Global Accountant May / June 2011

IAS 21 Foreign Currency

IAS 11 Construction Contracts

ICAEW opens new office in Beijing

GLOBAL ACCOUNTANT May/June 2011

• News • Corporate Governance • Technical • Business English • Job Skills

The art of defining a problem...

Deciding on May/June 2011 Engagements?

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Editors Desk

GLOBAL ACCOUNTANT

The exam period is here

CONTENT

[again!] and the Global Accountant wishes all who are sitting exams the best of luck. Those who are dedicated will pass.

Much is going on in accounting, the IASB [International Accounting Standards Board] have been very busy specially in Leases [IAS 17] and Revenue Recognition [IAS 18]; please look at the March / April edition for an in depth understanding of how they will change the way we account under these standards.

I would like to say thank you to our readers in the UK, China and Pakistan for their ideas on what they would like to see in the Global Accountant. All our international readers are welcome to contribute their thoughts on areas such as Content, Institute Membership, Careers and Job Skills.

The Global Accountant is now also available on computers and other mobile devices such as the iPad and mobile phones.

This will give you the flexibility to read your Global Accountant anywhere you are! After all we are Global and you are the Accountant, and together we are Global Accountant.

News 03 Brief 04 PwC among top companies for global diversity 05 New measures from the IASB 05 Watchdogs have bite 06 International inquiries into role of audit raise concerns 07 More competition in the U.K. audit market 08 Strong support for removal of UK GAAP 10 Absenteeism 12 Largest graduate intake

Corporate Governance

Contact: +44 (0) 208 1234 066 news@globalaccountantmagazine.com advertise@globalaccountantmagazine.com www.globalaccountantmagazine.com

Š Global Accountant 2011

Technical 15 IAS 21 18 Deciding on Engagements?

22 IAS 11 Construction Contracts 26 The art of defining a problem...

Business English 28 Boston Matrix (BCG Matrix) Value Chain Porters 5 Forces

Job Skills 30 Ask!

13 KPMG auditor acquitted in Hontex case

Published by: Global Accountant South Bank Technopark 90 London Rd., London SE1 6LN UNITED KINGDOM

14 Addressing governance in developing countries

32 Intercultural Competence

Contributors: ACCA PricewaterhouseCoopers IFRS Foundation IIRC HKICPA British Council Deloitte Ernst & Young ICAEW CIMA Special Thanks: Steve Collings, FMAAT FCCA George Glass, CIMA President

May/June 2011

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Brief News

A considerable 31% of new trainees are over 25 while 4% are over 30, suggesting professional services is a popular choice for career changers, also possibly due to a squeeze in other industries.

Strong support for removal of UK GAAP Technical

Art of Defining a Problem and Balanced Scorecards Corporate Governance

by making the effort to learn about new environments, whether it is the language, the customs, or the attitudes of the people, you are demonstrating that you have intercultural competence Job Skills

ASK! In the interview, don’t think you’re

Boston Matrix (BCG Matrix)

the only one who is “on the spot.”

Value Chain

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Commercially, an engagement should be profitable to make it worthwhile for the firm.

But the firm must take care that commercial considerations do not outweigh other matters to be considered.

22

‘a contract specifically entered into for the construction of an asset or a combination of assets that are closely interrelated or interdependent in terms of their design and function or their end use or purpose.’

Porters 5 Forces

26

Management accountants are highly analytical individuals who are also experienced in talking to different professional or managerial groups within organisations

by George Glass, CIMA President

May/June 2011

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News

International News

PwC among top companies for global diversity

PwC Global, May 2011, “PwC named among top companies for global diversity”

For the third year in a row, PwC was chosen among the top three in Diversity Inc’s Top Companies for Global Diversity list. The ranking is based on a study of global diversity best practices in 17 countries.

One of the reasons why PwC made it to the top three is its strong commitment to diversity, which starts at the top of the organisation.

Chairman of the PwC network Dennis Nally says: “I am delighted to see that our diversity efforts are being recognised. Talking with clients and PwC people around the world, I see evidence every day that diversity continues to be top

of mind and is a critical driver to remain relevant in a global market.

To give our people and clients the best experience of working with PwC, we know it’s crucial to value new perspectives and foster a global culture where differences are respected and sought out.”

In addition to this global ranking, the PwC US firm ranked no. 3 in the Diversity Inc Top 50 Companies for Diversity list and was recognised in five of Diversity Inc’s ten specialty lists, including no.1 for recruitment and retention.

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International News

New measures from the IASB

International News

Deloitte UK, May 2011, “Deloitte welcomes new standard setting measures from the IASB”

The latest set of accounting standards published [today] by the IASB covers a wide range of issues but contains much which will clarify current financial reporting.

The most substantial new standards are those on consolidation, IFRS 10, and fair value measurement, IFRS 13. In particular, IFRS 13 will create a single fair value framework that will ensure a consistent approach is applied to fair value measurement across IFRSs. IFRS 10 establishes a consolidation framework and provides helpful application guidance on how to apply a new revised consolidation model to many common scenarios across industries.

Veronica Poole, Head of the Deloitte Global IFRS Leadership Team, said: “These new standards are an improvement on current IFRSs though, as always, they will create challenges for corporate reporting.

In some areas there will be significant work to be done, specifically on the disclosures of fair value measurement for non-financial items and potentially reconsidering some consolidation decisions.

We commend the two boards for producing standards that genuinely converge and will produce greater consistency.”

Andrew Spooner, Deloitte Global IFRS Financial Instruments Lead Partner, added: “The new fair value measurement standard recognises that fair value will always require judgement and therefore different entities may reach different fair value estimates. But now they’ll be making those judgements using the same fair value mindset.”

He also warned that: “For industries that make use of special purpose entities, such as banks, and the fund management industry, they will need to think again about those critical consolidation judgements. Many consolidation decisions will remain the same, but some may change.”

Watchdogs have bite PwC Global, May 2011, “Watchdogs have bite”

The European Parliament has given the goahead for three new European Supervisory Authorities (ESAs) to oversee the activities of banks, securities markets and insurance companies with effect from 2011.

The establishment of the ESAs was proposed by the European Commission in September 2010 as one part of legislative reforms to tackle perceived weaknesses in the way Europe’s financial markets are policed. (See World Watch, Issue 1 2010, page 5).

The new ESAs are the European Banking Authority (EBA), the European Securities and Markets Authority (ESMA) and the European Insurance and Occupational Pensions Authority (EIOPA).

From 1 January 2011, they will collectively watch over the activities of national financial supervisors while helping the European Systemic Risk Board (ESRB) to monitor the build up of risk in the financial system overall.

Under new powers the ESAs can intervene as mediator in the event of disagreement between national supervisors and have the authority to settle disputes. They will also be able to ban risky financial products and activities. “This legislative package is one of the cornerstones in rebuilding economic growth in the EU,” commented Jerzy Buzek, president of the European Parliament.

“The new and strengthened financial supervisory authorities will help to ensure that we avoid deep financial crisis in the future.”

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News

International News

International inquiries into role of audit raise concerns Ill-advised changes to audit which add costs to business for little benefit could result from the volume of official inquiries internationally into the role of audit in the financial crisis , warns ACCA (the Association of Chartered Certified Accountants).

ACCA, in a policy paper Audit under fire: a review of the postfinancial crisis inquiries, addresses the issues which have been raised during investigations by the UK House of Lords, the European Commission and the US senate. In Singapore and elsewhere, regulators are also actively engaged in stakeholder consultations to assess how audit can be enhanced. The EC has promised legislative changes by the end of 2011.

Ian Welch, ACCA Head of Policy said: “Audit is under unprecedented scrutiny in the UK, Brussels and the US, following the global financial

crisis. We have already had the European Commission promising that ‘the status quo is not an option’.

In this paper we examine the various proposals put forward in the course of these inquiries and set out some recommendations for positive reform. Audit plays a vital role in the global economy by instilling trust in company reporting and we believe it needs to be enhanced for the greater benefit of investors and business.

“But it is essential that the changes made add value and are not motivated by the need to be seen as ‘doing something’. Any changes need to meet an appropriate public interest test. Some of the suggestions that have been mooted during the various inquiries, would be, we believe, ineffective and costly.”

Several recurring themes have emerged from the various inquiries including audit concentration, going concern issues, joint audits, mandatory audit rotation and the effect of International Financial Reporting Standards. ACCA is concerned that the political imperative for visible change may result in the wrong measures being adopted. ACCA believes some of the key issues include:

ACCA Global, May 2011, “International inquiries into role of audit raise concerns”

Audit concentration If competition concerns are to be addressed, policymakers need to take action on restrictive covenants and audit liability. Restrictive covenants are an anti-competitive tool, while current audit liability rules provide a powerful disincentive to any firm looking to challenge the ‘Big 4’.

Audit independence Calls for bans on non-audit work are wide of the mark, as are calls for the mandatory rotation of firms; ACCA believes joint audits to be ineffective but are the lesser of two evils compared to rotation. Independent audit committees need a more powerful role and should provide a fuller disclosure on their choice of auditor.

Audit’s role Audits should be enhanced to include perspectives on risk management, corporate governance, and testing the underlying assumptions in business models. There is an ‘expectations gap’ between what stakeholders think auditors are supposed to do and what auditors are actually asked to do. Expanding the role of audit would help narrow this gap.

Going concern Reform of the ‘all or nothing’ approach to going concern should be supported, and a more graded approach adopted.

The issue whereby any modification to a clean audit report becomes

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in itself a going concern problem needs addressing urgently.

Auditor-Regulator dialogue Regulators and auditors need to collaborate with one another rather than work in silos. Mutual trust and understanding are important drivers of effective communication.

Small business The audit of small and medium-sized enterprises needs to be adjusted to ensure audit remains relevant to those entities.

An internationally-supported range of assurance services for small businesses is needed. But policymakers must stop linking audit with ‘red tape’- audit can help small businesses add value to their financial statements, helping to improve access to finance.

International Financial Reporting Standards IFRS did not lead to a lessening of prudence or judgement in audit prior to or during the financial crisis; the system maintains a requirement that companies fairly present their position and performance. Criticisms on this issue are misplaced.

Ian Welch concluded: “Policymakers and legislators have had every right to ask tough questions of auditors in the aftermath of the financial crisis.

We believe enhancements to the role of audit can and should be made. But the changes which ultimately arrive as a result of all the inquiries need to bring real benefit and not be costly tinkering.”

International News

More competition in the U.K. audit market

A Plus the official magazine of HKICPA, May 2011, “Parliament calls for more competition in the U.K. audit market”

The House of Lords Economic Affairs Committee called for a probe on what it termed the oligopoly of the Big Four auditors after an eight-month investigation found that the firms limit competition and choice in the audit market.

The Big Four audit 99 of the FTSE 100 companies, raising concerns of possible market disruption should one of them fail.

“Our inquiry has revealed widespread concern about the Big Four’s dominance and the risk that they could become the Big Three,” said Lord MacGregor, the committee’s chairman.

Despite recommendations put forward by the committee to reduce such dominance, MacGregor said, “We feel that this market concentration is of such significance that a thorough review of the issues by the Office of Fair Trading and possibly the Competition Commission is now overdue.”

The Office of Fair Trading has not yet indicated what action it will take. The committee’s recommendations follow a recent proposal by the European Commission to break up Big Four dominance in the continent’s audit market.

The report also found that complacency among auditors contributed to the financial crisis. It said auditors were either unaware of the mounting dangers in the banks they audited or, if they were, failed to alert the authorities. The report said the lack of regular meetings between the auditors and the regulators constituted a “dereliction of duty.”

“We do not accept the defence that bank auditors did all that was required of them,” the report said.

The committee specifically criticised PwC for not alerting the authorities to the troubles at client Northern Rock PLC, which was rescued by the British government in 2008. The firm said it stands by its audit work. “I am surprised by the committee’s claim that there was a ‘dereliction of duty’ given their stated view that auditors fulfilled their legal duties,” said Ian Powell, chairman of PwC U.K. May/June 2011

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International News

Strong support for removal of UK GAAP Ernst & Young, May 2011, “UK business shows strong support for removal of UK GAAP without further delay”

UK businesses strongly support the introduction of International Financial Reporting Standards (IFRS) and Financial Reporting Standards for Medium-sized Entities (FRSME) as a replacement for UK GAAP, believing that now is the right time to move towards the new model of financial reporting, according to a survey from Ernst & Young.

In an online Ernst & Young poll of 290 companies attending a web seminar on the future of UK GAAP, two thirds said they thought a move to the two IFRS based frameworks was appropriate for the UK at this time, without further delay to the proposed timetable set out by the Accounting Standards Board (ASB). Just 27% expressed a wish to delay the introduction beyond 2014. While only 6% opposed the introduction of IFRS or FRSME altogether.

Prevailing view is that UK GAAP has run its course The views will perhaps come as a surprise to some, following government calls to review the convergence timetable. The financial cost of moving from UK GAAP to IFRS has frequently been cited as an unnecessary burden for many SMEs still reeling from the aftershocks of the economic downturn.

As early as last month the House

of Lords Economic Affairs Committee recommended that IFRS should not be extended to SMEs. Yet the Ernst & Young survey shows that the prevailing view among users and the preparers of accounts is that current UK GAAP has run its course, with majority opinion favouring the move, which could persuade the government to back the ASB’s proposals.

Andrew Davies, Ernst & Young partner in Financial Accounting Advisory Services comments, “This

is a clear vote in favour of wider IFRS application in the UK and is consistent with the views being expressed in most comment letters submitted to the ASB (as of mid April 2011).

“Participants in the web seminar represented a broad selection of UK corporates, with many coming from private UK companies or subsidiaries of non-IFRS preparers, who have had no experience of IFRS reporting to date. Their willingness to embrace IFRS

frameworks is therefore particularly striking.”

Davies adds, “UK entities reporting under UK GAAP cannot move to IFRS with reduced disclosures or the FRSME today, but a number are expected to early adopt once the ASB’s proposed standard has been finalised. This could help consistency of reporting globally, remove the need for reconciliations and improve corporate governance. Every company in the UK and Ireland reporting under UK GAAP or Irish GAAP will be affected. The ASB does listen, so it is important that everyone with an opinion makes their views known now.”

To FRSME or not to FRSME Just over a third (35%) of seminar participants said they expect to adopt EU-endorsed IFRS, while 24% propose to adopt the FRSME. The remainder (41%) were undecided or did not know.

These responses, considered together with a response that 50% of companies already have a conversion project underway, may suggest some are making their IFRS framework choice without first considering the related issues. Davies believes it is important to identify and assess the range of business impacts – as well as tax and accounting impacts – that result from the adoption of either IFRS or the FRSME.

Managing conversion successfully Under current timetables, the first mandatory non-UK GAAP financial

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statements would apply to 30 June 2014 year-ends, with a 1 July 2012 transition balance sheet. While it may seem a long way off, Ernst & Young cautions that time quickly disappears when all intervening steps are considered, including that IFRS conversion must take place alongside normal management activities.

“It can take one to two years to consider, in a structured way, all the implications and to embed the new accounting framework in systems, culture and processes,” says Geoff Ranson, director in Ernst & Young’s Financial Accounting Advisory Services team. “I have been advising a mid-tier company with UK-only operations which has taken two years to go through this process. In this case there was a

lot of complexity in certain aspects of the company’s operations and contracts. And the analysis had to be performed alongside business as usual.”

3 Implementation: applying research to derive conclusions and calculate differences.

4 Drafting new statutory accounts and accounting policies.

Careful planning holds the key to success. Looking just at the accounting implications, Ernst & Young says that there are four key stages to the IFRS conversion process.

1 Impact assessment: identifying potential GAAP differences that could impact on the business.

2 Solution development: further research is conducted in the business, looking at the underlying contractual arrangements and business operations to conclude on GAAP differences.

Davies concludes, “The ASB comment period ends on 30 April. It is important that all those affected by the proposals express their opinions. It is also vital that companies begin their planning processes early. There are a number of issues to consider in determining what frameworks to adopt and when to convert. Projects require careful management to ensure that decisions on accounting frameworks align with the entity’s strategic direction.”

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International News

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Absenteeism PwC, April 2011, “Absenteeism costing UK business £32 billion a year, with workers taking almost double the number of ‘sick’ days as US counterparts”

Absenteeism costing UK business £32 billion a year, with workers taking almost double the number of ‘sick’ days as US counterparts, says PwC UK workers have an average (median) 10 days unscheduled absence from their jobs each year, around twice that of their counterparts in the US (5.5 days) and Asia- Pacific (4.5 days), but on a par with Western Europe (9.7 days). Sickness accounts for around 80% of absence, which also covers jury service and compassionate leave.

With the average UK salary around £25,000, absenteeism is costing British business approximately £32 billion per annum, far more than previous studies have suggested.

This figure is also likely to be conservative, as it reflects direct cost of absence and does not take into account potential replacement costs and lost productivity. Richard Phelps, HR consulting partner at PwC, commented: “Absenteeism is a malaise for British business. With sickness accounting for the lion’s share of absence, the question for employers is what can be done to improve health, morale and motivation.

The line between ‘sickie’ and ‘sickness’ can be blurred, with disenchantment at work sometimes exacerbating medical conditions or preventing a speedy return. “One might assume the perceived US work culture of long hours and short holidays could lead to higher stress and sick rates. Our data suggests otherwise, or perhaps demonstrates that strong employee engagement and commitment can override workplace pressures. For a variety of reasons, there seems to be a hunger among workers in US and Asia to go the extra mile.”

PwC’s analysis suggests more flexible labour laws in the US and Asia

could also play a part, with a sense among workers that there is more at stake if they are not committed. Richard Phelps, HR consulting partner at PwC, commented: “Keeping staff engaged is arguably the biggest part of the battle, but you also need clear policies in place to make it less appealing for people to take unwarranted leave, while protecting those people with genuine illness. “There’s also a question of whether UK employers should be investing more in the health of their workforce. US firms tend to take greater responsibility for staff well- being, whether providing gyms in the workplace or access to councillors.”

globalaccountantmagazine.com

sick?!

Absence levels, and how employers approach the problem, vary significantly for different industries. According to PwC, technology companies have the lowest absence rates of any sector, at 7.6 days. Richard Phelps, HR consulting partner at PwC, commented: “Technology firms are often innovative in all that they do, including keeping employees committed. Intellectual capital is hugely important for these businesses, so making sure they get the best out of their people and avoid unnecessary absence is a priority.”

Banking and finance is just behind technology, with absence aver-

aging 7.8 days. Richard Phelps, HR consulting partner at PwC, commented: “People who work in financial services tend to be highly motivated and for some roles even a day’s unexpected leave can have a significant impact on results and reward. There simply isn’t the culture for absenteeism come rain or shine, people get into work”. The research highlights the impact workplace culture can have on absence. PwC’s data shows the public sector has the highest absence levels, averaging 12.2 days.

Absenteeism is also a problem for retail and leisure, at 11.5 days.

Richard Phelps, HR consulting partner at PwC, said: “While sometimes absence from work is unavoidable, once people see colleagues frequently taking unscheduled leave, absence becomes less of a dilemma and more of a right. Breaking the cycle can be hard. Retailers take a robust approach, with pay docked almost immediately. With retail resigna-

tion rates substantially higher than other sectors, some could argue this is hindering morale. But with a largely unskilled, often temporary staff base, boosting engagement is extremely difficult.”

PwC’s research comes at a time when the Government is conducting a major review of sickness absence. The independent review is focusing on combating long-term absence, which makes up 40% of the UK’s sickness rate according to PwC’s figures, and for which the State and the taxpayer stump up most of the costs. Richard Phelps, HR consulting partner at PwC added: “Short-term absence – which we classify as 5 days or less – can all too often spiral into longterm sick leave, and similar issues are often at play. The root cause is frequently a problem at work, so until this is treated you’re not going to get the person affected back in their job.”

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International News

Largest graduate intake PwC, April 2011, “Largest ever Spring graduate intake at PwC”

people applied for each vacancy.

This amounts to a massive 446% increase in applications to the Spring entry on 2009 applications, and a 192% increase on last year.

• PwC recruits record number of graduates in 2011 • Firm receives 30 applications for each vacancy • Successful applicants beat off stiff competition • Career changers seek less volatile industry PwC has welcomed 209 new graduates in April, the highest ever number to join through its annual Spring intake. The increase is testament to the fact that the firm has continued to maintain and increase its internship and full time graduate numbers throughout the recession and the recovery to prepare for growth.

Some 5,877 applications were received for 209 places to start in Spring, meaning that around 30

Although the majority graduated last year, a third of this intake graduated in 2008 and 2009, demonstrating how even some of the best of those who graduated mid recession are only now entering the employment market. Soaring application levels show that PwC is an increasingly attractive option for more and more people looking to start their career, or indeed begin a new one.

Welcoming the new recruits to the firm, Ian Powell, PwC Chairman and Senior Partner, advised them to take control of their own career destiny: “The recovery is bringing fresh opportunities and the business is growing, so maintaining and increasing the investment and value we have placed in our graduate recruitment numbers has massively paid off. The firm is not content with being number one; we are always pushing to go beyond that.

We want to be in a different space to our competitors and our people are vital in achieving that. In the

recession we cut back on discretionary spend and kept as many in employment as possible.”

Richard Irwin, PwC head of student recruitment, said: “PwC is committed to recruiting graduate talent with a diverse range of experience, and the firm’s Spring intake provides a compelling opportunity for students who don’t want to wait until September to commence their careers. Only a quarter of the new Spring trainees studied accounting, banking and finance degrees, while over a quarter studied science and engineering. This is just one aspect of the kind of diversity we value so highly in our graduate recruits.”

The shifting post-recession job market is forcing new graduates to make difficult choices. A considerable 31% of new trainees are over 25 while 4% are over 30, suggesting professional services is a popular choice for career changers, also possibly due to a squeeze in other industries.

PwC has been voted High Fliers Top Graduate Employer of the Year award for an unprecedented eighth year in a row.

Asian News

ICAEW opens Beijing office The Institute of Chartered Accountants in England and Wales opened a regional office in Beijing to raise its profile and attract members in China and Hong Kong.

Corporate Governance

referring to KPMG partners Jack Chow Siu-liu and Money Chow Man-yee, who were Leung’s supervisors. Both of them denied that they accepted any money or gifts from Chan.

KPMG said in a statement released after the ruling that it is committed to acting lawfully and ethically.

The firm declined to comment on whether Leung would be restored to his job.

KPMG auditor acquitted in Hontex case Senior manager says he was forced to accept bribe.

KPMG senior manager Leung Szechit has been cleared of taking bribe for his work on the HK$1 billion initial public offering of Hontex International Holdings Co. in December 2009.

The Independent Commission Against Corruption charged that Leung, 33, accepted HK$300,000 from Chan Chau-wan, a consultant for Hontex, to overlook accounting errors in the Fujian fabric maker’s IPO prospectus. The watchdog also accused Leung of persuading his assistant, Suki Lau Shuk-ting, to take HK$100,000. But District Court Judge Stephen Geiser ruled last month that the prosecution failed to prove beyond reasonable doubt that Leung intended to take the money from Chan as a reward.

Leung was arrested in April last year after Lau reported the incident to KPMG, which then referred the case to the ICAC. Leung told the court that he was forced to accept the money from Chan in the lobby of Prince’s Building and planned to return it to her but failed.

Piera Ho Wing-suen, a risk management partner at KPMG, told the court that Leung had quoted Chan as saying it was easier to give money to his two bosses. Leung told Ho that he assumed she was

The Securities and Futures Commission suspended trading of Hontex shares in March last year for allegedly using false or misleading information in its prospectus.

The SFC also obtained a court order freezing the funds raised from the IPO as future compensation to investors. Jonathan Li, an SFC spokesman, told Bloomberg last month that it is preparing to file additional court documents in an effort to restore the IPO funds to investors.

In a separate development, mainland police arrested He Xuekui, the controlling share- holder and chairman of the Shenzhen-listed Yunnan Green-Land Biological Technology Co. for allegedly cheating in the company’s IPO three years ago.

The China Securities Regulatory Commission instigated an investigation into the company last year for allegedly inflating profits and the value of its assets.

A Plus the official magazine of HKICPA, May 2011, “KPMG auditor acquitted in Hontex case”

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Corporate Governance

Addressing governance in developing countries

PwC, May 2011, “Addressing governance in developing countries”

A study of corporate governance disclosure requirements in 22 developing countries finds listed companies are required to provide significantly less information than their counterparts in developed countries. The results identified a number of common disclosure requirements and regulatory areas where standards could be raised to meet the expectations of capital providers, based on good international practice.

The Intergovernmental Working Group of Experts on International Standards of Accounting and Reporting (ISAR) commissioned the study to assess the state of corporate governance reporting in countries with relatively small equity markets (frontier markets).

• Financial transparency • Ownership structure and exercise of control rights • Board and management structure and process • Auditing • Corporate responsibility and compliance

The corporate governance disclosure requirements of relevant laws and stock exchange listing rules were compared against the ISAR benchmark of good practices identified in the Guidance on good practices in corporate governance disclosure issued by UNCTAD. The study assessed disclosure in five key areas:

There was even less disclosure of some areas than in 2009. For example, only one country (Nigeria) requires disclosure of the board’s responsibilities for financial communications; and only Croatia requires disclosure of the board’s confidence in their external auditors’ independence and integrity.

Disclosing the impact of environmental and social responsibility policies on sustainable development is not mandatory in any of the frontier markets.

The findings identified that the majority of the emerging markets studied do not have mandatory disclosure rules for most of the items in the ISAR benchmark of good practices. This contrasts with earlier UNCTAD studies of larger emerging markets where most of the benchmark items were subject to mandatory disclosure rules.

The best performing ‘frontier’ markets in the study, which require half or more of the ISAR benchmark items, were Slovenia, Nigeria, Croatia and Lithuania. www.unctad.org/isar

Technical

IAS 21 Deloitte & Touche, May 2011, “IAS 21 The Effects of Changes in Foreign Exchange Rates”

Basic Steps for Translating Foreign Currency Amounts into the Functional Currency Steps apply to a stand-alone entity, an entity with foreign operations (such as a parent with foreign subsidiaries), or a foreign operation (such as a foreign subsidiary or branch).

1 the reporting entity determines its functional currency

2 the entity translates all foreign currency items into its functional currency 3 the entity reports the effects of such translation in accordance with paragraphs 20-37 [reporting foreign currency transactions in the functional currency] and 50 [reporting the tax effects of exchange differences].

Foreign Currency Transactions A foreign currency transaction should be recorded initially at the rate of exchange at the date of

the transaction (use of averages is permitted if they are a reasonable approximation of actual).

At each subsequent balance sheet date: • foreign currency monetary amounts should be reported using the closing rate • non-monetary items carried at historical cost should be reported using the exchange rate at the date of the transaction • non-monetary items carried at fair value should be reported at the rate that existed when the fair values were determined.

Exchange differences arising when monetary items are settled or when monetary items are translated at rates different from those at which they were translated when initially recognised or in previous financial statements are reported in profit or loss in the period, with one exception. [IAS 21.28] The exception is

that exchange differences arising on monetary items that form part of the reporting entity’s net investment in a foreign operation are recognised, in the consolidated financial statements that include the foreign operation, in other comprehensive income; they will be recognised in profit or loss on disposal of the net investment. [IAS 21.32] As regards a monetary item that forms part of an entity’s investment in a foreign operation, the accounting treatment in consolidated financial statements should not be dependent on the currency of the monetary item. [IAS 21.33] Also, the accounting should not depend on which entity within the group conducts a transaction with the foreign operation. [IAS 21.15A] If a gain or loss on a non-monetary item is recognised in other comprehensive income (for example, a property revaluation under IAS 16), any foreign exchange comMay/June 2011

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Technical

ponent of that gain or loss is also recognised in other comprehensive income. [IAS 21.30]

Translation from the Functional Currency to the Presentation Currency The results and financial position of an entity whose functional currency is not the currency of a hyperinflationary economy are translated into a different presentation currency using the following procedures: [IAS 21.39] • assets and liabilities for each balance sheet presented (including comparatives) are translated at the closing rate at the date of that balance sheet. This would include any goodwill arising on the acquisition of a foreign operation and any fair value adjustments to the carrying amounts of assets and liabilities arising on the acquisition of that foreign operation are treated as part of the assets and liabilities of the foreign operation [IAS 21.47]; • income and expenses for each income statement (including comparatives) are translated at exchange rates at the dates of the transactions; and • all resulting exchange differences are recognised in other comprehensive income.

Special rules apply for translating the results and financial position of an entity whose functional currency is the currency of a hyperinflationary economy into a different presentation currency. [IAS 21.42-43]

Where the foreign entity reports in the currency of a hyperinflationary economy, the financial statements of the foreign entity should be restated as required by IAS 29, Financial Reporting in Hyperinflationary Economies, before translation into the reporting currency. [IAS 21.36]

Disposal of a Foreign Operation

The requirements of IAS 21 regarding transactions and translation of financial statements should be strictly applied in the changeover of the national currencies of participating Member States of the European Union to the Euro - monetary assets and liabilities should continue to be translated the closing rate, cumulative exchange differences should remain in equity and exchange differences resulting from the translation of liabilities denominated in participating currencies should not be included in the carrying amount of related assets.

relating to that foreign operation shall be recognised in profit or loss when the gain or loss on disposal is recognised. [IAS 21.48]

When a foreign operation is disposed of, the cumulative amount of the exchange differences recognised in other comprehensive income and accumulated in the separate component of equity

Disclosure • The amount of exchange differences recognised in profit or loss (excluding differences arising on financial instruments measured at fair value through profit or loss in accordance with IAS 39) [IAS 21.52(a)] • Net exchange differences recognised in other comprehensive income and accumulated in a separate component of equity, and a reconciliation of the amount of such exchange differ-

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ences at the beginning and end of the period [IAS 21.52(b)] • When the presentation currency is different from the functional currency, disclose that fact together with the functional currency and the reason for using a different presentation currency [IAS 21.53] • A change in the functional currency of either the reporting entity or a significant foreign operation and the reason therefor [IAS 21.54] When an entity presents its financial statements in a currency that is different from its functional currency, it may describe those financial statements as complying

with IFRS only if they comply with all the requirements of each applicable Standard (including IAS 21) and each applicable Interpretation.

[IAS 21.55]

Convenience Translations Sometimes, an entity displays its financial statements or other financial information in a currency that is different from either its functional currency or its presentation currency simply by translating all amounts at end-of-period exchange rates. This is sometimes called a convenience translation. A result of making a convenience translation is that the resulting financial information does not comply with all IFRS,

particularly IAS 21. In this case, the following disclosures are required: [IAS 21.57] • Clearly identify the information as supplementary information to distinguish it from the information that complies with IFRS • Disclose the currency in which the supplementary information is displayed • Disclose the entity’s functional currency and the method of translation used to determine the supplementary information

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Deciding on Engagements?

T

he syllabus for Paper P7, Advanced Audit and Assurance includes Professional Appointments (syllabus reference C4). The learning outcomes include the explanation of matters that should be considered and procedures that should be followed by a firm before accepting a new client, a new engagement for an existing client, or agreeing the terms of any new engagement. The engagement may be an audit, or it may be a non-audit or

assurance engagement. Acceptance decisions are crucially important, because new clients and/or engagements can pose threats to objectivity, or create risk exposure to the firm, which must be carefully evaluated.

One of the current issues being debated in the profession is whether there should be an outright ban on the provision of non-audit services to audit clients. In addition, new International Standard on Auditing (ISA) requirements compel

ACCA Global, May 2011, “ Acceptance decisions for audit and assurance engagements� [Technical article by Lisa Waver examiner for Paper P7]

the firm to establish whether preconditions for an audit are present when faced with a potential new audit engagement.

All of these factors mean that acceptance decisions must be taken with care.

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Accepting new audit clients IFAC’s Code of Ethics for Professional Accountants states:

‘Before accepting a new client relationship, a professional accountant in public practice shall determine whether acceptance would create any threats to compliance with the fundamental principles. Potential threats to integrity or professional behaviour may be created from, for example, questionable issues associated with the client (its owners, management or activities).’ This means that when approached to take on a new client, the firm should investigate the potential client, its owners and business activities in order to evaluate whether there are any questions over the integrity of the potential client which create unacceptable risk.

These investigative actions are usually performed as ‘know your client/customer’ or ‘customer due diligence’ procedures, which are also carried out in order to comply with anti-money laundering regulations.

Once a client has been accepted, the firm should consider the suitability of the specific engagement it has been asked to perform. In particular there may be ethical threats which mean that the engagement should not be accepted, in particular whether there are any threats to objectivity. Potential threats could

arise for example, if members of the audit firm hold shares in the client or there are family relationships. If threats are discovered, it may not mean that the client must be turned down, as safeguards could potentially reduce the threats to an acceptable level.

There may be other ethical matters to evaluate in relation to a potential new engagement, for example, whether any conflict of interest or confidentiality issues could arise, and if so, whether appropriate safeguards can be put in place.

Also, the firm’s competence to perform the potential work should be evaluated, especially if the potential client operates in a specialised industry, or if the client has a complex structure. A self-interest threat to professional competence and due care is created if the engagement team does not possess, or cannot acquire, the competencies necessary to properly carry out the engagement. Practical matters such as the resources needed to perform the work, the deadline for completion, and logistics like locations and geographical spread will have to be looked into as well.

Obviously, these matters need to be evaluated in the specific context of the potential engagement, and should be fully documented. Different types of potential engagement will give rise to different matters that should be evaluated. For example, if the firm is asked to perform the audit of a large group of companies with operations in many countries, then resourcing the audit may be the most significant issue. The fee may

be large, leading to a self- interest threat of fee dependence. On the other hand, if asked to perform the audit of a small owner-managed company, fee dependence is less likely to be an issue, but threats potentially created by the auditor appearing to make management decisions could be significant. In answering requirements on client and engagement acceptance, candidates are warned that their comments must be made specific to the scenario presented to them in order to pass the requirement.

Commercially, an engagement should be profitable to make it worthwhile for the firm. But the firm must take care that commercial considerations do not outweigh other matters to be considered.

IFAC’s Code makes it clear that acceptance decisions are not to be treated as a one-off matter. The Code states: ‘It is recommended that a professional accountant in public practice periodically review acceptance decisions for recurring client engagements.’ Changes in the circumstances of either the client, or the audit firm may mean that an engagement ceases to be ethically or professionally acceptable or creates a heightened level of risk exposure. Therefore, client continuance assessments are important and should be fully documented.

Preconditions for an audit Once a firm has decided to go ahead with an audit engagement, it must comply with the requirements of ISA 210, Agreeing the May/June 2011

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Terms of Audit Engagements. ISA 210 was revised as part of the International Auditing and Assurance Standards Board’s Clarity Project, with new requirements to perform specific procedures in order to establish whether the preconditions for an audit are present.

ISA 210 defines preconditions for

an audit as follows: ‘The use by management of an acceptable financial reporting framework in the preparation of the financial statements and the agreement of management and, where appropriate, those charged with governance to the premise on which an audit is conducted.’

This means that the auditor must do two things. First, the auditor must determine the acceptability of the financial reporting framework to be applied in the preparation of the financial statements. This includes evaluating whether law or regulation prescribes the applicable financial reporting framework, considering the purpose of the financial statements, and the nature

it acknowledges and understands its responsibility: • For the preparation of the financial statements in accordance with the applicable financial reporting framework.

• For internal controls to enable the preparation of financial statements which are free from material misstatement, whether due to fraud or error.

• To provide the auditor with access to all information necessary for the purpose of the audit.

In relation to the final bullet point, if management impose a limitation on the scope of the auditor’s work in the terms of a proposed audit engagement, the auditor should decline the audit engagement if the limitation could result in the auditor having to disclaim the opinion on the financial statements.

The engagement should also be declined if the financial reporting framework is unacceptable, or if management fail to provide the agreement outlined above. (ISA 580, Written Representations also requires that management provide written representations regarding its responsibilities in relation to the preparation of financial statements.)

of the reporting entity (for example, whether a listed company or a public sector entity). In most cases this will simply be a matter of confirming with the client that the financial statements will be prepared under International Financial Reporting Standards, or other national reporting framework.

Second, the auditor must obtain the agreement of management that

Accepting non-audit assignments It is very common for audit clients to approach their auditor for the provision of additional services, ranging from audit related services such as tax planning and bookkeeping, to other engagements such as due diligence and forensic investigations. The audit firm must again carefully consider whether it

is ethically and professionally acceptable to take on the additional service.

The main ethical threat created by the provision of non-audit services is the threat to objectivity. The threats created are most often selfreview, self- interest and advocacy threats and if a threat is created that cannot be reduced to an acceptable level by the application of safeguards, the non-audit service shall not be provided. The UK Auditing Practices Board’s (APB) Ethical Standard 5, Non-audit services provided to audit clients contains similar principles, and emphasises the ‘management threat’ which exists when the audit firm makes decisions and judgments that are properly the responsibility of management.

Both the Code and ES 5 outline a principles-based approach to determining the acceptability of

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involved with any decision as to whether the audit firm can be engaged to provide a non-audit service. Therefore, when approached to provide a non-audit service to an audit client, there should be full discussion with those charged with governance, including the audit committee, with a view to seeking approval for the engagement to go ahead.

a non-audit service to an audit client. With a few exceptions, if safeguards can reduce threats to an acceptable level then the service may be provided. Safeguards could include using separate teams to provide the various services to the client, and the use of second partner review or Engagement Quality Control Review. ES 5 specifies that it is the audit engagement partner who should evaluate the level of threat, the effectiveness of safeguards, and is ultimately responsible for the documentation of the acceptance decision.

The provision of non-audit services to audit clients continues to be debated by the profession. Many argue in favour of outright prohibition as being the only measure which can totally safeguard auditor’s objectivity. However, it is accepted that audit firms are best placed to provide audit clients with additional services due to the

knowledge of the business which they already possess, leading to a lower cost and higher quality service than that would be provided by a different firm. In 2010 the APB issued a feedback and consultation paper The provision of nonaudit services by auditors, which prompted continued discussion of these issues and recommended a number of measures to: • Increase the rigour with which auditors assess threats to their independence • Introduce a new non-audit services disclosure regime and • Increase the role of Audit Committees in overseeing the retention of a company’s auditors to undertake non-audit services.

The final bullet point is important as it links to corporate governance.

Under many codes of corporate governance, including the UK Corporate Governance Code, the client’s audit committee should be

As well as considering independence and objectivity, audit firms should remember that the fundamental ethical principles apply to non-audit services, just as they apply to audits. Therefore, when considering whether to provide a non-audit service, the firm should evaluate its competency to perform the work, whether confidentiality is an issue, and that it is able to comply with all relevant laws and regulations.

As discussed above, in answering requirements to do with non-audit services, candidates’ answers must apply knowledge to the specific scenario provided in order to score well.

Conclusion The evaluation of new engagements is a crucial part of successful practice management. The current debate over the acceptability of auditors providing non-audit services to their audit clients indicates that ethical matters will continue to play an important part in acceptance decisions.

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IAS 11 Steve Collings, FMAAT FCCA FCCA is the audit and technical partner at Leavitt Walmsley Associates Ltd and the author of ‘The Interpretation and Application of International Standards on Auditing’ (Wiley March 2011).

Construction Contracts

Students studying financial reporting papers will often come across the concept of accounting for construction contracts. Depending on the complexity of your financial reporting studies, accounting for construction contracts can become quite complex but with adequate question practise, they can become very simple.

The key to these types of questions is to do them in a methodical format.

revenue (and thus profit) recognition. Contracts can last for several years and a standard was therefore required to deal with revenue recognition in relation to long-term construction contracts.

Accounting for construction contracts is dealt with in IAS 11 Construction Contracts. This article will look at the core principles involved in IAS 11 and at the end of the article will look at a worked example.

The first thing to understand is what a construction contract actually is.

According to IAS 11, a construction contract is: ‘a contract specifically entered into for the construction of an asset or a combination of assets that are closely interrelated or interdependent in terms of their design and function or their end use or purpose.’

Percentage of Completion Method

The principal concern of accounting for long-term construction contracts involves the timing of

To avoid distortions in the presentation of periodic financial statements, the percentage of completion method was developed which reports the revenues proportionally to the degree to which the projects are being completed.

The percentage of completion method is a method of accounting that recognises income on a contract as work progresses by matching contract revenue with contract costs incurred, based on the proportion of work completed.

The problem in dealing with the percentage of completion method lies in accurately deciphering the extent to which the projects are being finished and to assess the ability of the entity to actually bill and collect for the work done.

The percentage of completion method uses the contract account

to accumulate costs and to recognise income. Under the provisions of IAS 11, income is not based on advances (cash collections) or progress billings. Any advances and progress billings are based on contract terms that do not necessarily measure contract performance.

Where costs and estimated earnings in excess of billings occur, the excess is classified as an asset. If billings exceed costs and estimated earnings, the difference is treated as a liability.

There are two ways in which the stage of completion can be calculated: Work Certified Method Work certified todate / total contract price Cost Method Total costs incurred todate / total contract costs

Contract Costs All contract costs are costs that are identifiable with a specific contract plus those that are directly attributable to contracting activity in general and can be allocated to the contract and those that are contractually chargeable to a customer. Examples of such costs could be:

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• Costs of material used in the construction contract.

• Wages and other labour costs directly attributable to the contract.

• Costs of design and technical assistance.

• Costs of hiring plant and machinery to complete the contract.

• Depreciation charges in respect of plant and machinery used in the construction contract.

IAS 11 recognises two types of construction contract that are distinguished according to their pricing arrangements: • Fixed-price contracts; and • Cost plus contracts.

Fixed price contracts are contracts for which the price is not usually adjusted due to costs incurred by the contractor. Where a contractor agrees a fixed-price contract, this essentially means that the contractor agrees to a fixed contract price or a fixed rate per unit of output. These types of contracts are sometimes subject to escalation clauses.

if this method will not result in the financial statements reporting a reasonable level of accuracy. It follows, therefore, that the percentage of completion method can only be used where the outcome of the contract can be estimated reliably.

Where the contract is either a fixed price contract or a cost plus contract, then the following criteria must be met to determine whether the outcome can be reliably estimated: Fixed price contract: • It meets the recognition criteria laid down in the Conceptual Framework which is that total contract revenue can be measured reliably and it is probable that economic benefits will flow to the entity.

• Both the contract costs to complete and the stage of completion can be measured reliably.

• Contract costs attributable to the contract can be identified properly and measured reliably so that comparison of actual contract costs with estimates can be done.

Cost plus contract: • It is probable that economic benefits will flow to the entity.

• The contract costs attributable to the contract, whether or not reimbursable, can be identified and measured reliably.

All the conditions above must be satisfied.

Cost plus contracts are where the contractor is reimbursed for costs plus a provision for a fee. The contract price is determined by the total amount of reimbursable expenses and a fee. The fee is the profit margin which is calculated as revenue less direct costs to be earned on the contract.

Recognition of Contract Revenue and Expenses IAS 11 prohibits the use of the percentage of completion method May/June 2011

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Outcome of the Contract Cannot be Estimated Reliably Where the outcome of a contract cannot be estimated reliably, contract costs and revenues should be recognised by reference to the stage of completion.

Revenue should be recognised only to the extent of the contract costs incurred that are probable of being recovered, so therefore revenue will equal costs and no profit recognised as shown in the following example:

Example 1 A company enters into a 2-year contract. The project manager is unsure whether the contract will be profitable or loss-making.

Costs incurred todate amount to $10,000.

As the outcome of the contract cannot be estimated, the amount of revenue to be recognised in the company’s financial statements is the same as the costs incurred resulting in no profit being taken, so: DR receivables $10,000 CR revenue $10,000

Outcome of the Contract is Loss-Making Where contracts are loss-making, revenue is recognised by reference to the stage of completion and costs of sales is the balancing figure which generates the required loss.

Example 2 Lucas Inc has a contract that is expected to make a loss of $1,000. The finance director has calculated that the amount of the

Outcome of the Contract is Profitable Where the contract is profitable, revenue should be recognised by reference to the stage of completion. Costs incurred in reaching the stage of completion are taken to the income statement as cost of sales. This is achieved by the percentage of completion to the total costs that are expected to occur over the life of the contract.

An illustration of how this works is shown at the end of the article.

contract revenue to be recognised is $800.

The income statement will include $800 worth of contract revenue.

The loss is estimated to be $1,000

Worked Example Leah Inc reports under IFRS and is preparing their financial statements for the year ended 31 March 2009.

On 1 October 2008, Leah Inc commenced work on a contract. The price agreed for the contract was a fixed price of $50 million. Leah purchased plant at a cost of $15 million exclusively for use on the contract. The directors of Leah Inc have estimated that the plant will have no residual value at the end of the contract which is due to finish on 30 September 2009. Costs incurred on the contract plus estimated costs to complete are as follows:

so cost of sales will be $1,800 to

Costs to date

Estimate of costs to complete

Materials purchased

9,000

5,000

Labour and other overheads

7,000

8,000

generate the required loss (i.e. a balancing figure).

This method is used because IAS 11 stipulates that losses must be recognised in the income statement as soon as they are foreseen.

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All the costs which have been incurred todate have all been debited to the contract account in the general ledger. Leah Inc have appointed an agent who has confirmed that at the reporting date (31 March 2009), the contract was 40% complete at which point the customer made a progress payment amounting to £15 million. The finance department have credited this progress payment to the contract account. There have been no other entries made in respect of this contract.

Required Show how the contract should be accounted for under the provisions in IAS 11 in the financial statements of Leah Inc for the year ended 31 March 2009.

Solution The overall revenue for the contract amounts to $50 million (the fixed price agreed).

We know that Leah has incurred the following costs and has made estimates of costs to complete as follows: As costs are less than total Step 1 revenue we know the contract is going to make a profit of ($50 million less $44 million = $6 million).

Step 2

The agent has confirmed that the contract is 40%

complete, so we take 40% of the total costs to ‘cost of sales’ in the income statement. We then add 40% of the expected revenue to revenue in the income statement: We then need to work out how much should be in the statement of financial position as ‘gross amounts due from customer’. We need a working as follows: Step 3

Financial Statement Extracts Revenue

(40% x $50 million)

$20,000

Cost of sales

(40% x $44 million)

$17,600

Conclusion It is important that when you are dealing with construction contract questions that you adopt a logical method of dealing with the numbers and are familiar with how to recognise revenue and profits depending on whether a contract is profitable, loss-making or uncertain. Once you have mastered the approach and understand how IAS 11 works, questions on construction contracts become a favourite topic. Lots of question practise is the key to this area of financial reporting syllabuses.

The gross amount due from customer can be shown as an ‘other current asset’ in the statement of financial position.

Step 4

Working: Gross Amounts Due from Costs to date:

$,000

$,000

Purchase of materials

9,000

$17,600

Labour and other overheads

7,000

Plant depreciation ($15,000 x 6/12)

7,500

Total costs to date

Purchase of machine

$15,000

Purchase of machine

$ 9,000

Labour and overheads

$ 7,000

Estimated costs to complete

$13,000

Less progress payment received

$44,000

Gross amount due from customer

Contract profit ($50,000 - $44,000)

23,500 6,000 29,500 (15,000) 14,500 May/June 2011

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The art of defining a problem...

There was an interesting article in the British magazine, Business Strategy Review, not so long ago which suggested that problem solving in management is not as effective as it is in law, medicine or engineering.

The article pointed out that such disciplines have a scientific process to define a problem, identify options, select the best solution and implement it.

The author commented that, in contrast, his experience of executive decision-making was that it was often motivated by dogma (along the lines of, “My gut feeling tells me that ...” ) or determined by competition among people within the organisation.

What actually got prioritised was sometimes verging on the trivial. Compared with a comparatively predictable environment such as engineering, business decision-making in organisations is complicated by having to consider the ‘people factor’ i.e. the need to think about inter-relationships, the need to get colleagues’ support for a decision and so on.

Because management accountants have a core role in supporting management decision-making, they need to consider this critique. Management accountants are highly analytical individuals who are also experienced in talking to different professional or managerial groups within organisations and interpret-

By George Glass, CIMA President

ing their different perspectives as they supply their management information needs. They are familiar with a wide range of management and management accounting tools and can advise on their appropriateness to deliver what is required.

CIMA’s recent research report entitled, Don’t blame the tools, reinforces the importance of separating out the problem from the solution. This is an essential point to take on board. A high propor-

tion of management initiatives fail to deliver – studies suggest the rate is in the region of 60 to 70 per cent. Some of these failures will be down to poor implementation.

But others may also arise from the wrong problem being prioritised (the “trivia” problem) or the project being dropped or quietly shelved if there is a change of chief executive or other top level sponsor (a consequence of the “dogma” problem).

If there is one management tool that is fail-safe, it surely has to be the balanced scorecard. A couple of years back, the CIMA Management Accounting Tools Survey

found the balanced scorecard was used by more than a third of respondents. Popularity of the scorecard took off after the publication of a paper by Dr Robert S. Kaplan and David P. Norton in 1992. The paper recognised that organisations needed a set of measures beyond short-term financial metrics and which was compatible with increasingly complex operating environments. The scorecard’s four quadrants (learning and growth, internal business processes, financial and customer) provided a way of laying down the operational embodiment of an organisation’s strategy and creating a road map for its mission and purpose. The scorecard will reach its twentieth birthday next year but its popularity has not yet peaked.

Our survey found that it was the tool that non-users said they were most likely to adopt within two years.

CIMA academic, Professor Wai Fong Chua, attributes the scorecard’s success to the fact that it is robust enough for people to share a common understanding of what it is, yet flexible enough to be adapted to different scenarios. It is also something of a benefit that the scorecard is instinctively understandable, graphic and can be presented on a single page. All in all, the balanced scorecard demonstrates management accountancy at it most effective - and most flexible - in catering for the needs of a whole range of businesses. It proves the kind of effective decision-making tool that would benefit any organisation - or, for that matter, discipline.

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Business English

Business English Business English section is provided to help in-

termediate and upper-intermediate learners of business English, improve their financial vocabulary and perhaps their knowledge of finance.

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Boston Matrix (BCG Matrix) A technique for analysing the potential of a business or business unit by reference to market share and growth rate. The matrix was developed by the Boston Consulting Group (BCG) in the 1970’s. It is used to help large diversified firms identify those business units or products that generate cash and those that use it, so that an overall strategy can be developed.

It can also be used as a tool of Portfolio Management. Four main categories are displayed below: Star High-growth business competing in a market where it is relatively strong compared with the competition. Although such business generate large cash flows, high investment will be necessary to meet increasing demand.

Cash Cow Is a low growth business with a relatively high market share. As these are mature, successful businesses with relatively little need for investment they generate substantial cash flows that can be used to develop other business unites or products.

Problem Child (sometimes known as Question Mark) Is a business with low market share but operates in higher growth markets. Such businesses are usually unable to sustain the level of investment necessary to turn them into stars.

Dog A business or business unit of larger firm with low market share in a low growth market. Firms usually face strategic decisions whether to continue to support dogs.

Porters 5 Forces A framework for analysing the balance of power within a particular industry and hence its overall profitability. It aims to identify what drives competition and threatens a firm’s ability to make profit in a the microenvironment.

Value Chain The chain activities by which a good or service is produced, distributed, and marketed. Each step of the chain (which may consist of the activities of one company or several) creates different amounts of value for the consumer.

There are five value-creating activities: • Inbound distribution • Operations • Outbound distribution • Marketing • After sales service And four supporting activities: • Buying • Research and development • Human resources management (HRM) • Infrastructure of the firm For management, the main application of the value-chain concept is that a company should examine its costs and performance at each stage, and decide amongst other things, whether it is best to carry out a particular stage in house or externally i.e subcontract it. The value-chain can provide the basis for a strategic analysis in terms of the for Competitive Advantage.

1. Rivalry between existing competitors (depending on their numbers, size, and relative market share); 2. The threat of new entrants into the market place (i.e. The extent to which there are significant barriers to entering the market consideration of rules, regulation and other oligopoly activity may need to be considered. Example: The telecoms industry where only a few contracts are granted by government to few companies to operate and what may happen if the regulators decide to ease those rules and grant further new contracts to new companies); 3. The threat of substitutes (i.e.

Products in other industries that consumers may see as alternatives); 4. Strength of buyer power 5. Strength of supplier power Note: Forces 2,3,4 and 5 all feed back into force 1 by driving up competitive rivalry.

This model is a starting point in Strategic Management Planning.

It was developed by Michael E. Porter of Harvard Business School in the late 1970’s.

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Job Skills

Ask!

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After all, you might end-up working for this individual, so it’s important for you to find out as much as you can about how he or she works, thinks, and communicates.

Additionally, asking smart questions will help you sound like an articulate, savvy business professional.

You’ll seem wellprepared and genuinely interested in working for the organisation.

The most important questions of your interviews might be the ones you ask. In the interview, don’t think you’re the only one who is “on the spot.” It is perfectly acceptable for you to ask questions of the interviewer and to take notes throughout the meeting (which will help you to formulate your questions). When an interviewer asks,

“So, do you have any questions for me?” the worst thing

you could possibly say is “No”. In some cases, you’ll be judged more on the questions you’re asking than the answers you’re giving. But do not over do it!

Take a look at these questions that you can ask the interviewer, and then feel free to come-up with even more of your own: • Can you give me more detail about the position’s responsibilities?

• Where do you see this position going in the next few years?

• What are two or three significant things you would want me to accomplish in my first few months?

• How often has this position been filled in the past two to five years?

• What would you like done differently by the next person who fills this position?

• How will my performance be evaluated, and at what frequency?

• What are the most challenging aspects of the job for which I am being considered?

• How would you define or describe your own management style?

• What are the strengths and weaknesses of my prospective subordinates, as you see them?

• Who will I be reporting to?

• What would the limits of my authority and responsibility be?

• What particular things about my background, experience, and style interest you?

• What are some of your longerterm objectives?

• Why did you join this company?

Why have you stayed?

• If I don’t hear from you within (time period), would it be ok to call you?

Research the company you are going for an interview. Knowledge is your best selling point; the more you know about the company the more you will look like the correct employee. Prepare thoroughly for your interviews by studying and practicing both your answers and your questions. The time you invest in this process will definitely payoff with more – and better – job offers!

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Job Skills

Intercultural Competence Intercultural competence is the ability to be able to work effectively with other cultures through an understanding of the attitudes and customs of other countries or organisations. Let’s look at an example of cultural differences regarding greetings.

W

hen you visit another country you may not necessarily greet people in the same way that you do as when you are in your own country. In some countries, it is customary to kiss people on each cheek, whereas in others you have to bow, and in some you may even rub noses to say hello. The traditions and customs that you are used to may not be acceptable in your host country. So, intercultural competence is all about being aware of these differences, and being able to behave keeping local norms in mind. It is also about keeping an open mind when dealing with people from different cultures.

When we consider different cultures, we can also think about differences in working styles in business. Therefore intercultural competence is also about understanding other companies’ ways of thought and being receptive to these different ways of thinking.

With business becoming more and more international nowadays, it is not uncommon to deal and work with different countries.

Businesses need to communicate and work together in order to

achieve business goals, which is why intercultural competence is so important. A lack of sensitivity can offend your host and therefore adversely affect vital business relationships.

any negative impact. Admitting that you were unaware that your behaviour or remark would cause offence is better than trying to brush over any upset you may have inadvertently caused.

This is why training in intercultural skills is seen as useful for anyone working in an international or multicultural environment, for example public sector staff such as doctors and nurses, as well as corporate staff working with colleagues or clients from different cultural backgrounds.

Cross-cultural competence training enhances people’s skills, and therefore future employment opportunities, by providing them with self-awareness and confidence-building exercises. In addition to this, it develops ‘people skills’ which means the ability to deal with people with sensitivity and empathy.

Within your work, think about a time when you were in the situation where you had to deal with a different culture. What was the business outcome? Was it successful? How far do you think the success was due to your intercultural competency? If you can think of a number of situations where you have had a successful business outcome with a different host culture, you may be able to show that you have this skill.

So, other than training, what can we do to improve this skill? The main thing is to be open and understanding to other communities. Don’t make assumptions about people based on their, or your, culture. Do some background reading, or talk to people who have experienced the host culture, and adapt your behaviour accordingly. And finally, if you do make a mistake, try to reduce

Furthermore, by making the effort to learn about new environments, whether it is the language, the customs, or the attitudes of the people, you are demonstrating that you have intercultural competence. In fact, you are already demonstrating this as you are willing to learn another language, and are reading this article in order to practise your English. So you now have another aptitude that you can add to your work skills!

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

May/June 2011

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