The Future of UK GAAP: Where are we up to?
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GLOBAL ACCOUNTANT January/February 2012
News Technical Career January/February 2012
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CONTENT News 03 Brief 04 Facebook’s data leaked before IPO 04 ACCA closes direct membership route for CIMA members
11 IFRS Conference in Kuala Lumpur 11 U.K. watchdog suggests size for PwC penalty 12 Urgent and co-ordinated global action is needed
04 E&Y faces suit over Madoff feeder fund
14 The Future of UK GAAP: Where are we up to?
05 Olympus ex-CEO bids to return as KPMG and E&Y approve new books
17 DFK International-Asia Pacific
05 Hong Kong takes top spot 06 Strong support for ‘comply or explain’ principle 07 Institute of Financial Accountants granted full IFAC membership 09 Global leaders in public finance call for change in governments’ financial practices 10 Michel Prada to chair IFRS Foundation Trustees
Contributors:
IFRS Foundation IIRC HKICPA Ernst & Young Special Thanks: Steve Collings
Technical 18 Predicting risk in an uncertain world 22 Related Parties 27 CIMA celebrates business excellence 28 The consolidated statement of financial position
January/February 2012 © GLOBAL ACCOUNTANT 2012 ISSN 2047-878X
Career 32 CV or application form?
Editors Desk Happy New Year and Year of the Dragon
to all our readers. Global Accountant is back and full of interesting topics to kickstart your year. Sir Alec Reed CBE, was announced Outstanding Contributor to Business Performance at the CIMA 2011 Annual Business Excellence Awards. Global Accountant congratulates all those who took part in what was an outstanding ceremony. [p.27] Hong Kong claimed first position in the World Economic Forum Index for Financial Market Development. We note that Hong Kong is the first financial centre in Asia to hold such position. As the world economy tilts towards Asia, we may witness more “firsts” being awarded to the Asian continent. We cannot ignore the fact of the growing numbers of western companies
moving into Asia. As a result of this, the demand for skilled accountants and particularly individuals who posses international accounting experience will certainly increase. Global Accountant has heard from individuals who have left their jobs in London and secured employment in Shanghai, China. With a good accountancy qualification, the world is truly your oyster. Consider global prospects and not only scarce local job openings. Finally, for our trainee readers, as the time draws closer to the release of exam results, you will soon start to consider which training provider to enrol for your studies. Careful consideration must be given when choosing a college or online material. Look for quality assurances provided by associations, speak to friends and find out about their experiences. Do not be entertained by cheap fees which some colleges offer to attract students.
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Brief News
“The company will likely come close to earning a full billion dollars in profit this year.” Hong Kong claimed the No.1 spot The definition of public accountability was tentatively removed from the draft FRMSE. Technical
Organisations are finding it increasingly difficult to manage and control risks. Outstanding contribution to business performance by a CIMA member: Sir Alec Reed CBE
Consolidated financial statements can become extremely complicated.
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Any system of corporate governance needs to be calibrated to the nature, scale and complexity of the organisation.
If the sovereign debt crisis does not stir us as an international profession to speak out on this issue, we will have missed an opportunity.
One of the revisions to ISA 550 was the introduction of the term ‘dominant influence’.
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International News
ACCA closes direct membership route for CIMA members ACCA (the Association of Chartered Certified Accountants) option for CIMA members to obtain direct membership of ACCA with effect from 1 January 2012. The direct membership route has historically been available to suitably experienced members of a small number of accountancy bodies, based on the overall quality of their qualifications and an equivalence in the core syllabus coverage. US News
Facebook’s data leaked before IPO A Plus the official magazine of HKICPA, January 2012, “Facebook’s data leaked before IPO”
Facebook has US$3.5 billion in cash and cash equivalents on hand and US$5.6 billion in assets, according to data published by the Gawker website in December.
This change was made alongside other ACCA Rulebook amendments with effect from 1 January 2012. ACCA is informing the market of this change now to provide fair notice to CIMA members with appropriate experience who may already be making their applications for direct membership of ACCA. ACCA will continue to offer CIMA members and students exemptions from selected ACCA Fundamental Level papers for those CIMA examinations which match the content of the ACCA Qualification. ACCA, December 2011, “ACCA Closes direct membership route for CIMA members”
US News
It is not clear how or why the information was leaked to Gawker, but most analysts said the data presented an encouraging picture prior to Facebook’s expected initial public offering in 2012. According to the figures, the social network company’s revenue totaled US$2.5 billion in the nine months to 30 September 2011, while net income reached US$714 million in the same period. “The company will likely come close to earning a full billion dollars in profit this year,” Gawker wrote.
E&Y faces suit over Madoff feeder fund Ernst & Young was accused of negligence, malpractice and breach of contract in a lawsuit filed by the liquidators of Cayman Islands-incorporated M-Invest, a feeder fund for Bernard Madoff’s bankrupt investment company, Bloomberg reported. The suit seeks US$900 million in damages over audits of MInvest’s annual financial statements from 2003 to 2007, according to papers filed in New York State Supreme Court. “The suit has no merit,” E&Y said in a statement. A Plus the official magazine of HKICPA, January 2012, “E&Y faces suit over Madoff feeder fund”
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International News
Olympus ex-CEO bids to return as KPMG and E&Y approve new books Disgraced board plans to pick own successors A Plus the official magazine of HKICPA, January 2012, “Olympus ex-CEO bids to return as KPMG, E&Y approve new books” Asian News
Michael Woodford, the former chief executive officer of Olympus Corporation, returned to Tokyo for the second time in December 2011 in a bid to convince shareholders of the embattled Japanese camera and medical devices company that he should be reinstated. Woodford told the Japanese media that he had a “realistic chance” of winning a battle for control of the company, adding he had the support of two major shareholders, whom he declined to identify. However, he faces a battle with the outgoing board of directors. The Olympus board agreed to resign following a damning report by an independent panel but plans to select its own successors before resigning. The panel reported that an elaborate scheme to cover up at least US$1.7 billion of investment losses was orchestrated by a group of top executives. “The management was rotten to the core and contaminated what was around it, creating in the worst sense a group mentality of the typical salarymen,” it concluded.
The panel also described the board as “yes-men” and credited Woodford for bringing the deception to light. “Those people who are described as ‘yes-men’ should not be choosing or having any influence on the future management of this company or any strategic decisions, ”Woodford told reporters. Meanwhile, auditing firms KPMG AZSA and Ernst & Young ShinNihon approved the restatement of accounts for the past five years on 14 December, according to the Asahi Shimbun newspaper. E&Y said it would seek an external opinion on its Olympus auditing work, given the scale of the scandal. The company has lost more than half its market value since Woodford was fired on 14 October 2011. The company apologises to all its stakeholders and relevant parties for all inconvenience caused by the investigation and that they are doing all they can to co-operate with authorities to reveal all related facts.
Hong Kong takes top spot
Hong Kong claimed the No.1 spot in the World Economic Forum’s 2011 index of financial market development, becoming the first financial centre in Asia to hold the position. The report takes into account the efficiency and size of the banking industry, the general business climate and overall financial stability. The United States and the United Kingdom took the second and third spots, respectively. A Plus the official magazine of HKICPA, January 2012, “Hong Kong takes top spot in development ranking” January/February 2012
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International News
Strong support for ‘comply or explain’ principle Responses to the European Commission’s green paper, The EU corporate governance framework, show strong support for the ‘comply or explain’ principle and for a flexible approach to corporate governance. PwC Global, December 2011, “Strong support for ‘comply or explain’ principle”
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onsultation between April and July 2011 drew more than 400 responses from companies, investors, professional advisers, public authorities and representative bodies. The paper’s 25 questions covered three broad areas – the ‘comply or explain’ principle, board effectiveness, and shareholder engagement. Analysis of the commission’s summary of responses, published in November 2011, shows strong support
long-term participation. Most were in favour of a European mechanism to help companies identify their shareholders and promote dialogue on corporate governance issues. Use of the internet to establish investor forums and facilitate cross-border voting to help improve shareholder cooperation was a popular response. However, there were calls for greater clarity on the rules for ‘acting in concert’. Most respondents believe that
for the current practice of ‘comply or explain’, which requires companies to state how their corporate governance approach measures up to national codes. While many called for improvements in the quality of information provided, most saw no need for additional regulation at EU level to supplement or strengthen national rules and governance codes in this or any other specific areas.
minority shareholders’ rights are well enough protected under the current arrangements.
On board composition and effectiveness, there was a 50-50 split on the question of separating the functions and duties of the chair and CEO. Around 75% are against the idea of an EU measure to limit the number of mandates held by non-executive directors, with most preferring to deal with the matter at local or company level. There was strong support for mandatory disclosure of remuneration policies, an annual remuneration report and details of key executive and non-executive directors. While most want companies to disclose their policy on board diversity, a majority are against the idea of requiring boards to ensure a gender balance.
“Any system of corporate governance needs to be calibrated to the nature, scale and complexity of the organisation. We believe that the necessary flexibility is most appropriately built into corporate governance arrangements through a ‘comply or explain’ regime in relation to the best practice codes designed and applicable at a member state level,” said Ian Dilks, PwC global leader of Public and Regulatory Affairs. “However, we do not believe that there is a need for additional legislation or regulation at EU level in the area of corporate governance generally, but rather a focus on promoting and encouraging good practice, including in large
Questions addressing shareholder engagement focused on ways of improving communication and active
private companies that do not fall within the remit of national codes, to follow the spirit of the codes in their disclosure.”
There was little support for the idea that EU corporate governance regimes should take into account the size of listed companies, and strong opposition to the idea that EU regulation should be applied to unlisted companies.
International News
Institute of Financial Accountants granted full IFAC membership The International Federation of Accountants (IFAC), the global body for the accountancy profession, has announced its decision to admit the IFA to full membership, at its annual Council meeting, held in November 2011 in Berlin. Speaking from Berlin, David Woodgate, the IFA’s chief executive, said, ‘Full membership of IFAC represents the achievement of a major strategic milestone. We have demonstrated the quality of our institute, confirmed through an external, independent due-diligence process.’ Professor David Hunt, President of the IFA, said, ‘Tremendous efforts were made by many people to ensure we met IFAC’s rigorous requirements, from ethics and education to professional standards. A big thank-you is due to all our staff for upholding our reputation.’
IFA, November 2011, “Institute of Financial Accountants granted full IFAC membership”
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International News
Global leaders in public finance call for change in governments’ financial practices
ments and social unrest, IFAC’s Ian Ball calls for improved global accountancy standards. The piece highlights some of the obstacles to successful reform, including a lack of political will. Mr Ball concludes by calling on the accountancy profession, investors, financial institutions and securities regulators to speak out: “If the sovereign debt crisis does not stir us as an international profession to speak out on this issue, we will have missed an opportunity, we will have failed to live up to our public interest obligations, and we will have let down the future generations who will have to pick up the tab.”
Writing in the January issue of Public Money & Management, David Walker, Chief Executive of the Comeback America Initiative and former US comptroller general, and Ian Ball, Chief Executive Officer of the International Federation of Accountants (IFAC), join others in calling on governments around the world to address their public financial management as a matter of urgency.
The publication is particularly timely given current economic conditions which have highlighted the importance of effective financial management. The arguments made here back up an initiative recently launched in Fixing the Foundations, an international prospectus where CIPFA argues for urgent and coordinated global action to improve public financial management to help avoid future financial crises. Outlining some of the consequences of poor public financial management, including the loss of political control, painful economic adjust-
David Walker’s essay explores US public finances, suggesting that the greatest threat to the US government’s future is its own fiscal irresponsibility. He points to the trillions of dollars in off-balance sheet obligations and the failure of the deficit reduction ‘supercommitee’ to reach agreement on any deficit reduction recommendations. He concludes: “Countries need to engage in a range of transformational reforms and citizens need to help ensure that policy-makers act in a timely and responsible manner before a crisis is at the doorstep.” CIPFA, January 2012, “Global leaders in public finance call for change in governments’ financial practices” January/February 2012
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International News
Michel Prada to chair IFRS Foundation Trustees The Trustees of the IFRS Foundation announced today the appointment of Michel Prada as Chairman of the Trustees. Mr Prada, a former Chairman of the Executive and Technical Committees of the International Organization of Securities Commissions (IOSCO), is a highly respected advocate of investor protection and independent standard-setting. He brings significant experience of leading investor-focused international organisations. Before and since the IFRS Foundation was created 11 years ago, Mr Prada has been deeply involved in and committed to matters related to the establishment of International Financial Reporting Standards (IFRSs) as the globally accepted high quality set of accounting standards. He served on the initial Nominating Committee that selected the new body of Trustees overseeing the independent standard-setting process in 2000 and was a leading proponent of European adoption of IFRSs in 2005.
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r Prada will serve an initial three-year term, effective 1 January 2012. His appoint-
executive search firm. The recommendation for his appointment was unanimously supported by
ment follows an extensive global search process led by the Trustees’ Nominating Committee with the support of a leading international
the IFRS Foundation Trustees and subsequently approved by the IFRS Foundation Monitoring Board.
In his 12 years as the Chairman of the Autorité des Marchés Financiers (AMF) and its predecessor body, the French markets and securities regulator, he was an outspoken advocate for investor protection and global standards. During this time he served as Chairman of the Executive and Technical Committees of IOSCO
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and was a founding member of the Financial Stability Forum (now the Financial Stability Board). Following the accounting-related failures of Enron and WorldCom in the United States and of Parmalat in Europe, Mr Prada led a collaborative effort by members of the international financial regulatory community to establish the Public Interest Oversight Board (PIOB) of the International Federation of Accountants (IFAC) in 2005. More recently, Mr Prada was a member of the Financial Crisis Advisory Group, formed to advise the IASB and the US-based Financial Accounting Standards Board on their response to the financial crisis. Mr Prada currently serves as Chairman of the International Valuation Standards Council, co- Chairman of the Council on Global Financial Regulation and is a non-executive Director of the International Centre for Financial Regulation. He attended the Institut d’études politiques de Bordeaux, and then the Ecole Nationale d’Administration from 1964 to 1966. He graduated from the University of Law and Economics in France with a Masters degree in Law. Sir Bryan Nicholson, Chairman of the Trustees’ Nominating Committee said: Michel Prada was closely involved in the formation of the IFRS Foundation. It is fitting that he returns to chair the Trustees at a point when IFRSs are on the verge of becoming global standards. His appointment
received the unanimous support of the Trustees and of the Monitoring Board. It is an excellent outcome to an extensive search process. Commenting on his appointment as Chairman of the IFRS Foundation Trustees, Mr Prada said: It is an honour for me to be appointed to a position that was held by a series of prestigious Chairmen. As a securities regulator, I am convinced that fair and efficient markets in a globalised world require global accounting standards that meet the needs of investors and other market participants.
Asian News
IFRS
Conference in Kuala Lumpur IFRS Foundation, January 2012, “IFRS Conference in Kuala Lumpur”
This year’s Asia-Oceania IFRS conference will take place in Kuala Lumpur, Malaysia on the 28 March 2012. The conference is hosted jointly by the Malaysian Accounting Standards Board and the IFRS Foundation.
UK News
I have long supported the role of the IASB for that purpose and the need for this organisation to build on appropriate governance and strong independence. I look forward working with my fellow Trustees to support the IASB in delivering this vision.
U.K. watchdog suggests size for PwC penalty
I have always greatly appreciated Michel’s judgement and his commitment to transparency in global markets.
The Accountancy and Actuarial Discipline Board in the United Kingdom has suggested that PricewaterhouseCoopers receive a fine of as much as £34 million (US$53 million) for auditing failures relating to JPMorgan’s securities business, the Financial Times reported. At a disciplinary hearing, the lawyers representing the board said that the penalty on PwC should not be “vastly disproportionate” to the £33.3 million fine imposed on JPMorgan last year.
IFRS Foundation, January 2012, “Michel Prada appointed as Chairman of the IFRS Foundation Trustees”
A Plus the official magazine of HKICPA, January 2012, “U.K. watchdog suggests size for PwC penalty”
Hans Hoogervorst, Chairman of the IASB said: Michel Prada and I worked closely together during our time at IOSCO. As Chairman of the IOSCO Technical Committee, Michel showed strong leadership that was respected around the world.
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International News
Urgent and co-ordinated global action is needed CIPFA, January 2012, “Urgent and co-ordinated global action is needed to improve how governments manage their finances if future crises are to be averted”
stimulation measures, and austerity programmes are often making decisions of strategic long-term significance based on incomplete, inaccurate and/or out-of-date financial information. The Institute stresses the importance of high quality accounting, auditing and financial management practices. They impact on the availability of public services, economic performance including market confidence, trust in government and quality of life. CIPFA is calling for a co-ordinated and concerted global effort as the only way to address these issues at the scale and pace required to avert further financial failures in years to come.
The global financial and sovereign debt crises have highlighted the weaknesses in how governments manage their finances – and urgent global action is needed to make radical improvements if future disasters are to be averted.
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he warning comes from the Chartered Institute of Public Finance and Accountancy (CIPFA), which is today calling for concerted and co-ordinated action by all organisations involved in how governments manage and account for public money. In its new prospectus - Fixing the Foundations - CIPFA argues that weak public financial management is regrettably commonplace in countries at all stages of development. As a result, governments currently grappling with sovereign debt issues, emergency budgets, fiscal
The Institute is inviting governments, international agencies, accountancy bodies and firms, academic institutions, charitable foundations, banks and all other organisations with a stake in public finance to work together on a range of programmes to tackle the issue. Launching the prospectus at a meeting of the International Federation of Accountants (IFAC) in Berlin, CIPFA Chief Executive Steve Freer said: “The time has come for all governments to wake up and confront their financial management shortcomings. We need a concerted global effort to deliver a stepchange improvement. The public interest demands nothing less”.
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UK News
The Future of UK GAAP : Where are we up to
?
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2012 will hopefully see a breakthrough in the progress towards changing UK GAAP. Although it is fair to say many practitioners are not in favour of the change, a lot of work is being done at the Accounting Standards Board (ASB) to make sure that the change is as painless as possible for those who will be affected.
of capitalising borrowing costs did not exactly bode well with entities such as Housing Associations. There was also a bit of uncertainty surrounding the future of FRSSE.
Effective date The Board have tentatively agreed to defer the effective date of the new GAAP until 1 January 2015.
Deferred tax In the meeting held on 8 September 2011, the ASB acknowledged that it had received a number of ‘adverse comments’ relating to the inherent complexities contained in its proposals for income tax. The proposals were in line with IAS 12 Income Taxes which recognises deferred tax using a temporary, rather than timing, difference approach. The ASB have asked its staff to develop a revised income tax section which would focus on providing consistent accounting with IAS 12 by applying a timing difference approach with additional tax effects in certain situations.
Subsidiaries When the Financial Reporting Standard for Mid-sized Entities (FRSME) was first issued it contained some quite significant differences between how we do things now as opposed to how the ASB planned FRSME to work in the future. The most notable differences related to prohibition of revaluation of fixed assets and the recognition of deferred tax using a temporary
Also in the meeting held on 8 September 2011, the Board made the tentative decision to proceed with reduced disclosures for subsidiaries, with the exception of a subsidiary that is a financial institution that will not be permitted from the disclosure exemptions contained in IFRS 7 Financial Instruments: Disclosures.
difference approach as opposed to what FRS 19 currently uses which is that of a timing difference approach. In addition the prohibition
Public accountability
proposed to make amendments to the draft FRSME as follows:
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For entities whose debt or equity instruments are traded in a public market; or that file, or are in the process of filing, its financial statements with a securities commission or other regulatory organisation for the purpose of issuing any class of instruments in a public market or who choose to provide such information, reference will be made to follow EUadopted IFRS. This will apply in the following areas: • Segment reporting (IFRS 8) • Earnings per share (IAS 33) • Interim reporting (IAS 34)
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With regards to discontinued operations (IFRS 5), the ASB are going to consider a further paper which will consider the requirements in the draft FRSME and whether clarification is can be provided.
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For those involved in insurance accounting, reference will be made in Section 10 Accounting Policies, Estimates and Errors of the draft FRSME to IFRS 4 Insurance Contracts.
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There are areas which are not sufficiently addressed in the draft FRSME relating to disclosures for financial institutions. In this respect it is proposed that Section 34 Specialised Activities will be increased to deal with these.
The definition of public accountability was tentatively removed from the draft FRMSE. As a result it January/February 2012
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Companies legislation – formats The format of financial statements in the UK is dictated in the Companies Act. The Board tentatively decided that companies legislation must take precedence and that the draft FRSME should be amended to reflect the requirements in legislation.
Public benefit entities FRED 45 was issued relating to public benefit entities in March 2011 which was a supplementary exposure draft. In the meeting held on 29 September 2011, the Board tentatively decided to amend the draft FRSME in order to incorporate the requirements in FRED 45 as opposed to issuing separate guidance for public benefit entities with the intention that the draft FRSME would clearly identify public benefit supplementary paragraphs. The Board also acknowledged that public benefit entities and those in the agricultural sector had concerns relating to how government grants were to be accounted for in the proposed FRSME. In response to these concerns, the Board asked its staff to consider amending the draft FRSME so that the current accounting practice in the UK and Ireland would remain unchanged. It was noted that this would only be an interim solution and a review of grant accounting would have to take place in the near future. In its meeting on 20 October 2011, the ASB discussed how donated inventory and incoming resources from non-exchange transactions
should be treated. It tentatively decided that the fair value of the donated inventory on initial recognition should be the deemed cost for the purposes of valuing this inventory. An entity that holds inventory for distribution that has no selling price should value this inventory at current replacement cost. When a PBE receives incoming resource from non-exchange transactions the ASB tentatively decided that these resources should only be recognised when the resource (the donated goods) can be measured reliably and where consideration is given to the benefits and costs. If it is not practical to estimate the value of donated goods with sufficient reliability or benefit, the income will only be recognised when the goods are sold. In the meeting on 17 November 2011, the Board agreed that: • Property held for the provision of social benefit will not be classified as investment property. • The definition of ‘value in use’ is to be amended in order to include assets held for service potential. • There would be no amendments to the ASB’s proposals for concessionary loans. • The FRSSE will be amended to require public benefit entities that apply the FRSSE to pay attention to the requirements for PBEs in the [draft] FRSME.
accounting for pension fund accounts which would then be developed into the pension’s SORP.
FRSSE In the meeting held on 15 December 2011, the ASB agreed that FRSSE would be maintained, but in a revised form, following the amendments to the Accounting Directives which are currently proposed by the EU. It also agreed that a further consultation on the FRSSE would be carried out this year. Also, with regards to the FRSSE, in its meeting held on 17 November 2011, the ASB tentatively decided on two further amendments to the FRSSE: • the presumed life of goodwill and intangible assets will be revised to five years when an entity is not able to make a reliable estimate of its useful life; and • an entity will be required to carry out impairment tests annually on assets when there is any indication that an asset is impaired.
Conclusion
Pension funds
This article has provided a brief summary as to where the ASB are up to with the future of UK GAAP. The ASB are listening to concerns from interested parties as to the effects the proposed new standard will have on companies and clients and are trying to accommodate, wherever possible, the recommendations. Hopefully we will all be given definitive date of implementation this year – time will, of course, tell.
The ASB said it would provide guidance in its revised FRSME on
Steve Collings, January 2012, “The Future of UK GAAP: Where are we up to?”
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Asian News
DFK InternationalAsia Pacific The growing economic influence of China has been felt at a major accountancy and finance conference.
give them international links with firms they can trust, and this has never been more relevant than it is in the links with China and the US. “As the trading world gets smaller, we can only see that trend growing.”
Around 50 members of DFK International – a top 10 global accountancy and business advice association – attended the organisation’s Asia Pacific conference and nine were from the US.
The conference was hosted by Anwar & Rekan, and included a diverse range of subjects ranging from the Indonesian economy to business etiquette in Asia.
It was the highest proportion of US delegates at a conference outside of America and Martin Sharp, Executive Director of DFK International, said it reflected the amount of work being referred from the States to China.
At the gala dinner, the association thanked Uday Chitale for his six years as Vice President, David Griffiths for his six years on the Executive Committee and also Leo Chan, who has stepped down from the Executive Committee.
He said: “There is no question that the amount of work being done in China on behalf of US firms, has greatly increased and that was reflected in the attendance.
DFK International’s Asia Pacific conference will be held in Bangkok this year, from October 31 to November 3.
“One of the major reasons many firms join DFK International is to
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Technical
Predicting risk in an uncertain world Organisations are finding it increasingly difficult to manage and control risks. Armoghan Mohammed looks at why the dynamics of risk are changing.
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The world is moving from a past in which boards believed in their ability to manage and control risks, to a present where established risk approaches and thinking are being repeatedly outflanked and outpaced. ‘Black swan’ events – those that occur without warning and have a profound effect on society and business – are happening more frequently. Today, ‘black swans’ are regarded as one of three types of risks that organisations face. They cannot be predicted or avoided. The others are ‘known risks’ that companies can identify and seek to avoid, plan for and mitigate, and ‘emerging risks’ that have come onto the radar, but whose full extent and implications may not yet be clear. By their nature, black swan events should only occur at irregular intervals. Yet recent experience suggests that events fitting the criteria for black swans are happening with increasing regularity. This acceleration raises the question of whether the black swans are actually turning grey – meaning that, rather than being isolated, outlier events, they are actually manifestations of a new, more uncertain and less predictable reality.
From control to uncertainty Asked to highlight the changes they are seeing, boards generally point to three main shifts: • Current risk frameworks and processes are no longer giving
the degree of protection that’s needed • Escalation of the speed with which risk events unfold, and the extent of their impact across different risk categories. This is a particular concern for high-impact catastrophic risks, which can threaten the viability of an organisation and even affect the way an entire industry operates. • A disproportionate amount of time and resource is being spent on running the mechanics of risk management, rather than moving quickly and flexibly to identify and address new risks.
New approaches If organisations are currently under- protected against the new risk environment, it follows that their existing risk management approaches and mechanisms are falling short. PwC recently conducted research into how various multinationals have responded to low-probability, high-impact risk events. Key findings include: • The boards of big organisations do not generally fully understand the risks that they are running – or how the knock-on impacts can spread across risk categories. This makes it harder to manage organisations within their risk appetite. • The Internet and social media allow information to move instantaneously around the world, morphing opinion into fact. Companies that cannot deliver the right responses
quickly are getting caught out. • Checks and balances at boar level are often not in place because the board may not have people with enough industry expertise to ask tough questions about executives’ decisions. There is frequently a gap between what management says about risk, and what it delivers. It helps when the board is asking the right questions, such as: Are the CEO and board setting the right behavioural example and risk-aware culture, in line with the strategy? Are rewards encouraging risk-based thinking and behaviour? In addition to financial and operational risks, are we as a board sufficiently focused on managing strategic risks?
Taking action Assuming we will continue to live in a world where predicting and controlling risk events is no longer feasible, what is an appropriate approach? A key consideration for each organisation is how it frames and perceives risk. Our view is that organisations should look to build on Enterprise Risk Management (ERM) by making changes to the way they frame and think about risk.
First, the business should move away from only identifying, measuring and prioritising the discrete risks they face. Management should focus more broadly on the resilience of the entire systems to which they contribute, ranging from global, industry, political
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and financial environments. All organisations need to progress from controls to risk cultures, managing in a coordinated way across different interests, organisational silos and external interactions.
non-executives voice frustration that the executives on their boards are too cautious in terms of risk – so greater clarity on risk appetite would certainly aid board effectiveness.
Second, since analytics will not be enough on their own, boards will need to be more explicit about the organisation’s risk appetite in pursuit of its strategy, and to build awareness at all levels
Third, there should be a parallel drive to integrate risk and strategy and to embed a risk-aware culture, behaviours and beliefs at all levels of the organisation. Ideally, this will be driven by the
of what risks it is willing to bear. Some may regard risk management as a distraction from the day job that is effectively someone else’s problem. In fact, it is part of everybody’s job, every day. Many
chief risk officer (CRO) or equivalent executive on the main board. Having more senior representation of risk will also help to remove the artificial distinction between financial, operational and strategic
risk and uncertainty, and encourage a more holistic view.
Moving towards risk resilience Taking these actions in combination should help organisations to realise the key business benefits that will help them progress from managing specific risks to achieving wider resilience in a new landscape where risks arise more frequently and with continuous uncertainty.
PwC Global, December 2011, “Predicting risk in an uncertain world”
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Related Parties ACCA Global, January 2012, “ISA550 Related Parties�
This article explores the objectives and requirements of clarified ISA 550, Related Parties. The standard has been revised and redrafted by the International Auditing and Assurance Standards Board, and is now broadly consistent with other ISAs in that a risk-based approach to the audit of related parties is adopted. This is often a challenging area, with a high risk of material misstatement, frequently leading to the identification of fraud risk indicators. Gaining an understanding the requirements of ISA 550 is essential for all auditors.
Definitions The definition provided of a related party in ISA 550 is based on a person or entity that has control or significant influence, directly or indirectly, over the reporting entity; another entity over which the reporting entity has control or significant influence, directly or indirectly, or another entity that is under common control of the reporting entity. The applicable financial reporting framework is likely to provide similar definitions (for example in IAS 24, Related Party Disclosures). The issue is that all entities, whether large or small, will have related parties, which the auditor must take steps to identify, and to assess the risk of material misstatement arising.
Risk factors and objectives Regardless of whether the applicable financial reporting framework establishes related party requireJanuary/February 2012
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ments, the auditor’s objective is to obtain an understanding of related party relationships and transactions. This understanding should then be used to assess any resulting fraud risk indicators, and to conclude on the appropriateness of the accounting treatment and disclosures applied to related parties and transactions. It is important to appreciate that ISA 550 recognises that related parties and transactions may give rise to a high-risk of material misstatement, and are therefore of particular significance to the auditor. Risks arise because: • Many entities operate through a complex range of relationships and structures, increasing the complexity of related party transactions; • Management may be unaware of the existence of all relatedparty relationships and transactions; • The entity’s information systems may not identify transactions or outstanding balances with related parties, especially for transactions conducted at nil value, or outside the normal course of business; • Related-party transactions may not be conducted under normal terms and conditions; and • Related-party transactions may be deliberately concealed by management, and their accounting treatments often carry a high risk of deliberate manipulation.
ISA 550 emphasises the importance of maintaining professional scepticism when planning and performing audit work on related parties.
Identification of relatedparty relationships and transactions ISA 550 requires the use of a riskbased approach to the audit of related parties and transactions. Specific reference is made to the engagement team discussion, in which specific consideration shall be made of the susceptibility of the financial statements to material misstatement resulting from related parties and transactions. Matters that could be discussed by the engagement team may include, for example, the entity’s organisational structure, instances of off balance sheet finance, and the existence of any special purpose entities controlled or influenced by management. ISA 550 imposes specific requirements in terms of enquiry with management. The auditor shall inquire regarding: • The identity of related parties, including changes from the last reporting period; • The nature of the relationships between the entity and the related parties; and • Whether any related-party transactions have been entered into, and the type and purpose of any such transactions. From a practical point of view, to help fulfil these requirements, the auditor should ask management
for a list of related parties and all relevant transactions. This list can then be reviewed for completeness, based on the auditor’s business understanding. Of course, management may not have such a list, especially if the applicable financial reporting framework contains limited or no disclosure requirements, in which case the auditor may need to discuss the ISA 550 definition of related party relationships with management and ask for a list to be drawn up. ISA 550 also requires that the auditor obtains an understanding of controls used by management to: • Identify, account for and disclose related-party relationships and transactions; • Authorise and approve significant transactions and arrangements with related parties; and • Authorise and approve significant transactions and events outside the normal course of business. The application paragraphs of ISA 550 explain that the risk of management override of controls is potentially high when considering related-party relationships and transactions, especially when the relationships present management with incentives and opportunities to conduct fraud. Examples of such frauds include the transfer of assets to related parties at an amount significantly different to market value, and using special-purpose entities to deliberately misrepresent the financial position or performance of the reporting entity.
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Related-party transactions outside the normal course of business ISA 550 requires that significant related-party transactions outside the normal course of business shall be treated as a significant risk. The ISA provides examples of such transactions, including complex equity transactions, sales transactions with unusually large discounts or returns, transactions with circular arrangements such as sale and repurchase, and the rendering of management services if no consideration is exchanged.
ISA 550 imposes a requirement that specific documents shall be inspected for indications of the existence of related-party relationships or transactions that management has not previously identified or disclosed to the auditor. The documents referred to in the ISA
graph A22 provides a comprehensive list of suggestions, including:
are:
ers; • Statements of conflicts of interest from management and those charged with governance; • Records of the entity’s investments and those of its pension plans; • Contracts and agreements with key management or those charged with governance;
• Bank and legal confirmations; and • Minutes of meetings of shareholders and of those charged with governance. Although the clarified ISA 550 requires the inspection of few specific documents, it requires the auditor to actively consider the inspection of other records or documents to identify related-party relationships transactions. Para-
• Entity income tax returns; • Information supplied by the entity to regulatory authorities; • Shareholder registers to identify the entity’s principal sharehold-
• Significant contracts re-negotiated during the period.
If such transactions are identified, enquiries should be made into the business rationale of the transaction, and the relevant terms and conditions. Of course, the issue here is that the auditor should be alert to fraud-risk indicators, as well as considering whether the transaction has been accounted for correctly, and disclosed appropriately in the financial statements. The application paragraphs of ISA 550 provide a helpful summary of matters that may be considered in evaluating the business rationale of a transaction, including the consideration of whether the transaction is overly complex, has unusual terms of trade, involves previously unidentified related parties, or is processed in an unusual manner. It is also important to consider whether significant related-party transactions outside the normal course of business have been authorised and approved by management, those charged with governance, or shareholders (where January/February 2012
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relevant). The absence of such authorisation and approval without rational explanation may indicate a high risk of material misstatement due to fraud or error.
Related parties with dominant influence One of the revisions to ISA 550 was the introduction of the term ‘dominant influence’. The domination of management by an individual or a small group of people without compensating controls is a fraud risk indicator. Examples are provided of indicators of dominant influence: • The related party has vetoed significant business decisions; • Significant transactions are referred to the related party for final approval; • There is little or no debate regarding business proposals initiated by the related party; and • Transactions involving the related party or a close family member are rarely independently reviewed and approved. Clearly, this type of situation could be common in owner-managed businesses. Additional procedures are suggested by ISA 550, with reference to ISA 240, The Auditor’s Responsibilities Relating to Fraud in an Audit of Financial Statements.
Discovery When the auditor discovers a related-party relationship or significant transaction with a related party that had not been disclosed by management, ISA 550 requires additional procedures to be
conducted. These include prompt communication of the discovery with the audit engagement team, enquiry with management as to why controls failed to identify or disclose the related party or transaction, and the performance of additional substantive procedures, such as analysis of accounting records for transactions with the newly identified related party. The main issues for the auditor to address here are whether the nonidentification of the related party or transaction is deliberate, and whether there are other non-identified related parties or transactions. If it appears that management has concealed their existence, the auditor may consider whether it is necessary to re-evaluate management’s responses to auditor’s enquiries. Deliberate concealment may be viewed as a fraud risk indicator, and ISA 240 becomes relevant.
Representations and communication ISA 550 requires that where the financial reporting framework establishes related party requirements, the auditor shall obtain written representations from management, and where appropriate, those charged with governance that: • They have disclosed the identity of all related parties, related party relationships and transactions that they are aware; and • They have appropriately accounted for and disclosed such relationships and transactions in accordance with the financial reporting framework.
ISA 550 also provides guidance on matters relevant to related parties that the auditor may communicate to those charged with governance, for example: • Non-disclosure (whether intentional or not) by management to the auditor of related parties or significant related-party transactions, which may alert those charged with governance to significant related-party relationships and transactions of which they may not have been previously aware; • Disagreement with management regarding the accounting for and disclosure of significant related party transactions in accordance with the framework; and • Difficulties in identifying the party that ultimately controls the entity.
Conclusion ISA 550 focuses the auditor’s attention on the risk of material misstatement that may arise due to the existence of related-party relationships and transactions. The standard emphasises the importance of considering these matters during planning and especially as part of risk assessment. There are some specific procedural requirements, and audit firms may need to review current practice to ensure that these requirements are met. Ultimately, ISA 550 provides clear guidance on the audit of this potentially challenging and extremely important area.
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CIMA celebrates
business excellence
T
a Champagne reception followed by dinner and was hosted by Sue Perkins, writer, presenter and broadcaster.
Over 350 guests attended the prestigious ceremony, held at the Lancaster Hotel, London, to honour those involved in promoting the profession and celebrate the CIMA Annual Awards’ 10th anniversary. The night began with
Speaking at the event, Harold Baird, CIMA President, said: “I would like to congratulate the award winners and commend all finalists for their commitment, innovation and dedication to delivering results that promote and develop the management accounting profession. The CIMA Annual Awards acknowledge the successes of first class chartered management accountants and those who support them throughout their careers. It is enormously rewarding to see how the CIMA qualification has facilitated such a high degree of excellence.”
The Chartered Institute of Management Accountants (CIMA) in December 2011 announced the individuals, teams and companies from around the globe who have delivered an outstanding performance in business at the CIMA Annual Awards.
Award Winners Distance learning student of the year: Maria Moto, Terence Murray and Associates, South Africa Part qualified student of the year: Sarah Griffiths, Deloitte, UK Case study success award: Charlotte Wardell Tutor of the year: Anthony Komedera, BPP Business School, UK Inspirational CIMA story of the year: Saima Batool Zaidi, consultant accountant, DSKI JV, Tehran Businesswoman of the year: Priscilla Mutembwa, managing director of Cargill Zimbabwe Consultant of the year: Mohammed Ali Azeem, senior consultant, Millward Brown Optimor, UK Innovation in business: Decision Support team, EDF Energy, UK Business partner of the year: Commercial Finance team, AstraZeneca, UK Finance team of the year - less than 5,000 employees: Group Finance team, Hallmark Cards plc, UK Finance team of the year - more than 5,000 employees: Business Services team, Marks & Spencer plc, UK Unlocking business intelligence: Protection Commercial team, Legal & General Large employer of the year - over 5,000 employees: NHS Institute for Innovation and Improvement Recruitment consultancy of the year: Reed Finance Outstanding contribution to business performance by a CIMA member: Sir Alec Reed CBE
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The consolidated statement of
financial position Steve Collings Steve Collings is the audit and technical partner at Leavitt Walmsley Associates Ltd and is the author of The Interpretation and Application of International Standards on Auditing.
The consolidated statement of financial position Students attempting financial reporting papers in this year’s diet of examinations will more than likely have to attempt a consolidation question if consolidations are on-syllabus. This article follows on from my previous article on IFRS 3, Business Combinations and considers the consolidated statement of financial position. When consolidated financial statements appear on your syllabus, the chances are you will be examined on this area at, more or less, every sitting (if not at every sitting) because consolidated financial statements offer a wide variety of ways an examiner can test your understanding and consolidated financial statements also tests higher level skills. Depend-
ing on the level of financial reporting examination you are taking will all depend on exactly what sort of challenges you will be faced with in the exam. You are well-advised to take time to study your syllabus in careful detail to ensure that your programme of study effectively covers all areas of the syllabus which your examiner can answer.
Quick summary
Share capital Always the parent company share capital only. Net assets and control Always 100% of the parent and 100% of the subsidiary. It is worth mentioning at this point that in order to qualify as a subsidiary, the parent must control the subsidiary. This is achieved with an ownership interest of 51% or more of the voting rights. IFRS 10, Consolidated Financial Statements also says that an investor controls an investee when the investor: • has power over the investee (in other words the investor has existing rights that give it the ability to direct the relevant activities of the investee); • has exposure, or rights, to variable returns from its involvement with the investee; and • has the ability to use its power over the investee to affect the amount of the investor’s returns. Reserves 100% of the parent, plus the group’s share of post-acquisition retained earnings of the subsidiary.
A quick summary of the consolidated statement of financial position is as follows:
Non-controlling interests This is the share of the net assets of the subsidiary which are owned by the other investors.
Purpose The purpose of the consolidated statement of financial position is
Figure 1 H acquired 100% of the net assets of S when the retained earnings of
to show the net assets which the parent company controls and the ownership of those assets as a single reporting entity.
S stood at $10,000. The draft statements of financial position for both companies are as follows:
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H $
ASSETS Non-current assets
Property, plant and equipment Investment in S
Current assets
Inventory and receivables
Total assets EQUITY AND LIABILITIES Equity Share capital Retained earnings Total equity
Liabilities
Trade payables Total liabilities
Total equity and liabilities
Additional information 1. During the year S sold goods to H for $50,000 resulting in a profit to S amounting to 20% of the selling price. At the reporting date, $15,000 of these goods remained in the inventory of H. 2. At the reporting date, H owed S $12,000 for goods bought and this amount is included in the trade payables of H and the trade receivables of S.
Required Prepare the consolidate statement of financial position for the H Group. Now before diving in, take a step back and think about what is going on here. The above requires quite a simple consolidated statement
• we have goodwill; and • we have pre- and post-acquisition reserves.
S $
80,000 46,000 126,000
40,000 40,000
40,000
30,000
166,000
70,000
100,000 45,000 145,000
30,000 22,000 52,000
21,000 21,000
18,000 18,000
166,000
70,000
of financial position, but there are a number of consolidation adjustments that need to be done. Before putting pen to paper, it is vital that you understand the full question requirements. Take time to consider: • the task is to prepare a consolidated statement of financial position; • H owns 100% of the voting rights in S, therefore S is a subsidiary, hence conforming with the requirements of IAS 27, Consolidated and Separate Financial Statements (IFRS 10, Consolidated Financial Statements); • we have intra-group transactions; • we have adjustments for unrealised intra-group profits;
By understanding fully the requirements we can then attempt the consolidated statement of financial position in a logical manner (gaining the ‘easy’ marks along the way) by using a step-by-step approach. Step 1 If you are not given the pro-forma consolidated statement of financial position in your exam, then I’m afraid you’ll have to learn it as part of your study and revision phase. When you have to write out your pro-forma, leave spaces for goodwill and (where appropriate) non-controlling interests. Step 2 Where you are not given the shareholding in a subsidiary working number 1 should be your starting point. In our example this is: H owns 100% of the net assets
S To work out the ownership interest parent has in subsidiary, divide the cost of the investment into the ordinary share capital of the subsidiary. Step 3 Get the ‘easy’ marks. We know from the beginning of this article that the equity share capital is the parent company only (H), therefore stick this figure into the ordinary share capital part of the consolidated statement of financial position.
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Step 4 You need to work out: goodwill, retained reserves, intra-group transactions and eliminate provisions for unrealised profits (sometimes referred to as ‘PURP’ adjustments or ‘URP’ adjustments). Everything else can be consolidated, so open up brackets next the various line items in the pro-forma and add H and S figures together before doing the adjustments. We do not have any non-controlling interests in the question as H owns 100% of S. Remember, try and get the easy marks first!
Solution
H Group Consolidated Statement of Financial Position $
Assets Non-current assets
Goodwill Property, plant and equipment
Current assets
Inventory and receivables
W1 (80,000 + 40,000)
6,000 120,000 126,000
W2
55,000
Total assets
181,000
Equity and Liabilities Equity Ordinary share capital Retained earnings Total equity
Liabilities
Trade payables Total liabilities
Total Equity and Liabilities
H only W3
100,000 54,000 154,000
W4
27,000 27,000 181,000
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Workings: Note: always show your workings on a separate page in your answer booklet and make sure you crossreference the figures on the face of the consolidated statement of financial position to the relevant working.
Working 1 – Goodwill Cost of investment (picked up from H statement of financial position)
Less: net assets acquired - share capital of S - reserves on acquisition as per the introduction
46,000
30,000 10,000 40,000 x 100% (40,000)
Goodwill per consolidated statement of financial position
6,000
Working 3 – Retained earnings H $ Per question
45,000
Less preacquisition retained earnings H share in S at 100%
S $ 22,000 (10,000) 12,000
166,000
PURP adjustment ($15,000 x 20%)
(3,000)
Consolidated group retained earnings
54,000
70,000
Per H statement of financial position
21,000
Per S statement of financial position
18,000
Per consolidated statement of financial position
(12,000)
27,000
Working 2 – Inventory and receivables Per H statement of financial position
40,000
Per S statement of financial position
30,000
S’s current account with H eliminated on consolidation
PURP adjustment ($15,000 x 20%)
(12,000)
(3,000) 55,000
Conclusion Consolidated financial statements can become extremely complicated – even at an introductory level and this article has considered a
Working 4 – Trade payables
H current account with S eliminated on consolidation
cope with more advanced exam standard questions. When you hit the revision phase, you should be practising lots of exam standard questions and getting used to the various adjustments that can be examined.
As mentioned earlier, this is a fairly simplistic consolidated statement of financial position and the more advanced you get in your studies, the more complex issues you can expect to face. The illustration above shows a number of key consolidation adjustments which need to be done. It is vital that students adopt a logical approach to consolidation questions. To develop your skills in this crucial area of financial reporting, start off by doing a number of relatively simple consolidation questions and build on this so you develop your technique well enough to
relatively simple group to help you kick start your studies ready for the exams in Summer. During the very early stages of studying for financial reporting papers which examine consolidated financial statements, you must develop a methodical approach to answering such questions. Many tuition providers and text books offer a methodical approach which you can adopt. However, you may have your own way of dealing with them which may be equally effective. The next article in this series considers the consolidated statement of comprehensive income. Steve Collings is the audit and technical director at Leavitt Walmsley Associates and the author of The Interpretation and Application of International Standards on Auditing (Wiley March 2011) and IFRS For Dummies (Wiley April 2012). He was also named ‘Accounting Technician of the Year’ at the British Accountancy Awards in November 2011.
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Career
CV or application form? When specific vacancies arise, many employers now no longer accept CVs, and insist on using their own application forms. A well-written CV, however, is still a useful thing to have. Here you will read about the differences between a CV and an application form, and pick up some tips on how to make sure your CV gives the best impression of you. You will look at the key vocabulary items from the article, check your comprehension and do an exercise on phrasal verbs. The Latin words curriculum vitae mean “running of life,” which might sound unusual, but when you think about it, the piece of paper more usually known today as a “CV” (or a “resumé” in American English) is indeed a record of how your life has run so far. That said, however, when writing a CV, what you leave out of your life story is as important as what you put in. Your CV should not be your whole life story, just the bits of it that are relevant to the position you are applying for. Many companies now no longer require CVs when advertising for specific positions. This is partly
because HR managers are fed up with reading through hundreds of badly written lists of schools and jobs, but also because if a company design their own application form, they can narrow down the field and target applicants into writing what the company really wants to know. An application form is often similar to a CV – you will be expected to write some brief personal information, a short list of your educational background and professional training, then complete a “personal statement,” usually a chance for you to show exactly how your experience qualifies you to do the job you are applying for. Notes for such personal statements always guide the applicant back to the job description and person specification of the vacant position. Filling out application forms, especially the “personal statement,” often seems difficult, but it’s easy to see how it’s better from an employer’s point of view. From the point of view of the applicant too, it makes you focus clearly on what you have
done, and exactly why you’d be good at the job you’re applying for – as well as giving you a chance to show off those all-important written communication skills! If you do have to submit a CV, or if you are submitting a CV to a company or organisation which doesn’t currently have any specific vacancies, but you want them to know about you – the experience of the personal statement can be useful. It certainly makes you more concise in what you write – and being concise is a vital thing in a CV. A CV is something essential for everyone to have – keep a version of it on your computer, and make sure you change it each time you apply for a new job – the same “one size fits all” CV won’t do! Here are a few tips: • Length: A four page long CV is almost certainly too long. Two pages is usually enough to say what any employer needs to know. • Truth: Show what you did to the best you can, but don’t tell lies. On the same point, don’t leave gaps in your employment history. • Style: Formal/neutral. Use a simple font (times new roman or arial) and black ink.
REFERENCE This article first appeared at www.britishcouncil.org/learnenglish and is reprinted with the permission of the British Council
January/February 2012
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