Global Accountant Jan / Feb 2011

Q&A

ACCA and CICPA sign agreement p02

Ratio Analysis p16 The Story Behind The Figures

by Andrew Wilkinson

Making good business sense: Creating sustainable business models in China

GLOBAL ACCOUNTANT

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Jan/Feb 2011

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Happy 2011 and Year of the Rabbit to us all. This issue of the Global Accountant cov-

Siret Aktuglu Executive Editor

ers important news and one which is of particular interest; Audit Quality. Since our last issue the UK has introduced new tax rules for banks, the IASB has issued its Management Commentary paper, the ACCA and CICPA have signed a Mutual Agreement. This is a clear indication of how fast the accounting environment is changing. You will find an extensive article on Ratio Analysis by Andrew Wilkinson and how to maximise your exam marks when interpreting such data. Finally, I would like to thank our readers who have sent in their comments regarding our previous exam issue and how they found it to contain 75% of the ACCA P2 Corporate Reporting exam. Please keep on sending us your comments of what you want to see in your next issue of the Global Accountant.

CONTENTS News 02 ACCA and CICPA sign agreement 03 Early Birds Published by: Global Accountant South Bank Technopark 90 London Rd., London SE1 6LN UNITED KINGDOM Executive Editor: Siret Aktuglu Project Manager - Asia Pacific: Samantha Lao Distribution Manager: Lilly Zhao Designer: Nico Xu Contributors: ACCA PricewaterhouseCoopers Ernst & Young IFRS Foundation IIRC HKICPA British Council Deloitte Special Thanks: Andrew Wilkinson, LSBU Contact: +44 (0) 208 1234 066 news@globalaccountantmagazine.com advertise@globalaccountantmagazine.com www.globalaccountantmagazine.com

Š Global Accountant 2011

04 Higher taxes for banks 05 Major global accounting networks support announcement of cooperation agreements Management Commentary 06 Audit quality and confidence is key 08 Ernst & Young charged with fraud 10 Enhance the role of audit, says global finance experts

22 Making good business sense: Creating sustainable business models in China

Corporate Governance 24 Pressure builds on NEDs

Interview 26 Q&A

Business English 28 Words of the Month

Study Skills 30 Think about it

14 Shift in economic powers

Job Skills

Technical

31 How can you make your CV more powerful?

16 Ratio Analysis The Story Behind The Figures

32 Teamworking

02

News

ACCA and CICPA sign agreement ACCA Global, January 2011, “ACCA and CICPA sign agreement at World Congress of Accountants”

The signing of a memorandum of understanding between ACCA and the Chinese Institute of Certified Public Accountants (CICPA) was the highlight of a special VIP reception during the World Congress of Accountants in Malaysia.

Present at the event, which took place at the Mandarin Oriental Hotel in Kuala Lumpur, were China’s vice minister of finance Dr Wang Jun and CICPA secretary general Chen Yugui.

‘This event marks a significant milestone in the long-standing partnership between CIPCA and ACCA. It is proof of a strong commitment to work together towards the development of the Chinese and the global accountancy profession,’ said ACCA chief executive Helen Brand.

‘ACCA is very honoured to be involved in contributing to the development of the finance profession in China. I firmly believe that this signing of a memorandum of understanding will help us both to

accelerate the process of internationalisation.’

She said the agreement would provide ‘support to our members through training and development opportunities, and will bring about the maintenance of high professional, technical and ethical standards’.

Brand also congratulated Wang and Chen on the significant progress made in international convergence of accounting and auditing standards. ‘You have forged a path along the road to internationalise the profession - and that is to be commended.’

globalaccountantmagazine.com

Early Birds PricewaterhouseCoopers, January 2011, “Early birds applications from students and graduates grab 50% of new PwC jobs”

ness and career coaching on offer to students online, in local offices and on campus.

Richard Irwin, PwC’s head of student recruitment, said:

Richard Irwin head of student recruitment

A record 118% increase in early application levels to PwC has secured over 600 jobs for students and graduates in offices across the UK. The recruits will join the UK’s largest private sector graduate programme in March, April and September across the firm’s assurance, advisory and tax businesses.

Some 600 full time roles remain nationwide, including new consulting roles that opened in regional offices this month. The firm’s second recruitment campaign for this university year gets underway shortly, with employability skills, commercial aware-

“We’ve seen early applications to the firm skyrocket this year because students wanted to be first in line for the jobs as soon as they were created.”

“Add to that a pool of graduates from 2009 coming back to the jobs market, and more employers reviving their recruitment, means it’s a perfect storm of interest and competition for graduate jobs.”

“We’ve created the largest ever number of jobs for students and graduates at the firm, so there’s plenty of opportunities remaining. Graduates applying

now could be working with us as early as April.”

Applications to London and the South continue to dominate interest in the firm’s trainee positions, but with vacancies nationwide Irwin warns students not to short change their job options by focusing on London vacancies: “You can kick start your career anywhere, so students need to make sure they’re not limiting their job prospects. Some of our biggest teams and clients are run from Manchester, Scotland, Newcastle, Reading, Bristol and Birmingham.

The training, support and career opportunity is the same for all our recruits, but the cost of living can be far more realistic for graduates concerned about student debts.”

PwC opened recruitment for over 1200 graduates, 400 interns and around 70 A Level students in early October. In total, over 1600 roles have been created, representing the highest ever recruitment levels on record for the firm.

03

04

News

Higher taxes for banks A Plus the official magazine of HKICPA, January 2011, “ U.K. collects higher taxes from banks”

The U.K. will impose higher taxes than previously proposed on British and foreign banks operating in the U.K. with more than £20 billion on their balance sheets.

Starting in January 2011, banks must pay 0.05 percent instead of 0.04 percent of their balance sheets. That will increase to 0.075 percent next year and will stay at that rate permanently. The government hopes to raise £2.5 billion to finance its budget and increase banks’ responsibility in keeping the financial system stable.

The levy is intended to replace the one-off 50 percent tax on bankers’ bonuses introduced last year. Last month, the Committee of European Banking Supervisors released guidelines that limit cash payouts

and the size of bankers’ bonuses to discourage excessive risk-taking.

Under rules that take effect this month, upfront cash payouts at banks in the EU would be capped at as low as 20 percent of total pay and large institutions must defer as much as 60 percent of top bankers’ bonuses over three to five years.

The Financial Times reported that many top U.S. and Swiss investment banks are mulling an overhaul of their pay structure to give higher salaries and lower bonuses to their EU bankers to comply with the new restrictions.

However, the U.K. Financial Services Authority last month issued an updated remuneration code and exempted smaller banks, hedge funds and asset managers from the tighter cap on cash bonuses outlined by the EU banking committee. But the biggest banks, such as Barclays, HSBC Holdings PLC and Lloyds, will have to comply with all the pay reforms, including a ban on offering guaranteed bonuses beyond one year.

globalaccountantmagazine.com

Major global accounting networks support announcement of cooperation agreement PricewaterhouseCoopers, January 2011, “Major global accounting networks support announcement of cooperation agreement”

tional, joined his colleagues at BDO, Deloitte, Ernst & Young, Grant Thornton International and KPMG in releasing the following statement:

Dennis Nally, Chairman of PricewaterhouseCoopers Interna-

“Over the last several years, regulation of the auditing profession has evolved substantially with independent oversight of audit firms now in place in many jurisdictions around the world.

Independent oversight has made an important contribution to audit

Management Commentary PricewaterhouseCoopers, January 2011, “Guidance on management commentary”

The IASB has issued a non-mandatory practice statement to help entities present a narrative report, often referred to as ‘management commentary’. This is the information that management might choose to provide users of their financial statements to explain the entity’s financial position, financial performance

and cash flows. It explains management’s objectives and its strategies for achieving those objectives.

The focus of management commentary will be specific to each entity. The IASB’s practice statement provides a broad framework of principles, qualitative characteristics and elements that might be used to provide users of the financial report with decisionuseful information.

quality and investor confidence in financial markets.

The global nature of corporate activity demands that audit regulators share information and cooperate across borders. Therefore, we are encouraged by the announcement of the cooperative agreement between the U.S. Public Company Accounting Oversight Board and Professional Oversight Board in the United Kingdom. We are pleased it will enable audit firm inspections to move forward and hope it will be followed by similar arrangements among other regulators which we encourage and support.

Such cooperation benefits not only the regulators and registered audit firms but also investors, whose investments today increasingly cross borders.”

Entities that are not currently required to provide management commentary and now elect to do so will be able to apply the new practice statement.

Entities that currently provide management commentary in accordance with local legislation or listing requirements are unlikely to be affected.

Entities that elect to apply the non-mandatory practice statement should review any existing management commentary to identify and include some or all of the features required by the practice statement.

05

06

News

Audit quality and confidence is key Increasing transparency of the audit

PricewaterhouseCoopers, January 2011, “PwC believes enhancing audit quality and confidence is key”

PwC welcomes the European Commission’s Green Paper on Audit Policy and believes there is much to be gained from a serious in-depth consideration of how to enhance audit quality and confidence in audit.

In its response to the Green Paper, PwC sets out three key ways in which the audit profession can take on board the lessons from the financial crisis: • increasing the transparency of the audit • extending the scope of the audit • examining the role of the auditor in relation to financial institutions

PwC agrees with the Green Paper’s suggestion that the way auditors communicate externally needs to be revisited to improve understanding and raise the awareness of the value added by an audit. PwC believes the most immediate way to increase the transparency of the audit is through the audit committee’s report, or its equivalent. For example, working with companies to see if they can agree disclosure of matters such as the key judgments made in concluding the audit.

Extending the scope of the audit

The Role of the Auditor in relation to Financial Institutions

The effectiveness of some of the narrative disclosures that accompany financial statements has been called into question by the crisis, in particular around certain risks, the uncertainties and judgments that underlie a set of financial statements and the going concern statement. In many member states, auditors currently report on these areas by exception. Standards for corporate reporting and auditing should be revised in order to give clearer and better assured information in these areas.

PwC believes better cooperation, communication and collaboration between auditors, banking and other supervisors would be beneficial, providing the necessary institutional frameworks, and practical working arrangements are in place. For example, PwC supports better two-way communication between regulator and auditor to enable both parties to perform their roles more effectively and greater scope for private reporting by auditors to supervisory regulators.

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With regard to specific measures in the Green Paper, PwC supports those that enhance the accessibility and transparency of the audit to stakeholders, such as: • Communications about financial reporting and the conduct of the audit, potentially through an expanded report by the audit committee; • Expanded reporting of key risks by companies on which the auditors could provide assurance; and • The introduction and adoption of ISAs throughout the EU.

PwC also supports ideas that will improve governance and oversight of the audit profession itself particularly:

• Regulation of the audit profession at an EU level through a two-tier mechanism of strengthened EU coordination and continued development of the oversight systems in member states; • A single European passport for auditors; and • The need for simplification of

• Expansion of existing restrictions on audit firms providing nonaudit services • Joint audits, mandatory rotation and mandatory re-tendering • Putting the appointment, remuneration and duration of auditor appointments in the hands of a third party

requirements for small-and medium-sized companies, audit firms and practitioners.

However, PwC also believes that a number of the other concepts in the Green Paper will not improve audit quality. For example:

In common with many market participants PwC does not believe that the audit function led to, or failed in, the crisis. Auditors must nevertheless respond to the lessons from the crisis and there is much to be gained by working with the European Commission and other authorities to enhance audit quality and confidence in audit.

07

08

News

Charged with Fraud: A Plus the official magazine of HKICPA, January 2011, “Ernst & Young charged with fraud over Lehman case”

The New York State Attorney General has sued Ernst & Young, auditor of Lehman Brothers, charging the firm with helping the failed U.S. investment bank “engage in an accounting fraud involving the surreptitious removal of tens of billions of dollars of fixed income securities from Lehman’s balance sheet in order to deceive the public about Lehman’s true liquidity condition.”

This is the first time a major accounting firm has been targeted for its role in the financial crisis.

Meanwhile, the circus of lawsuits continues, with Lehman suing Bank of America and a Barclays PLC affiliate, Long Island International Ltd., to recover US$150 million from a collateralised debt obligation it invested in three years ago. Lehman argued that the banks used its bankruptcy to deny it access to the funds and allowed other investors to get their money first.

Last month, a judge separately ordered Bank of America to pay Lehman US$90 million in

interest on top of the US$501.8 million deposits it was ordered to repay after illegally seizing Lehman’s deposits as collateral.

JPMorgan Chase also filed a lawsuit and accused Lehman of misleading it into lending more than US$70 billion to the bank three days after its collapse.

Lehman allegedly colluded with Barclays, which bought its core assets, into letting JPMorgan believe that the loans would be repaid after the Barclays sale. Last year, Lehman sued JPMorgan for allegedly taking billions of dollars from the bank as collateral in the days before it declared bankruptcy.

10

News

Enhance the role says global financ ACCA Global, January 2011, “Enhance thew role of audit, says global finance experts”

Auditors should report on risk, governance, the business model and other forward looking information, finds a new report from ACCA (the Association of Chartered Certified Accountants) which gathers expert opinions from a series of roundtables held during 2010 in key financial markets around the world.

The report, “Reshaping the Audit for the New Global Economy”, reflects discussions held in the UK, Poland, Singapore, Ukraine, Brussels, Zambia, and Malaysia about the future of audit during a year in which the role of audit has come under increasing regulatory scrutiny. Investors, corporates, banks, regulators, auditors and other stakeholders were brought together to give their views.

‘It was clear from our events that the audit function is still believed to add considerable value to business by increasing confidence in financial statements,’ said Ian Welch, ACCA head of policy.

‘But there was also a clear sense of frustration that more could be done to meet stakeholder needs and that the considerable work that goes into an audit should be better communicated. And the fact that there had been some banking and corporate failures in which auditors had not apparently been able to provide any warnings to stakeholders of looming problems was a cause for concern.

‘But they key problem is to find an answer to the liability issue.

Delegates consistently stated that this was a roadblock to innovation and to auditors taking on further responsibilities. The global roundtable series has shown there is, overall, a positive view of what audit can bring to economies. It is essential in the years ahead that the profession, policymakers and other stakeholders set out a path way to overcoming some of the issues this series has identified.’

Some of the key findings were: • Audit needs to be broadened in scope - as well as reporting on historic financial statements, auditors can meet stakeholders’ needs better by incorporating into the audit report a statement of responsibilities for reviewing risk management and governance arrangements. They should also report on the assumptions underlying the business model and whether these seem reasonable or optimistic.

• Greater communication of findings is needed for investors and other stakeholders. Ways need to be found to enable ‘red flags’ to be raised when auditors become aware of problems. A two-page ‘binary’ audit report is not sufficient.

• The current audit model needs to evolve and ultimately include reporting on real-time information. More timely reporting

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of audit, ce experts helps companies improve and maintain strong credit ratings.

• But auditor liability issues need to be addressed if real change is to happen; like all professional advisers, auditors are very conscious of the risk they run in providing their services to business clients.

Change cannot happen if auditors considered that they would thereby be exposing themselves to a level of liability which was unreasonable and which exceeded the business benefit of performing the audit.

• There was concern among some delegates about auditors needing to demonstrate ethics, scepticism and independence.

It was essential, participants said, that auditors applied the spirit not just the letter of standards and stood up for what was morally right. In some

But the spectre of audit liability looms large in face of much needed change

markets there were also fears of talented people being lost to the profession if fees were not raised to economic levels.

• Audit committees are increasingly seen as critical to ensuring the organisation has strong and effective processes relating to independence, internal control, risk management, compliance, ethics, and financial disclosures.

• On smaller enterprises, the challenge for the profession, in the face of regulatory pressure for scrapping reporting requirements, will be to establish successful scaled down audit procedures for SMEs. • Many felt that there needed to be increased dialogue between auditor and regulator.

Audit committees and auditors should liaise with regulators on key industry trends and risks.

Ian Welch concludes: ‘For all the issues and concerns raised over the course of a year, there was no serious questioning of the importance of the role of audit or whether it was necessary. The profession can meet the needs of its stakeholders by being willing to take on wider responsibilities in terms of audit scope. But at every roundtable, the spectre of liability hung like a deadweight across discussion.

‘More pro-activity and giving opinions on different areas equals more potential for litigation. In theory, the market should find a solution. In reality, governments must step in and end the log-jam by giving auditors the reasonable protection that will enable them to break free from the boiler-plate language so many participants complained about.’

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14

News

Shift in Economic Powers This is one of the conclusions from the latest in the series of PwC’s ‘The World in 2050’ reports. Measuring GDP at purchasing power parities (PPPs) - which corrects for the fact that price levels tend to be lower in emerging economies - the analysis shows that the E7 emerging economies (China, India, Brazil, Russia, Mexico, Indonesia and Turkey) are likely to overtake the G7 economies (US, Japan, Germany, UK, France, Italy and Canada) before 2020.

If instead we use GDP at market exchange rates (MERs), then the shift in the economic world order is slower but equally inexorable, with the E7 projected to overtake the G7 around 2032. China would also overtake the US in that same year to become the biggest economy in the world based on GDP at market exchange rates, although on a PPP basis this would be likely to occur before 2020. This is even allowing for some slowing of China’s growth rate over time due to its one child policy and the fact that, as it catches up with the US, it must rely more on innovation than imitation to sustain further growth.

The global financial crisis has accelerated the shift in economic power to emerging economies, says a report published by PwC. The table below summarises some of the key estimated overtaking dates for the E7 economies relative to the G7. We can see that these always occur later when using market exchange rates than PPPs, but even on an MER basis there is an inexorable process of the new world order replacing the old over the next four decades. While

precise overtaking dates are clearly subject to many uncertainties, and some emerging countries may fail to realise their full growth potential, the general pattern should be robust assuming no catastrophic political or environmental shocks that permanently throw the world off its current economic development path.

The contenders

Estimated overtaking dates based on GDP at PPPs

Estimated overtaking dates based on GDP at MERs

E7 vs G7

2017

2032

China vs US

2018

2032

India vs Japan

2011

2028

Russia vs Germany

2014

2042

Brazil vs UK

2013

2023

Mexico vs France

2028

2046

Indonesia vs Italy

2030

2039

Turkey vs Canada

2020

2035

globalaccountantmagazine.com

prior to the Industrial Revolution of the late 18th and 19th centuries that caused a shift in global economic power from Asia to Western Europe and the US – this temporary shift in power is now going into reverse.”

“This changing world order poses both challenges and opportunities for businesses in the current advanced economies, including the UK. On the one hand, competition from emerging market multinationals will increase steadily over time and the latter will move up the value chain in manufacturing and expand strongly in areas like banking where the global financial crisis has hit the West harder than the East.”

The most significant increase in its share of world GDP is actually projected for India rather than China.

In 2009 India’s share of world GDP measured at MERs was just 2%.

By 2050 this share could grow to around 13%. India could overtake Japan as early as 2011 based on GDP at PPPs and could even overtake the US by 2050 on this basis. India’s progress up the GDP league table will be much slower using market exchange rates because its domestic price levels are still far below G7 levels at present, but even based on GDP at MERs it should have overtaken Japan by 2030 and be close to catching up with the US by 2050.

The analysis finds that Australia and Argentina may be relegated from the ranks of the largest G20

economies by 2050, while Vietnam and Nigeria have the potential to join this list. Indonesia could rise from the sixteenth biggest economy in PPP terms in 2009 to the eighth biggest by 2050, overtaking not just Italy (as shown in the table above) but also France, the UK and Germany over the next 40 years. Depending on the measure used, the UK would only narrowly remain in the top ten in 2050 with a ranking of 9th place based on GDP at market exchange rates, or 10th based on GDP at PPPs. John Hawksworth, chief economist at PwC, said: “In many ways the renewed dominance by 2050 of China and India, with their much larger populations, is a return to the historical norm

“At the same time, rapid growth in consumer markets in the major emerging economies associated with a fast growing middle class, will provide great new opportunities for Western companies that can establish themselves in these markets. This applies not least to the UK, which currently sells only around 7% of its exports to the BRICs (including Hong Kong as part of China), about the same as it exports to Ireland at present and notably lower than the corresponding 10% of German exports going to the BRICs. If the UK is not to be playing in the slow lane of history for the next 40 years, then it needs to find a way to break into these fast-growing emerging markets on a much larger scale than achieved so far”.

PricewaterhouseCoopers, January 2011, “Global financial crisis accelerates shift in economic power to emerging economies”

15

16

Technical

RATIO ANALYSIS The Story Behind The Figures

globalaccountantmagazine.com

Introduction Examination questions on ratio analysis appear frequently. Students usually find the writing of a report on the topic considerably more difficult than the calculation of the ratios. At worst, students either ignore the report altogether or write that a ratio has gone up or down over a two year period. The aim of this article is to state the formulae and then explain the ratios so that students can outline the story lying behind the figures on an income statement and a statement of financial position.

The article will then outline the main shortcomings or limitations of ratio analysis.

Andrew Wilkinson Senior Lecturer in Accounting and Finance London South Bank University

Ratio analysis is a method of interpreting financial statements. It is used so that comparisons and contrasts can be made between different organisations in the same year or between the same organisation in different years. The information is of interest to the following stakeholders.

User group

User needs Managers need to know how well things are

1

Managers

progressing financially and about the state of the business.

Need to see whether or not the business is prof-

2

Owners

itable and whether there are sufficient financial resources to run the business.

3

Prospective Buyer

A prospective buyer will require information on profitability and solvency.

If the owner wants to borrow money for the use

4

Lenders (banks)

in the business the bank will want information on profitability and solvency.

5

Government

8

Suppliers

The Government will be interested in tax liabilities and economic policy.

Suppliers will be concerned with credit worthiness of the business and how long it will takes to pay its debts.

Customers will be concerned with guarantees

9

Customers

and warranties and whether the business is a going concern.

10

Employees

11

Public

12

Potential investors

Employees will be interested in security of employment, wages and pensions.

The public may be interested in the size of executive bonuses, environmental and moral issues.

Potential investors require information on the risk and level of return of return from an investment.

Accounting ratios are normally grouped into three categories, these being profitability, solvency or liquidity, and financial or investment.

17

18

Technical

Profitability Ratios • Return on investment

that increasing the ratio does not necessarily cause the gross profit to rise. This is because a greater volume or quantity of sales might be achieved by lowering

Net profit after interest and tax x 100% Equity

the selling price. The response of cus-

Shareholders are entitled to a share of

nature of the product and the market in

the profits after interest has been paid

which the good or service is sold.

tomers to price changes depends on the

on loans and after tax has been paid.

Shareholders compare the return on investment (ROI) with a return they could obtain on an investment with a similar level of risk. The ROI is concerned with matching the profit that belongs to the shareholders with their investment in the company. Generally, the higher the return the better, but account should also be taken of the risk involved.

• Return on capital employed (ROCE) Net profit before interest and tax x 100% Equity + long term loans The return on capital employed (ROCE) shows how successful the organisation has been in using the shareholders’ funds and long term loans to generate profit. The ROCE matches the profit before interest has been paid on long

• Mark up Gross profit x 100% Cost of sales

percentage. The explanation of the gross profit percentage is relevant to the mark up. However, the mark up shows gross profit as a percentage of the cost of sales rather than sales.

• Net profit percentage or Net profit margin Net profit after interest and tax x 100% Sales

desirable, but account should also be taken of the risk involved.

• Gross profit percentage or Gross profit margin Gross profit x 100% Sales This is the gross profit expressed as a percentage of sales. Raising the selling price or reducing the cost of sales increases the ratio. It should be stressed

suppliers rather than on its ability to make profit. They show an organisation’s ability to convert current assets into cash in order to settle the current liabilities.

• Current ratio Current assets Current liabilities Numerous textbooks claim that the norm is 2:1, that is, there should be twice as many current assets as current liabilities. However, size of the current ratio is determined to a large extent by the sector in which the organisation operates. For example, supermarket chains and pub companies tend to have relatively low current ratios because they carry a relatively low level of in-

overheads, account for the difference

ventory, have few trade receivables and

between the net profit percentage and

have a large number of trade payables.

the gross profit percentage. A higher

control of the overheads.

return on investment, a higher return is

its ability to collect money and pay its

percentage of sales. The expenses, or

and Customs has taken its share, with

vested in the organisation. As with the

survival of any business depends on

This is the net profit expressed as a

term loans and before the HM Revenue

loans and equity) that has been in-

These ratios are very important as the

Mark up is similar to the gross profit

figure is desirable as it reflects effective

the total long term finance (long term

Solvency Or Liquidity Ratios

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• Acid test or quick ratio Current assets - inventory Current liabilities

the prompt dispatch of invoices and

The carrying of too little inventory can

statements, the maintenance of a ‘re-

result in excessive reorder costs. These

ceivables aged listing’, telephone calls,

are the costs of preparing and checking

and visits. It also involves the use of tact,

of the numerous pieces of documen-

Textbooks claim that the ideal is 2:1, but

and the ability to distinguish between

tation every time an order is placed,

as with the current ratio the size depends

legitimate reasons for non payment, and

together with the physical checking

on the sector in which the organisation

tactics to avoid or delay payment.

and placing into inventory.

operates. The acid test excludes inventory because it takes time to sell inventory.

Also, the inventory may be sold to debtors, who will often take at least a month to settle their debt. The description of the inventory turnover ratio is relevant to this ratio and is shown below.

• Trade receivables collection period Trade receivables x 365 days Credit sales

• Trade payables payment period

This is the average length of time taken

known suppliers at short notice.

to pay trade payables (creditors). It may

The notes on the acid test or quick

be advantageous to take a take a rela-

ratios are also relevant to this ratio. The

tively long period to pay the creditors,

closing inventory should be used if the

as this will improve cash flow. However,

opening inventory figure is unavailable.

this may damage the moral reputation of the organisation. It may also cause

the debtors to pay their debts. A relatively

in obtaining credit in the future. It could

long period may be due to an attempt to

also cause the suppliers to encounter

increase sales by allowing the customers

cash flow problems, and therefore jeop-

more time to pay settle their debts.

ardise their future in business.

references on prospective debtors before the granting of credit facilities, setting credit limits, making credit terms clear,

include lost production, idle time, lost orders, and the higher cost of buying

the organisation to encounter difficulty

It may also be due to poor credit control.

result in inventory out costs. These may

Trade payables x 365 days Cost of sales

This is the average length of time taken by

Credit control includes obtaining credit

The carrying of too little inventory can

• Inventory turnover Average inventory x 365 days Cost of sales The holding or carrying of inventory is expensive as the following costs can be incurred. There are warehouse overheads such as heat, light, rent, rates, and insurance. The cash flow type costs include lost interest or overdrafts, because inventory rather than

small quantities of materials from un-

Financial Or Investment Ratios • Gearing Long term loans x 100% Equity + long term loans The higher the ratio, the higher the level of risk. Interest has to be paid on debt, whereas dividends are optional.

Also the debt has to be repaid. Lenders have priority over shareholders when the business is liquidated. High gearing is generally associated with relatively new, rapidly expanding organisations.

• Interest cover Net profit before interest and tax lnterest

cash is held. Inventory may

This is a measurement of how many

become obsolete when

times the company is able to cover

inventory becomes out of

its interest payments by profit before

date even though it may

interest and tax. A lower figure shows

be physically sound. There

greater risk. Some lenders impose

is also the risk of damage,

covenants on the minimum size, which

deterioration, evaporation,

will be tolerated. A low figure is associ-

and theft.

ated with high gearing.

19

20

Technical

• Dividend yield Dividend per share x 100 Latest market price per share

Shortcomings of ratio analysis

This ratio shows the dividend paid to

The information available to people

the shareholders as a percentage of

outside the company about the financial

the market price. A high percentage is

statements is usually limited to the annual

desirable to those shareholders who

published accounts and press reports.

require cash. However, it is likely that

Published accounts should always be

the market price of the share will fall

treated with caution. The published ac-

after the payment of a cash dividend

counts of ENRON, Marconi and World-

because the company will have fewer

Com gave a favourable impression of

assets. Cash is of course an asset.

these companies. Published accounts and ratio analysis have many shortcomings.

• Dividend Cover Net profit after interest and tax Dividends Profit after interest and tax belongs to the shareholders. It is also called ‘profits attributable to shareholders’. Part of it is paid to shareholders as dividends, and part of it is retained. The retained part is added to the profit and loss reserve, which is shown on the balance sheet.

Some lenders impose covenants on the minimum size, which will be tolerated.

• Earnings per Share (basic)

1.

Published accounts and not

company’s future prospects. Theoretically, it is the number of years required for the EPS to pay for the initial investment.

preciation, and profits or losses on the sale of non current assets.

6.

Organisations have the

freedom to choose accounting policies, albeit within the constraints imposed by legislation, SSAPs and IFRSs. Depreciation can be charged Tangible fixed assets can be shown

ken down into opening inventory,

AVCO or FIFO methods. The direc-

purchases, and closing Inventory.

tors set the allowance for doubtful

2.

debts.

The published accounts may

contain window dressing. This is a

7.

form of creative accounting. Simple

statement are usually those of the

forms, which are quite legal, are

past twelve months, whilst those of

the reduction of the inventory just

the statement of financial position

before the year end. This increases

are the amounts on the last day of

the inventory turnover figure and

the year.

The figures in the income

reduces the inventory holding

improves the acid test figures.

the inventory market is optimistic about a

include accruals, prepayments, de-

Inventory can be valued using the

reduces the trade credit period and

A high price earnings ratio implies that

the accruals principle. Examples

the ‘cost of sales’ figure is not bro-

profit and loss account. The number of

Latest market price per share EPS

flow, as they are prepared using

at cost or at revalued amount.

This ratio is shown on the face of the

• Price earnings

statement do not represent cash

give full information. For example,

period. Also, trade payables may be

nominal value is an amount other than £1.

The figures in the income

using different methods and rates.

Profit after interest and tax Number of ordinary shares issued

shares will have to be calculated if the

5.

paid just before the year end. This

3.

Conclusion As stated above, examination questions on ratio analysis appear frequently.

Comparisons should only

It is hoped the explanations will help

be made between firms in the

students to make more sensible sugges-

same business. It is inappropriate

tions in their reports and to even enjoy

to compare a heavy engineering

the topic!

company’s statements with those of a company in the leisure industry.

They will have different asset and capital structures.

4.

Some ratios can be calculated

in different ways.

22

Technical

Making good business sense: Creating sustainable business models in China

By Andrew Harding Executive Director - CIMA Markets As with all critical business challenges, corporate sustainability is an area where opinion is much divided.

On the one hand, management gurus like Peter Drucker declared that the purpose of a company is to serve society. On the other, academics such as Dr Aneel Karnani argue that corporate social responsibility (CSR) is a flimsy illusion - and that the business world will only mend its ways if government regulation is introduced.

Both viewpoints have some value. But if China and other global players are to avoid being hit by the type of financial turbulence currently being experienced in the West, lessons must be learned from the highrisk, short-term strategies that led to the current crisis. For this to happen, companies must ensure that not only are they sustainable in terms of their impact on the environment but that their business model is strategically sustainable as well.

For this to happen, businesses need to take a closer look at how corporate practices can add value in terms of cost. While social and environmental initiatives are undoubtedly important, the business sustainability that CIMA is keen to champion is that of ensuring businesses around the world are implementing strategies that reduce cost,

create a more sustainable supply chain, motivate staff and generate respect from customers.

To do this effectively, business leaders will need the support of management accountants. A growing number of leading international companies including Ernst & Young, Mercedes-Benz, IBM and Procter & Gamble, are choosing CIMA members (chartered

management accountants) to help them develop sustainable business models. This is because, unlike other accountancy qualifications which focus on traditional accounting practices, CIMA equips its members with the knowledge and tools to work with many different parts of an organisation as business partners. Our members are known for supporting strong decision making by providing: quality information, systems and processes; business mapping and monitoring; risk management; cost leadership; and transparency.

The CIMA qualification combines technical knowledge with an entrepreneurial mindset. This unique skillset enables our members to help companies develop leaner, more robust strategies. For this reason, finance professionals are in an ideal position to help business leaders embed sustainability into the DNA of both public and private sector organisations - by pinpointing key sustainability drivers and integrating them into business strategy.

CIMA is also helping governments around the world to support businesses as they move towards sustainability. The institute is working with the Prince of Wales’s Accounting for Sustainability project in the UK and its joint venture with the Global Reporting Initiative, known as the International Integrated Reporting Committee - which recently met in Beijing. Both these groups take an active role in lobbying the G20 governments into taking swift action to address the business challenges ahead.

Clearly, CIMA supports prudent regulation. The recent financial crisis has taught us that laws and regulation have their place. But that is only half the story. If we are to develop a sustainable economic environment then professionalism within business – doing the right thing even when nobody is looking - is vital. It may not be possible to completely eradicate dishonesty from the business world. But if integrity and accountability have the upper hand, those who transgress should have far less impact on the global community in future.

24

Corporate Governance

Pressure builds on

NEDs PricewaterhouseCoopers,

January 2011, “Pressure builds on non-executive directors, with time commitment increasing by 20% but little change in pay, says PwC report”

The financial crisis has put significant extra pressure on non-executive directors, with average time spent on the job rising by 4 days this year to an average 24 days. The extra time commitment has been driven by risk and regulatory requirements combined with greater business challenges, according to PwC’s 2010 nonexecutive director report.

Given the increased time demands and reputational risk, nearly half (45%) of nonexecutives now consider their fees too low and that a 25% increase would be appropriate. The average (median) fee increase among the 53 FTSE 100 companies that increased pay in 2010 was 11%, taking the average pay for a non-executive director in the FTSE 100 to £57,000.

globalaccountantmagazine.com

Philip Wright, partner at PwC who chairs the firm’s FTSE 350 non executive director programme, commented:

Sean O’ Hare, remuneration partner at PwC, commented: “Non-executive directors recognise that it would be insensitive to push for pay hikes at a time when companies are under huge financial pressure. Indeed 60% of the non-executives surveyed do not envisage a fee increase over the next financial year. But pent-up demand is likely to feed through to pay rises over the next two to three years.”

“To some extent pay will always remain relatively low compared with executive directors, as non-executives never want to jeopardise their perceived independence by being reliant on their fees. One day they may need to take the ultimate stand of resigning.”

“While the non-executive role is more rewarding than ever, there is a risk that the extra time demands will make the role less viable for individuals who have full-time positions elsewhere.

It would be disappointing if a company could not attract a chief executive as a non-executive, given the perspective and experience that such a person can bring to the job.”

For those non-executive directors who think the job has become less appealing, the majority cited the increased regulatory burden and reputational risk associated with the role.

Indeed non-executive directors regard regulatory requirements as the biggest hindrance to their ability to do their job (27% of respondents) followed by lack of time to debate issues (17%).

Sean O’ Hare, remuneration partner at PwC, commented: “When companies were confronting the worst recession since the 1930s, many non-executives felt they should

Perhaps reflecting the lower priority that non-executive directors place on fees, the report shows that 63% of non-executives feel the role has become more attractive over the past few years due to its challenging nature and the ability to add value.

have been allowed to focus on steering the business through the downturn, rather than grappling with layer upon layer of corporate governance. There is a sense among many nonexecutive directors that the economic crisis was related

more to risks in the financial services sector than corporates in general. There is consequent frustration among non-executives at the extent of regulatory focus on executive pay. ” On executive remuneration, the survey provides the perspective of the non executive directors who chair remuneration committees. Remuneration committee chairs feel their main challenge over the next year will be designing incentives linked to performance and business strategy. Managing executive and shareholder expectations are also expected to be significant issues. Indeed over half (51%) of remuneration committee chairs think shareholder representative bodies and proxy voting agencies hinder engagement on remuneration matters.

Sean O’Hare added: “Non-executive directors have been frustrated by what they see as the ‘finger wagging’ of institutional shareholders on remuneration issues. This is a marked contrast to the wooing exhibited by ‘buy-side’ shareholders.

Instead of focusing on rules, non-executive directors would like shareholders to help come up with solutions. With the FRC’s Stewardship Code published in July to promote better engagement between investors and companies, dialogue should become more constructive.”

25

26

Interview

Q&A

Q.

What subject area did you study at University? How did you balance your education with your social life?

A. I did a BA (Hon) Accounting and Finance and an MSc Accounting with Finance.

Anna chose to do a three year BA (Hon) Accounting and Finance degree at London South Bank University, so she could also get exemptions from nine of the ACCA exams.

She started her accounting career as a credit controller for a greetings card company, after a couple of years, she widened her accountancy skills and changed her job to manage the accounts payable department of a fashion designer.

She says: “….. be prepared to work hard, practice, attend all classes and keep yourself up to date by reading good publications such as the Global Accountant magazine” Anna now has an MSc Accounting with Finance and has completed her ACCA studies.

She is a qualified accountant and is a lecturer at London South Bank University.

I balanced work and study by making sure I had dedicated study time and dedicated time off to relax. Each time I sat down to study I set myself a goal that need to be achieved by the time I finished studying. I also rewarded myself after study.

Q.

Do you currently have or studying towards any professional qualifications? How are you benefiting from it?

A. I am an ACCA. I am currently considering the PGCHE (Post Graduate Certificate in Higher Education) and also a Phd. Being a qualified accountant has allowed me to follow a career as a university lecturer.

Q.

Q.

Tell us about your main skills which enabled you to obtain your current job?

A. My qualification is the main skill that enabled me to obtain my job.

Also my ability to communicate and work with other people is very important.

Q.

What are the most important aspects of your job?

A. The most important aspect of my job is when I am in the classroom, being prepared with material and ensuring students achieve the learning outcomes set at the beginning of the class.

Q.

What do you think makes a good team?

A. A good team is a group of people who understand each other’s strengths and weaknesses and are then able to use this knowledge to achieve their objectives.

Q.

Why are you interested in this career?

Where do you see yourself in five years time?

A. I am interested in this career because once I qualified as an accountant, I realised how much I enjoy relating to people and sharing the knowledge that I have.

There is nothing more rewarding than watching a student suddenly understand something.

A. With a PGCHE or a Phd (or both but who am I kidding)!

Q.

A. Its hard work but with dedication it is definitely achievable.

What are your biggest achievements?

A. My degree, my ACCA qualification and my MSc.

Q.

What advice would you give to students and other professionals who wish to follow a career in your field?

28

Business English

Bonds

Derivatives

Bonds are loans to local and national governments and to large companies. The holders of bonds generally receive fixed interest payments, once or twice a year, and get their money known as the principal - back on a given maturity date. This is the date when the loan ends.

Derivatives are financial products whose value depends on - or is derived from - another financial product, such as stock, a stock market index, or interest rate payments. They can be used to manage risks associated with securities, to protect against fluctuations in value, or to speculate. The main kind of derivatives are Options and Swaps.

Governments issue bonds to raise money and they are considered to be risk free investments.

In Britain government bonds are known as GiltEdged Stock or just Gilts. In the United States they are called Treasury Notes, which have a maturity of 2-10 years, and Treasury Bonds, which have a maturity of 10-30 years.

Swaps Swaps are arrangements between institutions to exchange interest rates or currencies. For example, a company that has borrowed money by issuing floating-rate notes could protect itself from a rise in interest rates by arranging with the bank to swap its floating-rate payments for a fixed-rate payment, if the bank expected the interest rates to fall.

globalaccountantmagazine.com

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.

Warrants

Options

Some companies issue warrants which, like options, give the right, but not the obligation, to buy stocks in the future at a particular price.

They are usually issued along with bonds, but they can generally be detached from the bonds and traded separately. Unlike call options, which last three, six or nine months, warrants have long maturities of up to ten years.

Options are like futures except that they give the right - give the possibility, but not the obligation - to buy or sell an asset in the future. If you buy a call option it gives you the right to buy an asset for a specific price, either at any time before the option ends or on a specific future date. However, if you buy a put option, it gives you the right to sell an asset at a specific price within a specified period or a specific future date. Investors can buy put options to hedge against falls in the price of stocks.

29

30

Study Skills

Th!nk about it About ten years ago employers were looking for candidates with a good high school education, that was the minimum requirement. However, looking at some job requirements these days, a university degree is the accepted minimum for most jobs, especially those advertised by large corporations. Employers are seeking more from candidates. A more advanced qualification, a better classification requirement is on the rise.

Would it be fair to say, ten years later an undergraduate degree will not be enough to satisfy the minimum entry requirements of similar jobs advertised today?

Why has the market turned in the favour of employers? Why are employers demanding more? There are many answers to these questions. Some would say, the demand and supply of such jobs is a result of a simple economics equation.

Employers are seeking better candidates with more advance qualifications, better results and superior interpersonal skills. They can because of that simple equation.

Furthermore, employers want more value for their money.

So, what can current and future graduates do to minimise the effect of time and economics?

As a university undergraduate degree loses its significance, the only reason to obtain a good classification will serve a sole purpose; and that is enabling students to access the further education course they want.

Accounting is becoming more complex. The globalisation of accounting standards and increased regulation places more pressure on employers to recruit only the skilled employees with proven technical knowledge.

As a masters degree and/or a professional qualification will become the minimum accepted requirement for jobs in the future, graduates will be forced rather than choose to embark on further education.

Dependent on the location and career objectives of the prospective student a decision will be made.

This may eventually cause students to stay in education longer and result in a more mature accounting professionals class around the world. It is not difficult to see the dynamics between employers demand, education and the consequences which will derive from their dependent relationship.

Students shall not waste time in obtaining all necessary qualifications and specialising in an area of their choice. Eventually, future graduates will find themselves in a more competitive job market where employers are demanding more than before; at the cost of employee salaries and youth.

Job Skills

Once you identified the skills and qualities you want to highlight, you will need to consider how to present them in the best way. The words you use in your CV and covering letter need to be chosen carefully to create a powerful selling tool. You need to: • Find the right words • Convey benefits • Stress Achievements Your aim is to suggest to the potential employer the advantages of employing you, so choose words with strong impact, which will convey your ability to achieve. The best words to use are action words as these give a sense of participation, involvement and accomplishment. Some examples: Achieve

Decide

Initiate

Negotiate

Produce

Arrange

Develop

Interact

Organise

Select

Calculate

Establish

Mediate

Perform

Simplify

Communicate

Identify

Modify

Persuade

Test

Create

Implement

Motivate

Plan

Work

Avoid lead in phrases such as “my duties included…..”, or “I was in charge of the section which…”. Instead, start with precise action words and benefits e.g. “Organised a charity event which raised over £1000”. Try to avoid the use of “I”, as a CV is a business letter rather than a personal document.

Whenever possible try to use an accomplishment orientated CV which shows results rather than one which is purely information orientated or descriptive. The following examples demonstrate how the same information can be presented in these two different styles.

Accomplishment Oriented: Interacted with auditors to establish improved procedures.

Handled queries and resolved day-to-day problems.

Increased sales when assistant manager by 10% through organising new distribution channels.

Information Oriented: I was an assistant accountant and worked with auditors.

I handled problems.

I worked in sales and distribution channels.

Both statements are valid but the accomplishment oriented statements transmit a feeling of action and achievement. Use accomplishment statements to strengthen your CV and covering letters.

How can you make your CV more powerful

31

32

Job Skills

Teamworking This article focuses on successful teamworking with colleagues, a skill which has become highly valued by employers. Read on to find out what factors help build a successful team, and how you can develop this skill.

Nowadays more and more employ-

Finally, the team leader plays a

As for an individual’s role, as well

ers are investing in teambuilding

significant role in influencing the

as taking the above questions into

activities and a persons teamwork

team. He or she can create a positive

consideration, you need to be aware

skills are considered as a prior-

work environment by motivating staff,

of your individual effect within the

ity when evaluating a person for

and making them feel valued and

team. Think about your successful

employment. Teamwork can be

supported. By staying focused on the

team outcome. What role did you

defined as the collaboration by a

goals of the team, and ensuring that

play? What did you personally do to

group of people to reach shared

this view is shared by team members,

help the team succeed?

goals. Good collaboration by team

the leader can make sure the team

members means goals are achieved

goals, rather than each member’s indi-

more easily. So what are the factors

vidual goals, are achieved.

behind successful teamwork?

In order to focus on the long term Firstly, communication is important

success of your team, there are

in a team. Being able to express

two important issues to consider:

and share ideas, as well as receiv-

a good team performance review

ing clear communication leads to

and each individual’s role within

greater cooperation. With this sense

the team. Reviewing team per-

of cooperation amongst staff, there

formance means looking at the

is greater productivity. Not only can

team’s achievements. You need to

this sense of cooperation benefit the

question whether you, as a team,

organisation externally by portray-

have achieved your goal yet. If so,

ing a positive image to clients, but it

are you satisfied with the quality?

helps the organisation internally as

What caused the success, who

there is more effective communica-

contributed, and in what useful

tion within different departments.

way? If you haven’t reached your objectives yet, what more needs to

Here are some further tips to help you become a better team member.

• Don’t put your own needs first, think of the common goal and getting that done as effectively as possible.

• Always acknowledge and appreciate the contributions of other members of the team.

• Don’t try to force your ideas upon others, or look down on others.

Be willing to cooperate and seek advice from other members.

• Play a proactive role by helping others when possible.

• Work within deadlines so you are never chased for work.

Secondly, the diversity of a team is

be done? If the performance has not

important because it involves having

been successful, you need to think

If you can put these tips into actions,

people whose experience, skills,

about what hasn’t gone well, what

your team members will not only look

interests and contributions comple-

difficulties remain, and what has

forward to working with you every-

ment one another, rather than dupli-

caused the problems. You also need

day, but you will also become a role

cate each other. If we have a team

to think about how these causes

model within your team. In addition

full of creative people who have lots

can be foreseen or minimised if

you will be able to demonstrate your

of new ideas, but the team is lacking

they were to happen again. Finally,

effective teamwork competence to

in people who have the patience to

the team should think about how

prospective employers.

see those ideas through to comple-

performance can be improved and

tion, then achieving the goal is far

these ideas should be incorporated

less likely.

into the team’s process.

REFERENCE This article first appeared at www.britishcouncil.org/learnenglish and is reprinted with the permission of the British Council

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