prospective clients who might otherwise try to involve their professional advisers in their own criminal activities.

The world at the moment is a dangerous and unstable place on many fronts. The international community still faces serious threats from terrorism and the spread of weapons of mass destruction. The depressed state of the global economy is also imposing highly competitive pressures

on individuals and businesses alike, and very often the pressures on both are liable to interact.

KPMG’s latest UK fraud survey suggests that recorded fraud in 2011 exceeded £3.5bn in total, with fraud by company management up by 74%. Even in Australia, which has escaped the economic downturn affecting Europe and North America, KPMG found a steady rise in the incidence of fraud and concluded that 80% of business fraud is committed by employees and managers, often taking advantage of weak controls and defective processes of detection.

Bribery and corruption is another area of crime thought to be exacerbated by a harsh economic climate. Despite the well-publicised case of Siemens, which was forced to pay a record $1.34bn in fines by courts in Germany and the US for a series of bribery offences, a survey published in May 2012 by Ernst & Young found that a staggering 54% of UK executives would not rule out engaging in unscrupulous or illegal behaviour, such as misstating financial statements or providing personal gifts or cash to secure business; the number of respondents prepared to offer bribes had almost doubled in two years. This is despite the introduction in the UK of legislation that exposes companies to criminal penalties if any of their employees, subsidiaries or intermediaries offer or pay bribes.

This developing context has now been reflected in the latest version of the authoritative recommendations

issued by the Financial Action Task Force (FATF), the global body charged with monitoring trends in financial crime and with developing anti-money laundering and counter-terrorism financing (AML/CTF) measures.

The latest set of recommendations, only the third revision since they first appeared, in 1990, imposes significant new expectations on governments to address emerging macro factors, including countering the proliferation of weapons of mass destruction and carrying out national risk assessment procedures to lay the foundation for focused remedial measures.

The revised recommendations incorporate a number of changes which stand to have a direct effect on practitioners and their work, as follows.

Client due diligenceThere is only a minor change made to what for most practitioners is the key area of client due diligence (CDD) – namely, the standard range of circumstances in which CDD procedures must be performed and the steps that need to be carried out in those circumstances. Formerly, parties were required by FATF only to obtain information on the purpose and intended nature of a business relationship. The new wording commits regulated parties expressly to understand its purpose and intended nature.

The revised wording makes it more explicit that the point of the exercise is not solely to ask for information about the client’s intentions but also to understand those intentions; it also implies that the amount of information to be asked for should be in proportion to what the nature and purpose of the relationship is understood to be.

Politically exposed persons The recommendations already cover politically exposed persons (PEPs) to the extent that they come from a different jurisdiction than the one in which the practitioner operates. So, for example, a senior politician or military figure from a foreign country (who is a prospective customer or a beneficial owner) should be regarded as a PEP and so subject to ‘enhanced’ due diligence (EDD).

The revised recommendations strengthen the PEP provisions with a new reference to domestic PEPs. Practitioners must now take

Accountants in crime-fi ght frontlineRevised global recommendations give practitioners an increased role in the crackdown on money laundering, terrorism fi nancing and tax evasion, says ACCA’s John Davies

WHENEVER A PRACTITIONER SUSPECTS THAT A PARTY HAS CONSCIOUSLY COMMITTED A TAX CRIME, THAT WILL BECOME A REPORTABLE MATTER

Practice40

AP_YPRAC_fraud.indd 40 08/10/2012 10:53

‘reasonable measures’ to determine whether a prospective domestic customer or beneficial owner is a domestic PEP (or a person entrusted with a prominent function by an international organisation). Where the prospective relationship is considered higher risk, practitioners are required to apply the EDD measures.

Revised recommendation 12 provides that the measures to be taken for both foreign and domestic PEPs should be extended to family members and close associates of the PEP concerned. This includes gaining senior management approval for dealing with them, carrying out reasonable inquiries to establish the source of their wealth, and undertaking enhanced ongoing monitoring of the relationship.

GroupsNetworks of professional firms are covered by a new recommendation to implement group-wide programmes against money laundering and terrorist financing. These should include policies and procedures for sharing information within the group for AML/CFT purposes.

Group-wide arrangements could prove particularly advantageous in

War on two fronts: the soldier at this checkpoint in Sana’a, Yemen, provides a very visible anti-terrorist measure, but accountants will also play an important role as gatekeepers of FATF’s system to create a hostile environment for terrorist financing

terms of placing reliance on CDD information acquired by third parties. Where a group as a whole adopts policies which follow the FATF recommendations, and where compliance with them is supervised at the group level by a competent authority, group companies should be allowed to rely on information provided by other group companies. Where such arrangements are put in place, national authorities may also decide that no special weight should be placed on the risk associated with the country in which the provider of information is based (another new element of the revised recommendations).

Extension of scope of the recommendations Some countries, such as the UK, already apply AML/CTF controls to tax offences but this has not until now been required under the FATF recommendations. The revised recommendations require individual countries to extend the scope of their AML/CTF measures to cover tax offences in respect of both direct and indirect taxes.

It will be up to each country to decide whether to apply a threshold of

materiality to this but, essentially, it means that whenever a practitioner suspects that a party has consciously committed a tax crime, then that will become, prima facie, a reportable matter. In those countries where tax offences do not currently form part of the national AML/CTF regime, this change is likely to have a significant impact on accountants.

The FATF recommendations do not have regulatory force automatically, but need to be adopted formally by national authorities and regulatory bodies. The process of doing this is already well under way. In Europe a fourth directive on money laundering is currently being drafted as a priority measure, so members in public practice should be prepared for changes to their gate-keeping responsibilities in the near future.

John Davies, head of technical, ACCA

41

AP_YPRAC_fraud.indd 41 08/10/2012 10:53

A monthly round-up of the latest developments in fi nancial reporting, audit, tax and law

HONG KONG

COMPANIES ORDINANCEThe Companies Bill was passed by the Legislative Council on 12 July. The main changes include:

* A mandatory system of no-par for all companies with a share capital.

* Private companies must have at least one director who is a natural person.

* The standard for company directors’ duty of care, skill and diligence is clarified with a mixed objective and subjective test.

* More effective rules to deal with directors’ conflicts of interest.

* The ‘headcount test’ for privatisations and specified schemes of arrangement is replaced by a ‘not more than 10% disinterested voting’ requirement.

* New rules for proposing and passing a written resolution.

* Public companies, larger private companies and guarantee companies must prepare a more comprehensive directors’ report that includes an analytical and forward-looking ‘business review’.

* Companies that meet specified size criteria can prepare simplified financial statements and directors’ reports.

* Strengthening of the enforcement regime in relation to the liabilities of officers of companies that contravene the Ordinance provisions.

* Auditors are empowered

to require information or explanation from a wide range of persons that they reasonably need to perform their duties.

* A new offence in relation to inaccurate auditors’ reports. This is where an auditor knowingly or recklessly caused two important statements to be omitted from the auditors’ report.

* Companies can dispense with annual general meetings by unanimous shareholders’ consent.

* An alternative court-free procedure for reducing capital based on a solvency test.

* All types of companies can purchase their own shares out of capital, subject to a solvency test.

* All types of companies can provide financial assistance to another party for the purpose of acquiring the company’s own shares or the shares of its holding company, subject to a solvency test.

For more information see www.cr.gov.hk.

BOARD DIVERSITYHong Kong Exchanges and Clearing has released a consultation paper on proposed changes to the Corporate Governance Code and Corporate Governance Report (Code) regarding board diversity. It proposes that board composition should reflect diversity of perspectives in addition to a balance of skills, experience and independence. The deadline for comment is 9 November.

The consultation paper can be downloaded from www.hkex.com.hk

Sonia Khao, head of technical services, ACCA Hong Kong

SINGAPORE

MORE TIME FOR STANDARDSThe Accounting Standards Council (ASC) will allow stakeholders more time to implement FRS 110, Consolidated Financial Statements, FRS 111, Joint Arrangements, FRS 112, Disclosure of Interests in Other Entities, FRS 27, Separate Financial Statements, and FRS 28, Investments in Associates and Joint Ventures. The mandatory effective date is deferred for a year to annual periods beginning on or after 1 January 2014. Earlier application is permitted. For more details see http://www.asc.gov.sg

ACRA: QUALITY CONTROL The Accounting and Corporate Regulatory Authority (ACRA) has issued Part 2 of its series of Audit Practice Bulletins on Singapore Standard on Quality Control (SSQC) 1, Quality Control for Firms that Perform Audits and Reviews of Financial Statements, and Other Assurance and Related Services Engagements.The bulletin can be downloaded from www.acra.gov.sg

TRAINING FOR DIRECTORS ACRA’s new training programme for company directors was held in September. The Directors

Proficiency Programme (DPP) saw company directors from small and medium enterprises being taught essential statutory requirements under the Companies Act and given e-filing guidance.The DPP is part of ACRA’s on-going efforts to promote a high level of corporate compliance in Singapore. More information is available at www.acra.gov.sg

INSURANCE ACT CHANGESThe last major amendment to the Insurance Act (Cap 142) was in 2004. In this consultation paper, the Monetary Authority of Singapore (MAS) proposes amendments to the Act to take into account regulatory and market developments since then and to align, where appropriate, the regulatory framework for insurance with that of other financial activities regulated by MAS. For more, see www.mas.gov.sg

VIETNAM TAX PROTOCOL The existing Singapore-Vietnam Avoidance of Double Taxation Agreement was amended in September with a Second Protocol.

The amendments include revisions to the permanent establishment, dividends, interest and capital gains articles. It will enter into force after ratification by both countries.The full text of the Protocol is available at www.iras.gov.sg

Joseph Alfred, policy and technical adviser, ACCA Singapore

*MALAYSIA

42 Technical update

AP_T_update.indd 42 12/10/2012 16:20

*MALAYSIARULES TO FACILITATE EXCHANGE TRADED BONDS AND SUKUKSOn 26 September, Bursa Malaysia introduced the Rules to Facilitate Exchange Traded Bonds and Sukuks (ETBS) to be listed and traded on Bursa Securities. ETBS is aimed at offering greater choice to investors seeking products that yield stable returns with capital protection.

The relevant rule changes to the Listing Requirements, Rules of Bursa Securities and the Rules of Bursa Depository can be accessed at www.bursamalaysia.com

CLARIFICATION ON THE EXECUTION OF FORM 48A FOR E-LODGEMENTOn 5 September, the Companies Commission of Malaysia issued Practice Note No. 14, Clarification on the Execution of Form 48A for the Purposes of E-lodgement.

For more information, go to www.ssm.com.my/en/public-practice-notes

TECHNICAL GUIDELINE ISSUED BY THE INLAND REVENUE BOARD (IRB)On 9 August, IRB issued a guideline in relation to the clarification on the non-application paragraph in the following Income Tax (Accelerated Capital Allowances) Rules:

* Income Tax (Accelerated Capital Allowance) (Plant and Machinery) Rules 2008 (P.U. (A) 357/2008)

* Income Tax (Accelerated Capital Allowance) (Information and Communication Technology Equipment) Rules 2008 (P.U. (A) 358/2008)

* Income Tax (Accelerated Capital Allowance) (Plant and Machinery) Rules 2009 (P.U. (A) 111/2009)

For more information, go to www.hasil.org.my under ‘Technical Gudelines’

ANTI-MONEY LAUNDERING AND ANTI-TERRORISM FINANCING ACT (AMLATFA) 2001On 29 August, the Inland Revenue Board informed taxpayers who commit any of the following three specified tax offences under the AMLATFA 2001 will be subject to a fine up to RM5m, jail for up to five years or both:

* failure to furnish income tax returns or give notice of chargeability (section 112 of the Income Tax Act 1967);

* submitting incorrect income tax returns (section 113 of the Income Tax Act 1967); and

* wilful evasion of tax (section 114 of the Income Tax Act 1967)For further details, refer to the IRB’s press statement at: http://tinyurl.

com/9qbu2bs

FRSIC CONSENSUS 18 ISSUEDOn 26 September, The Malaysian Institute of Accountants approved the release of FRSIC Consensus 18, Monies Held in Trust by Participating Organisations of Bursa Malaysia Securities Berhad. FRSIC Consensus 18 provides guidance on the accounting of monies held in trust by a participating organisation of Bursa Malaysia Securities Berhad pursuant to the provisions of Capital Markets Services Act 2007 and the Bursa Securities Rules.

For more information, go to http://tinyurl.com/9r2acj6

Vilashini Ganespathy, head – technical and professional development, ACCA Malaysia

AP_T_update.indd 43 12/10/2012 16:20

A monthly round-up of the latest developments in fi nancial reporting, audit, tax and law

INTERNATIONAL

FINANCIAL INSTRUMENTSThe International Accounting Standards Board (IASB) has produced a series of webcasts on financial instruments. The updates last one hour and require registration.

For more information visit www.ifrs.org

HEDGE ACCOUNTINGChanges to IFRS 9, Financial Instruments, have been published by the IASB. The amendments and accompanying guidance relate to changes to general hedge accounting.

The draft and guidance are available until early December, then the IASB will finalise the draft and issue the revised standard.

The guidance contains useful examples, questions and answers on implementation and details of amendments to other IFRSs.The amendments can be found at http://tinyurl.com/8gwklt7

IFRS FOR SMES

International changes and updates on IFRS for SMEs, including guidance for different-sized entities, information on country adoption and resources for small and medium-sized enterprises are available at www.ifrs.org/IFRS-for-SMEs

ILLEGAL ACTSThe International Ethics Standards Board for Accountants (IESBA) has issued an exposure draft,

Responding to a Suspected Illegal Act.

The draft is open for comment until 15 December and IESBA intends to revise the ethical standards code in light of the comments it receives in the second half of 2013.

The proposed changes highlighted in the draft are where professional accountants in practice or business override, or have a right to override, the fundamental principle of confidentiality and to disclose a suspected illegal act to an external authority.

Go to www.ifac.org/publications-resources

ISAES AT A GLANCETwo at-a-glance updates that will be useful when considering engagements over the next 12 months are:

* International Standard on Assurance Engagements (ISAE) 3410, Assurance Engagements on Greenhouse Gas Statements. The standard applies to assurance reports covering periods ending on or after 30 September 2013.

* ISAE 3420, Assurance Engagements to Report on the Compilation of Pro Forma Financial Information Included in a Prospectus. The standard applies for assurance reports dated on or after 31 March 2013.

The guides provide links to further information provided by the IAASB (International Auditing and Assurance Standards Board).

For more information visit

www.ifac.org/publications-resources

ISAS AND SMALLER AUDITSThe IAASB is finalising its survey on ISAs and how they have been applied to smaller audits and is collating feedback.

Its current work indicates that there are some benefits in terms of audit quality and the cost impact has been relatively small.

Views differ as to whether changes need to be made to the standards to make them more suitable for smaller audits.

The IAASB will be aggregating the UK results with those of other countries in the next few months.

The findings from the SME survey will be combined with the input that is expected to be received on ISA implementation from firms, regulators, standard-setters and others and will be discussed by the IAASB in June 2013.

REVIEW ENGAGEMENTSThe IAASB has issued International Standard on Review Engagements 2400 (Revised), Engagements to Review Historical Financial Statements.

The revised standard applies for periods ending on or after 31 December 2013.

The standard deals with the practitioner’s responsibilities when engaged to perform a review of historical financial statements, when the practitioner is not the auditor of the entity’s

financial statements, and the form and content of the practitioner’s report on the financial statements.

The standard contains useful illustrative information within the appendices including an illustrative engagement letter for an engagement to review historical financial statements and illustrative practitioners’ review reports.

When applying the standard, practitioners will need to consider International Standard on Quality Control 1 (ISQC1). The standard states:

* Relationship with ISQC 1. Quality control systems, policies and procedures are the responsibility of the firm. ISQC 1 applies to firms of professional accountants in respect of a firm’s engagements to review financial statements. The provisions of this ISRE regarding quality control at the level of individual review engagements are premised on the basis that the firm is subject to ISQC 1 or requirements that are at least as demanding.

The revised standard can be found at http://tinyurl.com/8tqf7xg

FIND THE STANDARDSYou can find direct links to international accounting and auditing standards at: http://tinyurl.com/9ahv6fd and http://tinyurl.com/8ptwg2l

Glenn Collins, head of technical advisory, ACCA UK

44 Technical update

AP_T_update.indd 44 12/10/2012 16:20

45Technical

Accounting solutionsIn this month’s column, PwC authors answer technical questions on share purchase agreements, and on accounting for insurance policies

QEntity A purchased 80% of entity B in 20x0. Under the share purchase agreement, entity A also has an option to

acquire the residual 20% shareholding in 20x2 at fair value of entity B. How should entity A account for the option in 20x0 and the subsequent acquisition of the non-controlling interest?

AEntity A has a call option over the remaining 20% at the date of acquisition; it should therefore assess whether the risks and

rewards in relation to this non-controlling interest in entity B have, in substance, also transferred to the group. If that is the case, entity A should account for the entire 100% as an acquisition.

Options priced at fair value usually result in transfer of risks and rewards to the holder at the point of exercise only. There are no other relevant circumstances to consider in this case. As a result, the risks and rewards associated with the non-controlling shareholding are not deemed to be transferred to the group on acquisition of entity B, and entity A should account for the 20% as a non-controlling interest in its consolidated financial statements.

The call option does not meet the definition of a financial liability under IAS 32, Financial Instruments: Presentation, as it is within the control of the entity A. Although there is minimal initial investment and the contract will be settled at a future date, the value of the option does not change in response to an underlying financial variable; it does not therefore qualify as a derivative under IAS 39, Financial Instruments: Recognition and Measurement, para 9.

In 20x2, if the option exercised, any difference between the consideration – that is, the fair value of the shares paid – and the carrying amount of the non-

of the insurance policy is greater than the present value of the defined benefit obligation it will reimburse. The policy does not meet the definition of a qualifying insurance policy and therefore cannot be treated as a plan asset. However, the criteria for recognising the reimbursement right as an asset have been satisfied. How should the cost of the insurance policy and the difference in value from the related obligation be accounted for?

A As a reimbursement right, the insurance policy is recognised as a separate asset, rather than being deducted from the

pension obligation to which it relates. In all other respects, this asset and any related income should be accounted for in the same way as plan assets (in accordance with IAS 19, Employee Benefits, para 104C and D). However, because the right to reimbursement exactly matches payments of a portion of the defined benefit obligation, the fair value of the reimbursement right is deemed to be the present value of that portion of the defined benefit obligation. Any difference between the cost of the insurance policy and the present value of the defined benefit obligation it is designed to reimburse should therefore be treated as an actuarial loss. This is independent of whether the insurance policy is purchased by the pension fund or by XYZ Ltd itself, because the policy meets the definition of a reimbursement right.

This month’s solutions were compiled by Imre Guba, Michelle Millar and Iain Selfridge of PwC’s Accounting Consulting Services

controlling interest is adjusted to entity A’s equity under IAS 27, Consolidated and Separate Financial Statements, para 31. The resulting cash outflow should be classified as a financing activity, as it represents a transaction with equity owners under IAS 7, Statement of Cashflows, para 42B.

QXYZ Ltd buys an insurance policy to reimburse payments of a portion of its defined benefit pension obligation.

Reimbursement under the insurance policy will exactly match the amount and timing of the benefits payable under the plan. The cost to the company

*IFRS AND US GAAPIFRS and US GAAP: Similarities and differences includes insight on recent and proposed guidance; detailed analysis of differences including an assessment of the impact; and a report on the US GAAP codification project. Visit www.pwc.com/usifrs

AP_INT_T_AccSolutions.indd 45 11/10/2012 11:26

A guide for the perplexedIn the fi rst of two articles, ACCA’s Roger Adams looks at recent innovations in the relentlessly expanding fi eld of corporate reporting

The corporate reporting space has grown immensely more complex in recent years. Not only has the volume and complexity of financial reporting standards increased, but the way in which large organisations are reporting has itself changed and expanded. Corporate social responsibility (CSR) or sustainability reporting, narrative reporting and integrated reporting are just three of the new forms that accountants (and users of accounts) have to contend with and make sense of.

Bigger and biggerOver the past 20 or so years the scope and content of the legally required annual corporate reporting package has mushroomed. A listed company’s annual report and accounts package will now contain most, if not all, of the following elements:

* performance highlights (key performance indicators)

* chairman and CEO’s reports or statements

* a description of the company’s business model together with an explanation as to how it creates value

* a management commentary (or business review, management discussion and analysis or operating and financial review)

* an executive remuneration report

* corporate governance and risk disclosures

* the audited financials including the directors’ report (often merged into the management commentary or business review), the income statement, balance sheet, cashflow statement and notes to the accounts

* the auditors’ report.

Many annual reports also contain a separate section dealing with corporate responsibility or sustainability.

A new era?As one might expect, the mandatory annual report and account package has traditionally been targeted at an investor or shareholder audience, and by and large this continues to be the case. Integrated reporting, which is discussed in more detail in the second part of this feature (to appear next month), continues to prioritise the investor as the key audience for the annual report and accounts.

However, a feature of large company reporting since 1990 has been greater standalone voluntary non-financial reporting to a wider stakeholder circle. Pressure for companies to become more transparent about their relationships with their employees, the communities where they operate and their impact on the natural environment and society at large has come from a variety of sources:

* Regulation. Increasing levels of regulation cover aspects of the sustainability universe such as carbon emissions, health and safety performance and employee welfare. Regulation, however, tends to prompt specific disclosure rather than wide spectrum disclosure.

* Reputation and competition. Guarding against reputational risk is now recognised as a core issue in supporting brand value. Non-governmental organisations, consumers and the media have been instrumental in turning the publicity spotlight on poor practices in areas as diverse as human rights, supply chain labour practices, environmental damage, lack of

workforce diversity and, most recently, business ethics.

* Operational efficiency and cost savings. The regular publication of targets for improvement – in workforce relations and in resource use, for example – can act as a stimulant to continuous improvement. The benefits of cost reduction and improved operational efficiency programmes are often easier to capture with non-financial measures (such as eco-efficiency ratios) than in purely financial terms.

* Values and ethics. An increasing number of organisations seek to link their corporate value set to their long-term corporate strategy and business model.

* Macro trends. Governments, regulators, economists and environmentalists alike are concerned about the negative effects of ‘short termism’. The focus is increasingly on creating sustainable value for the future. Both business models and report content are changing to reflect this shift.

CSR and sustainability reportingFrom a zero base in 1990, the related practices of environmental, social and sustainability reporting – also known as CSR reporting or corporate responsibility reporting – have now established a firm foothold as mainstream reporting tools.

According to KPMG’s International Survey of Corporate Responsibility Reporting 2011, reputational considerations continue to drive corporate responsibility reporting. Additionally, the benefits that can be

46 Technical

INT_UK_T_perplexed1.indd 46 12/10/2012 17:00

derived from innovation and learning are rapidly gaining appreciation. Not only do 95% of the Global 250 now issue corporate responsibility reports (up from 83% in 2008 and 64% in 2005), but almost half report gaining financial value from their corporate responsibility programmes. A third of national top 100 companies report the same benefits.

As the perceived importance of sustainability issues (such as climate change, water usage, diversity and so on) has grown, so too has the range of stakeholders to whom companies now feel obliged to report. And as the number of interested stakeholders increases, so too does the scope of non-financial corporate reporting (see table). As the bigger of the two tables on this page demonstrates, even non-financial reporting has its own subdivisions.

The KPMG report declares: ‘Clearly, corporate responsibility reporting is now an essential requirement for any company hoping to be seen as a responsible corporate citizen. Innovation and learning, in particular, has consistently ranked highly as a driver for corporate responsibility

reporting over the past decade. This is indicative of the large number of companies that see corporate responsibility as a means to drive greater innovation through their businesses and products in order to create a discernible competitive advantage in the market.’

And a 2010 Accenture study, A New Era of Sustainability, found:

* 72% of CEOs cite ‘brand, trust and reputation’ as one of the top three factors pushing them on sustainability. Revenue growth and cost reduction is second with 44%.

* 86% of CEOs see ‘accurate valuation by investors of sustainability in long-term

investments’ as important in reaching a tipping point in sustainability.

The second of these two findings is particularly important in ensuring that the investment community buys into the need to move to a longer time horizon for gauging the performance of their investments.

Roger Adams is ACCA’s director of special assignments

Next month: how to identify best practice in the new corporate reporting and whether the future of reporting lies in more fragmentation or some form of integration

Annual report and accounts

Environmental

Social/societal

Sustainability, CSR

Integrated reporting

Social and environmental performance highlights

Full CSR/sustainability report

People reporting

Climate change disclosures including greenhouse gas emissions statement

Water footprint statement

Annual report and accounts

Yes – along with financial highlights

Yes – highly truncated version of the CSR/sustainability report

No

Yes – highlights from CSR/sustainability report

Yes

Yes – in time

Separate standalone report

Yes

Yes

Yes – with detailed performance data

Possibly

Yes – in time

Since mid-1800s

Since 1990

Since mid-1990s

Since 2000

Since 2010

The growing scope of reporting The subdivisions within non-financial reporting

47

INT_UK_T_perplexed1.indd 47 12/10/2012 17:00

Hedge accounting: draft alertThe IASB wants better links between an entity’s risk management activities, the rationale for hedging and the impact of hedging on the fi nancial statements, says Graham Holt

IAS 39, Financial Instruments: Recognition and Measurement, sets out the requirements for recognising and measuring financial assets, and financial liabilities. Many users of financial statements felt that the requirements in IAS 39 were difficult to understand, apply and interpret. Thus, the International Accounting Standards Board (IASB) is developing a new standard for the financial reporting of financial instruments that is principle-based and less complex. The three main phases of the IASB’s project to replace IAS 39 are: A Phase 1: Classification and

measurement of financial assets and financial liabilities. In November 2009, the IASB issued the chapters of IFRS 9, Financial Instruments, relating to the classification and measurement of financial assets followed by the requirements related to the classification and measurement of financial liabilities in October 2010.

B Phase 2: Impairment methodology. The IASB is redeliberating the proposals issued in an exposure draft and the supplement to that draft to address the comments received from respondents.

C Phase 3: Hedge accounting. On 7 September 2012, the IASB issued a draft of the general hedge accounting requirements that will be added to IFRS 9.

In addition to the three phases above, in June 2010 the IASB decided to retain

the existing requirements in IAS 39 for the derecognition of financial assets and financial liabilities but to finalise improved disclosure requirements, which were issued in October 2010 as an amendment to IFRS 7, Disclosures.

The current rules on hedge accounting in IAS 39 have frustrated many preparers, as the requirements are not really linked to common risk management practices. The detailed rules have at times made achieving hedge accounting impossible or very costly, even when the hedge was an economically rational risk management strategy. The IASB wishes to provide better links between an entity’s risk management activities, the rationale for hedging and the impact of hedging on the financial statements.

Principle-based approachThe requirements also establish a more principle-based approach to hedge accounting and address inconsistencies and weaknesses in the hedge accounting model in IAS 39. However, the IASB has made some significant changes to certain aspects of the proposals contained in the draft that was issued in December 2010. The proposals do not fundamentally change the current types of hedging relationships, or the current requirement to measure and recognise ineffectiveness; however, the proposals mean that more hedging strategies used for risk management would qualify for hedge accounting.

The draft relaxes the requirements for hedge effectiveness assessment and consequently the eligibility for hedge accounting. Under IAS 39, a hedge must be expected to be highly effective both at inception and on an ongoing basis. Subsequently, the entity must demonstrate that the hedge has been highly effective. ‘Highly effective’ is defined as a quantitative test of 80% to 125% under IAS 39. Under the draft, more judgment is needed to assess the effectiveness of the hedging relationship. A hedging relationship would need to be effective at inception and on an ongoing basis, and would be subject to a qualitative or quantitative, forward-looking effectiveness assessment.

The following requirements need to be met:1 an economic relationship must exist

between the hedging instrument and the hedged item

2 the effect of credit risk must not dominate the value changes that result from that economic relationship

3 a hedge ratio must reflect the relationship between the quantities of the hedged item and hedging instrument used by the entity for its risk management purposes

4 an entity cannot intentionally weight the hedging instrument or hedged item to achieve an accounting outcome inconsistent with the purpose of hedge accounting.

The first requirement means that the

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48 Technical

AP_INT_T_HoltCPD.indd 48 12/10/2012 17:01

hedging instrument and the hedged item must be expected to move in opposite directions because of a change in the hedged risk such that there is causality and not just correlation between the items. Perfect correlation between the hedged item and the hedging instrument is not required and is not sufficient, as there must be an economic relationship. For example, there are different prices quoted for oil. These include the prices of West Texas Intermediate (WTI) crude oil and Brent crude. The former reflects the price at Cushing, Oklahoma, and nexus for the delivery of American and Canadian crudes and the latter reflects the price of North Sea oil. Therefore, it would be possible to hedge a Brent crude exposure with a WTI derivative.

The second requirement means that the impact of changes in credit risk should not be of a magnitude such that it dominates the value changes, even if there is an economic relationship between the hedged item and hedging derivative, and the third requirement indicates that the actual hedge ratio used for accounting should be the same as that used for risk management purposes, unless the ratio is inconsistent with the purpose of hedge accounting. The IASB appears to be specifically concerned with deliberate under-hedging, which either minimises the recognition of ineffectiveness in cashflow hedges or creates additional fair value

adjustments to the hedged item in fair value hedges.

The draft includes a number of changes to the definition of a hedged item. Risk components of non-financial items can be designated as a hedged item provided the risk component is separately identifiable and reliably measurable. The draft retains the principle for financial and non-financial risk components to be separately identifiable and reliably measurable and this must be assessed within the context of the particular ‘market structure’.

However, ‘market structure’ is not defined. It does not follow that, if there is a derivative instrument on aluminium and aluminium components are used in manufacturing cars, that aluminium is an eligible risk component in a hedge of car component purchases. There is probably a need to see how aluminium car components are priced in the market and how this relates to the price of aluminium.

The draft now includes a rebuttable presumption that non-contractually specified inflation risk will not usually be an eligible component of a financial instrument. Two scenarios are set out in the draft, one of which indicates that an inflation risk component is eligible for hedge accounting and another in which it is not.

Entities can hedge non-financial items for a price risk, for example, a commodity price risk that is only a

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THE DRAFT HAS RETAINED THE REQUIREMENT FORREBALANCING TO BE UNDERTAKEN IF THE RISKMANAGEMENT OBJECTIVE REMAINS THE SAME

component of the overall price risk of the item. This is currently prohibited under IAS 39.

The draft also makes the hedging of certain groups of items more flexible. A group of items, including a group of items that constitute a net position, may be a hedged item under the proposals if:1 it consists of items that are eligible

hedged items 2 the items in the group are managed

together on a group basis for risk management purposes.

The draft makes the hedging of groups of items more flexible, although it does not cover macro hedging which will be the subject of a separate document. Entities commonly group similar risk exposures and hedge only the net position, which could be the net of forecast purchases and sales of foreign currency. Under IAS 39, a net position cannot be designated as the hedged item. The draft permits such hedging strategies if the entity hedges on a net basis for risk management purposes. However, if the hedged net position consists of forecasted transactions in a cashflow hedge, hedge accounting on a net basis is only available for foreign currency hedges.

An entity is not allowed to voluntarily terminate a hedging relationship that continues to meet its risk management objective and all other qualifying criteria. However, the draft has retained the requirement for rebalancing to be undertaken if the risk management objective remains the same, but the hedge effectiveness requirements are no longer met.

Normally, accounting rebalancing will only be undertaken when adjustments

are made to the actual quantities used for risk management purposes unless deliberate and inappropriate action is undertaken to achieve an accounting result that is inconsistent with the purpose of hedge accounting.

The proposals on discontinuation have not changed but further guidance is given on how to distinguish between an entity’s risk management strategy and its risk management objective. Risk management strategy is established at the highest level and could include some flexibility to react to changes in circumstances without requiring a new strategy. The risk management objective is applied at the particular hedge relationship level.

The draft retains the current IAS 39 requirements for fair value hedge

accounting. However, the fair value option in IFRS 9 is extended to contracts that can be settled net in cash and meet the exception whereby applying fair value accounting eliminates or significantly reduces an accounting mismatch.

Additionally, the draft would permit certain credit exposures to be designated at fair value through profit or loss if a credit derivative that is measured at fair value through profit or loss is used to manage the credit risk of all, or a part of, the exposure on a fair value basis.

Some industries, such as banking and insurance, may see the proposals as of less importance than the IASB’s forthcoming macro-hedging paper, but sectors with substantial commodity-related risk such as airlines and manufacturers will welcome the opportunities provided. The new proposals are likely to benefit non-financial services entities which can hedge clearly defined individual risk items. However, the guidance remains complex in some areas and to comply companies may need to apply a greater degree of judgment. A principle-based approach requires additional disclosures to users of how a company is managing risk.

Graham Holt is an examiner for ACCA, and associate dean and head of the accounting, finance and economics department at Manchester Metropolitan University Business School

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50 Technical


Unpeel your competitive onionIn the second article in his series on strategy for accountants, Dr Tony Grundy unpacks the tools, identifi es customer value and ends up in a hot yoga pose

SWOT ANALYSIS IS OFTEN SUPERFICIAL, CAN BE DANGEROUSLY BIASED, DOES NOT PRIORITISE, AND FAILS TO EXTRACT THE ‘SO WHATS?’

This article focuses on the need to explore the nature of the business you are in. It also considers the uses and abuses of positioning tools such as SWOT and gap analysis, and PEST and Porter environmental analysis. Customer value, competitor positioning and intent, competitive advantage and the ‘competitive onion’ are all explored. And the article ends with an explanation of how it all links to financial returns, using the Bikram yoga system to illustrate the concepts.

In strategy, you need a clear notion of what business it is that you are in. Pursuing an answer may uncover that you aren’t just in one business, but in many. The curse of this is that separate

strategies/cunning plans will be required for each one.

The best way of identifying the businesses you are in is to look at different types of customers, needs and ways of meeting those needs.

These elements can be mapped out on charts – for example, customer types against types of need – as a matrix. Doing this can lead to the discovery of new possible businesses. You may also find that your organisation has many businesses, that some are marginal, and that some might be divested.

Strategy tools are typically matrixes, boxes or other models rendered as pictures to give a better and shared understanding of the complexity of strategy. They are essential, but without sufficient empirical evidence, reflective thought and challenge they can also be highly dangerous. The risks will be highlighted here.

Positioning toolsNow take the businesses you are in, one at a time, and look at positioning using SWOT and gap analysis.

SWOT analysis typically divides a box into four quarters to separate out a business’s strengths, weaknesses, opportunities and threats.

The advantages of SWOT analysis are that it is easy to use, familiar to most managers, puts issues into categories, is evaluative (strengths and opportunities are positive, weaknesses and threats are negative), and offers a powerful visualisation.

However, SWOT is often superficial (especially when used in isolation), can be dangerously incomplete and biased, may lack sufficient evidence, does not prioritise, fails to extract the ‘so whats?’, and is seldom explicitly used to develop options.

To get more out of SWOT, it should incorporate priorities – eg by asterisking the most important elements. Also, the implications (the ‘so whats?’) of SWOT need addressing:

* What patterns are there in the SWOT/broad themes? For example, has the company lost its way competitively? Is it too slow and unresponsive? Is it unbalanced in some way, or is there a fault line in its leadership, culture and mindset?

* Are some of the threats areas of major weakness, increasing the company’s vulnerability?

* Are there specific opportunities where it is particularly strong and which might be candidates for offensive strategies?

Gap analysis is the difference between where you want to be and where you are likely to be given the business’s current strategies. It is an essential way of framing the degree of stretch the organisation wishes to set itself, before conducting any strategic option evaluation. It is typically framed in terms of performance metrics – typically, sales or profit, although the metric can be market share, unit costs or gaps with competitors.

Gap analysis is a way of assessing either the difference between where you are and where you want to be (snapshot), or the difference between where you are likely to be on current plans and where you want to be (future gap) based on the business’s projected future performance.

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51Technical

CN_T_strategy2.indd 51 12/10/2012 16:44

Gap analysis is probably more important than SWOT analysis, as you need to keep constant track of the value of your strategic options and their contribution to the assumed shifts in strategic performance if you are to meet strategic goals.

Obviously, it is important that the strategic objectives set are not competitively unrealistic. But top managers frequently set an artificial stretch on these objectives for the managerial tiers below without giving them the support and coaching to come up with strategies that will actually bridge the gap.

The result is that the business always delivers less than expected. This increases top-down pressure to deliver, reinforcing the negative cycle of behaviours. In short, if gap analysis is used in this way by the business it can be counterproductive.

PEST analysisIn strategy the external environment is very significant. What business hasn’t been hit by the recession and now the euro crisis/government debt? Here, PEST analysis is helpful in picturing macro changes. The P stands for political (and regulatory) changes, E for economic, S for social (and demographic) and T for technological.As with SWOT, PEST analysis is often represented in a quartered box.

PEST factors may be very big (the credit crunch is an obvious one) or slow-burners revealed through

trends that are weak but which can still gather momentum – such trends need to be monitored and reflected on.

It’s time now to home in on the more immediate industry/market you are in. Here, Porter’s five competitive forces (namely, buyer power, entry barriers, competitive barriers, substitutes, supplier power) have a huge influence on profitability. The accountant needs to know and differentiate them for each and every market the business is in, especially when planning and supporting key strategic decisions.

Five forces and a funeralConsider, for example, the funerals market in the light of Porter’s five competitive forces: customers haven’t got the time to shop around, the purchase is very emotional (low buyer power), there are psychological barriers to entry, there are no real substitutes, and rivalry is gentlemanly. The result? Superior returns!

And if a funerals business had real competitive advantage, it would be an accountant’s dream. The definition of competitive advantage is: delivering better value to customers than your competitors can, or equivalent value at a lower cost.

This definition is economic as well as financial. Strategy is also about customer value, cost and competitors. Understanding and focusing on latent customer value – which you satisfy but your competitors don’t or can’t – can also help spark ideas for ‘cunning

plans’ and strategic options. By understanding your positioning relative to your rivals in terms of customer value added and cost, you can generate some exciting new strategies.

For example, in the late 1990s Tesco looked at some simple future-looking strategies for convenience formats (Express and Metro), home shopping and non-food (CDs, books, clothes, etc). By imagining it was travelling to the future (see last month’s article), Tesco saw the potential of these strategies and rolled them all out. Successful strategies are often simple but incorporate cunning – here it lay in the combination of these strategies and in Tesco’s drive and agility.

Now Tesco is a target for others and it should be thinking about their intent. Sainsbury’s, for example, positions itself as delivering superior service, while Tesco seems to have focused on range/price and relentless productivity gains. Is Tesco vulnerable on service if the squeeze on incomes in the UK eases up? Markets change, and strategies may have to adapt with them.

The strategy onion diagram on the next page brings all these models together with PEST factors and life-cycle effects. These all affect market growth, which in turn impacts the competitive forces toward the middle.

Within the business itself consideration should also be given to the sustainability and renewal of competitive advantage: these have a huge impact on economic returns,

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52 Technical


including the way you continue to deliver superior customer value, and stay way ahead of competitors.

Finally competitive advantage and change can be illustrated with a case study on ‘hot yoga’. Years ago Bikram Choudhury, an Indian yogi, formulated a series of yoga postures that take place in rooms heated to 105ºF. I became addicted to Bikram yoga in 2002 when there were four studios in London and few more in the UK; now there are over 20 in the capital and more than 500 worldwide in a franchised global brand.

Bikram yoga is psychologically and physically challenging. It is also an attention-grabber, appealing to young, inner-city professionals seeking a wonder body. Classes are packed out. Last Saturday there were 70 in mine, with water and towels generating perhaps £1,000 in a 90-minute session. It’s a competitively attractive market where Bikram has real advantage.

But recently several hot yoga studios have opened up in London, which threaten Bikram yoga’s future growth, margins and returns. The Bikram formula has not changed substantially in 10 years: is now a good time for the business to seize the strategic initiative again with a strategy review?

Dr Tony Grundy is an independent consultant and trainer and lectures at Henley Business School in the UKwww.tonygrundy.com

IN THE SEPTEMBER ISSUETHE ROAD FROM HERE TO THERE, THE SPICE GIRLSAND THE CUNNING PLAN

Political factors

Technological factors

Industry

Economic factors

Life cycle

Social factors

The strategy onion

Growth

Pressure

Competitive

Customers

Drivers

Company andcompetitors

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53


Dim sum bonds: a hot delicacyChina’s currency plans appear good news for offshore dim sum bonds and foreign investors, but greater clarity on tax issues is needed, say Matthew Wong and Ellen Sheng

RMB bonds have become an important financial instrument to China-focused corporate treasurers who aim to allow their corporate surplus cash to enjoy the prospective RMB appreciation against the US dollar.

Since RMB is not a freely convertible currency, there are currently two broad categories of RMB bonds, namely: 1 CNY bonds, traded in the China

domestic market;2 CNH bonds traded in the offshore

market, say Hong Kong (also known as ‘dim sum bonds’).

Foreign investors only have very limited access to the China domestic CNY bond market unless they can secure a special licence from the Chinese authorities as a Qualified Foreign Institutional Investor (QFII). On the other hand, the offshore dim sum bond market, which is targeted at foreign investors, is expected to grow exponentially over the next couple of years as a result of China government’s policy to internationalise its currency.

Uncertain tax position China’s tax regime governing onshore CNY bonds and offshore dim sum bonds are still in a state of flux. Existing China tax rules grant a corporate income tax exemption on coupon interest received from government bonds issued by China’s Ministry of Finance. However, China is silent on whether this favourable treatment can further be extended to: (a) capital gains arising from trading of Chinese government bonds; and (b) accrued interest arising from

amortisation of discounts on purchase prices of the bonds.

So far, Chinese tax authorities have not attempted to collect tax from foreign investors on capital gain arising from the trading of Chinese government bonds. As a result, foreign investors are struggling with whether to recognise Chinese tax provision on capital gains and discount income from trading of government bonds through QFII or the offshore market. There is also uncertainty as to whether a 5% business tax should be imposed on interest and capital gain arising from investment in Chinese government bonds.

For non-government corporate CNY bonds or CNH bonds, clear-cut Chinese tax rules have required the Chinese bond issuers to deduct 10% interest withholding tax at source when the relevant payments are made to offshore investors or QFIIs. Recently, non-Chinese overseas multinationals such as McDonald’s were also permitted to issue dim sum bonds in the offshore market.

It appears that interest paid from offshore CNH bonds issued by overseas multinationals outside of China should fall outside of the Chinese tax net. Foreign investors may find that the after-tax yield rate on investment of Chinese corporate bonds (with same credit risk and tenor) may be higher where the bond issuer is an offshore corporation.

As far as capital gains taxation is concerned, foreign investors trading CNY bonds in the Chinese domestic market through QFIIs have faced uncertain tax

positions, similar to the those on A-share trading, as the QFII taxation regime has not been confirmed.

Another grey area is whether the capital gain derived from trading of dim sum bonds in the offshore market should be subject to Chinese taxes. It is not uncommon to see this Chinese capital gains tax risk factor be thoroughly disclosed to investors in the offshore dim sum bond prospectus.

Again, the use of a suitable tax treaty-based platform to trade dim sum bonds may mitigate the potential Chinese capital gains tax risk. It is important to note that matters like treaty shopping and beneficiary ownership test are ‘on the radar screen’ for the Chinese tax authorities. Therefore, great care is required in structuring the right treaty-protected platform for dim sum bond trading.

Borrowers’ China concernsMultinational corporations (MNCs) expanding in China also see dim sum bonds as an emerging financing model for their China operation.

So far, MNCs like McDonald’s, Volkswagen, Caterpillar and Unilever have tapped the dim sum market. MNC borrowers in need of RMB funding generally have two options to raise capital directly in the currency: access the mainland China bank loan market, where rates are regulated by the People’s Bank of China; or issue dim sum bonds in the offshore market, where rates are market-driven and thereafter remit the proceeds to China.

54 Technical

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and foreign China’s currency plans appear good news for offshore dim sum bonds and foreign China’s currency plans appear good news for offshore dim sum bonds and foreign China’s currency plans appear good news for offshore dim sum bonds and foreign China’s currency plans appear good news for offshore dim sum bonds and foreign China’s currency plans appear good news for offshore dim sum bonds and foreign China’s currency plans appear good news for offshore dim sum bonds and foreign China’s currency plans appear good news for offshore dim sum bonds and foreign China’s currency plans appear good news for offshore dim sum bonds and foreign China’s currency plans appear good news for offshore dim sum bonds and foreign China’s currency plans appear good news for offshore dim sum bonds and foreign China’s currency plans appear good news for offshore dim sum bonds and foreign China’s currency plans appear good news for offshore dim sum bonds and foreign China’s currency plans appear good news for offshore dim sum bonds and foreign China’s currency plans appear good news for offshore dim sum bonds and foreign China’s currency plans appear good news for offshore dim sum bonds and foreign China’s currency plans appear good news for offshore dim sum bonds and foreign China’s currency plans appear good news for offshore dim sum bonds and foreign China’s currency plans appear good news for offshore dim sum bonds and foreign China’s currency plans appear good news for offshore dim sum bonds and foreign China’s currency plans appear good news for offshore dim sum bonds and foreign China’s currency plans appear good news for offshore dim sum bonds and foreign China’s currency plans appear good news for offshore dim sum bonds and foreign China’s currency plans appear good news for offshore dim sum bonds and foreign China’s currency plans appear good news for offshore dim sum bonds and foreign China’s currency plans appear good news for offshore dim sum bonds and foreign China’s currency plans appear good news for offshore dim sum bonds and foreign China’s currency plans appear good news for offshore dim sum bonds and foreign China’s currency plans appear good news for offshore dim sum bonds and foreign China’s currency plans appear good news for offshore dim sum bonds and foreign China’s currency plans appear good news for offshore dim sum bonds and foreign China’s currency plans appear good news for offshore dim sum bonds and foreign China’s currency plans appear good news for offshore dim sum bonds and foreign China’s currency plans appear good news for offshore dim sum bonds and foreign China’s currency plans appear good news for offshore dim sum bonds and foreign China’s currency plans appear good news for offshore dim sum bonds and foreign China’s currency plans appear good news for offshore dim sum bonds and foreign China’s currency plans appear good news for offshore dim sum bonds and foreign China’s currency plans appear good news for offshore dim sum bonds and foreign China’s currency plans appear good news for offshore dim sum bonds and foreign China’s currency plans appear good news for offshore dim sum bonds and foreign China’s currency plans appear good news for offshore dim sum bonds and foreign China’s currency plans appear good news for offshore dim sum bonds and foreign China’s currency plans appear good news for offshore dim sum bonds and foreign China’s currency plans appear good news for offshore dim sum bonds and foreign China’s currency plans appear good news for offshore dim sum bonds and foreign China’s currency plans appear good news for offshore dim sum bonds and foreign China’s currency plans appear good news for offshore dim sum bonds and foreign China’s currency plans appear good news for offshore dim sum bonds and foreign China’s currency plans appear good news for offshore dim sum bonds and foreign China’s currency plans appear good news for offshore dim sum bonds and foreign investors, but greater clarity on tax issues is needed, say investors, but greater clarity on tax issues is needed, say investors, but greater clarity on tax issues is needed, say investors, but greater clarity on tax issues is needed, say investors, but greater clarity on tax issues is needed, say investors, but greater clarity on tax issues is needed, say investors, but greater clarity on tax issues is needed, say investors, but greater clarity on tax issues is needed, say investors, but greater clarity on tax issues is needed, say investors, but greater clarity on tax issues is needed, say investors, but greater clarity on tax issues is needed, say investors, but greater clarity on tax issues is needed, say investors, but greater clarity on tax issues is needed, say investors, but greater clarity on tax issues is needed, say investors, but greater clarity on tax issues is needed, say investors, but greater clarity on tax issues is needed, say investors, but greater clarity on tax issues is needed, say investors, but greater clarity on tax issues is needed, say investors, but greater clarity on tax issues is needed, say investors, but greater clarity on tax issues is needed, say investors, but greater clarity on tax issues is needed, say investors, but greater clarity on tax issues is needed, say investors, but greater clarity on tax issues is needed, say investors, but greater clarity on tax issues is needed, say investors, but greater clarity on tax issues is needed, say investors, but greater clarity on tax issues is needed, say investors, but greater clarity on tax issues is needed, say investors, but greater clarity on tax issues is needed, say investors, but greater clarity on tax issues is needed, say investors, but greater clarity on tax issues is needed, say investors, but greater clarity on tax issues is needed, say investors, but greater clarity on tax issues is needed, say investors, but greater clarity on tax issues is needed, say investors, but greater clarity on tax issues is needed, say investors, but greater clarity on tax issues is needed, say investors, but greater clarity on tax issues is needed, say investors, but greater clarity on tax issues is needed, say investors, but greater clarity on tax issues is needed, say investors, but greater clarity on tax issues is needed, say investors, but greater clarity on tax issues is needed, say investors, but greater clarity on tax issues is needed, say investors, but greater clarity on tax issues is needed, say investors, but greater clarity on tax issues is needed, say investors, but greater clarity on tax issues is needed, say investors, but greater clarity on tax issues is needed, say investors, but greater clarity on tax issues is needed, say investors, but greater clarity on tax issues is needed, say investors, but greater clarity on tax issues is needed, say investors, but greater clarity on tax issues is needed, say investors, but greater clarity on tax issues is needed, say investors, but greater clarity on tax issues is needed, say investors, but greater clarity on tax issues is needed, say investors, but greater clarity on tax issues is needed, say investors, but greater clarity on tax issues is needed, say investors, but greater clarity on tax issues is needed, say investors, but greater clarity on tax issues is needed, say investors, but greater clarity on tax issues is needed, say investors, but greater clarity on tax issues is needed, say investors, but greater clarity on tax issues is needed, say investors, but greater clarity on tax issues is needed, say investors, but greater clarity on tax issues is needed, say investors, but greater clarity on tax issues is needed, say investors, but greater clarity on tax issues is needed, say investors, but greater clarity on tax issues is needed, say investors, but greater clarity on tax issues is needed, say investors, but greater clarity on tax issues is needed, say investors, but greater clarity on tax issues is needed, say investors, but greater clarity on tax issues is needed, say investors, but greater clarity on tax issues is needed, say investors, but greater clarity on tax issues is needed, say investors, but greater clarity on tax issues is needed, say investors, but greater clarity on tax issues is needed, say investors, but greater clarity on tax issues is needed, say investors, but greater clarity on tax issues is needed, say investors, but greater clarity on tax issues is needed, say investors, but greater clarity on tax issues is needed, say investors, but greater clarity on tax issues is needed, say investors, but greater clarity on tax issues is needed, say investors, but greater clarity on tax issues is needed, say investors, but greater clarity on tax issues is needed, say investors, but greater clarity on tax issues is needed, say investors, but greater clarity on tax issues is needed, say investors, but greater clarity on tax issues is needed, say investors, but greater clarity on tax issues is needed, say investors, but greater clarity on tax issues is needed, say investors, but greater clarity on tax issues is needed, say investors, but greater clarity on tax issues is needed, say investors, but greater clarity on tax issues is needed, say investors, but greater clarity on tax issues is needed, say investors, but greater clarity on tax issues is needed, say investors, but greater clarity on tax issues is needed, say investors, but greater clarity on tax issues is needed, say investors, but greater clarity on tax issues is needed, say investors, but greater clarity on tax issues is needed, say investors, but greater clarity on tax issues is needed, say Matthew WongMatthew WongMatthew WongMatthew WongMatthew WongMatthew WongMatthew WongMatthew WongMatthew WongMatthew WongMatthew WongMatthew WongMatthew WongMatthew WongMatthew WongMatthew WongMatthew WongMatthew WongMatthew WongMatthew WongMatthew WongMatthew WongMatthew WongMatthew WongMatthew WongMatthew WongMatthew WongMatthew WongMatthew WongMatthew WongMatthew WongMatthew WongMatthew WongMatthew WongMatthew WongMatthew WongMatthew WongMatthew WongMatthew WongMatthew WongMatthew WongMatthew Wong and and and and and and and and and and and and Ellen ShengEllen ShengEllen ShengEllen ShengEllen ShengEllen ShengEllen ShengEllen ShengEllen ShengEllen ShengEllen ShengEllen ShengEllen ShengEllen ShengEllen ShengEllen ShengEllen ShengEllen ShengEllen ShengEllen ShengEllen ShengEllen ShengEllen ShengEllen ShengEllen ShengEllen ShengEllen ShengEllen ShengEllen ShengEllen Sheng

TechnicalTechnicalTechnicalTechnicalTechnicalTechnicalTechnicalTechnicalTechnicalTechnicalTechnicalTechnicalTechnicalTechnicalTechnicalTechnicalTechnicalTechnicalTechnicalTechnicalTechnicalTechnicalTechnicalTechnicalTechnicalTechnicalTechnicalTechnicalTechnicalTechnicalTechnicalTechnicalTechnicalTechnicalTechnicalTechnicalTechnicalTechnicalTechnicalTechnicalTechnicalTechnicalTechnicalTechnicalTechnicalTechnicalTechnicalTechnicalTechnicalTechnicalTechnicalTechnicalTechnical

CN_T_dimsumbonds.indd 54 11/10/2012 12:04

So far, the offshore RMB market appears to be the cheaper alternative.

When dim sum bond issuers bring the proceeds to their China operation, great care should be taken by the offshore issuers in pushing debts to their China operating entities. The latter normally take the form of foreign investment enterprises (FIEs), which have to observe their limit on crossborder borrowing.

A normal FIE’s crossborder borrowing cap is determined by the difference between its approved total investment and registered capital, and there is a statutory limit on the ratio between the two (see table). For instance, an FIE with registered capital of US$12m can have an approved total investment of US$36m, thus translating to a crossborder borrowing cap of US$24m. A dim sum bond issuer should observe the above crossborder debt capacity of its China operating entities to determine the extent that bond proceeds can be pushed into China by way of debt.

MNCs that have set up a special investment holding vehicle in China with paid-up registered capital of at least US$30m have a more relaxed statutory ratio of 4:1. In other words, offshore dim sum bond issuers with Chinese investment holding company structure should have more capacity and flexibility to push debts down to China.

One of the reasons for the offshore dim sum bond issuers to use cross-border loans to bring proceeds to their Chinese entities is to enable the latter to ultimately bear the interest expenses and claim tax deduction thereon, thus

ensuring tax efficiency at China level. However, tax deductibility of crossborder-related party interest payments is subject to close scrutiny by the Chinese tax authorities. In particular, the China Tax Law has a specific ‘thin-capitalisation’ tax rule which empowers the Chinese tax authority to deny deductions on excessive interest paid to related parties if the related party debts of the taxpayer exceed certain prescribed ‘safe-harbour’ debt-equity ratios (ie 2:1 for on non-financial institutions). Such related party debts include not only loans from related parties, but also back-to-back arrangements and loans guaranteed by related parties and with joint and several repayment obligations.

The thin-capitalisation rule aims to counter tax-avoidance schemes of pushing debts from overseas groups to their Chinese subsidiaries in order to generate more interest expense deduction and to reduce China income tax burden. Where the taxpayer’s ratio exceeds the 2:1 safe harbour, further analysis and documentation would be required to refute the challenge from the tax authorities to disallow related party interest payments. The key is to develop

Total investment Under US$3m ($3m inclusive)

US$3m–US$10m ($10m inclusive)

US$10m–US$30m ($30m inclusive)

More than US$30m

Ratios 1:0.7

2:1

5:2

3:1

Min. registered capital 70% of total investment

US$2.1m

US$5m

US$12m

robust transfer pricing documentation to support that the taxpayer’s related party financing arrangements comply with the arm’s-length principle and there are genuine business reasons to borrow beyond the safe-harbour ratio.

The way forward The trading volume of dim sum bonds continues to explode in the offshore market as foreign investors have a strong appetite to Renminbi asset class given the prospect of currency appreciation. Meanwhile, dim sum bonds are also gaining traction with MNC issuers, which have a funding need for their growing Chinese operation. Borrowers and lenders of dim sum bonds must understand their Chinese tax and regulatory exposure if they are to unlock the opportunities in the market.

Matthew Wong is a tax partner and Ellen Sheng is a senior tax manager, of PwC China, based in Shanghai

The information presented is not intended to be comprehensive or final. Professional advice is strongly recommended before entering into any arrangements based on these notes.

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CN_T_dimsumbonds.indd 55 11/10/2012 12:05

Your annual CPD declaration for 2012 is due for submission to ACCA by 1 January 2013. Submit it online now or at any point until the end of the year by logging into myACCA.

As a professional body, our members define who we are – you represent ACCA to the world. We’re proud to have you among us and that you carry the ACCA designatory letters. It is these letters that distinguish you and show your commitment to professional development and ethics to your peers and employers.

Calling all membersTo maintain this high value of ACCA membership, each year we ask all members to declare their commitment to professional development, regardless of their particular development route. The declaration process is very simple and takes no more than five minutes to complete.

How to declare?The easiest way to declare is online by logging into myACCA via the ACCA website at www.accaglobal.com – 77% of members are already using this method.

Last-minute learning?There are still plenty of learning opportunities available if you need to complete your CPD requirement for 2012.

My Development is a dedicated CPD area of the ACCA website where you can source relevant learning for your CPD. My Development provides a one-stop shop for articles, e-learning,

podcasts, online seminars, research and qualifications from our partners.

More CPD than you thinkYou might think you haven’t completed enough CPD for the year, but each year we find that members are doing

more CPD than they realise. Think about what you have learned this year that is relevant to your role – did you undergo training on a new software or research a topic area specifically for a new client? There are many ways to learn and as long as what you’ve

learned is relevant to your career and you can explain how you have applied the learning, you can claim it as verifiable CPD.

For further information and to check the requirements of each route go to: www.accaglobal.com/cpd

Do I need to prove it?You do not need to send in supporting evidence with your annual CPD declaration – this process is just to confirm that you have maintained your professional development. However, you should keep your CPD evidence for three years in case you are selected for a CPD review.

What if I haven’t done any learning?The annual CPD declaration has two options: select Option A to show that you have completed your CPD or Option B if you have not. CPD is a membership requirement, so if you indicate that you have not met the requirements we will contact you with further advice on how to do so.

For further informationWe have published detailed instructions on our CPD

policy at www.accaglobal.com/cpd If you are facing difficulties with CPD

please contact ACCA as soon as possible, as you may have completed the requirement – or be eligible for a different route or a waiver – without realising it.

Submit your CPD declarationBy submitting your CPD declaration as part of your membership, you are demonstrating your commitment to professional development to your peers and employers

www.accacareers.com/china-hong-kongLOOKING FOR A NEW JOB?

ACCA56

CN_INT_A_CPD.indd 64 11/10/2012 12:34

57

YOUR ANNUAL SUBSCRIPTION NOTICE AND CPD DECLARATION HAVE BEEN POSTED TO YOU...

But you don’t have to wait to receive them. The quickest and simplest way to pay fees and submit a CPD declaration is through your online account at myACCA. Remember annual subscription fees and CPD declarations must be received by ACCA on or before 1 January 2013.

ACCA – the global body for professional accountants

www.accaglobal.com

Your professional development is important to us.To help you maintain your competitive edge we are proud to introduce ACCA’s new learning hub – My Development. It is designed to be the central access point for all your learning and help you meet your CPD requirement as well as progress in your career. You can find local face-to-face events, technical articles, e-learning and lots more.

Visit My Development today at www.accaglobal.com/cpd

57_(right).indd 45 11/10/2012 13:41

AB adverts2_Careers-Oct12.indd 5 17/09/2012 11:14

AB adverts_Kat_Careers-Nov12.indd 6 15/10/2012 12:43

Compact considerationsACCA recently signed up to the UN Global Compact. ACCA’s Roger Adams and Gordon Hewitt explain why, and look at whether it could be right for your organisation

In July 2012, following the Rio+20 United Nations Conference on Sustainable Development, ACCA announced that it has become a member of the United Nations Global Compact (UNGC).

What is the Global Compact and what are its objectives?The UNGC was launched in July 2000 with the aim of promoting the development, implementation and disclosure of responsible and sustainable corporate policies and practices. It is defined as ‘a strategic policy initiative for businesses that are committed to aligning their operations and strategies with 10 universally accepted principles in the areas of human rights, labour, environment and anti-corruption’.

The 10 principles are summarised in the box opposite. Signatories make a commitment to incorporate the 10 principles into their operations. Business participants are required to communicate the steps taken to do this via an annual Communication on Progress (COP), a public disclosure to stakeholders (eg investors, consumers, civil society and governments).

As a non-business participant, ACCA is not required to issue a COP but is encouraged to do so by UNGC as the requirement serves a number of important purposes, including advancing transparency and accountability; driving continuous performance improvement; safeguarding the integrity of the UNGC and the UN; and helping to build a growing repository of corporate practices to promote dialogue and learning.

Who are the other members?Currently there is a formidable array of more than 8,700 corporate

participants and other stakeholders from more than 130 countries, making it the largest voluntary corporate responsibility initiative in the world. Participants include leading international companies, service providers, partnerships and professional bodies, including many key ACCA partners.

Why has ACCA decided to become a member?By signing up, ACCA is demonstrating an active commitment to upholding its core values, as well as underlining our longstanding support for sustainable business. It brings ACCA into line with many leading companies and organisations, and increases the opportunities for more partnerships with both private and public sector organisations.

Membership fits well with our historical support for initiatives such as the Global Reporting Initiative, the UNCTAD/UNGC Sustainable Stock Exchanges programmes and the agenda of the International Integrated Reporting Council.

ACCA chief executive Helen Brand says: ‘Becoming a member of the UN Global Compact is a logical step for ACCA. The objectives of the Global Compact closely match our own corporate values. Our commitment to ethics and professionalism, married to our long-term support for the wider sustainability agenda and our numerous partnerships in the corporate responsibility arena, together demonstrate our willingness to both serve the public interest and contribute

to the continuous improvement of the way in which business is conducted in all sectors of the global economy.’

What does membership mean for ACCA in terms of governance, monitoring and reporting?In terms of a corporate commitment, ACCA will be expected to:1 make the Global Compact and its

principles an integral part of business strategy, day-to-day operations and organisational culture

2 incorporate the Global Compact and its principles into the decision-making processes of the highest-level governance body (ie Council and the executive team)

3 contribute to broad development objectives (including the Millennium Development Goals) through partnerships and

4 advance the Global Compact and the case for responsible business practices through advocacy and active outreach to peers, partners, clients, consumers and the public.

Why should other organisations consider joining?Private sector organisations and public sector bodies will have different motivations for subscribing to the objectives of the Global Compact. These will include:

* direct association with the UN from a pure brand perspective

* demonstration of a corporate responsibility leadership position at the sector/national level

* accessing a UN-driven enabler of closer relationships with

‘THE OBJECTIVES OF THE GLOBAL COMPACT CLOSELY MATCH OUR OWN CORPORATE VALUES’HELEN BRAND, ACCA CHIEF EXECUTIVE

ACCA60

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governments and non-governmental organisations

* enhanced feed-through to users of sustainability/integrated reporting exercises

* evidencing a strong commitment to corporate governance – reassurance for the growing body of environmental, social and governance (ESG)-driven investors.

The benefits also include:

* adopting an established and globally recognised policy framework for the development, implementation and disclosure of ESG policies and practices

* sharing best and emerging practices to advance practical solutions and strategies to common challenges

* advancing sustainability solutions in partnership with a range of stakeholders, including UN agencies, governments, civil society, labour and other non-business interests

* linking business units and subsidiaries across the value chain with the Global Compact’s Local Networks around the world – many in developing and emerging markets

* accessing the UN’s extensive knowledge of and experience with sustainability and development issues

* utilising UNGC management tools and resources, and the opportunity to engage in specialised workstreams in the ESG realms.

What impact has the compact had and where is it heading next?NGC membership hit 8,700 in 2012 and executive director George Kell has ambitions to reach 20,000 by 2020. Impressive as these numbers seem, it is worth bearing in mind the conclusions of the UNGC Corporate Sustainability Forum, held in Rio directly before the Rio+20 conference, that ‘despite progress, corporate

Human rights1 Businesses should support and respect the protection of internationally

proclaimed human rights and2 make sure that they are not complicit in human rights abuses Labour3 Businesses should uphold the freedom of association and the effective

recognition of the right to collective bargaining,4 the elimination of all forms of forced and compulsory labour,5 the effective abolition of child labour and6 the elimination of discrimination in respect of employment and occupation Environment7 Businesses should support a precautionary approach to environmental

challenges,8 undertake initiatives to promote greater environmental responsibility and9 encourage the development and diffusion of environmentally friendly

technologies Anti-corruption10 Businesses should work against corruption in all its forms, including

extortion and bribery

*GLOBAL COMPACT: THE 10 PRINCIPLES

sustainability has not penetrated the majority of companies around the world, nor have we seen the depth of action needed to address the most pressing challenges. To reach scale, economic incentive structures must be realigned so that sustainability is valued and profitable.’

ACCA believes that, via the embedding of our corporate values, through our investment in a wide-ranging corporate social responsibility programme and through our programmes designed to allow

employees and others to ‘speak up’, we are well placed to play our part in taking the UNGC agenda forward.

ACCA believes that the basic premise of the UNGC is sound and looks forward to playing a full role in

assisting in the achievement of its core objectives. At the same time we also hope to benefit from the shared learning and development resources and possibilities which lie at the heart of the UNGC process.

Roger Adams is director – special assignments and Gordon Hewitt is sustainability adviser, ACCA

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01 ZTE Corporation vice president Chen Hu speaks to delegates

02 ACCA South China steering team’s Bonnie Peng feeds back

The idea of shared services arose more than 20 years ago. Today it is a worldwide trend and is taking off in China, according to speakers at an ACCA forum in Guangzhou.

Speaking at the ACCA Employer Forum – Finance transformation: shared services centre management, three distinguished finance experts offered insights on the development of shared services in China, and how they can help finance transformation and create value for businesses.

Held on 25 July at the Ritz-Carlton Hotel, the event aimed to help participants learn the benefits of shared services and how they operate. Speakers also compared strategies in running outsourcing centres.

The idea of a shared service centre is to set up a central system that can take care of the accounting duties for all units of an organisation. One of the speakers, ZTE Corporation vice president Chen Hu, used his company as an illustration of how shared services have become established in China. One of the earliest adopters in mainland China, ZTE’s finance shared service centre handles the accounting functions of various subsidiaries of the firm, which employs more than 80,000 people in 107 countries.

The increased workload for his accountancy department in helping management make informed decisions – triggered by the firm’s

massive development following its 1997 listing – inspired him to launch a finance transformation in 1999. ‘It was a rather painful process,’ Chen recalled.

In 2005, he launched a shared service centre, standardising work through IT systems. In 2011, he moved it to the cloud to create the online central finance function ‘Finance Cloud Service’, headquartered in Xian.

Under the system, people from various offices send data to the shared service centre over the internet. At the centre, he said, specialised staff are responsible for handling a specific area of work ‘like an accounting factory’.

‘Our intention is to free up a group of very capable finance personnel to support the business and to create more value,’ Chen said.

His finance transformation has created three accountancy personnel types: strategic finance professionals, business finance professionals and conventional accountancy staff.

Strategic finance professionals specialise in investment, financing and tax planning. Business finance professionals support the firm’s marketing, research and development, purchasing and production, while conventional accountancy personnel run the shared service centre handling the finance and accountancy functions.

Building on Chen’s belief that the function of accountancy is to provide information to enable a business to make decisions, the shared service centre contains data chains to collect, process and provide information to different business sections, as well as to strategic finance professionals and business finance professionals.

‘Business finance professionals can turn the data into useful information and provide it to the right people at the right time for making business decisions,’ he said, adding that the data also helps strategic finance professionals make finance decisions.

Chen said the single system, whereby everyone is working on a standardised

basis, reduces repetitive work and speeds up the flow of information. People can do things more quickly and cheaply, such as turning expense claims into cash, issuing invoices and paying suppliers, he added.

He concluded that the finance transformation has created a system of ‘artificial intelligence’, without much need for real documents and people. ‘Our trend of zero paper usage brings in reduced need of manpower,’ Chen said, adding that ZTE has cut 40% in costs. ‘But we do not aim to lay off all existing accounting staff; we hope to let people know that the staff can bear workloads of up to 10 and even 100 times.’

However, despite having switched to a cloud-based system that involves staff scanning their claims and submitting them online, his department still cannot rid itself of ambiguous claims and employees manipulating invoices.

Chen said his finance transformation has included nurturing and training staff in speech, communication skills and teamwork, and sharing ways in which they can be strategic and creative.

The forum also presented a recent ACCA global survey, Finance

FINANCE TRANSFORMATION

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03 The ACCA Employer Forum addressed many of the issues

surrounding shared finance functions and offered advice on ways to improve organisation and communication

Transformation: Expert Insights on Shared Services and Outsourcing. Based on interviews with shared services and outsourcing experts, the report, released in February, concluded, ‘there is no turning back from shared services and outsourcing as a finance transformation tool’. It said benefits of shared services and outsourcing included transparency, lower cost, greater efficiency, improved governance and standardisation.

Presenting the survey, Bonnie Peng, a member of the ACCA South China steering team, briefed the audience on the global development of outsourcing or shared services. She said the practice began in the US in the 1980s, triggered by the need to reduce labour cost. Europe followed suit in the 1990s. Today, outsourcing has taken off in Asia, with India, Philippines and Malaysia being the major centres.

‘Hong Kong once had many shared service centres. But Hong Kong has gradually moved its outsourcing centres to places such as Guangzhou and Shenzhen,’ Peng said.

In 2009, the government began to actively support the outsourcing industry in 21 cities through financial support and a raft of tax incentives.

Another forum highlight was a panel discussion in which three experts shared their experiences and strategies in running outsourcing centres.

Mindy Shen, financial controller, HSBC Technology & Services – Service Delivery, HSBC Electronic Data Processing (Guangdong), said the organisation was set up in 1996 as HSBC’s outsourcing arm. It has now grown to more than 6,000 staff and serves various functions of the bank.

According to Shen, English-speaking countries have a competitive advantage in the outsourcing market and HSBC Global Service Delivery has 17 group service centres (GSCs) in Malaysia, Philippines, China, India and Sri Lanka. GSCs in India account for more than 50% of the bank’s outsourcing work; in China, 20%.

Guangzhou was successful in becoming an outsourcing centre due to its availability of Cantonese-speaking talent. But with rising costs, the bank may not confine this functionality to Guangdong. As mainland China’s businesses are growing, the bank may move its outsourcing functions to other Mandarin-speaking provinces, she said.

Shen shared a strategy adopted by HSBC in locating outsourcing

63

‘THERE IS NO TURNING BACK FROM SHARED SERVICES AND OUTSOURCING AS A FINANCE TRANSFORMATION TOOL’

centres. ‘Don’t put all your eggs in one basket. Our core businesses should not be confined to one single city; we must spread them across locations.’ Talent availability, cost, local facilities and government support were key factors.

As the ACCA report points out, the lack of change management is the largest barrier to finance transformation success. The typical problems cited include poor communication of the change process, ineffective programme management and insufficient resources to manage the change process.

Chen admitted that when he first set up the shared service centre, staff turnover was as high as 40%, largely due to poor communication. But he was quick to rectify the problem. ‘Now each year I have 15 minutes to talk directly to each manager, and show them that I truly listened to them and help them grow.’

Sherry Lee, journalist

For more on the ACCA global survey, Finance Transformation: Expert Insights on Shared Services and Outsourcing, see www.accaglobal.com/transformation

CN_A_sharedservices.indd 63 12/10/2012 16:48

Elected Committee members 2012/2013

Chairman

Members

Vice chairman

HONG KONG OFFICEANNUAL GENERAL MEETING AND ANNUAL DINNER 2012

ACCA Hong Kong’s Annual General Meeting (AGM) and Dinner, held in September, saw the election of Committee members for 2012/13, with William Mak and Roy Tsang elected chairman and vice chairman respectively. The event also included a presentation of the annual review 2011/2012.

The dinner was attended by around 300 members and guests, and the event included an artistic sand-drawing performance and an exciting lucky draw. Members and guests all had an enjoyable evening.

BEIJING OFFICEACCA CAREER DAYFifty-one employers, including the Big Four, offered around 300 finance/accounting jobs at the 2012 ACCA Career Day in September in Beijing. The event attracted 800 attendees including members, students, new graduates, 132 employers and more than 20 representatives from universities. Long-time attendee Ken Lee FCCA, a partner at Lee & Lee, said: ‘It is an excellent opportunity for us to find good finance candidates.’

EDUCATION FORUMThe fourth Employers and Educators’ Forum took place on 15 September. Around 30 educators from 20 universities in North China and 28 employers attended to discuss the education of young finance talents.

CFO ROUNDTABLEACCA Beijing held a CFO Roundtable – The Value of the Modern CFO – on 18 September, at which invited guests discussed some of the challenges CFOs are likely to face in China’s business world today. Panellists included Annie Sun, CFO of EMC China, Roberto Mello, CFO of GE Healthcare Greater China, Martijn Vankan, finance director of Shell China, James Pan, CFO of Minor Food Group China and Bob Lockwood, CEO of Tiandi Energy. Accounting and Business will be publishing a report on the event in the January issue.

William TL Mak

Roy CW Tsang

Hidy MY Chan

Ivan CC Chan

Ricky MH Cheng

Tracy SF Ho

Allan KF Lee

Arthur K Lee

Simon TW Leung

Jeremy CM Ngai

Teresa PS Tso

Fergus WT Wong

Alice KM Yip

Davy KW Yun

Partner, assurance services, PwC

Partner, audit service, Deloitte Touche Tohmatsu

Managing director, Hidy Chan Consultancy

Managing director and head of investment banking, Chang Jiang Corporate Finance (HK)

Partner, risk advisory services, BDO Financial Services

Partner, tax and business advisory services,Ernst & Young Tax Services

Director, Allan Lee Professional Solutions

Director – strategy, planning and risk management, Meiya Power Company

Director, The Hong Kong Community College; Associate Dean (Development), CPCE, The Hong Kong Polytechnic University

Partner, tax and China business advisory services, PwC

Partner, financial services, Ernst & Young

Director, tax services – national tax policy services, PwC

Partner, audit, KPMG

Partner, tax services, Deloitte Touche Tohmatsu

William Mak

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ACCA 65

1 NOTICE AND AUDITOR’S REPORTThe notice of meeting and the auditor’s report on the accounts for the period 1 April 2011 to 31 March 2012 were taken as read.2 THE MINUTESThe minutes of the AGM held on 15 September 2011 and published in the November 2011 issue of Accounting and Business were taken as read, and signed as correct. 3 RESOLUTION 1Adoption of the report of the Council and the accounts for the period 1 April 2011 to 31 March 2012.

Chairman Dean Westcott (ACCA president) gave his presidential address and asked chief executive Helen Brand to give a presentation. He then invited questions and comments on the Report and Accounts. He drew members’ attention to the statement which had been circulated and which showed that valid proxy votes had been cast in respect of Resolution 1 as follows: for 3,411, against 44. The president then put the resolution to the meeting and,

COUNCIL HIGHLIGHTSCouncil held a meeting on the morning of 20 September at which it considered some important issues.

* It received the regular report from the chief executive on ACCA strategic developments, organisational performance, key market developments and research and insights and technical developments.

* It considered a paper providing feedback on the Council meeting in Nairobi and noted that the event was successful in reinforcing ACCA’s position as a key supporter of the profession in Kenya and in Africa as a whole. Council agreed to reaffirm its policy of holding an international Council meeting every two years. It also agreed in principle that the international meeting in 2014 should be held in Dubai with associated regional visits to Bangladesh, Oman,

Pakistan and Sri Lanka.

* Council agreed to appoint Frances Walker and Rosalind Wright as lay members of the ACCA Regulatory Board with effect from September 2012 and to appoint David Thomas as a lay member in September 2013. The Regulatory Board comprises a majority of lay members and is chaired by a qualified lawyer.

Council then held its Annual Meeting on the afternoon of Thursday 20 September, following ACCA’s 107th AGM. Members voting at the AGM gave overwhelming support to the various resolutions before the meeting. The minutes are shown above.

At the Annual Council Meeting, Council chose ACCA’s officers for the coming year. ACCA’s new president is Barry Cooper and he will be supported by Martin Turner (deputy president) and Anthony Harbinson (vice president).

Council also welcomed one new member whose election was declared at the AGM – Orla Collins, who is based in Ireland. There are 16 different nationalities represented on ACCA’s 36-member Council, over one-third of whom are female, thus continuing to reflect the increasing diversity of the organisation as a whole.

Council took a number of other decisions at its Annual Meeting:

* It approved Council standing orders for 2012–13, in accordance with the bye-laws.

* It chose three Council members to serve on Nominating Committee in 2012–13, along with the officers.

* It agreed a Council work plan and a set of objectives for the Council year 2012–13.

The next meeting of Council is on 24 November, immediately after the 2012 meeting of the International Assembly.

107th AGM: 20 September 2012The AGM was held at 29 Lincoln’s Inn Fields, London, W2, and 48 members were present

on a show of hands, declared it carried, the votes being cast as follows: for 36, against 0.4 RESULT OF THE BALLOT FOR

THE ELECTION OF MEMBERS TO COUNCIL

The scrutineer’s report and the number of votes received by each candidate in the ballot for the election of members of Council were reported, as follows: Orla Collins 3,394; Dean Westcott 3,280; Brian McEnery 3,045; Julie Holderness 2,893; Robert Stenhouse 2,875; Jenny Gu 2,678; Leo Lee 2,592; James Lee 2,525; Gustaw Duda 2,423; Belinda Young 2,377; Raphael Joseph 2,375;

Andi Lonnen 2,145; Ronan Carrig 1,763; Frankie Ho 1,368; Azza Raslan 1,168; Shamreen Ashraf 1,084; Kwame Antwi-Boasiako 1,042; Aamer Allauddin 975; Billy Kang 924; Mubashir Dagia 891; Saad Maniar 815; Faisal Siddiqui 813; Jacques Fakhoury 786; Sham Mathura 725.The president, therefore, declared the

following members elected or re-elected to Council: Orla Collins, Gustaw Duda, Jenny Gu, Julie Holderness, Raphael Joseph, James Lee, Leo Lee, Brian McEnery, Robert Stenhouse, Dean Westcott and Belinda Young.5 RESOLUTION 3Appointment of auditorThe president reported that Council recommended that BDO LLP, chartered accountant and registered auditor, be reappointed as the association’s auditor. He then invited questions on Resolution 3.

He drew members’ attention to the statement which had been circulated and which showed that valid proxy votes had been cast in respect of Resolution 3 as follows: for 3,281, against 175. He then put the resolution to the meeting and, on a show of hands, declared it carried, the votes being cast as follows: for 33, against 1.

The president thanked members for their attendance and declared the meeting closed at 2.15pm.

INT_A_AGM.indd 65 12/10/2012 10:48

From left: Martin Turner, Barry Cooper and Anthony Harbinson

65 CouncilACCA holds its 107th AGM in London

64 NewsACCA Hong Kong elects 2012/13 committee; Beijing career day is a success; CFO roundtable discusses challenges

62 ACCA Employer ForumFinance transformation through shared services came under the spotlight at Guangzhou event

60 Compact considerationsACCA has signed up to the UN Global Compact

56 CPD Annual CPD declarations are now due for submission

Inside ACCA

Leading accountancy academic Professor Barry J Cooper from Australia was formally elected ACCA president in September.

Professor Cooper is head of the School of Accounting, Economics and Finance at Deakin University in Melbourne. Previously, he was head of accounting schools at the Hong Kong Polytechnic and RMIT University, Melbourne, and played a key role in establishing the ACCA Qualification in China. In his spare time he is an organic olive oil grower and processor.

During his term on ACCA’s Council, Professor Cooper has chaired a number of ACCA committees. He wrote his inaugural president’s column in Accounting and Business last month.

He said: ‘I look forward to playing my part in ensuring that ACCA continues to work closely with employers, and that we meet their needs in an increasingly global economy.’

ACCA’s Council also elected management consultant Martin Turner as deputy president; he has been chief executive of Hywel Dda Health Board and chief executive of the Central Northern Adelaide Health Service, and a Council member since 2004. Vice president for 2012/13 is Anthony Harbinson, who is director of justice delivery at the Department of Justice in Northern Ireland.

PUBLIC SECTOR LEADERSHIP PROJECTACCA has commissioned Nottingham Business School to research the roles, features and personal attributes which public sector financial managers should aim to display, highlighting good practices. To find out more or contribute contact Professor Malcolm Prowle at [email protected].

New presidentBarry Cooper takes the helm as ACCA president for 2012/13

ACCA HOSTS NEW YORK EVENTArnold Schilder (pictured), International Auditing and Assurance Standards Board (IAASB) chairman, was among leading figures in the auditing world who attended a New York cocktail reception hosted by ACCA USA. Guests included other senior IAASB representatives, staff of the International Federation of Accountants (IFAC) and ACCA New York chapter members. ACCA was also represented by technical director Sue Almond and ACCA USA head Warner Johnston.

SALARY SURVEY PUBLISHEDACCA students and affiliates frequently earn salaries that exceed national averages across other professions, according to ACCA’s latest Students and affiliates salary and career survey 2012. The report’s findings capture information on the salaries, bonuses and benefits, including students studying for the foundation level qualifications, as well as recording working hours, career plans and priorities.

Of the 22,379 responses, 63% received a pay rise on the previous year, with 65% gaining an increase of at least 6%. Of those receiving a bonus, 53% were awarded a larger bonus than in the previous year. In addition, 84% aim to gain a more senior position in their current area and 75% want to lead a finance team. www.accaglobal.com/salary

VIDEO EXPLORES PUBLIC VALUEDelivering value to business and society is a critical role for ACCA. A short video has been produced exploring what is meant by public value in the context of accountancy, and how ACCA as a professional body delivers that. Visit http://youtu.be/2U97GUWXE0k

ACCA HOSTS NEW YORK EVENTACCA HOSTS NEW YORK EVENTACCA HOSTS NEW YORK EVENTACCA HOSTS NEW YORK EVENTACCA HOSTS NEW YORK EVENTACCA HOSTS NEW YORK EVENTACCA HOSTS NEW YORK EVENTACCA HOSTS NEW YORK EVENTACCA HOSTS NEW YORK EVENTACCA HOSTS NEW YORK EVENTACCA HOSTS NEW YORK EVENTACCA HOSTS NEW YORK EVENTACCA HOSTS NEW YORK EVENTACCA HOSTS NEW YORK EVENTACCA HOSTS NEW YORK EVENTACCA HOSTS NEW YORK EVENTACCA HOSTS NEW YORK EVENTACCA HOSTS NEW YORK EVENTACCA HOSTS NEW YORK EVENTACCA HOSTS NEW YORK EVENTACCA HOSTS NEW YORK EVENTACCA HOSTS NEW YORK EVENTACCA HOSTS NEW YORK EVENTACCA HOSTS NEW YORK EVENTACCA HOSTS NEW YORK EVENTACCA HOSTS NEW YORK EVENTACCA HOSTS NEW YORK EVENTACCA HOSTS NEW YORK EVENTACCA HOSTS NEW YORK EVENT

66 ACCA news

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