www.miamalta.org
SPRING 2010
Embracing
THE
challenge
Interview with EU Commissioner
JOHN DALLI THE IDENTITY OF AN
ACCOUNTANT
TAKING STOCK
AN OVERVIEW OF THE AMENDMENTS TO THE ITA, ITMA & DDTA Integrity and Expertise
Cover: EMBRACING THE CHALLENGE
www.miamalta.org
SPRING 2010
Photo: D. Aquilina
www.miamalta.org
Embracing
THE
C
challenge
Interview with EU Commissioner
JOHN DALLI THE IDENTITY OF AN
ACCOUNTANT
O
N
SPRING 2010
T
E
N
T
S
TAKING STOCK
AN OVERVIEW OF THE AMENDMENTS TO THE ITA, ITMA & DDTA
The Accountant is published by Network Publications Ltd on behalf of The Malta Institute of Accountants.
INTERVIEW AND LIFESTYLE
NEWS
8 Local Update and MIA News 32 IFAC, IASB and FEE News
12 Embracing the challenge
Interview with EU Commissioner John Dalli
INTERVIEW AND LIFESTYLE
28
Issued quarterly
Spotlight on… Roberta Giorgio
Editor: Jonathan Dingli Design: Vincent Ellul Sales Manager Margaret Brincat Deputy Sales Manager Cherianne Farrugia
30 Making your fortune 45 SMP: Interview with
Silvio Busuttil
49 A walk down memory lane
Interview with MIA Past President Carmelo Mizzi
All correspondence, articles for publication and enquiries are to be addressed to:
FEATURES
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Tips for Cost-Effective ISA Application
The Editor The Malta Institute of Accountants Level 1, Tower Business Centre, Tower Street, Swatar BKR 3013 - Malta Tel: +356 21323991 Fax: +356 21323990 info@miamalta.org
By Stuart Hartley, FCA
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INTERVIEW AND LIFESTYLE
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Understanding and Interpreting Body Language By: Franz R. Wirth
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The Accountancy Board joins IFIAR By: Marcel P. Coppini
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Taking stock: an overview of the amendments to the ITA, ITMA and DDTA By: Marvin Gaerty
32NEWS 18FEATURES
NEWS
ADDRESS
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The identity of an accountant – Ben Scicluna
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It’s a question of Value... or not! By: Eugenio Privitelli
TECHNICAL
56 Accounting solutions 57 IFRS, IAS Update
STUDENTS
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Making it through the ACCA/MIA Joint scheme qualification Lecturers’ Tips for Papers F1 – F3 (Part 1)
60 ACCA Students’ notice
board
Spring 2010
ADDRESS
The identity of an
ACCOUNTANT President’s Address
There has been increasing momentum over the last year or so in connection with an issue that we have quietly lived with for some time. This relates to the not unusual use of the term “unqualified accountant” to refer to the provider of book-keeping services. Accountants, who spend five years of their lives studying for their degree or qualification, justifiably find this practice objectionable. All service providers are essential to maintaining the various elements of the chain of financial reporting. Thus there is a place for everybody who delivers a quality service that contributes to the overall public interest of proper and responsible recording of the results of business activity. Nonetheless, there should be no doubt that transparency and responsibility require that one holds oneself out to the public as only providing the services for which one has been educated, trained and regulated to ensure competence and proper accountability. It is relevant to note that it is the market that has effectively coined the term “unqualified accountant” or “partly qualified accountant”, without any influence from lobby groups working on their own agenda. With such a naturally evolved reality, this raises the point as to whether the public perception of the role of accountants, and accountants’ perception of their own role, may be rather far apart. It is also relevant to note that this market practice has not evolved in the case of other professions. One does not hear talk of “unqualified doctors” or “unqualified lawyers”, though in both these professions the nomenclatures and roles of the different providers of the chain of service delivery are clearly delineated and established (e.g. nurse, pharmacy technician, pharmacist, legal procurator etc). So seemingly widespread is this unsavoury practice that a recent scan of job adverts in the press has also identified cases where warranted firms of accountants are themselves placing recruitment adverts for “unqualified accountants” for their own clients. So why does the Maltese accountant not seem to have his own clear and publicly recognised identity as a professional that naturally leads in his area of expertise? The reasons as always may not be so simple to unravel, and some informal exploratory comments are made below. The Accountancy Profession Regulations, while legally protecting the use of the word “accountant”, define the work that only a warrant holder may perform as follows: • The issuing of reports on prospective financial information prepared for the promotion of investment in an entity or for the raising of finance
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• • •
The issuing of independent reports on share valuations or valuations of businesses Acting as reporting accountants in prospectuses, offering memoranda and other similar documents intended for public subscription The issuing of reports, including compilation or review reports, with respect to interim or annual financial statements of any entity but excluding any reports on financial statements prepared for internal purposes.
The Regulations contemplate that this list may additionally include any other service which may be prescribed by the Minister, though this has not yet been the case. There is increasing mention in informal debates that the list of prescribed services should include the preparation of any financial statements that purport to comply with generally accepted accounting principles and practice as defined in the Accountancy Profession (Accounting and Auditing Standards) Regulations, whether they be IFRS as adopted by the EU, or General Accounting Principles for Smaller Entities (GAPSE). However the suggestion that this is introduced as a statutory requirement also for financial statements prepared for internal purposes, rather than only for external reporting purposes as at present, does not always find support. The provisions in the Accountancy Profession Regulations were of course not designed or intended to defend the accountant’s patch in the marketplace. The provisions were enacted in order to protect the public interest and more specifically those users who place reliance on financial statements and other financial information. However while the provisions focus on the preparation of reports, there is no focus on who can draw up the underlying financial statements or other financial information. It is perhaps like prescribing that only surgeons can issue a report that a surgical intervention has been properly performed, but completely ignoring whether it is a surgeon or any other person who can perform the surgical intervention in the first place. The fact that not all business operators are required to comply with generally accepted accounting principles and practice does not help the public perception of the relevance of the accountancy profession. Unincorporated businesses are not required to comply with internationally accepted accounting rules, or with our local GAPSE that is derived therefrom. Instead they continue to wallow in accounting requirements drawn up in a different time and age, still referring to dinosaurian concepts such as the maintenance of a waste book in article 13 of the Commercial Code.
ADDRESS One of the main issues coming out of the Institute’s recent Forum for sole practitioners and SMPs was the request to investigate ways in which interaction with the various government departments can be facilitated, since many of them report that they often face all sorts of seemingly insuperable operational problems and walls of officialdom. Practitioners have complained for example that the answering of telephones at certain departments appears to be a remote luxury; they have also complained that while say architects have facilitated procedures for them to interact with the Malta Environment & Planning Authority, accountants holding official appointments as authorised client representatives are nevertheless asked to wait personally in line together with the general public in order to discuss and process their different clients’ issues. Accountants might arguably also be considered to be partly to blame for the possible dilution of the market perception of their services, since many have long abandoned the challenge of remaining updated with the rapid and constant flow of change in rules and regulation. As a result many accountants often find themselves unable to proceed beyond the preparation of an extended trial balance drawn up on simple traditional historicalcost accruals-based accounting rules, leaving specialists to do the rest. If perhaps there are accountants who earn their living exclusively through basic services such as book-keeping and tax compliance, it is perhaps no surprise that the general public cannot distinguish them from the book keeping community. Based on a FEE survey published in July 2009, Malta remains one of only three EU Member States with no operative statutory audit threshold (the others being Cyprus and France). Accordingly statutory audits are required for all limited liability companies, no matter how small and simple their operations may be. Although reasons in the area of fiscal morality are raised in support of this approach in the Maltese context, this would appear to be a non sequitur because unincorporated businesses are not subject to the same audit requirement, and
Spring 2010
fiscal morality is not a prerogative of limited liability companies only. In reality, unlike the other twenty-four EU member states, Malta considers that the statutory audit is the unavoidable cost of benefitting from limited liability protection, and undoubtedly there are many cogent reasons to support that position. Nonetheless the end result of this statutory requirement is that it could potentially militate, for example possibly in the eyes of owner-managers of micro entities, against the perceived value of the audit service beyond that of a necessary compliance cost, and in such a case this perception would then rub off on the perception of the role of the accountant too. In the case of accountants in business, much added value is undoubtedly brought to the decision table by accountants. However this is not an area which is the exclusive domain of accountants, and similar added value is also generated by those consultants with a natural flair for business acumen as well as by professionals from other disciplines too. Unfortunately the possible identity crisis may also manifest itself in operators who hold themselves out as providers of accountancy services when they are not so warranted and registered with the Accountancy Board. The Board is currently taking steps to address this matter as far as practicable. Similarly the Board has established working arrangements with the Registry of Companies so that filers of statutory audit reports are confirmed as being registered practicing auditors with the Board; a small number of notification breaches by practising certificate holders have in fact been identified and appropriately followed up. I think that some open minded soul searching needs to be done on this matter. Solutions will probably not be easy nor achieved short term. On the other hand I believe that we have a responsibility to work towards achieving the due respect that our profession deserves.
Spring 2010
LOCAL NEWS
Local Update
& MIA NEWS MIA holds first SMP Forum The Malta Institute of Accountants (MIA) held its first SMP Forum on Friday 26 February 2010 at the Westin Dragonara, St. Julian’s. The President, Mr. Bernard Scicluna, welcomed participants, explained the objectives of the Forum and introduced the items on the agenda. William Spiteri Bailey, the Chairman of the MIA Small and Medium Sized Practices Advisory Committee (SMPAC), briefed the audience about the origin of the SMPAC and its objectives. He then introduced Dr. David Zahra from Camilleri Preziosi Advocates, who delivered a presentation on Legal Structures of accountancy and audit firms and the underlying implications.
to issue these Guidance Notes, the scope of which is to assist Members in public practice in the drafting of a document retention policy. In summary the Guidance Notes: 1. Identify legal and professional requirements on the retention of documentation and set out guidance on their applicability or otherwise to Members in public practice; and 2. Set out the Institute’s recommendations on the management of client-owned documentation. In this regard the Guidance Notes also identify some ownership issues which may be relevant when a Member is drafting a document retention policy. The Information Paper is freely downloadable by MIA Members and Students from the ‘Guidance Notes’ e-library.
MIA issues guidance on the applicability of It was during this Forum that the Malta Institute of Accountants Generally accepted auditing standards together with the UK Association of Chartered Certified Accountants (ACCA) launched the Advisory Service for MIA members which The Institute has issued an Information Paper entitled TECH 03/10 took off on 1 March 2010. During his speech, Glenn Collins, Head Generally Accepted auditing standards as of Advisory Services at ACCA, explained defined under the Accountancy Profession to participants what the service entailed Act (subsidiary legislation). and the way it operates. Technical Advice and Support It was also during this Forum that the PI Indemnity cover, an insurance package specifically for accountants and auditors was launched to members by Ernst Millard, Managing Director Aon global Professions EMEA region, represented in Malta by MIB (Malta) Ltd.
Contact: Monday to Friday – 10.00 to 18.30 - +44(0)20 70595920 advisory@uk.accaglobal.com http://uk.accaglobal.com/ Advisory 29 Lincoln’s Inn Fields London WC2A 3EE United Kingdom
The second part of the forum was dedicated to two breakout sessions – one for mid-tier firms, chaired by David Pace and the other for Sole Practitioners, chaired by Silvio Busutill. Both sessions were fruitful and many interesting issues were raised.
The MIA President thanked all those members who were present for this Forum and encouraged the SMPAC to hold such Forums on a regular basis. MIA issues guidance on document retention The MIA has issued a new set of Guidance Notes entitled TECH 01/10 Document Retention. In the conduct of their profession, Members in public practice provide an array of services in the course of which they produce, prepare, acquire or bring into being various forms of engagement documentation for their use and consumption. Also, Members in public practice very often come in possession of client-owned documentation which they use or rely upon in the performance of the relevant engagements. In other circumstances, a Member in public practice brings into being documentation for and on behalf of a client. There being no relevant local guidance on the management of documentation the Ethics Committee of the Institute felt the need
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The “Accountancy Profession (Accounting and Auditing Standards) Regulations, 2009”, enacted by virtue of Legal Notice 19 of 2009, lay down important changes to the definitions of “generally accepted accounting principles and practice” (on which the MIA had issued guidance in TECH 01/09) and “generally accepted auditing standards”.
The scope of TECH 03/10 is to give guidance on the application of the new definition of generally accepted auditing standards and the implications arising therefrom, as well as to clarify potential issues arising from this new definition. The Information Paper is freely downloadable by MIA Members and Students from the ‘Briefing Notes’ e-library. MIA issues GAPSE Implementation Guidance documents The MIA has issued four implementation guidance documents which are intended to assist Members in implementing and complying with the requirements in the General Accounting Principles for Smaller Entities (GAPSE). The first document to be issued during the quarter under review was the GAPSE Applicability Checklist which is intended to assist Members to assess if entities (privately-owned or state-owned) are eligible to apply GAPSE. The GAPSE Applicability Checklist summarises the conditions that must be satisfied for the applicability of GAPSE as emanating from Regulations 5 of Legal Notice 51 of 2009 “Accountancy Profession (General Accounting Principles for Smaller Entities) Regulations,
LOCAL NEWS
2009” as amended by virtue of Regulation 2 of Legal Notice 58 of 2010 “Accountancy Profession (General Accounting Principles for Smaller Entities) (Amendment) Regulations, 2010”. The second document to be issued, entitled TECH 02/10 Guidance Notes on Historical cost accounting principles under GAPSE (occasionally and informally referred to as ‘Little GAPSE’), identifies all the applicable historical cost accounting principles and relevant disclosures under GAPSE. The scope of this technical pronouncement is to assist preparers in preparing individual entity financial statements under a pure historical cost basis in accordance with GAPSE. To achieve the latter objective, TECH 02/10 extracts the pervasive historical cost options throughout GAPSE into a shorter (50 page) self-contained document. The third implementation guidance document issued by the MIA contains a (Microsoft Word) template set of illustrative financial statements which can be used as a base for the drafting of financial statements under GAPSE. The latest implementation guidance document entitled “GAPSE: To the point.” is a summary of the recognition, measurement and disclosure requirements under GAPSE. The scope of the abovementioned technical pronouncement is to serve as general guidance in obtaining a general understanding of the relevant principles, and should not be used by preparers in assessing compliance with all the applicable GAPSE requirements. All GAPSE Implementation Guidance documents are freely downloadable by MIA Members and Students from the GAPSE e-library on the Members’/Students’ area of the Institute’s website.
AIA
NEW MIA MEMBERS AND UPGRADES
Spring 2010
Roxanne Abela Doreen Attard Audrey Azzopardi Victoria Azzopardi Analise Borg Eliza Borg Benji Briffa Nicolette Buhagiar Maria Camilleri Charlene Caruana Charmaine Caruana Maria Caruana Chantelle Cassar Marvic Cauchi Karl Coppola David Cutajar Clara Desira Kristian Galea Glen Gauci Stefan Grech Noel Grima Alice Losco Ruth Montebello Dorianne Pace Raycine Portelli Kevin Psaila Gillian Pullicino Monique Saliba
Abigail Scerri Karen Scicluna Luana Scicluna Andriette Spiteri Amanda Tabone Marlene Tabone Stefan Tanti Geoffrey Trevisan Audrey Ann Vella Keith Zammit
MIA Glenn Borg Franco Cini Consuela Cini D’Amato Roberta Galea
Upgrades Kenneth Aquilina Christian Bonnici Pierre Bonnici Dario Caruana Michael Darmanin Clifford Delia Brian Ferrante Aaron Mifsud
FEMA presents 2010 Awards
The fourteen award winners in the two front rows.
The Department of Accountancy, Faculty of Economics, Management and Accountancy (FEMA) held this year’s presentation of awards to the Bachelor of Accountancy (Hons) 2007/2009 graduate group. The Head of Department, Mr Peter J Baldacchino made an introductory speech on current trends of student and departmental research. Fourteen different awards were then announced by the Faculty Dean, Dr Saviour Gauci who also congratulated the winners. These were then presented awards by ten sponsors as outlined below. The Malta Institute of Accountants Best Student of the Year Prize was awarded by the President of the Malta Institute of Accountants Mr Bernard Scicluna to Ms Denise Cachia, who spoke about her experience as an accountancy student and in particular the positive changes she had been seeing at the Department and the University as a whole in the previous five years.
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This year’s Chartered Institute of Management Accountants prize was awarded to Ms Maria Mizzi for her dissertation “An Analysis of the Use of Financial Information in Local Small Companies”. The Cooperative Societies prize was awarded to Ms Ann Abela for her dissertation “The Applicability of Co-Operative Banking in Malta: An Assessment”. Ms Elaine Petroni won the Deloitte prize for best dissertation in Taxation “The Effect of the Commission’s Proposed Amendments to the EU VAT Directive on Insurance Business”. The other Deloitte prize, that for best dissertation on the Accountancy Profession, was awarded to Ms Annalise Borg. The title of her dissertation was “Becoming the Accountant of Tomorrow: Trends Affecting the Next Generation of Accountants”. This year Ernst & Young again awarded two prizes, one on Financial Reporting and one on Corporate Governance. The former was won by Ms Charmaine Borg for her dissertation “Significant Differences Between Selected IFRSs and GAPSE and their Impact from the Perspective of Small and Medium-Sized Practitioners”; the Corporate Governance Award was won by Ms Marvic Cauchi for her “Corporate Governance Reporting and its Significance in Maltese Listed Companies.” The Grant Thornton prize for Law related to Accounting was awarded to Mr Jean Paul Muscat for his dissertation “Limiting Auditors’ Liability in Malta – A Study”. The KPMG Financial Accounting prize was won by Ms Sarah Anne Fenech for her
dissertation “IAS41 – Agriculture: Issues in its Local Application”, while Ms Amanda Tabone won the KPMG Internal Auditing and Control prize for her dissertation “Performance Measurement and Balanced Scorecard Applicability to Maltese Internal Audit Units.” The RSM Malta prize in Finance was awarded to Mr Aaron Bugeja for his dissertation “The Feasibility of Operating as an Independent Minibus Owner/Driver.” The External Auditing award sponsored by PricewaterhouseCoopers was awarded to Ms Ruth Sammut whose dissertation was “Workload Consequences on Maltese Audit Firms and Audit Quality – An Analysis.” The other PWC prize was in Other Areas; this was won by Ms Diane Vella with her dissertation “Risk Management in the Maltese General Insurance Sector: An Empirical Study of Selected Local Insurers.” Finally the National Audit Office Public Sector Accounting and Auditing Award was won by Ms Doreen Attard for her study on “Improving Public Sector Expenditure Efficiency Through Multi-Year Budgeting – An Evaluation”. The top four dissertation award winners – Ms Amanda Tabone, Ms Diane Vella, Mr Aaron Bugeja and Ms Doreen Attard also presented an interesting synopsis of their studies to those present. After the presentation of the awards, the Dean made a concluding speech about the significance of supporting students in their research studies.
Spring 2010
INTERVIEW
Embracing
THE
challenge
Interview with EU Commissioner
John Dalli
Interview with EU Commissioner
John Dalli
By: Jonathan Dingli – Photos: D. Aquilina
John Dalli is an Honorary Member of the Malta Institute of Accountants (MIA) and a Fellow of the Association of Certified Chartered Accountants Accountant (ACCA). He qualified as an accountant in 1971 and held senior positions with a multinational manufacturing company both locally and internationally. John has been a Member of Parliament uninterruptedly for the past 21 years. In May 1987, he was appointed Junior Minister for industry and in May 1990 Minister for Economic Services. After the February 1992 elections he was appointed Minister of Finance, a post he held for nine of the eleven years between 1992 and 2003. He later served as Minister of Finance and Economic Affairs and Minister of Foreign Affairs and Investment Promotion. Following the last election in March 2008 Mr Dalli was appointed Minister for Social Policy, responsible for a portfolio that includes social policy, health, employment, housing, labour, and industrial relations.
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INTERVIEW Jonathan Dingli caught up with John, days after he took on his current role as EU Commissioner for Health and Consumer Policy, to learn more about the challenges he faced and his achievements in the service of the public interest, which today make him one of a team of 27 in charge of promoting the general interest of the European Union. Qualifying as an accountant in the late sixties and early seventies was a challenge in itself. You chose to read for a qualification which wasn’t even available locally and, thus, you opted for a course by correspondence in a time where email, Internet etc was unheard of. How determined were you to succeed, and how difficult was that process? In effect when I decided to go for this profession I started off by reading for a course that was at the time given by MCAST. I was then working as a commercial apprentice in the administration section of the Malta Drydocks and I was seconded to MCAST, where I used to attend lectures twice a week (in the afternoon) as it was a part-time course. But that lasted only two years; after having gone through the first two years at MCAST I had no option other than to go for a course by correspondence because MCAST did not extend its course for the third and fourth years (the ACCA course was a four year courses back then). At that time one had to pass through four subjects at once, otherwise you had to re-sit all four papers. So it was quite tough! But I was determined to obtain my accountancy qualification. Meanwhile I had left the Malta Drydocks and moved to Blue Bell while continuing to study for the course by correspondence. As you said it wasn’t easy since everything was done by mail. Despite the difficulties I passed through every year. But the real issue was not the hassle of having to do everything by correspondence, but the fact that with Blue Bell I was working very long hours. Therefore the time ‘available’ for studying was severely limited and that was perhaps the major challenge. But on the other hand I was gaining invaluable experience which, as you may appreciate, is a vital accompaniment to your academic study. Practically soon after qualifying you were appointed financial controller of a company which, at the time, accounted for 25% of Malta’s exports. As opposed to most other (then) qualifying accountants who would pursue a career in auditing or in public practice, you chose to practice your profession in industry. Was that a natural progression, or was it something you had in mind? It was definitely a choice – I love the manufacturing environment as it entails a very proactive approach. I never saw myself going from one company to the other auditing and reviewing what others have done. I wanted to do things myself. And therefore going into a productive environment for me was the obvious choice. And I must say enjoyed it thoroughly. I was part of a multi-national company with a large manufacturing unit in Malta. At the time I left Blue Bell it employed 1,500 people in Malta and Gozo, exporting about 40,000 garments a day. It used to pass through the cutting department around 1 million yards of cloth a month. I dare say it was one of the most
Spring 2010
efficient plants worldwide. As an organisation we didn’t produce high-tech products – it was just jeans – but even that required a lot of input. With such a massive operation, cost control was paramount. I am proud to say that we created extensive control systems within the company which were eventually taken up internationally. One system which comes to mind used to integrate the costing element of production into the financial accounting system. Today it sounds quite obvious, but with no computers at the time, that was quite an interesting task. All we had was a machine, which was a revolution in itself simply because it processed and stored data on cardboard cards with magnetic strips. I remember when the technicians of the company that sold us the equipment came to see it they were flabbergasted. We were using it as a computer. And that’s Malta after all!
L to R: Angelo Chetcuti, Jonathan Dingli, John Dalli and Frank Zammit
You were one of the first accountants to make it out of the back room and into the board room. What do you think are the essential attributes of a good Professional Accountant in Business? I believe it is a question of involvement. An accountant should not be a bureaucrat; he should understand all the processes and present himself as the person who is quantifying the decisions that are being taken by others. And in that way he begins to participate in the decision making process. And that is how he becomes respected and how he influences policy. And when he can influence policy he’s taken seriously. And that is how you get into the boardroom – by participating into the operational decision making process. In 1977 you left the Island and moved to Brussels where, amongst others, you were appointed as the manager of an international team to develop a computer management information system to control the total process of Blue Bell’s 25 subsidiaries in Europe. To what extent has this experience given you an edge in your professional career? It was a tremendous experience – I would say it was the turning point in my life. I went to Brussels initially to manage a trading company which Blue Bell had just set up however, within a few months, I was asked to manage this huge innovative project which would encompass all the subsidiaries under one standardised and harmonised IT system. The system recorded the process from the conceptual model (up to three years prior to actual production of the garments) up to the balance sheet.
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Spring 2010
INTERVIEW
It was a very interesting assignment. It had a budget I remember of $5 million a year and believe me in 1977 that was big money. I managed a department of about 40 people working on this project and it took me all around Europe. And I think this was the experience that really opened my mind – it exposed me to the diversity of Europe, studying the different commercial requirements across Europe, the different methodologies and the different cultures and, after all, it introduced me to the IT world. In the highly controversial election of 1981 you contested for the first time. How difficult was it for you to decide that you should move from a stable professional position to one in politics as your full time commitment in a time when politics was anything but stable? It was a very difficult decision to take, especially at the time we’re talking about when politics as you say was not stable. What pushed me was in fact that instability in politics. I felt that I had to do something for this country. The opportunity cost was giving up a very stable and well paid job. To put things into perspective, when 5 years later I was appointed minister, the salary I had as a minister was just a third of the salary I was earning before moving into politics. So it was a major shift for me, and a sacrifice for my family; but I believe that at the time we had to stand up and be counted and eventually re-direct this country on the proper way of democracy and development. From 1987 to 2004 (excluding those 20 months in which the Nationalist party went into opposition) you had been responsible for the economy and finance in Malta and, in particular, the challenging task of transforming the Maltese Economy into a vibrant and modern one. What do you see as your major achievement/s and contribution to the long term well-being of the Maltese Economy? That is a period that I look back at with great satisfaction. It involved very hard work – I used to work very long hours because unfortunately at the time if you wanted to have something done you had to do it yourself. But finally I believe that we managed, under the leadership of the Prime Minister Eddie Fenech Adami and with the cooperation of my colleagues, to move forward revolutionary policies and set in motion a process which required a change in the culture which many people were used to over a number of years. We started pushing liberalisation; we started pushing the market economy; we had reformed the taxation system by (amongst others) introducing a lot of controls. Bearing in mind the fact that people were earning much more money than they were earning before, due to opportunities in a fast-growing economy, introducing fiscal morality into the system was paramount. So what further augmented government’s strategy was not really taxation, because we did not introduce any additional taxes, but it was higher fiscal morality. People were earning a higher income, and a higher percentage of that income was being caught in the tax net. And the tax net gave government the opportunity to invest more in the country for the common good. I think the major challenge of them all was the liberalisation process. Remember in 1987 Malta had a 100% statecontrolled economy. You had to obtain government’s permission practically to import anything to Malta (be it a
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pencil or a pair of gloves). Everything had to pass through a government department – everything was controlled by a government company. Most of the companies in Malta were public – all the services were public – the financial system was public – it was government owned, which also means government controlled. And we had to change all this: we privatised banks, we privatised communications, etc… so when we came to join the European Union in 2004 Malta was a completely different country from the one we took over in 1987. From your experience, what makes an accountant an incredibly valid candidate to occupy such ministerial roles? As I said it depends on the accountant’s attitude. Being an accountant (or a member of any profession for all I know) does not necessarily make you a good politician. So it depends on your attitude. If your attitude is one
Spring 2010
INTERVIEW
that is hands-on, where you are interested not just in the procedural and bureaucratic aspects of your job, but you’re more interested in the processes surrounding you, then I believe an accountant has the necessary training to make him a very good member of a Cabinet. When in Cabinet I adopted the same attitude that I brought around a high management table in an operating company. The difference is that a government naturally runs for different results – a government doesn’t run for a positive bottom line at the end. The bottom line (the measure) for government is people’s quality of life. Therefore we had to ensure that the processes which we were controlling (i) were processes that are finally going to generate the necessary wealth and (ii) that this wealth was being properly utilised and distributed amongst the population so that you have a mass quality of life improvement. And I am very proud to say that this is what we’ve achieved from 1987 to 2004. This is what we’ve created – a country (without any resources whatsoever except our brains) with an extremely good and healthy economy ready to join the EU as in fact it did shortly after the end of that term. I remember there was this feel-good factor: people started to think about tomorrow, not in apprehension but in the sense of movement towards improving themselves. And this is why I look back with great satisfaction on those years. But as I said an accountant’s training is very relevant and valuable in any Cabinet. I do believe in training: I remember one of my slogans for the 1981 election read like this: “Politics is an area that affects the lives of everybody but politicians are not trained for the job.” And it’s true, so I believe that good management skills are very important, because this is management after all – managing a country and achieving the ‘better-quality-of-life’ bottom line. What would your answer to the last question be if I was referring to your recent role as minister for social policy, health, the elderly and community care? Not a different answer at all. The question is how to manage the situation. As a minister of the economy and eventually as minister of finance I had a role which I think I fulfilled quite well. Then when I moved into social policy and health first of all it was not a big break. Why? Because as minister of finance I knew exactly what was happening in social policy and health; as I said I’m a process person. Therefore as from day 1 I knew exactly what was happening and I knew what was needed – which was a push for sustainability. And therefore I moved in, seamlessly, and took this role of minister of social policy
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and health and started a programme of reforms which would enable the high quality delivery of health services at a sustainable level which is essential in the long term. And I believe the work that was done in a relatively short period was a good job which set the ball rolling for a lot of reforms. You have now taken the role of EU Commissioner for Health and Consumer Policy for the next five years. What do you envisage to be the major challenges ahead? How will your vast experience be put to good use in your current role? In the first few weeks that I have been now in this office, one can already see a major shift of emphasis in the work that you do. Although in Malta you’re much more handon, as EU Commissioner you are primarily involved in the conceptual policy making level. Because there’s so much to do, and there’s so many people doing it (and they’re doing it very well)! Which for me is fine – I’d rather now spend my time out in the policy areas and in the decision making process. So you have to be decisive. I’ve already shown that I’m not a person that would gape at problems, waiting for them to go away. Problems never go away. So you study, you take and consider all the input and information that can be provided by your advisors, but then you have to take decisions. And this is my function here in Brussels, and I already know that I will enjoy it thoroughly. Your first important assignment was when you moved to Brussels from where you returned in 1979. You’re now back in the EU capital, albeit in a very different role. Do you see this as being your final step in your distinguished career? That’s really not for me to say!!! We can plan our lives but finally I think that life can take turns that one doesn’t really expect. As I was not expecting this turn. So I will take the test as it comes as I always did. I do my best in the job that I’m having now and I’ll let the future determine itself. I’m not a person who’s going to sit by the seashore – I’m not that type of person. I need to be active. And I hope that I’ll have the strength to continue being active in the future for the benefit of the people amongst me – all the Maltese people to whom I dedicated more than half of my life. And also, why not, to give myself the personal satisfaction that one expects, and also to give people who placed their trust in me the level of satisfaction that they would expect.
Spring 2010
FEATURE
Tips for Cost-Effective
ISA Application By Stuart Hartley, FCA
As attention turns to the clarified International Standards on Auditing (ISAs) issued in 20091, it may be a good time for auditors to assess whether the risk-based approach, which became effective for 2005 audits and underpins these ISAs, is being applied in a cost-effective manner. The IAASB staff issued a Q&A document, Applying ISAs Proportionately with the Size and Complexity of an Entity 2, in August 2009 to assist auditors in applying the clarified ISAs in a cost-effective manner. Below are some additional tips that may help: 1. Embrace the ISA requirements. 2. Identify sources of risk, not just the effects. 3. Spend time to plan well. 4. Understand the control environment. 5. Aim for continual improvement. 6. Two-way communication.
TIP 1. EMBRACE THE ISA REQUIREMENTS “Knowledge is power” Sir Francis Bacon, 1597
It is surprising how many small and medium-sized practices (SMPs) have yet to take the time required to study the ISAs. Incomplete knowledge can be self-defeating as it creates uncertainty about what is really required by the ISAs. The result is wasted time deliberating over what has to be done and performing unnecessary work, just in case it may be needed. In particular, lack of knowledge about requirements may lead to: • The entire risk assessment phase of the audit becoming an “add on” to the other substantive audit work performed, instead of being used to focus audit effort on areas where there is a greater risk of misstatement in the financial statements. • Turning what should be a simple audit into a complex and time consuming project. This can arise if efforts are focused on completing needless standard audit forms and checklists rather than using professional judgment to scale the work according to the size and complexity of the entity being audited and the risks involved. Another important element is attitude. If the engagement partner has a negative attitude then ISA implementation may simply mean extra work just to comply rather than an opportunity to improve the quality and cost effectiveness of the audit. It is better to embrace the ISAs. Gaining a sound knowledge of what is required can be empowering. It equips partners and key staff to lead the way, to use their professional judgment wisely, and to make informed, confident decisions on matters such as: • Changes needed in engagement workflow and the firm’s system of quality control, including:
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• Partner involvement in planning. • Customising audit forms and checklists to be scalable for different sizes and complexity of audit clients, particular industries, and particular engagement risks. • Ongoing staff communication and file reviews. • Engagement productivity. • Identifying the areas where staff training is required. • Determining what to include (and what not to include) in audit scope, risk assessment, and designing responsive audit procedures. • How to address the risk of fraud. • Efficient allocation of staff and other resources. An understanding of the ISA requirements is also important for: • Building the underpinning required to implement future changes to the ISAs. • Refining the firm’s audit approaches to deal with issues arising from implementing the standards on particular engagements. Audits of many small entities may be straightforward, but some can also pose challenges (such as less sophisticated accounting expertise and less formalised internal control) that do not exist in larger entities.
TIP 2. IDENTIFY SOURCES OF RISK, NOT JUST THE EFFECTS
“Learning is the discovery that something is possible” Fritz Perls When auditors are asked to identify risks, the natural tendency is to start by reading the financial statements. While this may identify the effect of risks that could apply to virtually any entity, such as valuation of inventory, completeness of sales, or accuracy of estimates, such an approach may fail to identify fully the bigger and more pervasive risks that are specific to the entity. These sources of risk could include adverse industry trends or an accountant prone to error, which could affect virtually any account balance. Rather, start by identifying the sources of risk and then, as the second step, linking those sources to possible effects in the financial statements. For example, a source of risk could be a declining demand for the entity’s products. One obvious misstatement (effect) in the financial statements would be valuation of inventory. But it would be a mistake to stop there. Think about other possible misstatements emanating from this source of risk. For example, declining sales could result in a sales manager just missing a bonus threshold, banking covenants could be breached, or a going concern issue may exist. In fact what seems, on the surface, to be a straightforward business risk may also provide someone with the opportunity or incentive to commit fraud—take that sales manager who stands to get a reduced bonus.
1
See http://web.ifac.org/clarity-center/index
2
http://web.ifac.org/publications/international-auditing-and-assurance-standards-board/practice-alerts-and-q-as#applyingisas-proportionate
Spring 2010
FEATURE
ISA 315 is entitled Identifying and Assessing the Risks of Material Misstatement through Understanding the Entity and its Environment. Therefore, risk identification should come from our understanding of the entity as a whole, not just from reading the financial statements.
Key questions that should be discussed at the planning session include those in the chart below.
One way of thinking about this is to consider the sources of risk, obtained from understanding the entity and its environment, such as those in the chart below.
In addition, encourage staff to identify areas where audit procedures seem excessive in relation to the risk of misstatement being addressed. For example, if a number of account balances are immaterial, is it necessary to perform a long list of standard audit procedures that might be more applicable to a much larger balance? Take time to ensure each staff member understands the necessity and purpose of the documentation they are required to complete. Countless hours can be lost by staff attempting to complete a form they do not understand. As information is obtained about each area, take time to identify possible sources of risk. Then consider what misstatements (including those that might arise due to fraud) could occur in the financial statements as a result. Many of the risk sources identified in this way will likely be pervasive in nature (they cannot be allocated to specific assertions), which will help in assessing risks at the financial statement level. Effective risk identification also provides information that can be used to develop constructive recommendations in areas the entity should consider.
TIP 3. SPEND TIME TO PLAN WELL
TIP 4. UNDERSTAND THE CONTROL ENVIRONMENT
It has been said that for every hour spent in planning, five hours can be saved in execution. Many SMPs have found this to be true. Effective audit planning is often the difference between a quality audit within budget and a poor quality audit over budget.
When obtaining an understanding of internal control relevant to the audit, see that controls, such as those found in the control environment, are identified. One may wish to refer to such controls as “pervasive controls.” Pervasive controls, which are quite different from transactional controls, address matters such as integrity and ethics, corporate governance, employee competence, managements’ attitudes toward control, fraud prevention, risk management, and control monitoring. The chart below illustrates one way of viewing pervasive and transactional controls.
“He who fails to plan, plans to fail” Anonymous
Effective planning requires two key ingredients: • Undistracted time of the engagement partner and key staff. This does not necessarily mean dedicated team meetings held in the office. On very small engagements, planning can be achieved through brief discussions at the start of the engagement and as the audit progresses. • Willingness to make key decisions based on appropriate professional judgment. Planning involves: • Informing the team on what the entity is all about, what has changed in the past year, and the likely implications of those changes. • Addressing audit inefficiencies identified in prior year engagements. • Ensuring staff fully understand what they are required to do and why.
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Other planning tips include: • Ensure that fraud risk is properly addressed. Because fraud is deliberate, detecting it may require some element of unpredictability, such as performing certain audit procedures on a surprise basis. Encourage staff to be sceptical and inquisitive and empower them to raise issues, observations, or unexplained matters. Fraud may be discovered through piecing together a number of small matters that by themselves would seem insignificant. • Consider assigning similar or related file sections to the same staff member. This will ensure work performed in one area is not repeated again in another.
Spring 2010
FEATURE
The most important controls in entities of any size are those found in the control environment. This is sometimes referred to as the “tone at the top,” which outlines the values of the entity and management’s commitment to competency and ethics. If the tone at the top is good, the owner-manager of a small entity may exercise effective control over transactions which otherwise might be done through extensive segregation of duties in a larger entity. However, if the tone at the top is poor, management override can easily occur and even the very best transactional controls over processes, such as purchases and sales, could be overridden. One can see that under the risk-based approach, only relevant controls are identified, documented, and assessed.
TIP 5. AIM FOR CONTINUAL IMPROVEMENT There is a tendency for some auditors to blindly follow the example of the previous auditor, resulting in a file that mirrors that of last year. A better approach would be to document once (in the first year) and then update the existing documentation (to the extent possible) for changes in subsequent years. The documentation in year one should enable auditors in subsequent years to leverage their understanding of the entity and focus attention on new industry trends, key operational changes, new inherent risks, and revised internal controls. If changes are minimal, then so too will be the additional documentation. Achieving continual improvement requires consideration of existing practices at all planning meetings. Here are a few suggestions: • Revise the file index. The ISAs have introduced new terminology and concepts that are central to the audit. Review your firm’s file index to incorporate the new terminology and processes. • Consider how file information can best be reviewed—this year and in future years. • Document all risks identified, and their assessment, in one place. Recording risks in one place reduces the chance of missing some, helps ensure risks get assessed in a consistent manner, and makes the file easier to review. One can also include cross reference risks to the risk response. Finally, it also makes the task of updating risk factors, later in the audit and in subsequent years, easier. • Standardise how internal controls will be documented. When documenting internal controls, ensure that the linkage between the risks of material misstatement and the control procedures to mitigate such risks is clear. This enables the file reviewer to assess control design, and when changes take place, the impact on control design can easily be identified. • Record audit issues, their resolution, and any related communications to management or those charged with governance in one place. This might take the form of a summary memorandum. This will ensure key issues are not missed in the file review process and will assist in planning the audit in subsequent years.
TIP 6. TWO-WAY COMMUNCATION Good ongoing communication (while maintaining the auditor’s independence and objectivity) between the auditor, management, and those charged with governance is important to avoid misunderstandings and to develop constructive working relationships. Consider, for example, explaining to management (and those charged with governance) what an audit is all about, the responsibility of the auditor under the ISAs, and what management can do to help the audit go smoothly.
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SUMMARY 1. Take time to study the ISAs. Embrace them. 2. Identify the sources of risk specific to the entity, and then identify the effects on the financial statements. 3. Time spent in planning will save hours in execution. Use professional judgment to focus audit effort where it is needed most. 4. Understand the control environment. 5. Aim for continual improvement in the audit. This includes documenting audit evidence in year one so that it can be easily updated in subsequent years, as well as considering each year how audit efficiency can be improved. 6. Ensure management is fully informed as to what an audit is all about and establish clear and constructive channels of communication that will help the audit run smoothly. Stuart Hartley (shartley@focusroi.com) is a consultant and writer who specialises in auditor training. –––––––––––––––––––––––––––––––––––––––––––––––––––––
IFAC RESOURCES Online • International Center for Small and Medium Practices at www. ifac.org/smp which includes: • Relevant links at http://www.ifac.org/SMP/relevant_links.php • Free quarterly e-newsletter at http://www.ifac.org/SMP/ index.php#News • IAASB Clarity Center at http://web.ifac.org/clarity-center/index Publications • All IAASB and SMP Committee publications can be found under the Publications & Resources Section of the IFAC website at http://web.ifac.org/publications. • Applying ISAs Proportionately with the Size and Complexity of an Entity is at http://web.ifac.org/publications/internationalauditing-and-assurance-standards-board/practice-alerts-and-qas#applying-isas-proportionate. • ISA Modules developed by IAASB staff are at http://web.ifac. org/clarity-center/support-and-guidance#support-modules. • Guide to Using International Standards on Auditing in the Audit of Small- and Medium-sized Entities is at http://web.ifac.org/ publications/small-and-medium-practices-committee. Some IFAC member bodies have adapted this for their own members, such as the Institute of Chartered Accountants in Australia (ICAA) (see http://www.charteredaccountants.com.au/A121542159) and the Malaysian Institute of Accountants (MIA) (see http://www.mia. org.my/new/psp_auditandassurance_knowledgebase_the.asp). An updated Guide, conforming to the clarified ISAs, is planned for mid-2010. • Guide to Quality Control for Small- and Medium-Sized Practices is at http://web.ifac.org/publications/small-and-mediumpractices-committee. An updated Guide is planned for mid-2010. • Translations of some of the above publications are at http:// www.ifac.org/Translations/database.php. Copyright © January 2010 by the International Federation of Accountants (IFAC). All rights reserved. Used with permission of IFAC. Contact permissions@ifac.org for permission to reproduce, store or transmit, or to make other similar uses of this document.
Spring 2010
FEATURE
Understanding & Interpreting
BODY LANGUAGE (BL) By: Franz R. Wirth
Introduction BL is the term for the unconscious, physical movements we all make that communicate thoughts and feelings and is technically known as Kinesics. It is said that 50 % to 80 % of human communication is non-verbal (NV). Although it is not an exact science, interpreting BL correctly is a complex art, but you can easily learn to read broad messages. BL can be both genetic, as well as either environmental or cultural. Some NV BL includes facial expressions (physiognomy), such as those that express happiness, sadness, fear, disgust, surprise and anger, eye movement, breathing, heartbeat, pulse, blushing, and perspiration amongst others. An open, relaxed posture and good eye contact are indicatives that a person is comfortable with themselves and with what they are saying or hearing. Conversely, a tense posture, perhaps with arms crossed and little eye contact may indicate evasiveness, suppressed anger, or disagreement. Leaning forward when seated may indicate interest or agreement, whereas leaning back indicates lack of interest or resistance. Proxemics is another BL ingredient that transmits a message. This personal space aspect of BL can be interpreted in two particular ways, namely, within a distance of 1M for a personal encounter or further than 1M for a social encounter. It is all a matter of comfort zones. Be aware of these signals in yourself as well as in others. I will now delve deeper into the subject by taking you through some different and practical scenarios – presentations and meetings, salesperson and customer, interviewer and interviewee and finally Coach and Coachee (121).
Presentations and Meetings During presentations it is advisable to make use of visuals whenever possible, since they are powerful aids, but always remember to maintain that all-important eye contact, by looking at the audience rather than the screen. This is effective presentation. In so doing, the wide choice of styles that you may adopt to present your message and material, such as by roaming or from a fixed point, using notes, (which is much preferred to reading a script), by keeping the proceedings either formal or informal, participative or lecturing, and so on and so forth, will help you to judge the impact of your talk on your audience and adjust if necessary. Always try to inject humour into the presentation as a means of winning over your audience, and always end on a strong, emphatic note.
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A meeting where a round table is used gives the message that the proceedings will involve teamwork and fairness. Nobody is at the head of the table. During meetings, if you are faced with a situation where a manager is seeking a volunteer to run a project, you may have a number of reactions from those in attendance. For example, one may simply be bored and disinterested, another interested but hesitant, whereas the eager one would be quick to take the initiative and to volunteer. It pays you to get into the habit
of volunteering, to lead or take on extra responsibility since you will gain invaluable experience. The person who shows no interest or, who even hesitates, will gain nothing. You are to choose the right moment to offer to lead and then be decisive. Ensure that the others follow as you start to lead. As a final note on this practical scenario and on this particular aspect of BL, turn down a leading role unless you have the necessary means to master it properly.
Salesperson and Customer A Salesperson must be confident if the Customer is to have confidence in the Salesperson and in what is being offered for sale. A Salesperson must be prepared to adapt the style to fit that of the Customer. Eye contact, facial expressions and BL play a very important role in the rapport-building process. A Salesperson should smile and use open, non-threatening gestures, besides watching the Customer’s BL for clues as to how the Customer is responding and to then modify behaviour accordingly. A Salesperson should question and listen to the Customer, rather than making statements, and should take careful note of objections and complaints. All this information may give the Salesperson further clues as to the needs of the Customer. It is recommended that the Salesperson should be positive and honest when communicating, should lean forward, make eye contact and emphasise key points with hand gestures. The Salesperson must ensure that the BL remains positive throughout the meeting. In this way, the Customer will
FEATURE respond positively and if the Customer gestures with open arms, this will indicate that the Customer is receptive to the Salesperson’s suggestions. Using positive BL, the Salesperson will encourage the Customer to move towards a commitment or to adopt the Salesperson’s ideas, resulting in a sale. So a Salesperson should keep an open posture, using relaxed arms, leaning forward, slightly tilting the head, avoiding slouching, maintaining eye contact and wearing a smile. The Salesperson should respond with reassuring gestures if the Customer betrays signs of nervousness or negativity. In a sales transaction scenario, the Salesperson should be able to detect whether a customer appears hostile or confused and then, in an open and friendly manner, attempt to encourage the client to provide feedback, however negative, in the hope that the Salesperson can allay any fears. A Salesperson must always bear in mind that any hostility is not aimed personally. Neuro-Linguistic Programming (NLP) is a technique that comes in handy for the Salesperson to attain conversational harmony with the Customer. While listening intently, the Salesperson should seek to match the spoken language and the BL to that of the Customer, mirroring, or better still synchronising, the Customer’s imagery, phraseology, posture and gestures, modifying any that are counterproductive.
Interviewer and Interviewee When being interviewed or assessed in your job, those judging you will be looking for signs of a confident attitude. Therefore have faith in your own ability and others will recognise it. You must therefore express confidence in your own abilities, appear willing to learn and improve, be articulate and well presented, give evidence of jobs well done and, very importantly, exude positive attitude. As already stated, direct eye contact shows confidence, whereas leaning forwards indicates keenness. Allow your hand movements to be free and expressive. Almost goes without saying that you should be neatly attired. One important point to keep in mind is that a total lack of anxiety indicates over-confidence. On the other hand, when conducting interviews you should keep your own talking to a minimum since you want the candidate to say as much as possible about their understanding of the job, your company, their past performance – what they did really well in their previous jobs. You are interested in their strengths first, weaknesses second. Equally important, you must observe them carefully, taking into account BL and appearance. It is normal for the leading interviewer to listen carefully to an interviewee, who will be enthusiastic and keen to impress, and to ask questions only when necessary. A colleague interviewer would note the candidate’s appearance and open manner. When assessing a candidate, you are to observe carefully – keep a checklist of attributes and skills handy and ensure that you address them all. Having done all this, above all do not ignore your intuition, your personal reaction and judgement. Psychometric tests and handwriting analysis (graphology) are often used to evaluate a candidate’s suitability, but they are no substitute for personal judgement, reinforced by the person’s track record, references and any appropriate skill tests. It is very important that you actually like the candidate. Ask yourself whether the candidate seems ‘nice’ and if the individual will fit in. Conflicts and rivalry within groups are counterproductive, so avoid candidates who display at
Spring 2010
interviews a degree of personal assertiveness that may fracture the team spirit.
Coach and Coachee (121) One important issue to address during 121 sessions is to sit diagonally (30° to 60°) and not in front of each other. Perhaps one can use the same corner of a square table. This implies a comfortable and cooperative arrangement. It is advisable to start a 121 session on a positive note. A Coach’s first remarks will set the tone for the rest of the session. Perhaps you can converse briefly about a positive, unrelated matter, such as a shared interest as football, to put the Coachee at ease. It would also be a good idea to praise any achievements since the last meeting, such as the attainment of pre-established targets, and allude specifically to such work that has been well done. Automatically this will convey positive interest and focus attention on performance. To achieve a realistic amount of ground to cover, one should also agree on the length of the session. The outward appearance of a person often gives insight into their feelings. An employee exhibiting defensive BL and a negative attitude may be feeling insecure. An open, upright posture shows confidence, whereas a withdrawn appearance shows lack of self-belief. To recapitulate, the Coach should maintain direct eye contact when greeting the Coachee, lean forward when shaking hands to convey a warm welcome and should get up out of the chair and physically approach the Coachee to show respect and goodwill. In response to all this, the Coachee will surely react positively to the Coach’s enthusiastic tone of voice, and would have a relaxed and positive posture in response to the Coach’s manner. During 121 sessions it is important for both the Coach and the Coachee to know how to recognise nonverbal (NV) signals. People rely as much on the way things are said as on what is said – understanding BL gives you insight. During a Coaching session, take note of tones and pitch of voice, facial expressions and hand gestures. Is the speaker coming across as active, positive and focused? Or passive, confused and self-divided? In the former case, continue to press on with questions concerning options and goals. In the latter case, make time to explore the basis of the problem and be ready to lend more support. Always listen to concerns that are barriers to achieving goals. The following are a few NV signals: • Showing preoccupation – avoidance of eye contact and fidgeting may indicate preoccupation with other matters. A restless gaze indicates thoughts are elsewhere and folded arms form a barrier to communication.
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Spring 2010
FEATURE
In a Coach’s role, you are to ask the Coachee if there is something on the mind. • Showing disagreement – a frown, denoting disagreement, and hunched shoulders, normally when a Coachee is on the defensive, may reveal scepticism or even anger. In a Coach’s role, you are to ask for the Coachee’s thoughts on what has just been said. • Revealing disinterest – averted eyes indicating evasiveness, restless movements such as checking or watching the time, could also denote disinterest. In a Coach’s role you are to ask the Coachee how the session can be brought back on track. • Indicating uncertainty – when hands touch the face, particularly pulling the ears, and a faraway look, can demonstrate doubt or uncertainty. In a Coach’s role, you are to ask the Coachee if there is a matter that the Coachee needs to discuss. We need to be careful not to misinterpret BL. For example, is a person rubbing the eye because of an irritation or because of tiredness, crossing the arms because of the need to keep warm or because of defensiveness, scratching the nose because of an itch or because of the need to conceal a lie. Having said that, one can interpret crossed arms as possibly defensive, crossed arms and crossed legs as probably defensive and crossed arms, crossed legs, frowning and clenched fists as definitely defensive and probably hostile. In summary, be aware that your expressions mirror your thoughts. During 121 sessions, it pays the Coach to observe the Coachee’s BL, and in so doing, gain valuable insights into issues at hand. Communication is all about listening with care. The Coach should endeavour to adopt a sympathetic tone of voice, show attention and interest using a direct gaze, invite trust through a relaxed posture and convey a willingness to help by using an open BL. The Coachee should not use an averted gaze since this implies uncertainty, avoid a defensive posture that shows lack of confidence but instead use hand gestures that indicate an eagerness to communicate. As a good Coach, you must understand what makes staff tick and you must be sensitive to the feelings of others in order to maintain their firm commitment. It is wise to devote time to finding links between staff capabilities and goals and your efforts will be rewarded by results. Do learn to foster political know-how and be aware of who wields power in your organisation, which sensitive toes to avoid, and who is likely to support or oppose a proposal. A Coach empathises with the Coachee when putting oneself in the Coachee’s shoes, encouraging and pushing the Coachee to achieve results. The Coach must look attentive and interested, using a calm tone of voice and matches BL to convey receptiveness. In return, the Coachee would respond positively and relaxes, explains problems more easily, and the use of open palm gestures would emphasise successful communication.
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A Coach must listen to the Coachee’s responses to the question made. He is to acknowledge the points being made by tilting his head forward. He is to avoid being overwhelmed with information. It is always advisable to control the flow of information by pausing while listening. If the 121 session starts to lose direction, the Coach is to politely stop the
Coachee and summarise what has been said. If the Coach finds himself getting confused, ask a question that clarifies a point or that leads on to considering a possible option. Alternatively, the Coach should challenge what has been said and should ask how it is relevant to the Coachee’s or Team’s goals. By leaning backwards, the Coach would be signalling a pause for reflection, or through the use of hand gestures he would be signalling a desire to slow down the flow of information. At this point, the Coach would ask the Coachee where the session is going. The Coach’s position of feet, close to each other but not touching, would denote open, positive BL. In essence, the Coach would also be listening with EARS, a mnemonic for Empathise, Acknowledge, Reflect and Summarise. Coaches should also endeavour to transform all Coachees into ‘Champions’, who are loyal and enthusiastic, from ‘Walking Wounded’, who are the ones who remain loyal despite unvoiced complaints, from ‘Missing in Action’, who are disenchanted and unproductive, and finally from ‘Detractors’, who are highly critical of the Company. The Coach must understand staff, in order to develop true commitment, and listen to unhappy employees, since they may reveal serious problems. The Coach must give equal weight to the Coachee’s intellectual needs, expression of individuality and emotional needs, if the Coach is to win their minds, spirits and hearts. To achieve, a Coach is to allow some autonomy in creating the Coachee’s work environment, he is to make them feel valued by openly recognising their achievements, and empowering them by handing over as much control as possible in their areas of responsibility. When a Coach involves staff in decisions, and agreement to a task is achieved, Coachees are more likely to feel a sense of ownership for it. A Coachee who is on board will show commitment by asking and answering questions and leaning forward in the process of discussion. An interested posture and definite answers are what a Coach should be looking out for. On the other hand, the non-committal Coachee would turn away and be unresponsive to questions, would have a wavering look and a slouching posture.
Conclusion Now I urge you to take that necessary step to move from theory to practice and reap the benefits from all that was discussed above. One thing to keep in mind is that one should not jump to conclusions, especially negative ones, using BL analysis only. Understanding BL enables better self-awareness and self-control too. One final note – I recommend that you view a couple of ‘Lie to Me’ episodes and sharpen your BL analysis through them!
About the author Graduating in Business Management from the University of Malta and then concluding his MIA studies, Franz R. Wirth has been in employment for more than 20 years with the Intercomp Group of Companies, a leading organisation in the local IT industry. He is the Director responsible for Finance and Administration as well as the Companies’ Secretary. He sits on the MIA Council, apart from a number of other MIA Committees such as the PAIB, CPE and Education ones.
Spring 2010
LIFESTYLE
Spotlight on…
One of her favourite mottos is
Roberta Giorgio “Dream as if you’ll live forever. Live as if you’ll die today.” By: Catherine Mallia Bonavia
When asked whether she prefers to work in the family business or with third parties, Roberta replied: “Like most things in life, both options have their pros and cons. In my opinion, the biggest advantage of being self employed is flexibility, whilst the biggest disadvantage is that business problems are taken home and working hours are endless. On the other hand, working for third parties probably does not afford oneself the satisfaction one can reap through managing one’s own business; however I have to say it is possibly less stressful. So ultimately it is a matter of personal preference.” The initial challenge of Giorgio & Partners was to engage staff due to the shortage of skilled resources in the accountancy profession and being a new firm did not help either. Eventually they managed to recruit a couple of promising University students who have grown with the firm.
Roberta Giorgio
Describing herself as optimistic, modest, hard-working, determined, assertive, and friendly, she was brave and strong enough to struggle with the state of affairs when struck with the sudden death of her father and business partner, Richard W. Giorgio. Owner of Giorgio & Partners, 33-year old Roberta Giorgio couldn’t really understand what the accountancy profession involved except that it involved numbers up till the age of 12. At the time she was in Form 2 and as the children of her age, she had to choose two subjects to specialise for her ‘O’ Levels. Roberta confesses that at the time she was not devoted to study, and as a matter of fact her parents had their own doubts on whether she will be able to make it. Opting for accounts was not an option, since sciences were not her forte. The fact that her father was an accountant had obviously encouraged her to pursue the choice. So was the influence of a family friend and an accountant by profession, Victor Schranz, whom she wishes to thank for being such an inspiration for her success. As with most students, Roberta started taking her studies seriously when she joined sixth form. She eventually graduated from the University of Malta in the year 2000 and commenced her career in the accountancy profession with Ernst & Young, where she had the opportunity to work in various European countries on a secondment-basis. In April 2005, she left E&Y to continue her career as a sole practitioner for about one year until her father retired from E&Y in June 2006, at which stage they set up the partnership Giorgio & Partners.
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At the time, Roberta’s duties and responsibilities included managing the firm’s accounting and finance matters and human resources. On the other hand, her father’s responsibilities included Risk Management and Compliance Principal responsibilities. Other duties of the firm were shared. All was doing well until 2009 when out of the blues, Roberta’s father passed away. This was a shock for all the family but most of all for Roberta, as for her this meant not only losing a father but also her business partner. Roberta explains how her father was the source of expertise and experience in the partnership. He knew the business thoroughly, having been one of the pioneers of the industry. To her, he had also been a mentor, from her studies at University, through the start of her career and their eventual partnership. A couple of days after this unexpected and shocking death, Roberta returned to work, her priorities being reassuring staff and clients that the firm will go on despite this sudden change. Notwithstanding this difficult time, Roberta managed to take over the extra responsibilities. Fortunately her father had involved her on all the work of his clients so this made part of the transition easier. The balance between emotion and work could not be reached without the precious support of the firm’s staff and clients, and last but not least her husband Martin. Roberta wishes to express her gratitude to them for being there at this crucial moment of her life. Following a year full of hard challenge in taking full responsibility of ensuring the continuation of the firm, she has yet another tough challenge to manage – that of striking the right balance between motherhood commitments with the responsibility of a business owner determined to continue carrying on with her profession. Roberta has recently given birth to young Matthew, now two and a half months old. On returning home from hospital, she worked from home
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since driving was out of the question for the first five weeks. Unfortunately that time of the year was a very busy period for the firm, so taking even a short break was impossible. Where there is a will there is a way … and yet again things ran smoothly thanks to the staff of Giorgio & Partners in particular the managers Ruth Grima and Miriam Vella. Once again Roberta wishes to express her appreciation for their assistance.
Since Matthew is still very young, Roberta arranged for a baby sitter twice a week, but there are also days where she takes him with her to the office. Luckily enough little Matthew is a relatively good baby, but as with children at this particular age, the mother needs to evolve her life around his schedule, meaning that Roberta’s working day is extended till late at night. She does her best to dedicate the weekend for her family.
Juggling work and family is not an easy feat and Roberta could not do it without the help of her mother, Ita, who despite the fact that she has a job herself, she actively participates and helps Roberta in her family duties. The disadvantage of being the business owner, as opposed to being employed, and without having the shoulder of another partner, meant that Roberta could not avail herself of maternity leave.
Roberta’s hobbies are mainly travelling and swimming. Both Roberta and her husband Martin agree that a holiday once or twice a year is a must as this is the only way that they can take a real break from work. No travel plans have been made for 2010 in view of the little one, but Roberta intends to devote as much time as possible to swimming from which she was deprived in the last couple of years. She is sure that little Matthew will be sharing her own love for swimming as he loves his daily bath!!! When asked about the gender issue vis-à-vis work and family life, Roberta believes that women are more at a disadvantage than men. Women often tend to take on a bigger part of the responsibility of bringing up a family. However she also believes that today’s women are very positively challenged, and with the right support from their families they can be quite capable of finding the right balance between their family life and their professional careers. “In fact, I want to take this opportunity to encourage all women who choose to follow the path of a professional career, as this is not in itself mutually exclusive of a happy family life.”
Roberta, her husband Martin (centre left) along with the godparents during Matthew’s baptism.
“The accountancy profession has become a very demanding one, especially considering all the deadlines we have nowadays, however, one must not forget one’s own family. Family is, after all, what we primarily work for and our true source of happiness, so it is important to set aside enough quality time to spend with our loved ones.”
Well …at least I hope that the title caught your attention long enough to encourage a cursory look at this page.
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LIFESTYLE
Making your
FORTUNE By: Dr Gerald Buhagiar
I know little about financial figures but do find that auditing biochemical figures provides enough food for thought to draw me away from the headlong rush called life. As unpleasant as it may seem, it is sometimes useful to stop and reflect how we can affect our own medical futures and fortune. Without any doubt, we are subject to a number of forces that are well outside of our control. These come in the form of our genetic programming, our biological past and present, etc. Yet, not all is so inescapable that we cannot modulate our destiny. It requires effort, as our health, like any other entity, requires attention. It is so easy to fall into the false trap that health will take care of itself automatically. More likely than not, for the vast majority of us, it does so in our earlier years and it is this positive experience that draws us falsely into a lifelong habit of doing next-to-nothing about our health. Modern lifestyles, incorporating altered eating habits, access to cheap, highly palatable, energy-dense yet nutritionallypoor foods, sedentary habits and labour-saving devices have accelerated one of the major health problems that we face today – obesity. Even small excesses in daily caloric intake translate very easily into unhealthy weight gain over a lifetime. Over the years, I have received various comments from patients questioning why they should lose weight. It is actually quite an insightful situation when one considers that such comments originate from intelligent people. With the growing epidemic of overweight and obesity, people are developing a skewed perception of what is normal in weight. Now that the average body weight tends toward plump rather than svelte, the perception of what is normal may be sliding. This social multiplier effect undoubtedly has health consequences that are flying under people’s radar, creating a false sense of security. At the expense of stating the obvious, being overweight is bad for health. This does not mean that everyone who is overweight will develop health problems but the risks are well documented. Excess weight has been linked to diabetes, hypertension, cholesterol problems, arthritis, heart disease and some forms of cancer, such as breast cancer. Weighing a third more than the ideal weight has been shown to take three years off one’s life. For those readers engaged in a lifelong battle with the bulge, I can appreciate the sense of frustration and helplessness that the term “ideal weight” brings. Many people in the medical field appreciate that the achievement of the ideal weight is not for everyone, especially as we live in a world that is far from ideal. The sense of failure is very often the cause for people giving up in their efforts, with consequent loss in opportunity, weight-related control and subsequent aggravation of the whole issue. Modern medicine falls short in offering a satisfactory solution to weight issues. I feel that it is much more practical to address a healthy life-style and to let one’s weight settle out where it can. The medical world has coined the phrase “the healthy obese”, to highlight that
clean living, may still translate into substantial health benefits without necessarily achieving the ideal weight. Weight should be viewed as just another parameter towards achieving the best health possible; it should not however be considered the totality of success. A simple and sustained 5% loss in weight lowers blood pressure, sugar and blood fats – no single medication can achieve all of that. For those readers who are fortunate to have an ideal weight without the necessary efforts required by the rest of other mere mortals, I still have a word of warning. Being of a normal weight is not a guarantee for good health. I have seen many thin people with problems of diabetes, hypertension and heart disease. Physical inactivity and poor food choices as well as psycho-social stress still play a part in contributing to these common diseases. Thus, it is safe to say that no one is truly exempt from the obligation of taking care of his or her own health. I enclose a number of simple dos and don’ts. Hopefully they should not prove to be too intrusive into one’s daily routine. They may even be enjoyable! 1. Ensure regular and adequate sleep. 2. Take breakfast within an hour of waking up. 3. Take a meal or a small snack every 3 to 4 hours. 4. Don’t multitask when eating. This includes don’t eat whilst working or watching the television. 5. Consume enough fluids. 6. Walk at least 1 mile per day. 7. Measure your waist line. Women more than 80 cms and men more than 92 cms are overweight. This should prompt measurement of blood pressure, blood sugar and blood fats. Each and every journey begins with a few small steps and, hopefully, this article might prompt some readers on their way to a better medical fortune. Generally, almost all that is precious in life can be appreciated better when in a good state of health.
Dr. Gerald Buhagiar MD, MSc, FRCP, FRCPath
is a Consultant Pathologist at Mater Dei Hospital in charge of the Biochemical Services. He is an accredited specialist in Diabetes Mellitus and Endocrinology and in Chemical Pathology. He is a part-time Senior Lecturer in the department of Medicine and Surgery at the University of Malta.
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NEWS-GLOBAL of issues, including IES 8’s target audience, the knowledge and skills required to work as a competent audit professional, and the advanced-level competences required by audit professionals. The IAESB’s objective in revising IES 8 relates amongst others to the implementation of a revised structure that clearly sets out the objective of the IES, to clarify obligations imposed on IFAC member bodies and to ensure consistency with the other IESs.
IFAC releases 2010 handbooks The International Federation of Accountants (IFAC) has released the 2010 Handbook of International Quality Control, Auditing, Review, Other Assurance, and Related Services Pronouncements, which includes the International Auditing and Assurance Standards Board’s (IAASB) complete set of clarified International Standards on Auditing (ISAs) and International Standard on Quality Control (ISQC) 1 now in effect. It also includes the IAASB’s standards on review, other assurance, and related services, a glossary, and a preface to the international standards. IFAC has also released the 2010 Handbook of the Code of Ethics for Professional Accountants containing the Code of Ethics for Professional Accountants which has been revised by the International Ethics Standards Board for Accountants (IESBA) for improved clarity and strengthened independence requirements. The revised Code becomes effective on 1 January 2011, with early adoption permitted. The handbooks can be downloaded free of charge in PDF format or purchased in print from IFAC’s Publications and Resources site: web.ifac.org/publications.
IAESB issues consultation paper on competence requirements for audit professionals The International Accounting Education Standards Board (IAESB) of IFAC will be revising International Education Standard (IES) 8, Competence Requirements for Audit Professionals. IES 8 is one of eight standards that address the principles of learning and development for professional accountants. The IESs prescribe good practice in learning and development for professional accountants and should be incorporated into the educational requirements of IFAC’s membership body, which is comprised of professional accountancy institutes from around the world (including the Malta Institute of Accountants). The IAESB is seeking guidance on a number
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The IAESB strongly encourages organisations and individuals to comment on proposed revisions which can be found on the IFAC website.
IFAC launches new and improved publications and resources website
and how it may affect financial reporting. Entitled XBRL: The Emerging Landscape, the publication explains that the IAASB’s current ISAs were not developed with XBRL in mind and, accordingly, do not require auditors to perform procedures on XBRLtagged data as part of a financial statement audit. It clarifies how XBRL may lead to a demand for various types of assurance and related services engagements, and describes the scope of the IAASB’s planned consultations to determine whether to develop a new international pronouncement addressing XBRL. The publication may be downloaded free of charge from the IAASB section of IFAC’s Publications and Resources site.
IFAC has launched a newly redesigned and expanded Publications and Resources website (http://web.ifac.org/publications), featuring over 200 titles developed by IFAC and its standard-setting boards and committees. This new site improves the user experience through enhanced navigation and features, including links to recommended publications based on user’s selection. The website includes the following broad range of pronouncements and resources: • IFAC policy position papers and special reports; • International standards on auditing and assurance, accounting education, ethics, and public sector financial reporting developed by IFAC’s independent standard-setting boards; • Good practice guides on corporate governance, sustainability, and other topics of interest to professional accountants in business; and • Videos, presentation slides, guides to assist small and medium accounting practices, and other tools and resources to facilitate the adoption and implementation of international standards. Visitors will experience enhanced functionality and interactivity with the addition of a search engine to facilitate user search and retrieval of specific resources of interest.
IAASB staff issues Q&As to raise awareness of XBRL uses in business reporting Recognising the growing international use of Extensible Business Reporting Language (XBRL) - a language for the electronic communication of business and financial data that is changing business reporting around the world - IAASB staff have developed a new question-and-answer publication. It is designed to raise awareness about how XBRL-tagged data is prepared
IASB and FASB publish proposals on reporting entity concept The International Accounting Standards Board (IASB) and US Financial Accounting Standards Board (FASB) published for public comment an exposure draft on the reporting entity concept. The proposals form part of a joint project to develop a common and improved conceptual framework that provides the basis for developing future accounting standards. A discussion paper on the reporting entity concept was published in May 2008. Respondents broadly supported the boards’ preliminary views. In response to these comments the exposure draft proposes what a reporting entity is and when an entity controls another entity. Comments on the exposure draft can be submitted by 16 July 2010.
Trustees appoint two leading financial executives to the IASB The Trustees of the International Accounting Standards Committee (IASC) Foundation announced the appointment of two leading financial executives to the IASB: • Dr Elke König, former member of the executive board and chief financial officer (CFO) of Hannover Re Group (Germany)
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NEWS-GLOBAL
• Darrel Scott, CFO of the FirstRand Banking Group (South Africa). Dr König and Mr Scott will begin their five-year terms as full-time members of the IASB in July and October 2010 respectively. The appointments fill vacancies that will be created by the retirement of Robert Garnett and Gilbert Gélard at the end of June 2010. A search is ongoing for a replacement for Jim Leisenring, who also retires at the end of June 2010.
IASC Foundation publishes free training material for IFRS for SMEs The IASC Foundation published two
batches of training materials for the International Financial Reporting Standard for Small and Medium-sized Entities (IFRS for SMEs). The free-to-download training material forms part of a range of initiatives undertaken by the IASC Foundation and the IASB to support the widespread adoption of the IFRS for SMEs. The training material is designed to assist companies and accounting practitioners in applying the standard. It will also assist educators in teaching how to apply the IFRS for SMEs. Once completed, the training material will comprise 35 separate modules - one for each section of the IFRS for SMEs. A good number of modules are now available for download from the IASB website (http://www.iasb.org/ from the FEE website. FEE expects to continue to perform more detailed work in the area of XBRL in the future. Additionally, FEE is committed to actively contribute to the IAASB initiatives related to XBRL and its implications for auditors and other stakeholders.
NEWS
FEE issues Policy Statement on eXtensible Business Reporting Language (XBRL) - The impact on accountants and auditors Documents filed using eXtensible Business Reporting Language (XBRL) or XBRL enabled documents are becoming more prevalent. Regulators, reporting entities and users of financial statements, annual reports and other financial information are interested in reducing costs, increasing efficiencies and the quality of information in dealing with financial reports. XBRL has the potential to play an important role in such endeavours and in particular in reducing costs such as the cost of capital by increasing transparency and ease of use of financial information.
FEE issues a Policy Statement on key issues for management and auditors for the 2009 year-end financial reporting season In a policy statement issued recently,
marking the sixth policy statement to be issued by the European Federation on the crisis, FEE reminds auditors and accountants in business of a number of key issues in the area of financial reporting and auditing, covering questions of ongoing relevance. The Policy Statement on the Financial Crisis VI also addresses emerging accounting and auditing issues in a period where first signs of economic recovery are being tempered by a general understanding that there may still be a long way to go.
The FEE (Federation of European Accountants) XBRL Policy Statement is designed to briefly explain XBRL, its impact on accountants and auditors and FEE’s position on XBRL. It deals with: • Awareness making on XBRL; • Implications of XBRL for statutory auditors and other implications for the accountancy profession; • Practical consequences, benefits and challenges of the adoption of XBRL; • Education and training on XBRL; • Regulatory update on XBRL in the European Union.
Meaningful disclosures on risk exposures, on the way these risks are managed by an entity’s management and on the key judgements and estimates made by management in preparing their financial statements will remain essential. Entities’ management need to ensure that they properly and fairly evaluate and estimate the value of the different elements in their entities’ financial statements and prepare thoroughly for their assessment of the entity’s ability to continue as a going concern and make appropriate disclosures. Without aiming at being comprehensive the policy statement raises the attention to the following issues that FEE believes require particular consideration in the 2009 yearend financial statements and related audit: going concern; fraud; financial instruments and impairment.
The Policy Statement is freely downloadable
FEE had also issued the following Policy
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IFRS+for+SMEs/Training+material.htm). The remaining modules will be published in the course of this year as they are completed. Each module guides the learner through the official text, develops the learner’s understanding of the requirements through the use of examples, and points out where significant judgements are required. It also includes questions designed to test the learner’s knowledge of the requirements as well as case studies to develop the learner’s ability to apply the IFRS for SMEs. The training material is part of a range of measures taken by the IASC Foundation and the IASB to support and facilitate the implementation of the IFRS for SMEs around the world.
statements on the crisis, all of which are freely downloadable from the FEE website: I Reflecting on the Crisis II Matters of Specific Relevance for Statutory Auditors during the Financial Crisis III Call for Action for European SMEs IV Dynamic Provisioning for Financial Instruments V Shaping a Sustainable Economy
Challenges of Accrual Accounting in the Public Sector FEE and ICPAC (The Institute of Certified Public Accountants of Cyprus) organised a Joint Seminar “Challenges of Accrual Accounting in the Public Sector”. In the aftermath of the financial and economic crisis, it is essential to stress the importance of accrual accounting in the public sector and discuss the challenges of implementing it. Equally, it is also important to learn about the experiences and developments in public sector accounting in European countries. The Joint FEE and ICPAC Public Sector Seminar provided an update on the strategy of the International Public Sector Accounting Standards Board and it discussed the public sector developments in accounting and auditing in several European countries. Both the benefits and challenges of implementing accrual accounting were addressed. The Seminar discussed the potential of International Public Sector Accounting Standards (IPSAS), shared participants’ experience of using them and also the challenges related to the implementation of accrual accounting. Countries are in different stages of implementing accrual accounting and within countries there are differences e.g. between central and local administrations, publicly owned enterprises and governmental agencies and other public entities. By holding the Seminar FEE and ICPAC are proud to have contributed to the debate on accrual accounting in the public sector.
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FEATURE
The Accountancy Board joins the INTERNATIONAL FORUM OF INDEPENDENT AUDIT REGULATORS By: Marcel P. Coppini, Head Quality Assurance Unit
to IFIAR. These are:- Abu Dhabi, Australia, Austria, Brazil, Canada, Denmark, Dubai, Egypt, Finland, France, Hungary, Germany, Italy, Ireland, Japan, Korea, Lithuania, Luxembourg, Malta, Mauritius, the Netherlands, Norway, Singapore, South Africa, Spain, Sri Lanka , Sweden, Switzerland, Chinese Taipei, United Kingdom and United States of America. Bulgaria and Turkey were accepted as members at the Singapore meeting. Enquiries have also been made by Greece, Israel, Malaysia & Mexico.
L to R: Peter Boyle (then Vice Chairman IFIAR), Marcel Coppini (Head of the Quality Assurance Unit), and Steven Maijoor (Chairman of IFIAR)
Introduction On the 15 March 2009 the Accountancy Board applied for recognition by IFIAR – The International Forum of Independent Audit Regulators (IFIAR), which forum was set up in Paris on the 16 September 2006. Malta was accepted as a member country of IFIAR on the 27 August 2009. I attended the plenary meeting of IFIAR in Singapore which was held between the 14th and the 16th of September 2009. IFIAR is an international organisation of audit regulators world wide. IFIAR Verin is the legal entity – set up by a charter agreement between different member countries across the globe the main object of which charter are: 1) Sharing knowledge of the audit market environment and practical experience of independent audit regulatory activity with a focus on inspections of auditors and audit firms. 2) Promoting collaboration and consistency in regulatory activity. 3) Providing a platform for dialogue with other organisations that have an interest in audit quality. It is regulated by the Articles of Association as approved by the members in General Meeting in Singapore on the 15 September 2009. It is managed by two officers – the Chairman and the Vice who are advised by the Advisory Council which is made up by representatives of seven of the 34 member countries. The countries on the advisory council are France, Germany, Japan, Norway, Singapore, UK and USA. There are audit regulators from 34 countries which are affiliated
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IFIAR is self financing and will start charging an annual registration fee of euro 10,000 as from January 2010.
Meeting in Singapore The meeting in Singapore was the sixth plenary meeting of IFIAR. This was hosted by the Accounting and Corporate Regulatory Authority – the equivalent counterpart of the Accountancy Board in Singapore. The following plenary meeting was held in Abu Dhabi in March 2010 and the next will be held in Madrid in the fall of 2010. The audit regulators within IFIAR set up plenary meetings bi-annually. The first day of the meeting, which was restricted to just members, was mainly taken up by administrative matters – namely obtaining agreement on IFIAR’s Charter and the approval of the Articles of Association which regulate the IFIAR’s operations, the powers of the Officers, as well as the appointment of the Advisory Council. The Chairman of IFIAR is Steven Maijoor (from the Netherlands Authority for the Financial Markets) whose term of office comes to an end in 18 months’ time. Mr Paul Boyle (from the UK’s Financial Reporting Council) who was vice Chairman resigned and was replaced by Mr Paul George (also from The FRC) whose term of office is also of 18 months. Audit inspections remain the core area of focus of IFIAR. In fact IFIAR held its fourth inspection workshop for members in Paris between the 9th and 12 February 2010. These workshops continue to provide an opportunity for the sharing of inspection techniques and experiences. The Paris workshop also included an induction for new members and for members that have only recently started inspections. Members also update each other on their work progress and on issues related to current market conditions. The second Day of the Singapore meeting was open to observers. A dialogue session was held with a regionally diverse group of five investor representatives – namely the
FEATURE Asian Corporate Governance Association, APG Investments, Standard Life Investments, The Council of Institutional Investments and the Investment Management Association. Members from the International Organization of Securities Commissions (IOSCO), The European Commission and the World Bank presented and discussed a number of papers prepared by IOSCO’s Technical Committee for public consultation, some of which are referred to hereunder. Structural Risks of the Audit market – the risk of an over concentrated market focused on the Big 4 firms and the difficulties being encountered by mid tier firms to grow. Some have raised concerns about the impact on investors and the world capital markets from the potential loss of one of the largest firms. New concepts were discussed, including the floatation of mid tier firms and the opening ownership of audit firms to the public at large. Of particular relevance was the Oxera report which examines the risks attached to the over concentration of the audit market. It was pointed out that Independent Audit Regulators should monitor potential sources of catastrophic risk to the firms. Audit Quality: In spite of all the efforts made by the International Auditing and Assurance Standards Board (IAASB) and the setting up of audit regulators, IOSCO still believes that contrary to what one would expect the Expectation Gap is still there and the observers still felt that reporting on the truth and fairness of the financial statements should not be the auditor’s sole prerogative. Many market participants believe that the auditor’s standard reporting model generally provides information of limited use to the investor. As the business world becomes more complex the business investor wants to know more on accounting estimates being used in the financial estimates and the risks associated with such estimates. The investor is also concerned with the procedures being applied to mitigate the risk of fraud and the risks associated with financial collapses. Audit Firm transparency and Governance: The largest auditing firms are key participants in the securities markets. Many investors and other market players believe that the firms should comply with the same principles of transparency and governance generally demanded of other market participants, both for the sake of credibility of the market system as a whole, and also for the credibility and the long term well being of the firms themselves. Many participants felt that Independent Audit regulators should require the largest audit firms to: • prepare and issue audited financial statements to the investing public; • provide greater transparency as to their governance arrangements, client profiles, quality control procedures and the policy issues they face; • develop key indicators of audit quality and effectiveness and disclose those indicators to the investing public; and • appoint independent “directors” who are empowered and able to influence the firms’ boards Jean Philippe Delsaux of the EU Commission addressed the meeting and updated the members at the meeting with the main activities undertaken by the EU in the field of audit regulation. These included: 1. The implementation of the Statutory Audit Directive 2. Equivalence of Third Country auditors 3. Co-operation with non EU jurisdictions 4. International Standards on Auditing and their translation into the different languages 5. PIOB Funding 6. Audit Market Consultation The last day of the meeting was taken up by a presentation by the IAASB, where Arnold Schilder and Jim Sylph gave an overview of the major projects it has set up for the next 12 months and this included the following:
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a) An auditing standard on Fair Value and complex Financial Instruments; b) Reliance to be placed on work of internal audit – a revision of ISA 610; c) Assurance reports on control of service organisations; and d) XBRL. Prof. Arnold Schilder (who succeeded John Kellas as Chairman of the IAASB) stated that the Clarity project has now been concluded with the introduction of a suite of 36 clarified ISAs and a new ISQC1. The IAASB does understand the work which firms are facing to keep in line with auditing standards and have in fact undertaken that no further amendments to these ISAs will take place for a period of two years as from when they become effective. IAASB also recognises the burden on SMPs to put into practice the new ISAs and has in fact set up on its website the ‘Clarity Centre’ which site should give a point of reference when adopting the new ISAs. The Clarity Centre comprises aids to assist the practitioner and do not replace the ISAs themselves. The IAASB has since launched six modules on six of the new ISAs. These should be of considerable assistance to auditors particularly SMPs. These modules take the form of videos and slide presentation on the application of the updated ISAs, not only to raise the awareness of the new ISAs but also to provide an understanding of the changes made to the ‘old’ ISAs. These are also to be complemented with a set of Frequently Asked Questions. It is therefore important to keep tab of this enhanced IAASB website ( http://web.ifac.org/clarity-center/the-clarified-standards) in the coming months. Needless to say, the IAASB will keep take note of any problems which may arise in the adoption of the new ISAs and it will monitor this through audit regulator organisations (including IFIAR). It is also interesting to note that the IAASB will also be visiting Malta on the 20 September 2010. It is pertinent to point out that a suite of 36 clarified International Standards on auditing along with a new ISQC1 have been published and are now available from IFAC. These will become effective for audits of financial statements for accounting periods beginning on or after 15 December 2009. Effectively this means that the “new” ISAs will apply to 2010 audits. Time was also spent with other small jurisdictions like Mauritius, Luxembourg, Finland and particularly Singapore and exchanged views on the QA processes they have in place and the problems they ordinarily come across. These included: • Structures of the Oversight Board, their funding and their regulatory function; • The profile of the audit profession in different jurisdictions; • Monitoring inspections – the problems being encountered – particularly with elderly full time sole practitioners and issues arising with part time sole practitioners; • Transparency reports by auditors of listed companies; • Annual reports by other Independent Regulators; • Recruitment of independent reviewers; • Inspection reports and corrective action being taken by the Independent Regulators of different jurisdictions; • The importance of smaller jurisdictions to share information, co operate and seek representation on the IFIAR advisory council.
Conclusion One cannot but emphasise the importance of these meetings where independent regulators from around the world get together to discuss their views, processes and their way of regulating. It is indeed encouraging to note that Malta, in my view, places well when compared to other regulators across the globe and in spite of our smallness I am very pleased to note that we can nonetheless contribute to such international forums.
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FEATURE
Portman International implements Financial services firm Portman International has adopted CaseWare accounting and auditing software for its Malta operation. The software, which was customised for local legislation by the newly appointed local representatives Audit Solutions Limited of Balzan, was already being used for Portman International’s accounting and auditing practices in the United Kingdom and Ireland. “This state-of-the-art software allows employees to be much more productive and will enhance their knowledge and experience,” Portman International Managing Director David Marinelli said. “We have been using this software for our UK-domiciled companies for the past five years.” The official hand-over of the software took place during the recent visit of Marcel Keizer, Sales Director of the European Office of CaseWare International Inc. Mr Keizer said: “Malta is becoming an important island for doing business with other countries and there are many Maltese professionals who are regularly attracting business to the island. As Malta becomes a more important global financial centre, the use of CaseWare applications is an advantage for local accounting and auditing firms.” He also stressed the time- and cost-saving elements of the software: “The adoption of this software brings a very good element of time saving. In Holland they estimate an audit firm can save 40% of the time on a regular audit.” Anthony Vella, Director of Audit Solutions, said: “There was no need for us to prove CaseWare or make any sort of introduction to Portman International on the product. Now that a local version is available they have gladly taken it on board. For them it is important that they have a distributor that is no more than a few minutes away.” CaseWare adopts the Windows Explorer format and is intuitive and user friendly – all in a paperless environment. Its financial reporting template has been customised to include Notes required by the Companies Act in Malta. There are also templates for the abridged version of financial statements for both private exempt and private non-exempt companies; plus the full IFRS based financial
statements. A great deal of customisation is possible to enable layout styles and other types of personalisation to be integrated into the finished output file. This software has been adapted to comply with the implementation of GAPSE (General Accounting Principles for Small Entities), which came into force in January 2009 for financial statements ending on or after January 1, 2009. CaseWare programs are also linked to TIFD (Tax Index of Financial Data), required by the Inland Revenue Department. The General Ledger can be imported. Any invoice scan becomes part of the Audit file and is not opened in the original format but within CaseWare itself. Five years of data and seven years of budgets can be supported in a single file. All kinds of consolidation are possible and password-protected data files can be sent by e-mail. Updates to the software are provided at least annually. The software includes a library structure with three layers so data stored is not overwritten when updates are integrated. There are about 400 notes built into the library with titles that apply to the accounts that are being produced. These are also updated annually. In-house notes can be added to the library. It is estimated that 10 hours per job can be saved using these CaseWare notes. The Portman International business was established in London in 1985 and offers a comprehensive range of professional, fiduciary and trading support services in Malta, the UK and Ireland. Portman International is a member of TIAG® (The International Accounting Group), a global alliance of high-quality, independent accounting firms with more than 100 member firms based in over 60 countries. Member firms serve clients around the world in a range of business transactions. CaseWare is a Canadian company whose licence has been acquired by 250,000 auditors worldwide. Based in Toronto, it has a network of 90 distributors, mainly themselves auditors or with a financial background, and its software is sold in 130 countries. It appointed Audit Solutions as its local distributor in April 2009.
David Marinelli, Managing Director of Portman International (first from left), shakes hands with Anthony Vella, Director of Audit Solutions, in the presence of Marcel Keizer, Sales Director of CaseWare International Inc.
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Advertorial – Caseware International
CaseWare
Spring 2010
FEATURE
Taking stock
AN OVERVIEW OF THE AMENDMENTS TO THE
ITA, ITMA & DDTA By: Marvin Gaerty
ACT 1 of 2010 (Budget measures for the financial year 2010 and other administrative measures) – Amendments to the Income Tax Acts and the Duty on Documents and Transfers Act The aim of this article is to provide an overview of the amendments to the Income Tax Act (ITA), Income Tax Management Act (ITMA) and Duty on Documents and Transfers Act (DDTA) introduced by Act 1 of 2010. The majority of the amendments can be grouped under the following three categories: 1. 2. 3.
Anti-abuse measures Measures to encourage investment and job creation Compliance measures
This article will address the first category while the other two will be dealt with in an article to be carried in the next issue of the Accountant.
ANTI-ABUSE MEASURES The various exemptions and reliefs provided for under the ITA and DDTA have been amended by introducing more onerous conditions in order for taxpayers to be entitled to such exemptions and reliefs. In addition two new provisions have been introduced bringing to charge two new types of transfers being a deemed transfer of shares under article 5(9A) (de-grouping charge) and a deemed transfer of value under article 5(13)(b)(ii) (value shifting).
1. INTRA-GROUP TRANSFERS The ITA and DDTA both provide for an exemption / deferral from tax and duty on the transfer of certain assets between two companies, which form a group of companies. New conditions have been introduced for the purpose of determining whether two companies form a group in those cases where the asset transferred consists of immovable property situated in Malta or shares in a “property company”. Where the asset transferred intra-group consists of immovable property or shares in a company which, directly or indirectly, owns immovable property, the provisions of articles 5(9) and 5A(4)(f) of the ITA, and 32(6) of the DDTA only apply where the individual direct or indirect beneficial owners of the transferor and transferee companies are the same and each such individual holds, directly or indirectly, substantially the same percentage interest in the nominal share capital and voting rights in each of the companies.
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The same conditions apply for the purpose of claiming an exemption from duty under article 42(1) DDTA in the case of a restructuring of holdings involving a transfer or exchange of shares, involving companies which directly or indirectly own immovable property.
“Property company” means: (1) a company which owns any immovable property situated in Malta, or any rights over such property, or (2) a company which holds, directly or indirectly, shares or interests in a body of persons which owns any immovable property situated in Malta, or any rights over such property. The provisions of articles 5A(4)(f) and 5(9) of the ITA and articles 32(6) and 42(1) of the DDTA shall only apply where the following conditions are satisfied. Test 1 – “Same individuals test”: The individual direct or indirect beneficial owners of the group companies must be the same. However where any individual holds, directly or indirectly, less than twenty percent of the nominal share capital and voting rights in any one of the group companies (not in both), such individual shall not be taken into account in determining whether both companies are owned by the same individual shareholders. However if more than one individual holds, directly or indirectly, less than twenty percent of the nominal share capital and voting rights in any of the two companies, the exception referred to above shall not apply if together such individuals hold, directly or indirectly, twenty percent or more of the nominal share capital and voting rights in any of the said companies. In such case such individual shareholders need to be taken into account in determining whether the two companies are owned by the same individual shareholders. Test 2 – “Same percentage test”: each individual taken into account for the purpose of the “same individuals test” must hold, directly or indirectly, substantially the same percentage interest of the nominal share capital and voting rights in each of the said companies. An individual holds substantially the same percentage interest of the nominal share capital and voting rights in each of the two companies where the difference between the percentage interests held in each company does not exceed twenty percent.
FEATURE The individual direct and indirect shareholders of Company A are Mr. X (20%), Mr. Y (70%) and Mr. Z (10%). The individual direct and indirect shareholders of Company B are Mr. X (30%), Mr. Y (60%) and Mr. R (10%). In the case of Company A the percentages refer to both nominal share capital and voting rights however in the case of Company B the voting rights are held as follows: Mr. X (30%), Mr. Y (40%) and Mr. R (30%). % Nominal share capital: Mr. X Mr. Y Mr. Z A Ltd (%) 20 70 10 B Ltd (%) 30 60 - Difference in percentage interest 10 10
Mr. R 10
Both tests are satisfied with respect to nominal share capital. % Voting rights: A Ltd (%) B Ltd (%) Difference in percentage interest
Mr. X 20 30 10
Mr. Y Mr. Z 70 10 40 0 10
Mr. R 0 30 30
The five year holding period in article 5A(12A) has been extended to six years and a new article 5(9A) has been introduced bringing to charge a deemed transfer of shares in a company which owns, directly or indirectly, immovable property situated in Malta arising as a result of the transferor and transferee companies ceasing to be a member of the “original group” before the lapse of six years from the date of the exempt intra-group transfer. The scope and application of both articles are identical with certain exceptions. Article 5A(12A) has been amended, bringing it in line with the new article 5(9A). The company which holds the shares acquired intra-group is treated as having disposed of the shares and reacquired them at their market value on the date the company had acquired the said shares from the group company in an acquisition to which article 5(9) applied. This article only applies where the asset transferred intra-group consists of shares in a company which on the date of the intra-group transfer either owned immovable property situated in Malta, or else held, directly or indirectly, shares or interests in a body of persons, which owned any immovable property situated in Malta and the said property or any part thereof is still, directly or indirectly, owned by such company on the date it ceases to be a member of the group.
Ceasing to be a member of the “original group” The term “original group” means:
Test 1 is not satisfied since Mr. R has to be taken into account in determining whether the individual direct or indirect beneficial owners of A Ltd and B Ltd are the same and Mr. R does not hold any shares in B Ltd. A Ltd and B Ltd are not considered to be a group of companies for the purpose of articles 5A(4)(f) and 5(9) of the ITA and articles 32(6) and 42(1) of the DDTA.
1. 2.
Intra-group transfers of immovable property held as a trading asset
The chargeable company ceases to be a member of the original group, if such company and the company from which it had acquired the shares no longer satisfy the provisions of paragraphs (i) and (iii) of article 5(9).
The tax exemption in respect of intra-group transfers of immovable property is available only if the transfer is one falling within the scope of article 5. The transfer has to be a transfer of a capital asset. This applies whether the transfer qualifies for tax relief under the provisions of article 5A(4)(f) or article 5(9) directly.
In making such determination reference has to be made to the same individual shareholders that were taken into account in determining whether the transfer qualified for the exemption at the time of the intragroup transfer.
However in the case of a transfer falling within the scope of article 5A(4)(f), where the transfer is not a transfer of a capital asset, the exemption will still apply if: 1. 2.
The transfer forms part of a restructuring, involving the transfer of the whole or part of a company’s business to another company, and The property being transferred must have been owned for more than seven years.
Subsequent transfers of assets on which an exemption from tax has been claimed A new proviso has been added to article 5A(4)(f), which requires that upon a subsequent transfer of the property made within a period of seven years after the date of the exempt intra-group acquisition, (where the transferor elects to exclude the transfer from the scope of article 5A), for the purpose of ascertaining the income, whether chargeable under article 5 or under article 4(1)(a), the cost and date of acquisition of the said property shall be the original cost and the date when it was acquired before the exempt intra-group transfer took place.
the transferor and transferee companies taking part in the intragroup transfer, and the individual, direct or indirect, beneficial owners of the said companies who were taken into account in determining whether the transfer qualified for the exemption at the time of the intra-group transfer.
Example: Mr. X and Mr. Y each hold 50% of the ordinary share capital and voting rights in Company A and Company B. On the 30th June 2010 Company A transfers shares in Company C to Company B. On the 30th September 2011 Mr. X and Mr. Y transfer all their shares in Company A and Company B to Company D, which is fully, owned by Mr. Z. The original group was made up of Company A, Company B and their (direct or indirect) individual shareholders being Mr. X and Mr. Y. After the transfer of shares to Company D the original group ceases to exist and even though A Ltd and B Ltd are still considered to be a group for the purpose of article 16, the de-grouping charge applies since Mr. X and Mr. Y no longer hold shares in A Ltd and B Ltd.
Exceptions (i) Intra-group transfers preceding 1st January 2010: Where the intra-group transfer took place before the 1st January 2010, the new conditions shall not be disregarded for the purpose of determining whether a company ceases to be a member of a group. In such case, in determining whether the group ceases to exist, reference is made only to paragraphs (a) and (b) of article 5(9)(i).
2. DEGROUPING CHARGE
(ii) Donations and transfers causa mortis:
ACT II of 2009 introduced article 5A(12A) which brings to charge a deemed transfer of immovable property situated in Malta arising as a result of the transferor and transferee companies ceasing to be a member of the group before the lapse of five years from the date of the exempt intra-group transfer.
Where an individual acquires shares in terms of a donation exempt from tax under the provisions of article 5(2)(e), or a transfer causa mortis, such individual shall be deemed to have held such shares from the date such shares were previously acquired in an acquisition preceding the date of the donation or the transfer causa mortis.
ITAITMA&DDTA
Example: Company A and Company B are both beneficially owned and controlled directly and indirectly to the extent of more than 50% by the same shareholders. Company A is to transfer immovable property (or shares in a “property company”), to Company B.
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Spring 2010
FEATURE
(iii) Winding up and dissolution: A company shall not be treated as ceasing to be a member of a group in cases where it ceases to be a member of a group as a result of being wound up or dissolved or in consequence of another member of the group being wound up or dissolved. If the chargeable company (the company which owns the shares acquired under a transfer that was exempt under article 5(9)), is wound up or dissolved such company is not treated as leaving the group and article 5(9A) will not apply. If the company which transferred the shares to the chargeable company is wound up or dissolved, the chargeable company is not treated as ceasing to be a member of the original group however, for the purpose of determining whether the chargeable company ceases to be a member of the original group, such company shall be deemed to have remained in existence.
ITAITMA&DDTA
Computation of the chargeable gain A deemed transfer of shares under article 5(9A) is treated as a transfer of a controlling interest irrespective of the percentage interest in the company that those shares represent. For the purpose of determining the chargeable gain, the transfer shall be deemed to have been made at the market value of the shares as determined in accordance with subrules (6) and (7) of the Capital Gains Rules. The date of the deemed transfer is the date of the exempt intra-group transfer and not the time at which the group ceases to exist. However the resulting gain is treated as accruing to the chargeable company immediately before the company ceases to be a member of the group.
Reallocation of gain or loss Any gain resulting from the deemed transfer is to be declared by the chargeable company, being the company which holds the shares acquired under an exempt transfer. The chargeable company has the option to allocate the resulting gain or loss to another company, which forms a group with the chargeable company in accordance with article 5(9) at the time the “original group” ceases to exist, provided that the following conditions are satisfied: 1. At the time the group ceases to exist, the company to whom the gain or loss is allocated must be incorporated in Malta, and 2. A joint election is made by the chargeable company and the company to treat the chargeable gain or capital loss as accruing to the company, and 3. Such joint election is made by notice given to the Commissioner not later than twelve months after the end of the accounting period of the chargeable company or the other company (whichever is the earlier) in which the group ceases to exist, and 4. Provisional tax is paid by the company at a rate of 35% of the market value of the shares deemed transferred within 15 working days from the date the group ceases to exist.
De-grouping charge: intra-group transfers of immovable property situated in Malta The provisions of article 5A(12A) have been amended and apply in the same way as provided for in article 5(9A). An option to reallocate the tax liability from the chargeable company to another group company has also been introduced similar to that found in article 5(9A). In order for the chargeable company to reallocate the 12% final tax charge to a group company, (i) a joint election has to be made by the chargeable company and the company to whom the tax liability is allocated, (ii) such joint election is made by notice given to the Commissioner not later than fifteen working days from the date on which the group ceases to exist, and (iii) the payment of tax has to be made within 15 days from the date the group ceases to exist.
3. SHARE VALUE SHIFTING PROVISIONS The value shifting provisions (VSP) have been introduced so as to bring to charge to tax and duty a transfer of value in shares in the same way as if a transfer of shares had taken place.
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The value shifting provisions prescribed under the new articles 5(13) (b)(ii) of the ITA and 42B of the DDTA apply where the market value of shares held is reduced as a result of a change in the issued share capital of a company, or a change in voting rights attached to such shares, and such value passes into other shares in or rights over the company held by another person. The VSP apply where there is a change in the issued share capital or voting rights in a ‘property company’. In the case where the company is not a ‘property company’ the VSP will not apply if it can be shown to the satisfaction of the Commissioner that the said change is effected for bona fide commercial reasons and does not form part of a scheme or arrangements of which the main purpose, or one of the main purposes is avoidance of liability to tax. Where a transfer of value takes place, the person whose share value has been reduced is deemed for the purpose of article 5(13)(b)(ii) of the ITA to have made a transfer equal to the value so reduced, on which tax is payable. Also the person acquiring value is deemed for the purpose of article 42B of the DDTA to have made an acquisition of such value on which duty is payable. Events that give rise to a change in the issued share capital include: A. Issue of shares to existing or new shareholders by way of: 1. Cash consideration 2. Capitalisation of reserves 3. Capitalisation of loans 4. Preference shares redeemed out of a fresh issue of ordinary shares 5. Issue of shares in exchange for the acquisition of shares or other assets B. Conversion of securities C. Reduction of share capital
Non-applicability The VSP do not apply in the following cases: Income Tax Act: 1. 2. 3.
The change in the issued share capital or change in voting rights does not produce any change in the individual direct or indirect beneficial owners of the said company, or in the proportion of the value of the said company represented by the shares owned beneficially directly or indirectly by each such individual. The change in the issued share capital consists of an allotment of shares in a company as a result of an exchange of shares on a restructuring of holdings exempt from tax under the provisions of article 5(14). The transfer of value is made by the transferor to a person | referred to in paragraph (i) of article 5(2)(e). The said company is a company whose securities are listed on a stock exchange recognised under the Financial Markets Act.
Duty on Documents and Transfers Act: 1. 2. 3. 4.
The change in the issued share capital or change in voting rights does not produce any change in the individual direct or indirect beneficial owners of the said company, or in the proportion of the real value of the said company represented by the shares owned beneficially directly or indirectly by each such individual. The change in the issued share capital consists of an allotment of shares in a company, as a result of an exchange of shares from one company to another exempt from duty under the provisions of article 42(1). The transfer of value is the result of a change in voting rights and such transfer is made by the transferor to a person referred to in paragraph (i) of article 5(2)(e) of the Income Tax Act. The said company is a company whose securities are listed on a stock exchange recognised under the Financial Markets Act.
Both under article 5(13) of the ITA and article 42B of the DDTA the VSP do not apply in respect of shares which do not participate in any way in the profits of a company other than by way of a fixed rate of return.
FEATURE Where any person derives gains or profits from the transfer of value in securities, he is required to submit to the Commissioner within fifteen days of the transfer a provisional tax payment equivalent to 7% of the gains or profits i.e. the value reduced. Such shareholder shall submit together with the payment the prescribed form Schedule F.
The capping shall not apply with respect to income derived from loans or credit, where it can be proved to the satisfaction of the Commissioner that the amount paid or payable in respect of the loans or credit reflects the amount that would have been paid or payable if the persons referred to in this sub-article were not related.
5. TRANSFER OF LISTED SECURITIES
Duty is to be paid to the Commissioner by the transferee acquiring value within fifteen working days from the date of the deemed transfer of value. Such shareholder shall submit together with the payment the prescribed Fifth Schedule.
A transfer of shares listed on a stock exchange recognised under the Financial Markets Act, not being securities in a collective investment scheme, is exempt from tax under the provisions of article 5(6)(b) of the ITA.
4. LIMITATION ON DEDUCTIONS
However this exemption will not apply where the transferor is a person who held the shares immediately before they were admitted to listing.
A new article 14(4) ITA has been introduced. The scope of this article is to limit the amount of deductions allowed in the case where transactions are carried out between related parties in respect of immovable property situated in Malta This provision applies where: (i) a person derives income from work carried out on or in relation to immovable property situated in Malta, consisting of brokerage and professional services, construction work, project management of construction work and work of tradesmen, or (ii) a person derives income from the granting of loans or from any form of credit to finance the acquisition, development, construction, refurbishment, renovation of immovable property or any right thereon and any other matter which increases or enhances the value of such immovable property or any right thereon, and (iii) such property is owned by a related person.
Related person The following are deemed as related persons: (i) an individual is deemed to be related to another person if that other person is a body of persons of which the said individual is, directly or indirectly, a shareholder, partner or member; and (ii) two bodies of persons are deemed to be related persons if they are directly or indirectly controlled or beneficially owned as to more than twenty-five per cent by the same persons.
Separate chargeable income The income derived from the work, loans or credit, or from the transfer of such immovable property or any right thereon to which such work, loans, or credit is related, shall be deemed to constitute separate chargeable income. This provision is targeted at both the company carrying out the work on the property and also the owner of the property.
Person carrying out the work
This amendment shall only apply in respect of shares admitted to listing on or after 1 January 2010. Shares held by the original shareholders, which are transferred upon listing or subsequently, will be chargeable to tax under article 5 of the ITA. The rate of tax applicable on the gain will be 15%. This tax is not a final tax and can be set off for the purposes of collection against the tax liability of the transferor for the respective year of assessment. The normal rules in respect of share transfers apply however, the transfer value taken into account shall in no case exceed the market value of the shares immediately upon being admitted to listing. This means that the first quoted price will establish the maximum transfer value of the shares, which will remain fixed irrespective of any increase in the market price.
6. TRANSFER OF MARKETABLE SECURITIES Article 42(2) of the DDTA provides the criteria for determining the rate of duty applicable to a transfer of marketable securities. Previously this article referred only to the company in which marketable securities are transferred and did not make reference to underlying companies, which may have owned immovable property. This article has been amended to provide a test on a consolidated basis, meaning that for the purpose of determining the rate of duty under these new provisions all companies, which individually would be considered as property companies, have to be taken into account. Also the provision limiting the amount of liabilities to be taken into account in determining the real value of a company has been amended so as to only allow a registered debt, relating to the acquisition cost of immovable property, where such debt has been registered within three months from the date of acquisition of the property. A new provision identical to that found in rule 5 of the Capital Gains Rules has been introduced which provides that in calculating the real value of marketable securities the percentage of the real value of the company, as represented by the shares transferred, is to be calculated by reference to the higher of the percentage of the nominal share capital and voting rights. Also the real value of shares transferred is now to be calculated in accordance with rule 5(6) and (7) of the Capital Gains Rules.
In determining the chargeable income derived from the said work, the total deductions allowable under article 14 shall not exceed the amount of the consideration received or receivable for the said work.
Person transferring the property In determining the chargeable income derived from the transfer of the property the total deductions allowable under article 14 shall not exceed the consideration received or receivable for the said immovable property or right thereon, in so far that such excess consists of any amounts paid or payable in respect of the work, loans, or credit referred to in this sub-article. Any amounts paid or payable in respect of the said work, loans, or credit shall be taken into account only after all other allowable deductions have been taken into account.
About the author Marvin is an accountant by profession. He is at present responsible for managing the Tax Compliance Unit. He was previously employed as a Tax Enforcement Manager with the Inland Revenue department. Marvin also worked as a tax adviser, stockbroker and compliance officer with a company providing investment services before joining the IRD. Marvin is a frequent lecturer in courses organised by the MIA and M.I.T. and a lecturer for the Advanced ACCA tax paper with BPP Professional Education Malta
ITAITMA&DDTA
Payment of tax / duty
Spring 2010
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LIFESTYLE
Spring 2010
THE SMP
POINT of VIEW Silvio Busuttil is a Fellow of the Malta Institute of Accountants and an active member of the Institute’s SMP Advisory Committee. At 56 years of age, he is married to Rita and has two sons, Mark aged 26 who is married to Roberta, and David aged 23. The family resides at San Pawl tat-Targa. His hobbies are travelling and following Formula 1 (in particular his favourite team Ferrari). He describes himself as hardworking, very determined and capable of sticking to his principles. He considers himself as very target-oriented, in fact if he set his mind on reaching an objective or doing something in life, he always managed to achieve his ambitions.
Catherine Mallia Bonavia met with Silvio to know more about his achievements, ambitions, and the advantages and disadvantages of being a sole practitioner today. What was your dream job as a young boy? Since I was a young boy my dream job was to become an accountant. None of my family members were in the profession, but once I met an accountant and we talked a lot about the subject and the profession. That was the point when I decided what I wanted to be and eventually made the dream come true. At what point in time did you opt for a career in the accountancy profession? I opted for a career in the accountancy profession when I was still attending to my secondary education. At that time Malta had a great shortage of accountants and, since the manufacturing industry was in its early stages, the demand for accountants was increasing year after year. Any previous work experience prior becoming a sole practitioner? I started my career as an Accounts Clerk in the manufacturing industry with General Instruments Europe which manufactured electronic equipment and had two plants, one in Kirkop and another in Gozo. The company employed around one thousand workers at that time. Shortly after I took responsibility of the data processing department within the same company. Computers at the time were in their early stages, their size was massive (a computer was nearly the size of a whole room) and their operating functions were very limited. I decided that computing was not my line and after two years I changed my job and joined Chocolate Products Co. Ltd. as an Accounts
Clerk. It was the first chocolate company in Malta. For the first couple of years, it was parastatal but eventually it was bought by private shareholders. Chocolate Products Co. Ltd. used to export its products to various countries including Canada and Ireland. The work of an accounts clerk at that time was very different from today’s. Everything was done manually as computers were still in their early stages. All books of accounts and payroll systems were kept manually. After a couple of years working as an accounts clerk, I continued my studies and eventually was given the responsibility of a Financial Controller. I was only 23 years old at that time. I continued to work with Chocolate products for thirteen years. What gave you the plunge to become a sole practitioner? I started building up my client base a few years after I started working in the manufacturing industry and I continued to increase my client base on a part time basis year after year. When Chocolate Products Co. Ltd. closed operation, I decided to set up my own private practice and become a sole practitioner. Did you take long to decide and take action? Were family members involved in the decision making process? It took me a couple of years to decide to start up my private practice. It was a very difficult decision because if at a point in time you are employed with a very good salary package and then you decide to start your own private practice, you are not going to earn the same amount of money overnight. It was a very difficult decision I had to take and I definitely needed the support of my family. When I started my private practice my children were still young, however I was lucky because my
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LIFESTYLE wife had her own private beauty clinic and she gave me her own full support. What were the challenges that you faced at the time? Did they go beyond your expectations? Were family and friends supportive? My challenges were to grow further my practice year after year. Like other sole practitioners I started my practice on my own. Then as the practice started to grow further, I had to start recruiting staff. Today we are eight at my office including myself. I must admit that my family was always supportive in my decisions. Though my sons never wanted to take my profession, my daughter in law is my right hand person at my office. Are those challenges the same challenges that you have today? I think that the challenges in our profession nowadays are greater than before because the demand for our work has grown much more than when I started in the profession. What are the advantages and disadvantages of being a sole practitioner? Obviously the advantage is that the fruit of your efforts are retained by yourself. Going back I would have preferred to have started up my practice earlier. The main disadvantage is the long hours, because when you have your own private practice you tend to work longer hours. Furthermore a sole practitioner has the problem to keep himself abreast with professional developments and with the continuous changes in laws, accounting and audit standards. New laws and changes in standards keep on coming out continuously and require a great effort to keep oneself abreast. In a partnership, the partners might agree in which area each individual partner will specialise, but being a sole practitioner, a greater effort
Spring 2010
is required to keep up to date and attend most of the CPE activities that will be available. Moreover, being a sole practitioner, in order to meet the continuous deadlines in our work, requires great efforts and attention. Work-life balance – how does it stand? I am that type of person who tries to find a balance between work and time for myself and my family especially in weekends. With the stress involved in our profession, it is beneficial for our health to take frequent breaks. Looking back, is there something which you wanted to do and did not do and something you did and wished that you did not do? Looking back, sometimes I think that it might have been wiser if I had set up a partnership with someone else in the past. However, as I have now set up my own private practice and at my age, I do not think that I will go for it. I do not think that there is anything which I did in my life and which I regret doing nowadays. What is the motto in your life that keeps you going? In my life I always looked forward to do things which make me successful and which give me fulfilment and satisfaction. I find that practicing my profession is one of the things which keeps me going. Any advice to your fellow colleagues? As I said above it is not so simple nowadays to keep abreast with our profession. The sole practitioner has been in practice in Malta for a long time and is still in practice all around the world. I suggest to my colleagues not to give up, perhaps together with the help of the Malta Institute of Accountants we could find ways and means to resolve the difficulties we face in our profession.
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Spring 2010
A walk down
MEMORY LANE
Interview with Carmelo Mizzi, MIA Past President (1975-1977)
By: Catherine Mallia Bonavia
INTERVIEW
I qualified as an accountant in December 1970, having succeeded in the Malta Institute of Accountants’ examinations, which had started in the 1960s. I became a member of the Institute in February 1971 when the total membership was about one hundred. In fact, my Registered No. was 101. During the annual general meeting of 1971 I was I was elected to Council and formed part of the Education Committee which then I presided till 1978. In 1973 when I was still a Council member, we had a visit by the A.C.C.A. President MR. T.O.W. Newman, and the Secretary Mr. F.C. Osbourn. At that time the Institute was in continuous contact with the Association trying to establish a closer relationship. The result of that initial meeting is evident with the close connection that exists today. As I was representing the Institute on the Malta Federation of Professional Associations, in 1975 I was elected President of that Federation. During that same period I represented Malta in a Commonwealth Foundation convention which was held in Nairobi, Kenya. In April 1976 a letter was received from Sir Henry Benson, the Chairman of the International Accounting Standards Committee, giving details of a meeting to be held in Munich during the International Congress of Accountants in October 1977 and enquiring whether any representatives of the Institute would be attending. This Congress, attended by myself as Vice-President at the time and my successor President Albert E. Vella, proved to be of huge significance to the Institute as the Malta Institute of Accountants became a founder member of the International Federation of Accountants and the International Accounting Standards Committee.
Mr Carmelo Mizzi
It was during my presidency exactly in 1976 when Council agreed and approved that, in future, student members during examinations, provided that such machines were noiseless and cordless. It was also in the same year that it was agreed that Council Meetings will be held on every first Tuesday of the month. I have been involved in Institute activities up to 2002 when I was a member of the Ethics Committee, even though I had retired from work on 31st December 1999. My experience during these 31 years of service, especially during my two year presidency between 1975 and 1977, has been of utmost interest and full of challenge, and that is why I wish to share it with the journal’s readership.
Commonwealth Foundation Officials and International Representatives at the Commonwealth Foundation Convention. Mr. Carmelo Mizzi is sitting in the front row (right).
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FEATURE
Spring 2010
It’s a question of Value... By: Eugenio Privitelli
OR NOT!
This feature (the first in a series of two) is a synthesis of a dissertation published by the author in November 2009 and submitted to University of Leicester in partial fulfilment of the requirements for the degree of Master of Science in Finance. The second feature will be carried in the forthcoming (Summer 2010) issue of the Accountant. INTRODUCTION Long before I ever taught of researching the stimulating and mind twirling topic (sic!) of asset valuations for inclusion in financial statements, the concept of reporting assets at their marketable value rather than historical cost (a concept that seems to have found its place in the history books of accounting) has always fascinated my rather poor number crunching intellect. What really excites my senses are not the theoretical underlying concepts packaged in IAS 36, that up to this day still stir and shake my unaccustomed mindset, but rather the often heated debate on value measurement that generally characterises this subject.
Similar to other industries the hotel business is proving to be more volatile than the market likes. The collapse of long established financial institutions such as Northern Rock, Lehman Brothers, Merrill Lynch, Citigroup, Fennie Mae, Freddie Mac, AIG etc., the collapse of the ‘real estate market’ in the US and UK in particular and hard hit tourism demand due to lower ‘purchasing power’ in established source markets are exerting tremendous pressure on hotel organisations worldwide to review long established industry norms and operating practices.
DEFINING VALUE
Peto et al. (1996) suggest that: ‘valuation is the estimate of the most likely selling price, the assessment of which is the most common objective of the valuer’. Verginis and Taylor (2004) on the other hand state that: ‘valuation is the process of determining market value that is, an estimation of the price of exchange in the marketplace’.
Various proponents on hotel valuations suggest that the value of a hotel is the present worth of the future economic benefits accruing to ownership which usually comprise of periodic cash flows plus the proceeds of an eventual sale.
Part 1 of this paper reviews a number of valuation methodologies discussing these within the framework imposed by IAS 36. It also examines relevant issues raised that can materially impact on local value considerations and investment decisions. Particular reference will be made to the hospitality industry although the debate can easily be extended to other industries that are heavily dependent on immovable property in the generation of their income.
The Canadian Uniform Standards of Professional Appraisal Practices (CUSPAP) define market value as: ‘The most probable price which a property should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller each acting prudently and knowledgeably, and assuming the price is not affected by undue stimulus’.
WHY DETERMINE AN ASSET’S REAL VALUE
Market Rent (MR)
Damodaran (1996) states that: ‘knowing what an asset is worth and what determines that value is a pre-requisite for intelligent decision making – in choosing investment for a portfolio, in deciding on the appropriate price to pay or receive in a takeover and in making investment, financing and dividend choices when running a business’.
The International Valuation Standards Committee (IVSC)1 states that valuations based on market rent (MR) shall be defined as: ‘The estimated amount for which a property, or space within a property, should lease (let) on the date of valuation between a willing lessor and a willing lessee on appropriate lease terms in an arm’s length transaction after proper marketing wherein the parties had acted knowledgeably, prudently and without compulsion’. IVSC PS 3.3
IAS 36 – IMPAIRMENT OF ASSETS UNDERLYING CONCEPT Within the context of our discussion IAS 36 – Impairment of Assets sets out the procedure that entities must apply to ensure that their assets are carried at no more than the amounts expected to be recovered through the use or sale of the assets. Whilst the concept underlying the standard is relatively easy to comprehend, economic and financial upheavals are making its application a challenging task due in particular to symptoms that may impact on value. These symptoms include economic downturn and its effects on demand and yields; lack of liquidity within financial markets; uncertainty and volatility in the market values of financial instruments; bank instability; lower inflation and lower interest rates; and reductions in the market value of property in most countries, accentuated by a lack of buyers.
Open Market Value (OMV)
Value in Use (VIU) The use of the VIU approach is generally limited to the valuation of owneroccupied property by a business or other entity for inclusion in financial statements2. This approach is similar to MV but assumes that: ‘the buyer is granted vacant possession of all parts of the property required by the business and disregarded potential alternative uses and any other characteristics of the property that would cause its Market Value to differ from that needed to replace the remaining service potential at least cost’. RICS (2003) IAS 36 para.6 defines VIU as: ‘the present value of estimated future cash flows expected to arise from the continued use of the asset and from its disposal at the end of its useful life’.
As the established international standard setter for valuation, the IVSC develops and maintains standards for the reporting and disclosure of valuations, especially those that will be relied upon by investors and other third party stakeholders. It also supports the need to develop a framework of guidance on best practice for valuations of the various classes of assets and liabilities and for the consistent delivery of the standards by properly trained professionals around the globe. – Source http://www.ivsc.org/
1
2 UK & US Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS). Within the context of this research reference to the standard means reference to IFRSs specifically IAS 36 – Impairment of Assets.
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Spring 2010
FEATURE
The VIU calculation therefore involves two key components: • The future cash flows estimated to be derived from the continuing use of the asset; and • The application of an appropriate discount rate that reflects current market assessments of the time value of money and the risks specific to that asset.
Fair Value (FV) The IVSC defines ‘fair value’ as: ‘The amount for which an asset could be exchanged between knowledgeable, willing parties, in an arm’s length transaction’, IVSC PS 3.5 The essential difference between fair value and market value is that it is a price that would be agreed between two parties and that price may reflect the interests of those parties. Fair value is also a measurement basis where financial statements are prepared under IFRS. In such cases fair value is generally assumed to be the same as market value. IAS 36 provides that: ‘fair value of land and buildings is usually determined from market based evidence and only if such evidence is not available is the adoption allowed of alternative approaches such as the income approach or the replacement cost approach’. Within the local scenario the lack of available market evidence for hotel sales as an ‘operational’ or ‘going concern’ entity suggest that alternative procedures are particularly relevant.
Worth The IVSC defines worth or investment value as: ‘The value of property to a particular owner, investor, or class of investors for identified investment or operational objectives’. IVSC PS 3.4 Worth differs from MV and FV in that it reflects the value to an individual and therefore will be used only in specific cases. Whilst it can be a point of debate in the case of hotel valuations – especially where profit is considered of secondary importance to lifestyle (a scenario applicable to the local context some 20 years ago when hotels were family run businesses) – the focus here is on economic wealth accretion and shareholder added value.
HOTEL VALUATIONS Research has evidenced major difficulties in identifying an approach that ‘best fits’ and is sufficiently robust in the valuation of hotels. The RICS Guidance Note 1(2006) classifies hotels as: ‘specialised trading properties (STP) where they are valued at market value by reference to the estimated future trading potential because they are normally bought and sold as fully equipped operational business entities’. Mahony (2007) states that: ‘due to their unique nature hotels are far more complex to value than other forms of property valuations’. Whilst many consider the Discounted Cash Flow (DCF) approach as the primary valuation method, others including RICS (1994) argue that this method ignores property market conditions and is thus not reflective of real business scenarios. Rushmore (1992a) refers to hotel valuations as: ‘complex, often complicated and that require a comprehensive knowledge of hotel operations as well as a thorough understanding of various valuation techniques and procedures’. If one adds to this Malta’s unique real estate environment where encroachment and scarcity of prime building sites in the major tourist areas have restricted the choice of investment opportunities in hotels, then the basis on how such assets should be valued becomes even more complex. Jackson (2008) states that: ‘in the lodging industry, the value of a hotel is the present worth of the future economic benefits accruing to ownership, which usually comprise of periodic cash flows plus the proceeds of an eventual sale’. He identifies three approaches to valuing hospitality enterprises including the cost approach, the sales comparison approach and the income capitalisation approach.
Cost Approach Rushmore (1975), Sikich (1993) and Lesser (1992) all agree that: ‘the absence of any income-related considerations and the need for subjective depreciation estimates make this approach of little relevance in hotel valuations’. Stefanelli (1982) argues that: ‘the cost approach i.e. the determination of value based on asset replacement which is rebuilding costs less allowance for depreciation is not concerned with the current market value of the hotel or the future net income that the hotel may generate’. Reynolds (2008) considers this method as potentially relevant for insurance or the replacement value of buildings.
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Sales Comparison Approach Damodaran (1996) states that: ‘relative valuation approaches are those which forecast the value of an asset by looking at the pricing of a comparable asset recently sold, relative to a common variable like earnings, cash flow, book value or sales’. Andrew et al (2007) argue that: ‘since this approach relies on current market conditions it normally requires adjustments in order to compensate for differences between comparable hotels’. IAS 36 para.26 & 27 refers to the sales comparison approach as: ‘the best evidence of an asset’s fair value when traded in an active market and, when current bid prices are unavailable, the price of the most recent transaction may provide a basis from which to estimate FV less costs to sell (FVLCS) provided that there has not been a significant change in economic circumstances between the transaction date and the date as at which the estimate is made’. Lesser (1992) argues that: ‘the sales comparison approach is deemed not appropriate or reliable in the valuation of hotels given the dissimilarity between properties in aspects such as level of service, conditions of physical improvements, location, as well as the characteristics of the local market. IAS 36 para.6 assumes that: ‘the value of the asset should be determined in an active market were the asset is homogeneous, traded between two knowledgeable willing individuals and prices are available to the public’. In this regard the sales comparison approach for hotel valuations fails since it is usually difficult to obtain comparable sales (hotels can rarely be homogeneous), make the necessary adjustments as well as obtain accurate information regarding the true motivations of buyers and sellers. Market research has indicated that recent hotel sales activity in Malta cannot be considered a reliable benchmark of real market VIU since the motivations of investors (buyers) have not always been clear. During recent years hotel sites on the Island have often been sold more for property speculation such as conversion to self-catering apartments, residential premises, old people’s homes or office blocks rather than as direct investment in hotels as ‘going concern’ entities.
Income Capitalisation Approach Rushmore (1975) considers the income capitalisation approach as: ‘the most appropriate for hotel valuations as it includes procedures that are comparable to those employed by hotel investors’. Bodlender (1985) states that: ‘this approach goes beyond the relative simplicity of the cost and sales comparison approaches by attempting to relate the wealth-generating capacity of the hotel to its value’. Copeland et al., (1994) argue that: ‘the income capitalisation valuation approaches reflect the risk-averse investor’s behaviour which is maximisation of shareholder value’. Damodaran (1996) states that: ‘income capitalisation valuation approaches relate the value of an asset to the present value of expected future cash flows from the asset’. Nilsson et al., (2002) consider the income capitalisation approach as: ‘the most effective basis for a framework on which to derive market value of a hotel’. The four main valuation methods identified under this method are: • Single or Direct capitalisation rate methodology (SCR) • Discounted cashflow analysis (DCF) • Simultaneous valuation formula (SVF) • Band of investment method (BIM)
Single Capitalisation Rate (SCR) SCR looks at a property’s income potential based on historical and current financial information as well as industry norms in order to stabilise the income for a one year period. Thereafter the stabilised income is capitalised at an overall rate considered to be consistent with the market to yield an estimate of the market value of the property. Comparability of properties is an issue that both Martin (1993) and Accetta (1998) view as the most difficult to determine in the hotel environment. Both note that: ‘in using this method the heterogeneous nature of hotels has to be taken into consideration in order to make appropriate adjustments for differences in age, use, location and occupancy levels thus limiting the credibility of this method’. Following September 11, 2001 income streams for hotels have become rather unstable and effectively a lot of proponents consider this method as no longer sufficiently reliable. From a local perspective apart from difficulty in comparability of properties and volatility of income streams this method becomes even more difficult to apply since accessibility of data used in the valuation of recently sold hotels is treated in strictest confidence. The insularity of the environment makes the SCR method rather inappropriate within local valuation frameworks.
FEATURE Discounted Cashflow (DCF) The RICS (1992, 1994) recommends that: ‘the DCF method should be the primary valuation method because it is technically superior to other valuation methods’. Sayce (1995) reinforces this argument by stating that: ‘since hotel investors are interested in future profits not past performance, valuations based on the SCR and BIM are less accurate’. DCF looks at a number of years as opposed to relying on one year of stabilised income and is therefore ideal if future income does not mirror the current income, and when future income is subject to variances. This approach is considered by many proponents as typical of a hotel environment where usually one has to analyse various sources of revenue that are highly sensitive to both micro and macro economic factors. The RICS (1994) however argue that: ‘whilst multiyear forecasts may seem appropriate in theory, practitioners should recognise the uncertainty of forecasted income’. Damodaran (1996) states that: ‘the value of an asset is not what someone perceives it to be worth but it is a function of the expected cash flows on that asset’. He argues that: ‘assets with high and predictable cash flows should have higher values than assets with low and volatile cash flows’. RICS (1994) argues that: ‘although this method does consider the future generation of income and thus investor interests, it ignores the current property market conditions as it purely concentrates on the future generation of net income’. This reasoning is particularly relevant within the Maltese scenario given the scarcity of buildable land (land itself often increases in intrinsic value even if not developed) and investor profile. Potential small local investors faced with limited ‘local’ investment opportunities especially due to a rather insular financial market (although foreign investment options exist) usually turn to ‘property’ as the only ‘secure’ and ‘reliable’ investment source. This trend is particularly noticeable during periods of economic turmoil even though investors are aware that potential revenue streams may be lower in the short run. It is in fact observable that local demand trends for property during uncertain economic periods tend to be higher or remain stable thus having minimal effect on ‘investment risk exposure’ at least for the short/medium term.
Simultaneous Valuation Formula (SVF) Mellen (1983) states that: ‘simultaneous valuation is a formula that may be used to calculate a property’s value given a variable income stream over a forecast period and given the known return requirements of the debt and equity components’. SVF was specifically developed as a capitalisation technique for the valuation of hotel properties but is also applicable to any income producing property possessing a variable income stream and other related characteristic. Mellen (1983) argues that: ‘the earnings potential and thus value of a lodging facility is directly related to the competence of its manager, managing agent or owner. The major difference between DCF and SVF is that the latter discounts through a mortgage-equity technique which takes into account factors such as interest rate, amortisation term and loan-to-value ratio instead of using common discounting procedures to present value to estimate the market value.’ SVF emphasises the market as the determining value factor. As Mellen (1983) states: ‘the investment criteria of the sophisticated equity participant must be regarded simultaneously with the considerations of the owner who is faced with the immediate impact of paying debt service and generating a return on equity’. This statement does reflect Malta’s current real estate environment although the local traditional owner’s motivation when embarking on such projects has often in the past been an extension of ego or secondary pursuit rather than a serious business proposition. In the current local context valuers cannot therefore afford to ignore either of these two primary players (i.e. owners and equity investors) since both groups are very active and compete for a limited number of ‘viable’ properties either through direct investment or the ownership of an equity stake. The major difference between these two stakeholders is that the traditional owner usually takes a long-term view with ‘asset’ accretion considered the main wealth generator while the equity investor is generally intent in securing a reasonable dividend/interest income stream but having a higher propensity to divest investment to secure more lucrative options as and when the opportunity arises. Within the local context this sometimes irreconcilable position can cause significant ‘stress’ in the valuation process.
Band of Investment Method (BIM) Sikich (1993), Rushmore (1978; 1983; 1990; 1992a), Mellen and Castro (1994) note that: ‘BIM is essentially concerned with the weighted average cost of capital
Spring 2010
(WACC) and a single year’s stabilised net income’. This technique is however considered to be best suited for a stabilised property (typical example would be a shopping mall with leased outlets, office block etc.,) expected to maintain a constant level of occupancy and net income into the future. This is however hardly considered typical of a hotel environment and therefore such a valuation technique is not widely regarded as applicable in hotel valuations although it might be the best approach if the investor’s intention is to change the nature of the property from its current status to a more stable income-earning assets such as the conversion of a hotel to an office block or ‘old people’s home’, a scenario that is also highly relevant in the current Maltese environment as evidenced by recent hotel sales.
PREFERRED VALUATION APPROACH FOR HOTEL PROPERTIES Proponents of the various valuation approaches have expounded their arguments on the validity of one method against the other however research fails to identify clear evidence that would suggest the best approach for hotel valuations. BAHA (1993) however endorse an income capitalisation and more specifically a tenyear DCF valuation as the preferred method. Rushmore (1992c, d) and Luehrman (1997) recognise that: ‘DCF simulates the investment rationale and strategies of investors’, while Tebow (1994) argues that: ‘since most of the data required is derived from the hotel property’s market it reduces the need for subjective inputs by the valuer in contrast with some of the other valuation techniques’. Stuart-Jones (1982) argues that: ‘the weakness of the DCF valuation is that it relies on estimates of future performance, growth opportunities, financing needs, and discount rates often made without the benefit of access to detailed information which is necessary for making confident predictions’. The increased likelihood of impairment charges coupled with the complexity of IAS 36 have often raised contentious issues between owners/investors and valuers (often accountants) in Malta with the former vying for asset accretion and the latter preferring a more prudent approach in restating asset carrying amounts. Part 2 of this paper will seek to address ‘valuation’ issues as perceived by these stakeholders and whether impairment considerations could effectively shy away investment from this important economic activity for Malta.
––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––– REFERENCES
Accetta, G.J. (1998), ‘Supporting capitalisation rates’, Appraisal Journal, Vol. 66 No. 4, pp 371 – 374 Bodlender, J. (1985), ‘Going concern valuations for the hotel industry’, Journal of Valuation, Vol. 3 No. 2, pp 134 - 144 British Association of Hotel Accountants (BAHA) (1993), Recommended Practices for the Valuation of Hotels, BAHA, London Copeland, T.E., Koller, T. and Murrin, J. (1994). ‘Valuation: Measuring and Managing the Value of Companies’, John Wiley & Sons, New York, NY. Damodaran, A. (1996), Investment Valuation, Tools and Techniques for Determining the value of Any Asset, John Wiley & Sons, New York, NY. Jackson, Leonard A. (2008), ‘An examination and application of current lodging valuation practices’, Journal of Retail and Leisure Property (2008) Vol. No. 7 pp 234 - 247 Lesser, D.H (1992), ‘Property tax valuation of lodging properties’. Cornell Hotel and Restaurant Administration Quarterly. Vol. 33 No.1, pp 73 – 81 Luehrman, T.A. (1997), ‘What’s it worth? A general manager’s guide to Valuation’. Harvard Business Review, Vol. 75 No. 3, pp. 132 – 142 Mahony, M. (2007), ‘The Influence of Domestic Fiscal Incentives and Internationalisation on Hotel Valuation’, The Property Valuer, Summer 2007. Martin, W.B. (1993), ‘Direct capitalization or discounted cash flow analysis?’, The Appraisal Journal, Vol. No. 61 No. 3, pp 390 - 395 Mellen, S.R. (1983), ‘Simultaneous Valuation: A New Capitalization Technique for Hotel and Other Income Properties’, The Appraisal Journal, Vol. 51 No. 2, pp 165 – 189 Menorca, E.S. (1992), ‘Hotel valuations: the income capitalisation approach’, Journal of Property Valuation & Finance, Vol. 11 No. 3 pp 211 – 216 Nilsson, M., Harris, P. & Kett, R. (2002). ‘Valuing hotels as business entities’. Journal of Leisure Property. Vol. 2 No 1 pp 17 - 28 Peto, R. French, N. and Bowman, G. (1996), ‘Developments in valuation methodology: price and worth’, Journal of Property Valuation & Investment, Vol. 14 No 4, pp 79 – 100. Reynolds, R. (2008), ‘Hotel Valuation – A Look at the Main Approaches and Key Valuation Components’, International Hotel Appraisers Inc, fall 2008. pp 18 - 22 Royal Institution of Chartered Surveyors (RICS) (1990), Statements of Asset Valuation Practices and Guidance Notes, RICS, London Royal Institution of Chartered Surveyors (RICS) (1992), Manual of Valuation Guidance Notes, RICS, London
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FEATURE Royal Institution of Chartered Surveyors (RICS) (1994a), The Mallinson Report: Report of the President’s Working Party on Commercial Property Valuations, RICS, London Royal Institution of Chartered Surveyors (RICS) (1994b), The Valuation of Hotels, the Royal Institution of Chartered Surveyors response, ‘The recommended practice for the valuation of hotels’, issued by the BAHA, RICA, London, pp 1 – 7. Royal Institution of Chartered Surveyors (RICS) (1995), Appraisal and Valuation Manual, RICS, London Royal Institution of Chartered Surveyors (RICS) (2003),’Appraisal & Valuation Standards 5th ed. London RICS, Books, UKPS 1.3 Rushmore, S. (1975). How much is your place worth? A case study in hotel-motel valuation. Cornell Hotel and Restaurant Administration Quarterly. Vol. 16 No. 1 pp 38 – 48 Rushmore, S. (1992a), ‘Seven current hotel-valuation techniques’, Cornell Hotel and Restaurant Administration Quarterly, Vol. 25 No. 3, pp 49 – 55 Rushmore, S. (1992b), ‘The valuation of distressed hotels’, Cornell Hotel and Restaurant Administration Quarterly, Vol. 33 No. 5, pp 61 – 71 Rushmore, S. (1992c), Hotels and Motels: A Guide to Market Analysis, Investment Analysis, and Valuations, American Institute of Real Estate Appraisors, Chicago. IL. Rushmore, S. (1992d), ‘Hotel-valuation techniques’, Cornell Hotel and Restaurant Administration Quarterly, Vol. 33 No. 4, pp 49 -56 Rushmore, S. (1993), ‘Ethics in hotel appraising’, The Appraisal Journal, Vol. 61 No 3, pp 357 - 366 Rushmore, S. and Baum, S. (2001), Hotels & Motels - Valuations and Market Studies, Appraisal Institute, 2001 Rushmore, S. and Goldhoff, G. (1997), ‘Hotel Value Trends: Yesterday, Today, and Tomorrow’, Cornell Hotel and Restaurant Administration Quarterly 1997; Vol. No. 38; pp 18 - 29 Sikich, F. (1993), ‘Business Valuations: from the accountant’s perspective’, The Bottomline, Vol. 8. No.2 pp 14 - 18 Stefanelli, J.M. (1982). Buying or selling a restaurant: How to set the price. Cornell Hotel and Restaurant Administration quarterly. Vol. 23 No. 3, pp 80 - 92 Stuart-Jones, C. (1982), Successful Management of Acquisitions, Derek Beattie Publishing, London. Tebow, B. (1994), ‘In defence of DCF analysis’, Real Estate Review, Vol. 24 No. 3 pp 394 - 398 Verginis, Constantinos S. and Taylor J. Stephen. (2004) ‘Stakeholders’ perceptions of the DCF method in hotel valuations’, Property Management Vol. 22 No 5, 2004 pp 358 - 376
Spring 2010
ABOUT THE AUTHOR Eugenio Privitelli has been working with the Corinthia Group of Companies for 21 years. Prior to taking up the position of Director of Internal Audit he occupied the posts of Group Financial Controller and Director of Finance within the same Group. Eugenio started his career with AirMalta Company Ltd occupying the post of Asst Officer Finance before moving on as Senior Auditor with Emanuel Bonello & Co (now Grant Thornton). He also worked for a couple of months with Deloitte Haskins & Sells (Florence) office. Apart from being a fully qualified accountant with a BA (Hons) Acct. from the University of Malta, Eugenio holds an MBA (Henley) and an MSc in Finance (University of Leicester). He is a Fellow of the Malta Institute of Accountants, Member of the Malta Institute of Management, an Affiliate of the Institute of Internal Auditors UK & Ireland and an Associate Member of the Institute of Data Processing & Management UK. Eugenio is also an Audit Committee Member at Malta Enterprise and sits on the Board of Manoel Theatre and the Mediterranean Conference Centre. He can be contacted on email eprivitelli@ corinthia.com.
Spring 2010
TECHNICAL
Accounting
By: Neville Cutajar
SOLUTIONS SCENARIO 1: EXECUTIVE CALL OPTIONS A company has a system of rewarding its management by providing share options. On 1st April 2008 the company granted ten executives call options to purchase up to 5,000 shares each on 1 April 2010. This was partly a means of deferring them from leaving as the options only vest if the executives would have still to be employed on 1 April 2010. The HR manager estimates that 90% of the executives will remain with the company for the two year period and exercise their options in full. The following information is available for each option. (i) The option price is €20 per share. (ii) The market value of each share was €15 on 1 April 2008 and €18 on 31st March 2009. (iii) The market value of the share option was €2 on 1 April 2008 and €2·20 on 31 March 2009. IFRS 2 – Share Based Payment – requires entities to recognise obligations that will be settled in shares – equity settled share based payments – at either the market value of the goods or services provided by the recipients of the payment or at the market value of the share based payment, whichever is the easier to ascertain. In the case of share based payments to employees the market value of the share based payment is to be used. The market value should be measured at the date the award is granted, not the date the amounts [in this case share options] vest. The market value of a share option at 1 April 2008 was $2 and so the market value of the expected award is €2 x 10 x 5,000 x 90% = €90,000. The option has a market value even though it has no intrinsic value either at granting date or currently. This is so because of expectations regarding the future share price. Since the award is based on service over a two year period then the charge to income for the year ending 31st March 2009 is 1/2 x 490,000 = €45,000. An equivalent amount will be credited to equity and will be included in the future proceeds of issue of the shares, assuming the options are exercised.
SCENARIO 2: RESTRUCTURING AND CLOSURE OF OPERATIONS In 2009 a company, with a financial year ending 31st March, entered into negotiations with employee representatives to restructure its operations and close down two of five retail outlets. Broad agreement was reached with the union representatives on 25 March 2009 and the plans publicly announced on 27 March 2009. Relevant employees were sent letters on 28 March 2009 offering them redundancy or redeployment. The restructuring was completed on 31 May 2009. The financial effects of the closure were as follows: (i) The company incurred closure costs of €1 million, including redundancy payments of €400,000. (ii) Costs of redeploying existing employees totalled €200,000. (iii) Plant and equipment was scrapped at a loss of €150,000. (iv) The properties of the two outlets were sold at a profit of €300,000 after year end. (v) The operating losses of the two outlets from 1 April 2009 to 31 May 2009 totalled $100,000. (vi) The net sum of all the above is a cost of $1,150,000. A provision for the consequences of the reorganisation is required in principle. This is because the decision to close was communicated to
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those affected before the year end and so, under the principles of IAS 37 – Provisions, Contingent Liabilities and Contingent Assets – there is a constructive obligation to restructure at 31 March 2009. The amount to be provided for is to take the following in consideration: • The provision should be for the direct consequences of the decision to close and should not include items relating to the on going operations of the business. Therefore redeployment costs should not be included. • The provision should not include any amounts relating to future operating losses unless they arise under an onerous contract. • The provision should not be reduced by potential gains on future asset sales but the estimated losses on the sale of plant should be recognised. IFRS 5 – Disposal of Non-current Assets and Reporting of Discontinued Operations states that assets held for sale should be measured at the lower of carrying amount and fair value less costs to sell. An asset is classified as held for sale if its value will be recovered principally through sale as opposed to continuing use. The assets of the two outlets would appear to satisfy this definition. The potential loss on sale of plant is not part of the restructuring provision as such but will need to be reflected in a lower carrying value for the plant. Under the principles of IFRS 5 it would be correct to show the results separately if the retail outlets can be regarded as a discontinued operation. For this to be the case the outlets would have had to satisfy the following conditions: (i) Being a component of the entity (operations and cash flows that can be clearly distinguished, operationally and for financial reporting purposes, from the rest of the entity) that either has been disposed of or is classified as held for sale; and (ii) – A separate major line of business or geographical area of operation; or – Part of a single co-ordinated plan to dispose of a separate major line of business or geographical area of operations; or – A subsidiary acquired exclusively with a view to resale. In this case the retail outlets cannot be regarded as a discontinued operation since neither condition is satisfied. Condition (i) isn’t satisfied since the retail outlets being closed are not deemed as a separate component (I.e. a SBU) of the entity whilst condition (ii) isn’t satisfied since It is expected that the markets served by the two outlets are going to be supplied by the remaining outlets and therefore no geographical area of operation or market has been discontinued. This means that in respect to year ending 31st March 2009 a provision will be made for €1 million, with an impairment loss on plant and equipment of €150,000.
About the author
Neville Cutajar is 3a Accountants (www.3a.com.mt) managing partner and director. He is the firm’s technical partner in relation to International Financial Reporting Standards. He is also the partner in charge in respect of compliance and quality control issues at 3a. He has ample experience in management consultancy, internal auditing as well as information systems audits. He may be contacted on neville@3a.com.mt.
TECHNICAL
Spring 2010
IFRS, IAS UPDATE IASB issues limited exemption amendment to IFRS 1 The International Accounting Standards Board (IASB) issued a minor amendment to IFRS 1 First-time Adoption of International Financial Reporting Standards. The amendment relieves firsttime adopters of IFRSs from providing the additional disclosures introduced in March 2009 by Improving Disclosures about Financial Instruments (Amendments to IFRS 7). It thereby ensures that first-time adopters benefit from the same transition provisions that Amendments to IFRS 7 provides to current IFRS preparers. The additional disclosure requirements included in Amendments to IFRS 7 were part of the IASB’s response to the financial crisis; they require enhanced disclosures about fair value measurements and liquidity risk. Additionally, the amendment to IFRS 1 clarifies the IASB’s conclusions and intended transition for Amendments to IFRS 7. The effective date of the amendment Limited Exemption from Comparative IFRS 7 Disclosures for First-time Adopters (Amendment to IFRS 1) is 1 July 2010, with earlier application permitted.
IASB re-exposes proposals on measuring liabilities for asset decommissioning, legal disputes and similar items The IASB published for public comment an exposure draft of one section of a replacement for IAS 37 Provisions, Contingent Liabilities and Contingent Assets. The section contains revised proposals for measuring liabilities within the scope of IAS 37. IAS 37 applies to liabilities not covered by other accounting standards, such as liabilities to decommission assets and liabilities arising from legal disputes. The IASB previously published proposals to amend IAS 37, including revised measurement requirements. In the light of the comments received the IASB identified a need to develop more guidance on one part of those proposals: the measurement of these liabilities. The abovementioned proposals seek public comment on that draft guidance. The IASB aims to complete the standard, including final guidance resulting from the proposals, in 2010. An IASB ‘Snapshot’, a high level summary of the proposals, is available to download free of charge from the project section of the IASB website (www.iasb.org).
Spring 2010
STUDENTS
MAKING IT THROUGH THE ACCA/MIA
JOINT SCHEME QUALIFICATION Lecturers’ Tips for Papers F1 – F3 (Part 1)
By: Abigail Felice & Krista Farrugia, BPP Lecturers
The paper based and computer based examinations for Papers F1 to F3 of the ACCA Qualification are all multiple choice questions and a candidate’s ability to use good examination techniques when answering such questions will strongly influence the mark in these papers. In this article we will provide some practical guidance to assist you in maximising your marks by setting some golden rules and emphasising certain key points. Tip 1: Preparation The golden rule for success is to prepare thoroughly. On a regular basis, examiners’ reports comment that many candidates are poorly prepared. This is evidenced by the attempt to ‘question spot’, which is very risky and is strongly discouraged by examiners. Each multiple choice question relates to a specific topic of the syllabus. Thus if you want to maximise your chances of passing the exam you must ensure that you cover the whole syllabus in your study. Besides this, it is important to attempt past exams and exam standard questions. You can practise computer based exams on the following link: www.accaglobal.com/students/study_exams/ cbe/demo. After every exam session, three questions for each of Papers F1, F2 and F3 are published with comments from the examiners. Candidates should also follow up on questions tackled during the exam preparation period. A student should reflect not only on why a specific option is the correct answer but also on why the other options are wrong. When attempting questions, it is useful to remember that a key purpose of the exercise is not just to get the question right but also to improve one’s understanding. Tip 2: Read the question A great amount of time, effort and discussion is put into each question before it appears on the exam paper. This means that the candidate needs to read the question very carefully, as the wording has been chosen with care. For example in Paper F2 Management Accounting, a common question is to calculate the EOQ and the demand is stated for a period of, say, three months. To arrive at the correct answer, candidates must have recognised that the demand must be taken as an annual figure in the calculation of the EOQ. This is not an attempt to confuse students but to ensure that the concept is properly understood and that students can apply the technique to various situations where information can be presented in various ways. Students should also bear in mind that Paper F3 Financial Accounting, is not only about numerical computations but also covers the theory aspect. Candidates need to show their ability of applying knowledge in every circumstance and never
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learn the subject systematically. For example, in a depreciation question, besides knowing the appropriate formulas, students should be capable to explain the main purpose of depreciation. In this example, depreciation questions can take two formats, either computational or theoretical. Tip 3: Think It is common fallacy that the multiple choice questions are easy. This is based on the fact that one of the options has to be the correct answer, so if a candidate can get to one of the solutions, that answer is the correct one. It is essential that a candidate reads the question carefully and thinks carefully about the answer. This is because of the way the incorrect options referred to as ‘distracters’ are constructed. This term is used in question writing, where examiners attempt to identify the most common mistakes made by candidates and use these as a basis for the incorrect options. Tip 4: Work out your answer As the incorrect answers are based on common mistakes, it follows that attempting to guess the correct answer is not likely to be productive. To prevent yourself from being distracted by the incorrect options, it is essential that you use your understanding of the topic to work out your answer. Tip 5: Structure your approach To arrive to the correct option, one needs to take a methodical approach during the working process. In the second part of this article, which will be published in the next issue of the Accountant, we will give you sample questions with practical tips on how to tackle them. Tip 6: Answer all the questions It is of vital importance that none of the questions in the paper are left unanswered. All the above tips are essential if you want to maximise your marks when attempting multiple choice questions. Don’t forget that further tips will follow in the next issue.
Spring 2010
STUDENTS
ACCA STUDENTS’ NOTICE BOARD
Important dates for you to remember in the forthcoming months. The table below outlines the important dates for you to remember throughout the next four months. We recommend you note these in your diary. APRIL Appeals against the results of an administrative review should be received by the first week of April. 15 Your Examination Entry Form for the June exams must be received by ACCA’s exams department. Applications to change variant papers must be received by this date or changed on myACCA. Examination Entry Acknowledgements will start to be posted. MAY Examination Attendance Dockets will start to be posted for the June exams. JUNE Exams will be held over an eight-day period in the first and second week as follows: Monday 7 June Tuesday 8 June Wednesday 9 June Thursday 10 June Friday 11 June Monday 14 June Tuesday 15 June Wednesday 16 June
F6 Taxation
P6 Advanced Taxation
F4 Corporate and Business Law
P7 Advanced Audit and Assurance
F3 Financial Accounting
F8 Audit and Assurance
F9 Financial Management
P4 Advanced Financial Management
F2 Management Accounting
P5 Advanced Performance Management
F5 Performance Management
P1 Professional Accountant
F7 Financial Reporting
P2 Corporate Reporting
F1 Accountant in Business
P3 Business Analysis
JULY 15 Requests should be submitted for special circumstances to be taken into consideration for marking scripts from the June exam session. 31 Applications for exemptions must be received by this date for December exams.
Record candidates and improved results in ACCA’s latest exam figures Over 6,600 achieve affiliate status A record number of students took ACCA exams in December 2009, with 197,928 candidates taking 388,872 papers. This growth compares favourably with 187,335 students taking a total of 370,715 papers in June 2009. The exams results, issued on 22 February, revealed that 6,678 students successfully completed their final exams to become ACCA affiliates. ‘We are delighted that results are steadily improving throughout the professional level papers,’ said Aude Leonetti, ACCA acting executive director - learning. ‘This is, we believe, due to our
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continued focus on study resources and strong partnerships with learning providers around the world. ‘We are also extremely pleased to see that performance in the Fundamentals paper F5 (Performance Management) continues to improve as a result of the package of support that we put in place for this paper. We continue to focus on ensuring that students have the best possible resources to enable them to progress through ACCA’s internationally recognised examinations. ‘It is encouraging to see that despite the global economic conditions, tens of thousands of people continue to develop their skills for a career in accounting. We also want to congratulate the 6,678 people who have now completed their exams and we look forward to welcoming them to ACCA membership on completion of their practical experience requirements and professional ethics module. ACCA is committed fully to supporting these individuals in the next phase of their careers.’
Spring 2010
STUDENTS
The global pass rates for the December 2009 sitting of the ACCA Qualification are as follows:
Registering for exams Save time and go online The quickest and simplest way to register for your exams is online at myACCA. Registering for your exams online means: • you get immediate confirmation of receipt and processing of your exam entry so you don’t need to worry if you’ve been entered for the exams • you get immediate validation of exam entry information so any errors or misunderstandings can be sorted as soon as possible • you can go back and change the exam centre you’ve selected • you can change your law/tax variant and standards or stream • should you change your mind about which exams you feel ready to take then you can amend your exam selection. Please note that you can amend your exam selection at no extra cost up until the standard exam entry closing date of 15 April 2010 for June exams and 15 October 2010 for December exams.
* Results achieved by students for paper-based examinations and computer-based examinations during the period of 1 August 2009 to 31 January 2010
Administrative reviews ACCA has a range of procedures in place which reviews the academic judgements made by examiners and these ensure that the final results are robust. However following publication of the results if you do not feel that your result reflects your perceived performance, you may request an Administrative Review under the following circumstances: • ACCA ‘s procedures have not been properly applied in arriving at your mark • you have received an absent mark but you were present at the examination • you were not present at an examination but have received a mark. If you wish to request an Administrative Review, please complete the form which you will find in student accountant and submit it to the return address at the bottom of this form within 15 days from results release date, enclosing the appropriate fee as follows: • ACCA Qualification Knowledge Module (per paper) - £40 • ACCA Qualification Skills Module (per paper) - £45 • ACCA Qualification Professional Level (per paper) - £50 ACCA will carry out an Administrative Review of all processes followed to determine your final mark. You will receive written confirmation of the outcome of the Review in week commencing 22 March for February results and week commencing 20 September for August results. If your mark is amended as a result of the Administrative Review, you will receive a refund of your Administrative Review fee and an amended examination entry form, if applicable. The administrative reviews allow ACCA to ensure transparency and fairness, and are available for all qualifications that are assessed by exam. However, this is not a re-marking service. As part of the administrative review you will receive information on whether or not you reached the pass standard in each question attempted. This will take the form of P (Pass) or F (Fail) - actual marks will not be disclosed. This change to the service is in response to requests from students and tuition providers. It will provide an indication as to where a good understanding of a topic area has been demonstrated, and should assist with revision in cases where students have failed an examination. No additional fee is being charged. If you would like an administrative review to be undertaken you must request it within 15 working days of the results release date. Should an error be found in the review, you will receive the corrected mark before the exam entry closing date for the next session. Your mark will be adjusted to reflect your true result. Please note that your mark may be lowered if an administrative error had inflated your original mark.
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If you’re still not convinced that registering online is the way to go and you decide to complete the paper-based Examination Entry Form sent to you in February, this must be received at ACCA’s exam department in the UK by 15 April 2010. Please remember to allow time for postal delivery. Please note that due to the volume of entries received it is not possible for ACCA to process examination entry information received by email, fax or any paper format other than your Examination Entry Form. Payment must be included with your entry and you should only submit credit or debit card details on the relevant section of your Examination Entry Form. Please use only one method of exam entry as multiple applications may result in duplicate fees being charged. If you have not received an acknowledgement seven days prior to the closing date, you should confirm whether your entry has been received by viewing your status on myACCA or contacting ACCA Connect.
Reach your goal New membership transfer process introduced It is now more important than ever to use the trainee development matrix (TDM) to record your practical experience requirement (PER), so that ACCA can track your progress and determine when you have met the requirements for membership. ACCA will be able to transfer you to ACCA membership once you have: • completed your exams • completed the Professional Ethics module (where required) • recorded 36 months’ in a relevant role via the PER return • answered the challenge questions for 13 performance objectives and had these signed off by your workplace mentor. On meeting all four of the above requirements, you will receive an email or letter advising that you can transfer to the register of ACCA members. You will be asked to reply and to accept the transfer to membership declaration, agree to pay the membership admission fee and, if necessary, provide additional information. The correspondence you receive will explain exactly what your next steps are. The TDM helps you through every stage of PER - from planning your development, targeting performance objectives, and writing the answers to your challenge questions through to having these verified by your workplace mentor. It also helps you maintain a virtual CV, charting your employment and career progress. You can also use the TDM to complete your annual PER return - and remember, you can make more than one PER return in a year. Please note that your most recent entry will overwrite any previous declaration, so make sure to include details of any information entered in your last entry. You can record as little as one month’s experience when you make your annual return - if it is relevant, it will all add up to the 36 months required.