Decision Making Techniques
IFRS 4 Insurance Contracts
Chinese Accountancy Heads Visit Birthplace of the Profession
GLOBAL ACCOUNTANT July/August 2011
• News • Corporate Governance • Technical • Business English • Job Skills
July/August 2011
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Editors Desk
GLOBAL ACCOUNTANT
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CONTENT
hank you for all the feedback from those who sat the Corporate Reporting exams back in June. Once again the Global Accountant [May/June 2011 Edition] with your support covered relevant topics and is humbled to have supported you reach that pass mark. Please continue to send feedback. For those student readers who are interested in summer internships should also read the PwC article: “PwC largest number of summer interns” and start thinking about next years intake. You will realise competition is fierce. So, try to consider other smaller firms too; they can provide you with more detailed experience. Summer internships can equip you with the difference from your competition after graduation. Moreover, may result in a conditional job offer. Summer internships are valuable time investments. In this edition you will also find IAS 2 Inventories and IFRS 4 Insurance Contracts to the latest news of heads of leading Chinese CPA firms visit to the ICAEW in London. Being an accountant is not just about number crunching [as most non-accountants would describe it]. In todays world it is almost impossible to ignore how accountants affect lives not just on local level but also internationally. We are positioned at the core of decision making and because of those decisions businesses take directions. We produce financial documents, communicate numbers, educate, advise, plan, and drive business. What ever decision you make an ethical one. Large corporations are now suffering because of previous doings. And finally, as mentioned above that borders for businesses are diminishing and you being a subscribed reader we thought we would adopted a name for all our readers, “Global Accountants”. How is that? Enjoy the read.
News 03 Brief 04 PwC largest number of summer interns 05 Non-doms will be disappointed
13 ACCA: “Audit reform needed” 14 New Appointments at DFK International 16 CEOs say “...Innovation”
06 Chinese Accountancy Heads Visit Birthplace of the Profession
Technical
07 UK FRC consults on women in the boardroom
22 IAS 2 Inventories
08 Innovation is a necessity, not an option say Business School academics behind new course
18 Insurance Contracts
26 Integrated Reporting makes business sense
Business English
09 Demand for graduate positions and work experience at record high
28 Business English
10 Ernst & Young comment on ASB proposals for UK Financial Reporting Framework
30 What do they look for?
Job Skills 32 Decision Making Techniques
12 Deloitte Audit Technical Partner to become ICAEW President
Published by: Global Accountant South Bank Technopark 90 London Rd., London SE1 6LN UNITED KINGDOM Contact: +44 (0) 208 1234 066 news@globalaccountantmagazine.com advertise@globalaccountantmagazine.com www.globalaccountantmagazine.com
© Global Accountant 2011 ISSN 2047-878X
Contributors:
IFRS Foundation IIRC HKICPA Ernst & Young
July/August 2011
Special Thanks: Steve Collings Nick Topazio
July/August 2011
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Brief News
The growth of internships has shifted the competitive front line for employers in identifying Britain’s next generation of business talent
As the Chinese accountancy profession grows and attracts international businesses and attention it is a great time for accountancy firms in China and the UK to be working together
It’s in everyone’s interest to see audit strengthened Undergraduate applications soar by 96%, as students focus on attaining work experience to boost their CVs Technical
CIMA sees the integrated report as a natural extension of the narrative section of the annual report Net realisable value is the estimated selling price of inventories in the ordinary course of business less the estimated costs of completion and estimated costs which would be incurred in making the sale. Job Skills
Your CV is really a marketing piece
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We also need to ensure we have a generation of future leaders who understand international standards and who have access to the latest technical information.
IFRS 4 definition of an insurance contract as ‘a contract under which one party accepts significant insurance risk from another party by agreeing to compensate the policyholder if a specified uncertain future event adversely affects the policyholder’.
It comes as no surprise that companies spend a lot of their training budgets on developing their staff’s decision-making techniques.
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International News
PwC largest number of summer interns
PwC, July 2011, “PwC opens its doors to largest ever number of summer interns”
• 88% increase in applications for summer work experience programmes • Over 25% of this year’s full time graduate intake will be returning interns
PwC, the professional services firm, will open its doors across the country this week to 351 paid interns, the largest group ever to join the firm’s summer business programme for students. Responding to record levels of interest, and an increased emphasis by the firm on identifying talented students earlier for full time trainee roles, the programme was expanded by 50% this year, and now represents over a quarter of its total student and graduate hire activity. 420 interns will join in total across this year in total.
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Almost 8000 students applied in eight months, an 88% increase on last year. Some 23 students were vying for each role, with interns joining from over 45 universities from Swansea to Stirling, Aberdeen to Exeter. The group will take part in a range of work experience programmes in 23 offices in the UK, including a week shadowing senior leaders in the business, a three day residential business school, international internships in Germany, Italy and the US, and a six week programme in the UK. The interns work in PwC’s tax, assurance and consulting businesses, are coached and mentored and take part in training and assessment programmes during their time with the firm. Before finishing university, 95% of interns are offered a full time graduate role at PwC. Ian Powell, chairman and senior partner, PwC said: “Internships are a crucial gateway to widening access to employment experience and opportunities. The success of our programme this year is in the diversity of applicants we’ve attracted, and experiences they are being offered. If graduates are to have real prospects they need real experience of work, and opportunities like this get them under the skin of business.” Sonja Stockton, director of recruitment, PwC said: “The growth of internships has shifted the competitive front line for employers in identifying Britain’s next generation of business talent. Programmes like this demand more of employers and students, but it’s an investment that pays off in attracting highly motivated and entrepreneurial people.” “Over a third of our full time graduate intakes this year are former interns. We’re recruiting with confidence from this group, because they have real experience of our business, clients and industry under their belts, so can hit the ground running in their career.” “Unlike the graduate jobs market, it’s not a one way street, because it allows students to test employers, not just the employers testing the students.” PwC, recently voted the UK’s Top Graduate Employer for the seventh year in a row by students, will recruit a record 1,600 students and graduates this year. Over 27,000 have applied since applications opened in September 2010.
International News
Non-doms will be disappointed Ernst & Young, June 2011, “Non-doms will be disappointed by latest tax proposals – Ernst & Young”
Ernst & Young respond to consultation document on the reform of the taxation of non-domiciled individuals. Budget 2011 announced a proposed reform of the taxation of resident non-domiciled individuals to ensure they make a greater contribution to tax, in particular by longer term UK residents. The Government has issued a consultation document which seeks views on these matters. As these individuals make a valuable contribution to the UK economy, the proposed reforms to the current system are also intended to encourage their investment into the UK to generate growth and jobs.
Key areas under consultation: • Increasing the existing £30,000 annual charge to £50,000 for those individuals claiming the remittance basis and who have been UK resident for 12 of the previous 14 years; • enabling non-domiciled individuals to remit overseas income and gains for the purpose of commercial investment into UK business companies without incurring a remittance tax charge; and • Further technical simplifications to some aspects of the current remittance basis rules to remove onerous administrative burdens.
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International News
Chinese Accountancy Heads Visit Birthplace of the Profession ICAEW, July 2011, “Chinese Accountancy Heads Visit Birthplace of the Profession”
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Managing partners from 29 leading Chinese firms meet with UK counterparts Heads of leading Chinese accountancy firms visited the birthplace of the profession in Britain as part of an exchange visit facilitated by the Institute of Chartered Accountants of England and Wales, a world leader of the accountancy and finance profession. During the first ever exchange organised by the profession itself, the managing partners from 29 top Chinese certified public accountancy firms met with their UK counterparts, and toured Chartered Accountants’ Hall, the historic ICAEW headquarters. ICAEW, which established its Greater China international region in Beijing in March this year, has been based in Moorgate, London, since it was founded over 130 years ago. The tour of Chartered Accountants’ Hall was part of a 12-day visit (July 11-22) aimed at exchanging business ideas and
development opportunities. They also had the opportunity to learn more about ICAEW, including its internationally-recognised training programmes, qualifications and technical resources. ICAEW has been working with the Chinese Institute of Certified Public Accountants since 2004, with the two institutes signing a joint-qualification agreement in 2006. ICAEW is currently the only international institute whose members gain exemptions from the CICPA exams. As CICPA responds to the Chinese government’s call to internationalise the accounting profession and boost talent, ICAEW is developing Chinese accountants through offering additional international qualifications and skills. Jason Yu, Managing Partner of Zhonghui CPA, and member of Kreston international network, said: “It is fantastic to have the opportunity to visit the place where chartered accountancy was born over a century ago. In China the profession is only 23 years old but we face the challenge of training a generation of leaders who can help drive forward one of the world’s fastest growing economies.
We also need to ensure we have a generation of future leaders who understand international standards and who have access to the latest technical information. “At a time like this it is helpful to remember there was once a time that accountancy itself was a young, growing profession, and yet it produced highly-motivated, hardworking people who went out and changed the financial world.” Douglas Lau, Regional Director, ICAEW Greater China, said: “As the Chinese accountancy profession grows and attracts international businesses and attention it is a great time for accountancy firms in China and the UK to be working together. “Becoming an ICAEW Chartered Accountant means gaining a qualification that is recognised and respected worldwide, which helps CICPA members to solidify their status as highly qualified professionals with international expertise. At the same time ICAEW is looking to build more links with the profession in China. This visit is a great opportunity to develop links and build stronger relationships between the Chinese and UK profession.”
UK News
UK FRC consults on women in the boardroom A Plus the official magazine of HKICPA, June 2011, “UK FRC consults on women in the boardroom”
The Financial Reporting Council started a consultation on whether the UK Corporate Governance Code should be revised to require listed companies to publish the gender diversity policy of their boards and subsequently release reports annually. Last year, women made up only 12.5 percent of board members in the UK’s top 100 blue-chip companies.
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International News
Innovation is a necessity, not an option say Business School academics behind new course The ‘Managing the Strategic Value of Innovation’ programme, from 21 to 23 November 2011, is designed to help senior managers decide what innovations their organisation should pursue, for example in their processes and problem-solving, and how they can best develop and implement these. It has been designed to focus on the benefits of innovation and how it can used most effectively by existing companies and new start-ups. Professor David Gann
Organisations need to adopt innovative approaches to their business as they face the triple whammy of intensifying global competition, fastdeveloping technologies and diminishing world resources, according to the academics behind a new three-day programme at Imperial College Business School.
The researchers from the Business School’s Innovation and Entrepreneurship (I&E) Group who have designed the programme say that in order to thrive, businesses need to combine entrepreneurial, research and design skills, as well as having the right business model to gain the most value from new ideas. Head of the Group, Professor David Gann explains: “In a rapidly changing world, innovation is no longer an option, it is a necessity. Companies that innovate have higher survival during downturns, are more profitable and outpace competitors in periods of economic growth. Success depends upon aligning innovation with your firm’s strategy and using the most modern approaches to innovation management.” The Business School is the highest
ranked School in Europe for entrepreneurship and the I&E Group collaborates with a number of businesses, investigating the ways in which organisations can use innovation to succeed. For example, the Group has worked with BAA and Laing O’Rourke to analyse the innovative approach that they used when planning and constructing Terminal 5 at London’s Heathrow airport. This £4.2 billion project managed to avoid the late completion and huge budget overruns that often affect large infrastructure projects. The types of innovations that BAA adopted included creating incentives for different contractors to work together; using digital tools to allow designers, engineers and project managers to bring together and understand the different phases of the project; and creating a single ‘design visualisation system’ which replaced in-house IT systems with standard software that linked into the logistics systems. The I&E Group’s research highlighted that it was important to include a ‘systems integrator’ in the management process, and the Group has created a conceptual model that other organisations can use to avoid the problems often
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associated with megaprojects. This research has already brought benefits to the redevelopment of Ascot Racecourse, work on the St Pancras terminal of the Channel Tunnel Rail Link and the 2012 London Olympics. Participants on the course in November will learn how to examine their existing strategies
and how to identify new opportunities, using insights from case studies from world- leading companies. They will explore an organisation’s strengths, weaknesses, opportunities and threats in innovation, and produce a development plan for transforming their own organisation’s results through innovation.
“This course provides the latest ideas, frameworks and tools on how to become a successful innovator, whether in small, medium or large companies and in any sector of the economy,” said Professor Gann. Imperial Collage Business School, May 2011, “Innovation is a necessity, not an option say Business School academics behind new course”
UK News
Demand for graduate positions and work experience at record high Ernst & Young [UK], July 2011, “Demand for graduate positions and work experience at record high, says Ernst & Young”
The biannual survey from the Association of Graduate Recruiters said that the number of applications for graduate jobs has reached the highest ever recorded. Stephen Isherwood, head of graduate recruitment at Ernst & Young, reflects on the findings and talks about what’s happening at one of the UK’s major graduate recruiters: • Graduate applications at Ernst & Young up 30% this year • Undergraduate applications soar by 96%, as students focus on attaining work experience to boost their CVs • Vacancies still available for September but graduates need to be look beyond London for job opportunities
“We’ve also seen record demand for our graduate vacancies this year, with a 30 per cent increase in the number of applications. It’s clearly a very competitive jobs market but, for candidates who are prepared to be flexible, there are still vacancies available for September. However, graduates will need to get on their bikes for work and look beyond the UK’s major cities. There are some fantastic opportunities to work for global organisations like Ernst & Young, based in towns up and down the country such as Reading and Southampton, which provide the same career development opportunities as working in the capital. “Candidates can also help themselves to stand out from the crowd and by having work experience on their CVs. We’ve seen a 96 per cent increase in the number of
applications for our undergraduate programmes for this year alone, whether it’s our insight days, summer internships, or international and industrial placement schemes. Work experience is a great way of showing potential employers that you have initiative and are equipped with skills for the workplace. We’re aiming to recruit over 50 per cent of our graduate trainees from our work experience and internship programmes, so it can also provide a real foot in the door.”
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UK News
Ernst & Young comment on ASB proposals for UK Financial Reporting Framework
Ernst & Young, June 2011, “Ernst & Young comment on ASB proposals for UK Financial Reporting Framework”
T
he Accounting Standards Board (ASB) has released a summary of tentative decisions reached at the Board meeting [16 June 2011] in relation to the future development of the UK Financial Reporting framework. The existing proposals had anticipated a move towards a two
tier framework based on public accountability, with companies reporting under EU-adopted International Financial Reporting Standards (IFRS, ‘Tier 1’) and Financial Reporting Standards for Medium-sized Entities (FRSME, ‘Tier 2’) as a replacement for UK GAAP from 1 July 2013.
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as financial institutions previously defined as publicly accountable. However this does raise a significant concern about the proposals for a reduced disclosure framework, on which decisions have been deferred. This is the preferred option of a large number of UK and overseas listed groups currently reporting under IFRS with a strong preference to move towards alignment of the accounting policies used in their individual UK reporting entities with group reporting, but without the burden of full IFRS disclosures. The feedback from this group of companies was clearly expressed in the comment letters to the original discussion paper.
The revisions discussed yesterday will result in a six month delay in the adoption of the revised framework to years commencing on or after 1 January 2014, the removal of the ‘Tier 1’ requirement for publicly accountable entities to report in accordance with IFRS and further change in FRSME. These significant revisions seem to point towards a future need to reexpose the proposals and for further stakeholder consultation. The removal of Tier 1 will be welcomed by certain entities such
Andrew Davies, Ernst & Young UK&I lead partner of Financial Accounting Advisory Services comments: “Large and listed groups in the UK view the option to adopt IFRS with reduced disclosures as fundamental to their support of the proposed framework and to the future improvement of their own financial reporting processes. Any UK entity would still be able to adopt full IFRS (as they have since 2005) but would not have the significant benefit of the reduced disclosure option which minimises cost and resource requirements.” The tentative decision on further adaptation of the ‘Tier 2’ FRSME proposes to incorporate existing accounting options in UK GAAP that are also consistent with options available in IFRS. This change comes in response to comments from stakeholders on certain limitations within the FRSME and will allow the ASB to influence the
IASB’s agenda for future development of IFRS for SME’s. Davies comments: “Ernst & Young strongly encourages stakeholders to continue their involvement in the debate, particularly in relation to the potential removal of the IFRS with reduced disclosure option. The ASB is likely to conclude on this at their July meeting, so anyone wishing to ensure it is not withdrawn should speak up now.” Davies continues: “It appears that the ASB is inventing a new ‘UK GAAP’, based on IFRS for SMEs, tailored to a UK business environment. In the future such a framework would require numerous amendments and ongoing maintenance to meet divergent demands, rather than the original premise that IFRS for SMEs should not be significantly amended.” The IASB’s future process to manage and maintain the consistency of IFRS and IFRS for SMEs frameworks is relatively unclear. Significant accounting change is being introduced in relation to key accounting standards such as leases and joint arrangements within IFRS that will create significant divergence. By introducing wider application of the FRSME and further amendments, the ASB will need to continue to maintain a relatively complex process to monitor consistency with both the EU-adopted IFRS and IFRS for SMEs frameworks. Davies concludes, “the ASB, if it is compelled to change FRSME, should certainly aim to anticipate future changes to, rather than deviate from, IFRS for SMEs”.
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International News
Deloitte Audit Technical Partner to become ICAEW President ICAEW, June 2011, “Martyn Jones elected as next ICAEW Vice President”
Martyn Jones, national audit technical partner at Deloitte, has been elected as ICAEW’s next vice president. He formally took office in June 2011 and will be nominated as ICAEW President in June 2013.
Commenting on his election, Martyn Jones said: “The economic crisis and subsequent fragile recovery have brought home to us all, the crucial role that chartered accountants play. They are instrumental in helping companies drive growth which in turn is critical to the prospects of economies around the world. Through its strategy, ICAEW is also playing an important role in shaping the future of the profession, developing the knowledge and skills of future business leaders and helping businesses build a sustainable future. I look forward to the opportunity to playing my part in helping ICAEW deliver on its strategy and aspirations.”
dards committee and a member of our technical strategy board. I look forward to working with him in his new role in the coming months.” Martyn Jones qualified as an ICAEW Chartered Accountant in 1976 and has over 30 years of working with businesses of all sizes as well as with the public and third sector. His experience ranges from audit, training, risk management, corporate governance services to service innovation and handling professional and regulatory issues. He is chairman of Deloitte’s Corporate Governance Services group, a member of DTTL global Audit Technical Advisory Board and also of the CBI’s companies committee.
Gerald Russell, ICAEW President said: “It is a tribute to the strength of our council that there were three such strong candidates for our next Vice President. As I know from my own experience, it is an enormous privilege that comes with great responsibility. I would like to thank all three candidates for putting themselves
During his career, Martyn has been a very active supporter and heavily engaged with the work of ICAEW. He campaigned successfully with Sir David Tweedie to get the true and fair view concept embedded in audit reporting internationally. He subsequently led ICAEW’s Working Group to support members
forward for such an important role and add my congratulations
on the implementation of Clarity International Standards for Auditing
to Martyn on his election. Martyn has played a significant role within ICAEW as a member of council as well as a chair of our ethics stan-
(ISA). Martyn has been a member of ICAEW’s council for the last four and a half years and has sat on several ICAEW committees.
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International News
ACCA: “Audit reform needed” ACCA, July 2011, “Liability switch needed to give impetus to audit reform”
Rules governing auditors’ liability will need an overhaul if audit is to respond effectively to criticisms made after the financial crisis, says ACCA (the Association of Chartered Certified Accountants) in a new published study. With regulators calling for more competition amongst auditors and an expanded role for them, ACCA argues that such outcomes will only be achieved with a corresponding reform of audit liability to encourage auditors to take on more responsibilities and protect smaller audit firms looking to enter the market. ‘Since the financial crisis, several studies have revealed consistent high levels of support for audit amongst stakeholders,’ says John Davies, ACCA’s head of technical. ‘Calls for more competition and a broader scope of inquiry for auditors, supported by ACCA, must recognise the cost implications of conducting extra work, extra training, and the increased liability exposure for both established and challenging firms.’ In many countries, liability arrangements continue to be structured along the lines of joint and several liability. Where a client suffers a loss due to the actions of more than one party, they may sue one or all of the other parties for the full set
of damages claimed. This has led to the ‘deep pockets syndrome’ where the audit firm – if it is partly at fault – is singled out amongst other defendants because they are known to carry substantial amounts of professional indemnity insurance. ‘The adoption of broader responsibilities for auditors risks complicating existing legal assumptions as to their duty of care and increase their exposure’, argues John Davies. ‘The reform agenda, which we support, needs to recognise this risk of exposing auditors to unreasonable levels of liability and prohibitive insurance costs. If we want more competition amongst audit firms, and a model of audit that better meets stakeholder needs, then we need to consider
The UK Government has accepted the principle of allowing auditors to limit their liability but its most recent initiative has so far failed to attract widespread support. The more radical option of proportionate liability, as introduced in Australia, sees the auditor responsible for only the damages directly caused by their own actions or negligence. Such a system is considered preferable to solutions such as statutory liability caps, which break the responsibility link and would be unfair to wronged clients. John Davies concludes: ‘It’s in everyone’s interest to see audit strengthened. Stakeholders say they want a wider remit and, in principle, auditors are ready to accept it. Liability reform must be seen as a necessary tool to help make this happen’.
“It’s in everyone’s interest to see audit strengthened”
ACCA’s study, Audit reform: aligning risk with responsibility, can be downloaded from ACCA’s website.
replacing joint and several liability with proportionate liability as other countries have done.’
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International News
New Appointments at DFK International The new president of DFK International is turning to technology to make the world a smaller place for the leading accountancy association’s members.
Scott Hazy, President DFK International
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Scott Hazy wants to use the latest technology to bring members from all corners of the world closer together through a variety of multimedia forums. He said: “I want to look at new ways of reaching those members in parts of the world who, for instance, cannot afford to travel overseas to our conferences, but would still benefit from having access to them. “One of the main benefits of being a member of DFK International is the sharing of best practices and coming together with other members in your region or across the world to optimise your firm’s operations.” Hazy, an audit partner specialising in international business with Bennett Thrasher in Atlanta, USA, takes over from Mike Tovey, managing partner of UK-based Chantrey Vellacott DFK. Hazy said: “DFK International has a lot of momentum and in five years has almost doubled in size in terms of revenue. Last year, our member firms’ revenue exceeded one billion dollars worldwide.
“I want to build on that momentum as we look forward to the association celebrating its 50th anniversary in 2012.”
to support the DFK member firms in the region.” The trio of appointments, to be held for three years, were made following elections at the annual conference of DFK International in Chicago, USA.
Hazy will be supported by new Deputy President Demetris Demetriou, co-founder of audit and accounting firm DFK Demetriou Trapezaris based in Nicosia, Cyprus. Martin Sharp, Executive Director of Demetriou, a member of DFK DFK International, said: “The conferInternational since 1994, said: “I ence was a resounding success with have been involved in reviewing our the highest number of delegates ever strategy and am looking forward to in attendance in our 50 years.” implementing The Regional DFK International is ranked those Firm of the amongst the top 10 global changes Year Awards accountancy associations and has to further were also over 300 offices in more than 80 strengthen announced at countries worldwide. our global the conferposition.” ence with Gooding Partners, based in Perth, Navin Patel, a managing partner of Australia, winning the Asia Pacific chartered accountancy and busiRegion. ness advisory practice DFK Oswin Griffiths, based in Auckland, New Kenway Mack Slusarchuk Stewart Zealand, has been appointed AsiaLLP, based in Calgary, Canada, was Pacific Region Vice-President. presented with the award for the Americas Region, and Anne Brady He said: “I believe my accounting McQuillans DFK, based in Dublin, and commercial experience in Asia Ireland, won the Europe, Middle Pacific, and my appreciation and East and Africa Region title. understanding of various cultures in the Asian countries will enable me July/August Jul./Aug. 2011 2011
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International News
PwC’s 14th annual Global CEO survey found that that innovation is high on the executive agenda in virtually every industry. In all, 78 per cent of CEOs surveyed believe innovation will generate ‘significant’ new revenue and cost reduction opportunities over the next three years. But it is highest for those where technology is changing customer expectations. In both the pharmaceutical and entertainment and media sectors, for example, more than 40 per cent of CEOs believe their greatest opportunities for growth come from spawning new products and services. Additionally, the survey found that CEOs are re-thinking their approach to innovation and increasingly seeking to collaborate with outside partners and in markets other than where they are based. For example, a majority of entertainment and media CEOs said they expect to co-develop new products and services.
PwC, June 2011, “CEOs say innovation is most important factor for growth, leadership, strategic integration, accountability required”
New PwC study: “Demystifying innovation: Take down the barriers to new growth” Innovation – in the form of developing new products and services – has become as important to growth for CEOs as raising their share of existing markets. A survey by PwC of 1200 CEOs from around the world found that innovation, along with increasing their existing business, now outstrips all other means of potential expansion, including moving into new markets, mergers and acquisitions, and joint ventures and other alliances.
“Innovation is a matter of survival for companies in sectors facing rapid changes in technology and high customer expectations,” said John Sviokla, partner and Business Leader for Innovation and Strategy at PwC US. “Forward-looking companies strive for innovations that will give them competitive advantage and create growth. In today’s fast-moving environment companies must constantly improve and re-invent their products, services and even brands. “The next decade will be the ‘most innovative time’ since the industrial revolution due to the dynamics of
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over a billion new customers, global connectivity, and radical new technologies and science,” Sviokla said. “In mature markets companies must innovate to differentiate themselves; in emerging markets, they need innovation to lessen their dependence on lower costs.” According to a new PwC, study, “Demystifying Innovation: take down the barriers to new growth,” the drive for innovation must arise from the CEO and other executive leadership by creating a culture that is open to new ideas and systematic in its approach to their development. The innovation process generally has four phases: • Discovery: Identifying and sourcing ideas and problems that are the basis for future innovation. Sources may include employees as well as
customers, suppliers, partners and other external organisations. • Incubation: Refining, developing
• Innovative people work for the money. Establishing a culture that embeds innovation in the organisa-
and testing good ideas to see if they
tion will attract and retain creative
are technically feasible and make
talent.
business sense.
• Innovation is a lucky accident. Suc-
• Acceleration: Establishing pilot pro-
cessful innovation most often results
grams to test commercial feasibility.
from a disciplined process that sorts
• Scale: Integrating the innovation into the company; commercialisation and mass marketing.
through many ideas. • The more open the innovation process, the less disciplined. Advances in collaborative tools, like
The study also identifies seven misconceptions about the innovation process: • Innovation can be delegated. Not
social networking, are accelerating open innovation. • Businesses know how much innovation they need. Leaders
so. The drive to innovate begins at
must calculate their potential for
the top. If the CEO doesn’t protect
inorganic growth to determine their
and reward the process, it will fail. • Middle Management is the ally of
need to innovate. • Innovation can’t be measured.
innovation. Managers are not natural
Leadership needs to identify its
champions of innovation. They to re-
ROII-Return on Innovation Invest-
ject new ideas in favor of efficiency.
ment.
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Insurance Contracts ACCA Global, July 2011, “Insurance Contracts - The Exposure Draft”
The International Accounting Standards Board (IASB) introduced IFRS 4, Insurance Contracts as an interim standard to allow insurance companies to comply with International Financial Reporting Standards (IFRSs) and a European directive requiring the use of IFRS by 2005.
I
t represented the first phase of the insurance project. At that time, the IASB sought to minimise the amount of change required to current accounting policies and practices so as to avoid changes that might be reversed in the second phase of the project. It allowed insurers to continue most of their current accounting policies for insurance contracts.
It is expected to affect significantly the financial reporting of all insurers. In addition to the change in accounting policies and practices, the proposals may heavily impact systems, data and tax, reporting and control processes. The proposals apply to all entities that issue insurance contracts.
Same definitions
standard, such as product warranties, residual value guarantees and contingent consideration payable in a business combination. IFRS 4 permitted insurers that issued financial guarantee contracts to treat them as insurance contracts, although other companies treated them as financial instruments. The IASB will now require all contracts that meet the insurance contract definition to be accounted for as insurance contracts. As a result, financial guarantee insurance, mortgage guarantee insurance and trade credit insurance will all now be within the scope of the standard.
The second phase of the insurance project was published as the Preliminary Views on Insurance Contracts discussion paper in May 2007, which focused on an exit value measurement approach for insurance contracts.
The exposure draft retains the IFRS 4 definition of an insurance contract as ‘a contract under which one party accepts significant insurance risk from another party by agreeing to compensate the policyholder if a specified uncertain future event adversely affects the policyholder’.
On 30 July 2010 the IASB published its latest insurance contracts exposure
As in IFRS 4, insurance risk is defined as any risk other than finan-
to measure insurance contracts using a current measurement model
draft, which proposes a comprehensive standard to address recognition, measurement, presentation and disclosure for insurance contracts.
cial risk. The IASB has continued to exclude certain contracts that meet the definition of insurance contracts from the scope of the
where current estimates are remeasured each reporting period. The model is based on a fulfilment objective, which reflects the fact that
The proposals will require an insurer
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an insurer generally expects to fulfil its liabilities over time by paying benefits and claims to policyholders as they become due, rather than transferring the liabilities to a third party. This is based on the principle that insurance contracts create rights and obligations that work together to create a package of cash inflows such as premiums, and outflows such as benefits and claims. Current assessment will be required of the amount, timing and uncertainty of the future cashflows that the insurer expects its existing insurance contracts to generate as it fulfils its rights and obligations under the contract. This measure is referred to as the present value of the fulfilment cashflows, which is measured using the following: • current estimate of future cashflows • discount rate that adjusts those cashflows for the time value of money • explicit risk adjustment • residual margin that eliminates any gain at the inception of the contract.
Residual margin The IASB has concluded that there should not be any initial profit recognition for insurance contracts. If the above calculation results in an asset, a residual margin is added to eliminate the gain, so the contract is measured initially at zero. If the present value of the cashflows is greater than zero, then there is a loss recognised, which represents an onerous contract. As the insurance contract unwinds, an insurance asset or liability is created. One of the most controversial issues is whether an explicit risk adjustment should be included in measuring the contract liability to reflect the effect of uncertainty inherent in the estimated future cashflows. The risk adjustment is the maximum amount the insurer would be willing to pay to be relieved of the risk that the ultimate cashflows exceed those expected. In the model preferred by the Financial Accounting Standards Board (FASB), there is no explicit risk adjustment; instead, a margin is established to eliminate any
gain at recognition. Any excess of expected cash outflows over expected cash inflows would be recognised immediately as a loss. The benefits of the risk adjustment are that it reflects risk included in the liability at every reporting period, reflects subsequent changes in risk and ensures that an insurance liability includes a margin. This is consistent with the pricing of financial instruments. The main issues are the reliability and consistency of the risk adjustment measurement, which may vary between countries, depending on whether similar risk adjustment techniques are used. Profit may vary according to the technique used. At the end of each reporting period, the liability will reflect current estimates of cashflows, current discount rates and a risk adjustment that reflects the remaining risk of uncertainty about the amount and timing of the cashflows. Changes in estimates are recognised immediately in the income statement. However, recognising changes in estimates in the income statement will lead to an increase in volatility of reported results for many insurers that currently use fixed assumptions. The residual margin is recognised over the period in a systematic way that reflects the exposure from providing insurance coverage. Thus the residual margin is unwound, not remeasured.
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Acquisition costs Under the proposals, incremental acquisition costs (ie, the costs of selling, underwriting and initiating an insurance contract) that would not have been incurred if the insurer had not issued that particular contract are included in the present value of the fulfilment cashflows of a contract. All other acquisition costs should be expensed when incurred in profit or loss. This is more restrictive than current accounting in many countries, which may allow an element of direct costs to be treated as deferred acquisition costs. The proposals require that reinsurance business assumed should be measured using the same block measurement approach as for other insurance contracts. An insurer recognises an insurance contract when it is bound by the terms of that contract or when it is exposed to the risk under the contract - whichever is earlier. An insurer derecognises an insurance contract liability when the contract obligations are discharged, cancelled or expire. At this point the insurer is no longer at risk and no longer has to transfer resources to satisfy the obligation. Whether an insurer is bound by an insurance contract will depend on the legal requirements in the country concerned. The recognition criteria could mean that contracts will be recognised earlier than the date on which the insurance coverage commences. During the gap period, the insurer is required to perform a liability adequacy test, which could result
in recognising a loss in the income statement or recognising changes in assumptions and discount rates, but the amortisation of the residual margin does not commence until the insurance coverage starts.
Unbundling Some insurance contracts contain one or more elements that would be within the scope of another IFRS if the insurer accounted for those elements as if they were separate contracts - for example, an investment component of a contract. If a component is not closely related to the insurance coverage specified in a contract, it is proposed that an insurer unbundle and account separately for that component. The following are examples of components that are not closely related to the insurance coverage and that would result in unbundling: • an investment component reflecting an account balance credited with an explicit return at a rate based on the investment performance of a pool of underlying investments; the rate should pass on all investment performance, but may be subject to a minimum guarantee • an embedded derivative separated from its host contract under IAS 39 • contractual terms relating to goods and services that are not closely related to the insurance coverage but have been combined in a contract with that coverage for reasons that have no commercial substance. The insurance measurement model differs from other measurement
models, so unbundling is important. However, the unbundling requirements are not accompanied by application guidance, so some terminology will be open for interpretation. It seems there may be an intention to unbundle life contracts into separate insurance and financial instrument components. The proposals also require shortterm contracts of 12 months or less that do not contain embedded derivatives or options to be measured initially at premiums less any incremental acquisition costs. Any claims that arise on these contracts will be measured at the present value of the cashflows using the model as for all other insurance contracts. The income statement is determined by the measurement model. Premiums will no longer be recognised except for the short-term approach as revenue. There will be separate disclosure of: • underwriting margin • gains and losses at initial recognition • non-incremental acquisition costs • experience adjustments and changes in estimates • interest on insurance liabilities. Users will need to be educated in the new presentation format and the implication of the new approach on reported earnings. Some adjustment will be needed to become used to the non-disclosure of premiums and claims on the face of the income statement. Insurers will need to assess the impact of the proposed changes and there is only a short time available to influence the final standard.
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IAS 2 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.
Entities in various shapes and forms will have inventory: manufacturing companies, retail outlets, major PLC’s – there are lots and lots of such entities. Students of financial reporting papers that examine IAS 2 will think of the standard as largely basic – but is it? This article by Steve Collings takes a look at IAS 2 and what it is all about.
Firstly, it is important to understand exactly what ‘inventories’ are. IAS 2 describes Inventories as assets: • Held for resale in the ordinary course of business; • In the process of production for resale; or • In the form of material or supplies to be consumed in the production process or the rendering of services. Students will be familiar with the core aspect of IAS 2, which is to value inventories at the lower of cost or net realisable. This is a very familiar phrase and is common in most GAAP (UK SSAP 9 also requires such a valuation).
Inventories Cost
Costs should not include:
It is important that students understand what constitutes ‘cost’ under IAS 2. Under the provisions of IAS 2, cost comprises the following: • Purchase costs • Costs of conversion • Other costs
• Abnormal amounts of wasted materials, labour and other production costs; • Storage costs unless necessary to the production process; • Administrative overheads; and • Selling costs.
Purchase costs are the actual cost of the inventories but should also include any non-refundable taxes or import duties. In addition, transport and handling costs should be brought into the cost of inventories. Where an entity receives discounts or rebates then these should be deducted from the actual cost of inventories. Remember, therefore, it is important that students understand that there may be more to the cost of an item of inventory than initially meets the eye.
Net Realisable Value
Costs of conversion are costs such as direct production costs or production overheads. Other costs should only be recognised in inventory valuation if such costs have been incurred in bringing inventories to their present location and condition.
Net realisable value is the estimated selling price of inventories in the ordinary course of business less the estimated costs of completion and estimated costs which would be incurred in making the sale.
Measuring Cost There are two costing methods which can be used in measuring cost – standard cost and the retail method.
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Standard cost takes into account normal levels of materials, labour, efficiency and capacity utilisation. Entities that apply standard cost will need to regularly review their standards and should be revised if deemed necessary. The Retail Method is a method which is permitted in IAS 2, but the standard itself does not address the techniques to employ this method. The retail method is generally used by retailers to estimate the cost of their closing inventory at the end of an accounting period. The retailer can undertake an inventory count at retail prices or use an estimate closing retail inventory and then use cost-to-retail ratio to convert the closing inventory at retail to its cost. An advantage of doing this is that it eliminates the need to go back to purchase invoices to determine the cost of the items. When using the retail method, it is important to determine the costto-retail ratio. This ratio provides a relationship between the cost of the goods available for sale and the retail price of those goods. A simple illustration using the FIFO method is shown below:
Where specific identification of individual costs to individual items is not practicable, then IAS 2 permits two formulae: • First-in, first-out (FIFO); and • Weighted average. Students studying international streams of financial reporting papers should be aware that IAS 2 does not permit the use of LIFO. This formulae was prohibited because it does not assign up to date costs to inventory.
FIFO FIFO assumes that items purchased or manufactured first are subsequently sold first resulting in inventory at the reporting date should be the most recently purchased or produced inventory. Weighted Average This formulae assumes a weighted average and is determined from weighted average costs of items at the beginning of the period and the cost of similar items purchased or produced during the period.
Cost
Retail
Opening inventory
$100,000
$200,000
Worked Example
Purchases
$500,000
$800,000
Total goods available for sale
$600,000
$1,000,000
Gabriella Inc started in business on 1 September 2008 buying and selling chairs. During the month of September, Gabriella Inc recorded
Sales at retail
($800,000)
Closing inventory at retail Cost to sales ratio = Closing inventory at cost =
$200,000 $500,000 / $800,000 $200,000 x 0.625
their inventory as follows:
=62.5% $125,000
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Purchases 5 September
purchased 200 chairs at $150 per chair.
16 September
purchased a further 80 chairs at $185 per chair.
Sales Gabriella Inc sold 250 chairs on 24 September for $50,000. Required Calculate the gross profit made on the chairs and determine the value of closing inventory for Gabriella Inc using FIFO and weighted average formulae.
Solution FIFO – Gross Profit Calculation 200 chairs @ $150 per chair
$30,000
50 chairs @ $185 per chair
$9,250
250
$39,250
Sales value
$50,000
Gross profit
$10,750
Weighted Average – Gross Profit Calculation 200 chairs @ $150 per chair
$30,000
80 chairs @ £185 per chair
$14,800
280
$44,800
Now we work out how much one chair would be as ($44,800 / 280) = $160, therefore we sold 250 chairs on 24 September, so the ‘cost’ using a weighted average formulae would be (250 chairs @ $160 per chair) is $40,000. We can now work out the gross profit as follows: Sales value Cost at weighted average Gross profit
Closing Inventory Value – FIFO We have bought 280 chairs and sold 250 chairs, resulting in 30 chairs left in inventory, so: 30 chairs x $185 = $5,550 Closing Inventory Value – Weighted Average 30 chairs x $160 = $4,800
$50,000 ($40,000) $10,000
Consignment Issues Students dealing with financial reporting papers will often hear the phrase ‘substance over form’ and this is a particular important concept
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to comply with when dealing with consignment issues. A consignment sale is one where the buyer agrees to sell goods on behalf of the shipper. This is extremely common in the motor industry – for example a dealership will sell vehicles on behalf of the manufacturer. Care needs to be taken with these issues because the key question in such transactions is who is to record consignment inventory as an asset in their statement of financial position? Under the concept of ‘substance over form’ we have to look at who
bears the risks and rewards of ownership of the inventory. So in our example above, does the motor dealer record the vehicles as inventory in their statement of financial position or not? If the risks and rewards of ownership pass to the dealer then the dealer will recognise the inventory in their statement of financial position together with a corresponding liability to the manufacturer. If, on the other hand, the dealer does not bear the risks and rewards of ownership then they will not recognise the inventory in their statement of financial position. Instead,
the manufacturer will recognise the inventory in their statement of financial position.
Conclusion This article has looked in some depth at the provisions laid down in IAS 2. You can see that there is more to the standard than simply saying that an item of inventory should be valued at the lower of cost or net realisable value. Students need to be able to address what components comprise cost and what determines net realisable value. Students should also have an appreciation as to how to account for consignment issues.
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Integrated Reporting makes business sense Long-term value creation requires well-managed organisations. The corporate reporting system provides a window on the internal decisionmaking capabilities of an organisation. If an entity’s external reports fail to engage or communicate meaningfully then this suggests poor internal management information and consequent sub-optimal decision-making. In short, poor external reporting is an indicator of an organisation that is not well-run, whereas effective reporting has to be founded on a robust management information system that is more likely to lead to better decision-making. Directing scarce resources towards those organisations that are wellmanaged and therefore likely to optimise their use requires an effective corporate reporting system. The link between the efficient allocation of scarce resources and the corporate system is an important reason why society in general should be concerned that the system is effective. There is no shortage of initiatives around the world seeking to improve the state of corporate reporting, one which is gaining increasing momentum ‘Integrated Reporting’. The champion for this cause is the International Integrated Reporting Committee (IIRC) which has mainly been driven by developments in South Africa under the auspices of Professor Mervyn King, in the UK through the Prince of Wales’ Accounting for Sustainability initiative and internationally by the Global Reporting initiative.
By Nick Topazio, Head of Corporate Reporting Chartered Institute of Management Accountants
Integrated reporting requires organisations to provide a concise, clear, comprehensive and comparable integrated reporting framework which should be structured around the organisation’s strategic objectives, its governance and business model, as well as integrating material financial and non-financial information. CIMA sees the integrated report as a natural extension of the narrative section of the annual report focusing on the key drivers of long-term economic success such as strategy, business model, financial position, operational capa-
bilities, opportunities, risk management and environmental issues to the extent that they will materially impact on the future economic strength of the company. Our vision of business sustainability is for companies to fully embrace the profit motive yet at the same time recognise the need to act as good citizens acting in the public interest. Sustainable business policies make good commercial sense as this behaviour is likely to result in the generation of more reliable long term cash flows. Society also needs responsible commercial organisations to generate the tax revenue needed to
run public bodies, provide employment for its citizens and to produce the goods and services needed to fuel economic growth. The creation of this shared value should be the focus of integrated reporting. The response to major climatic or natural resource issues such as sealevel, drinking water and fish stocks should, in the first instance, be the responsibility of governments acting internationally. The integrated report of a company should respond to these issues to the extent that the issue or the international response to it has a current or foreseeable direct and material effect on the long-term economic success of the business. Additionally governments may require data on the usage of scarce natural resources to allow effective macro-management of various environmental issues. There is a growing momentum for change in corporate reporting, with each initiative seemingly calling for greater alignment between the information reported to users of corporate reports and that used internally by directors and managers for effective decision-making. We believe that sustainability issues, material to the long-term success of a business, need to be firmly embedded into the decision-making processes within organisations. The long-term success of organisations benefits all of its stakeholders. It is important that the IIRC recognises the key imperative of a board of directors, which is to ensure the long-term success of their business, and ensures that their proposals not only help to make sense of business but also make business sense.
For further information on CIMA’s Thought Leadership programme go to http://www.cimaglobal.com/thoughtleadership
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Business English
Business English Business English section is provided to help intermediate and upper-intermediate learners of business English, improve their financial vocabulary and perhaps their knowledge of finance. Objectivity
Operational risk
Opportunity cost
An accounting concept attempting to ensure that any subjective actions taken by the preparer of accounts are minimized. The aim of the rules and regulations required to achieve objectivity is that users should be able to compare financial statements for different companies over a period with some confidence that the statements have been prepared on the same basis. One of the major advantages claimed for historical – cost accounting is that it is objective, but necessarily some subjective decisions will have been made.
The risk of direct or indirect loss resulting from inadequate or failed internal processes and systems, or from a wide variety of external events. The control of operational risk has been the object of much attention in recent years, for example in the 2004 Basle Two accord concerning the capital adequacy of banks and in the Turnbull Report in the UK. It has also led to changes in the regulation of financial institutions and the requirements for the listing of public companies.
The economic cost of an action measured in terms of the benefit foregone by not pursuing the best alternative course of action. The cost of funds, for example, must be measured in terms of the returns they could earn in the capital markets for taking the same degree of risk. Opportunity cost is an important factor in decision making, although it represents costs that are not recorded in the accounts of the relevant organization.
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Job Skills
What do the look f
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ey for As you might have already discovered, your CV is really a marketing piece. That is why it is important for you to understand what employers look for in a CV. Your ability to nail down what these things are can increase your chances of getting that most desired job interview. While each employer has their own particulars, some of these you may have heard about but forgot about them. While others might be brand new to you. A CV is not something that you complete and never
change over the course of your job search. Just about every job opportunity you are going to need to adjust your CV at some level to fit the position. What Employer Look for in a CV They look for focus. Employers like to see applicants who have a predictable, focused CV. It shows that the applicant knows where their strengths are and they use them to the best of their ability. Don’t be discouraged if your CV does not have a focused background. While a bit more challenging, there are still ways to show a focus. Just keep in mind that employers like to see a clear CV that is easy to follow. They look for a good presentation. If your CV is not visually appealing, the red flag goes up. This is serious; it does not matter if the content is great if the presentation looks bad. It causes doubt in the employers mind as to what your physical presentation might be. Depending on the work responsibilities, they also bring into question how your written presentation might be as it relates inside and outside the company. Presentation is important.
you can do this is by having bullet points at the top that list out your core competencies in short 1 to 3 word phrases. Such as a specific duty or accounting software skill. Your ability to tailor this part of the CV to the position description is what gets you the interview. While there are more things that employers look for in a CV, these are the most common. Now, pull out your CV and answer these questions: • Does my CV have a good focus? Is there something that pulls away from the focus that I need to remove? • Does the style and format of my CV look professional? Does it provide the professionalism that I want to portray? • Is my CV easy to scan? Can I easily pick out key words and terms or is there too much text on the page?
Question: What will you be looking for if you were the employer?
They look for concise and crisp descriptions. If you haven’t realised it yet, no one will be willing to or have the time to read your life story. What they do is peruse your CV. They scan over the CV and stop and read at certain places. You need to know how to design a CV that is easy to scan. One way July/August 2011
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Decision Making Techniques The following article outlines two techniques which can be employed when making decisions.
M
aking the right decision
is crucial in the world of business. It comes as no surprise that companies spend a lot of their training budgets on developing their staff’s decision-making techniques. If you make a well considered decision you will lead your team to success. On the other hand, a poor decision can end in failure. There are many different techniques that we can adopt for decision making. Below two examples are outlined.
The Pareto Analysis When many different courses of action are possible, the Pareto analysis is a useful technique to employ. It works on the mathematical principle that by doing 20% of work you are able to generate 80% of the reward that you would get if you did 100% of the work. The Pareto analysis is a way of identifying which changes will give the most benefits. You start by listing all of the possible changes that you could make (based on problem areas or available options). Then you award each item on the list a score. There are different methods of scoring depending on the type of changes you are addressing.
One example might be to award points according to the number of complaints different areas of the business have received. You deal with the highest scorers first because they will bring about the most change.
At the end of each line you can either draw a small circle – to represent a result, or you can draw another square – if another decision is required. Squares represent decisions to be made and circles represent uncertain outcomes. If a solution is completed then a line
Decision Tree Analysis
ends without any shape. Continue drawing lines and shapes as necessary. Finally review the diagram by awarding each possible outcome a score. You will soon have a clear idea about which decisions need to be taken and which can be left. If you use this technique you should make sure you lay out all of the possible options so that they can then be challenged.
Decision trees can provide you with a structure by which you can see your options and possible outcomes more clearly. They help you to form a balanced picture or the pros and cons of taking a course of action. You start a tree by drawing a small square on the left side of a big piece of paper. This represents a decision you need to make. Then you draw lines out to the right to represent each possible solution. You should write each solution along its line.
REFERENCE This article first appeared at www.britishcouncil.org/learnenglish and is reprinted with the permission of the British Council
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