ACCOUNTANCY CYPRUS No.126 - MARCH 2017 by The Institute of Certified Public Accountants of Cyprus

accountancy cyprus | issue 126 | march 2017

No. 126 | MARCH 2017

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hri s s C iou o d ji t r is eor g r gha s h pis • C a G Geo mia ullou e a • R stas Kaz s Lo as o u o • C eorge doul iforo thom a • G risto Onis Pap h iel s C o • abr tin r ou ias • G gous Pash eodo v • A arios M. Th • M akos i • L

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ACCOUNTANCY CYPRUS

cont e nts 2017 Accountancy Profession Strategic Forum By Dr Martin Manuzi

accounting & audit Professional Services and the Economy

Interview with Christis M. Christoforou, CEO, Deloitte Cyprus

professional services

18 interview

Head of the House

Interview with Demetris Syllouris, Speaker of the House of Representatives.

48 52 53 54

Economy Recovering, Competitiveness Falling By Theodore Panayotou

Protectionism: A Blow to World Economic Growth By Marios Mavrides, MP Quality Over Quantity By Demetra Kalogerou | The Cyprus Stock Exchange By Nondas Cl. Metaxas

The Economics of Electricity Markets By Dr. Andreas Poullikkas

Globalization and World Trade Have Stalled By Tasos Anastasiades

62 63 64 66 68 70

The January Barometer By Antypas Asfour Shackled and Drawn By Savvakis C. Savvides At Your Service By George Markopouliotis. As You Sow, So Shall You Reap By Demetris Georgiades The World in 2050: Global Economic Outlook By PwC

Cyprusâ&#x20AC;&#x2122; Technological Advancement: A Brief History By Dr Iacovos Aristidou

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THINKING AHEAD

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cover story The Future of Audit in Cyprus

How new and revised Auditor Reporting Standards will affect the profession.

No. 126 | MARCH 2017

Issue 126 March 2017

74 76 78

Anti-Tax Avoidance Directive

Identifying Forged ID & Passport Documents

Transfer Pricing on our Doorstep By Petros Krasaris and Charalambos Palaontas

taxation

The New Face of Tourism By Dr Sotiroula Liasidou | United We Stand, Divided We Fall By Haris Stavrinides You CAN Always Get What You Want By Demetris Stylianides Hidden Growth within Family Businesses By Demetris Vakis Regulatory Challenges for the Banking Sector in 2017 By Marios Lazarou Stand Up for Your (Data) Rights By Christos Makedonas

80 82 84 86

Chief Financial Officer of PHC Franchised Restaurants Public Ltd

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ISSN 1450-2380 Editor-in-Chief Ninos Hadjirousos, FCA Editor Tasos Anastasiades, B.Sc., M.A. (Econ) The Institute Council Demetris Vakis (Chairman) Marios Skandalis (Vice-Chairman) Maria Pastellopoulou (Secretary) Members Andreas Andreou, Nicos Chimarides, Odysseas Christodoulou, Pieris Markou, Stavros Pantzaris, Philippos Raptopoulos, Spyros Spyrou, Demetris Taxitaris, Antonis Vasiliou, Christos Vasiliou, Kyriacos Zangoulos Address 11 Byron Avenue, 1096 Nicosia, Cyprus

Boom or Bust? The Dangers of Lessons Unlearnt…

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By Antonis Loizou

Get Real!

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By Tassos Yiasemides

On Course for Recovery

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By Petros Sivitanides

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Treatment of Trusts in the OECD’s CRS By Christina Themistocleous

Interview with the Deputy CEO of Cyta, Michalis E. Achilleos

oF ayprus in c

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By Savvas M. Klitou

A Healthy Telecommunications Sector Requires a Level Playing Field

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Interview with Alex Mouradian, Sales Director for Greece, Cyprus & Malta at SAP

Financial Management Re-imagined with Cloud Solutions By Evie Demetriou

Stormy Weather By Iacovos P. Ghalanos

Mailing Address P.O.Box 24935, 1355, Nicosia, Cyprus Tel: +357 22870030, Fax: +357 22766360 e-mail: info@icpac.org.cy www.icpac.org.cy The publication is prepared by

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Address 5 Aigaleo St., Strovolos 2057, Nicosia, Cyprus, P.O.Box 21185, 1503, Nicosia, Cyprus Accountancy Cyprus is published quarterly by the Institute of Certified Public Accountants of Cyprus and is sent free to all members if the Institute as well as to a large number of other persons, companies and organisations. The Institute can accept no responsibility for the accuracy of contributed statements or articles appearing in this publication and any views or opinions expressed are not necessarily endorsed by the Institute, its Council or by the Editors.

ACCOUNTANCY CYPRUS

THINKING AHEAD

By Kyriakos Iordanou, General Manager, ICPAC

Training Members of Boards of Directors

ne of the most difficult tasks is, undoubtedly, succeeding in bringing together members of Boards of Directors for training purposes, especially those on the Boards of Public Interest Entities (PIEs). Last month, nonetheless, ICPAC rose to the challenge and took the initiative to realize such an ambition. On February 7-9, we organized a series of workshops and presentations in collaboration with ICAEW, providing Members of the PIE Boards an insight into their role and responsibilities by virtue of their institutional and fiduciary duties, as well as their additional duties, which will be effected by the new Auditors’ legislation to be enacted soon. The series of high-level workshops (five in total) entitled “False Assurance” and Directors’ Changing Responsibilities brought together members of the Boards and Executive Management of banks, insurance companies and listed companies in separate sessions, to screen the ICAEW-produced film False Assurance and provoke discussion on legal and ethical matters and the enhanced responsibilities of the Audit Committees. Apart from tightening the bonds between ICPAC and ICAEW, this initiative served two more pioneering objectives: Firstly, it aimed at bringing together the

three main groups of Public Interest Entities, while at the same time fostering bilateral cooperation with their corresponding professional bodies. Hence, the workshop for listed and public companies was supported by the Cyprus Stock Exchange, the one for insurance companies had the support of the Insurance Association of Cyprus and the workshop for banks was supported by the Association of Cyprus Banks. Another presentation was dedicated to the auditors of PIEs. This breakdown into smaller, homogenous and relevant groups encouraged the open and focused discussion. Secondly, one of the presentations was open to all professional accountants, during which a panel discussed the film’s messages. The panel consisted of the regulators of the financial services industry – the Chairwomen of CySEC and the PAOB and the President of ICPAC – together with the keynote speaker, Duncan Wiggetts, Executive Director for Professional Standards at ICAEW, who spoke at all the workshops. I also spoke, as General Manager of ICPAC, as did George Kazamias, Chair of the Auditing Standards Committee of ICPAC. The beauty of the endeavour was the fact we brought together all the relevant industry stakeholders, enabling them to cooperate and learn from the presentations, whilst giving the opportunity to more than 400 participants to gain knowledge and awareness. We are delighted to have worked with a globally

renowned accountancy body, two regulators, two professional bodies and one state authority on an initiative that is probably the first of its kind! The new Auditors Law, expected to be approved by the House of Representatives soon, will trigger increased responsibilities and obligations, not only for the auditors of Public Interest Entities but also for Boards of Directors and the members of Audit and Risk Committees. The role and responsibilities of the Board of Directors of every company, but especially of those that carry the burden of public interest, are growing by the day. It is therefore crucial, as well as for their personal benefit and protection, that they remain up to speed on all relevant developments; hence training on how a Board or an Audit Committee should best operate, coupled with what technical and ethical values they should possess, is of paramount importance. Training Boards and Executive Management is not an easy job but, in this case, it was both pleasant and rewarding. I am confident that the messages conveyed were well received, while the fact that the relevant regulatory authorities were present too sends out a clear signal to everybody. We are very positive about organizing more similar events and all of us at the Institute are eager to do so soon, again bringing together all the relevant stakeholders under one roof.

ACCOUNTANCY CYPRUS

institute news

News from the Boardroom Τhe first quarter of 2017 found the Council of the Institute convening three times in order to discuss and decide upon various matters relating to ICPAC, its activities and interests, as well as matters regarding the profession and the economy in general. The main activities and decisions of the Institute’s Council included the following:

Meetings with Officials • 26/1/2017 The Vice President of the Institute, Marios Skandalis, and the General Manager held a meeting with David Jenkins of the International Compliance Association (ICA), to explore further ways to enhance the cooperation that was recently established between the two bodies. • 31/1/2017 The President attended and addressed the graduation ceremony of ICAEW students in Nicosia. • 1/2/2017 The President of the ICAEW, Hilary Lindsay, visited ICPAC at its premises and met with the President, members of the Council and management of the Institute. During the meeting, matters of mutual interest were discussed, as well as ways to further enhance the bilateral cooperation. • 10/2/2017 The Vice President and the General Manager of the Institute held a meeting on with representatives of the Transparency International – Cyprus Chapter and the newly formed ACFE Cyprus branch to consider ways of establishing a broad cooperation between the three bodies. • 16/2/2017 The General Manager, Christos Kyriakides and Marios Kallias participated in a meeting on with the other two competent authorities for the Insolvency Practitioners (the Insolvency Service and the Cyprus Bar association) to discuss the current state of affairs and reach common understanding for the sector. • ICPAC underwent a monitoring visit by the Cyprus Public Audit Oversight Board between 20 and 24 February 2017. The visit involved a review of all the proce-

dures and process of the Institute, and falls within the scope of the authority of the Oversight Board. • During the quarter, the General Manager and other senior Officials met with IMH for the prompt preparation of the Nicosia Economic Congress and the International Compliance Forum which will take place later this year. • Various meetings with stakeholders and members of the Parliament took place to discuss issues of common interest, as well as for the better preparation of the new Auditors’ Law. • 9/3/2017 The General Manager met with the Speaker of the House of Representatives, Demetris Syllouris, to discuss matters of relevance to both parties. In particular, the progress of pending bills at the House was discussed, together with the prospect of further cooperation on research matters. • The President and the General Manager of the Institute had the opportunity to meet and chat in a more casual manner with the President and the CEO of ACCA, Brian McEnery and Helen Brand, on 9-10 March 2017 during their visit to Cyprus on the occasion of the ACCA’s Council meeting which took place in Nicosia on 11/3/2017. • 8/12/2016 The President and the General Manager had a very useful meeting at the Permanent Representation of the Republic to the EU, discussing the most important issues that relate to the economy of the country.

Council’s main decisions • At its meeting in December 2016, the Council decided to revise its strategic plan for the period 2017-2020, taking into consideration all factors affecting the Institute, its members, the profession and the economy of the country. • At the same meeting in December 2016, the Council approved the appointment of Irene Loizidou Ioannou as Admissions and Licensing Officer of the Institute. • In February 2017, the Council approved the budget of the Institute for the year 2017. • During the quarter, the Council looked at various ways to foster its effectiveness in dealing with the increasing volume of issues involving the Institute, as well as the new responsibilities assumed by ICPAC with the enactment of the new Auditors’ Law.

Other important meetings and activities • Between 7 to 9 February 2017, ICPAC organized a series of presentations dedicated to this end in collaboration with ICAEW, providing the members of the boards of the Public Interest Entities an insight on their role and responsibilities by virtue of their institutional and fiduciary duties, as well as their additional duties, which will be effected by the new Auditors’ legislation, to be enacted soon. • The 5 high-level workshops entitled «“False Assurance” and the Directors’ changing responsibilities» brought together members of the Boards and executive management of the banks, insurance companies and listed companies in separate sessions, in order to present the insightful film “False Assurance”, produced by ICAEW, and provoke discussion on legal and ethical matters and the enhanced responsibilities of the Audit Committees. Key note speaker was Mr Duncan Wiggetts, Executive Director, Professional Standards of ICAEW, complemented by the General Manager and Me George Kazamias, Chair of the Auditing Standards Committee of the Institute. • ACCA chose Cyprus to hold its quarterly Council meeting, which took place on 11/3/2017. During the presence of the President, the CEO and other members of the Council and senior officials of ACCA, a number of activities were organised for their members, and ICPAC representatives had the opportunity to meet and discuss matters relating the profession and to the enhancement of the bi-lateral relations. • During the quarter, ICPAC representatives appeared before Parliamentary committees dealing with matters relating to Companies Law, tax, EU matters such as the Common Corporate Tax Base, the ‘Panama Papers’, etc. • The General Manager and Amalia Hadjimichael, Monitoring and Compliance Officer, attended various meetings with MOKAS on matters relating to anti-money laundering and the ‘Panama Papers’. • Both the President and the General Manager had various meetings during the quarter with other officials, stakeholders and Members of Parliament on issues relating to the Institute and the profession.

Upcoming major events of the Institute are: 25/4/2017: 6th Nicosia Economic Congress 4/5/2017: Accountancy Profession Strategic Forum 2017 21/6/2017: ICPAC’s Annual General Meeting

ACCOUNTANCY CYPRUS

Irene Loizidou Ioannou appointed as ICPAC Admissions & Licensing Officer • ICPAC’s professional team has grown as of February 1, 2017 with the addition of Irene Loizidou Ioannou, who takes over as Admissions & Licensing Officer of the Institute. Under her management will fall the functions of new member admission as well as the licensing of members and firms. Apart from further enhancing the services offered to members, Irene’s appointment shows the Institute’s commitment to the continual upgrading of its structure and its responsiveness to members’ needs. • Irene started her professional career with KPMG. From 1996

until 2016, she worked at Bank of Cyprus Public Co Ltd, initially from Bank of Cyprus Factors and later in the Credit Risk Assessment Department, which she headed. During her career at Bank of Cyprus she had the opportunity to work on various projects and gained valuable experience in a wide range of areas. She is a member of the Institute of Certified Public Accountants of Cyprus (ICPAC), a Fellow of the Association of Chartered Certified Accountants (FCCA) and also holds a Masters degree in Business Administration (MBA) from CIIM.

At Professional Briefing ACCA’s Council meeting in Cyprus

ACCA selected Nicosia, Cyprus to hold its quarterly Council meeting. Between 9 – 11 March 2017, ACCA’s Council members, the CEO and other senior officials during their stay in Cyprus attended various activities open to ACCA local members and held their official quarterly meeting. This has been a very significant and prestigious event for ICPAC, which underpins the excellent cooperation between two bodies. During those days, ICPAC officials had the opportunity to meet their ACCA’s counterparts and explore opportunities to further enhance their mutual cooperation for the benefit of the two bodies, their members, the profession and the society in general. Arthur Andersen revived

As from the 1st of March 2017, it is a reality: through a French initiative, Arthur Andersen is reconstituted, with 26 offices on 5 continents and in 16 Countries. Arthur Andersen encompasses offices in the following countries & states from the first day of their launch: United States (Chicago, Houston, New York, San Francisco), Europe (Cyprus, France, Greece), India, Brazil, the Middle East (Saudi Arabia, Bahrain, Dubai, Kuwait, Lebanon, Oman, Qatar), Egypt, Indonesia and Nepal. Discussions are underway for setting up offices in China, Canada, Australia, Israel, Russia and in a number of countries in the European Union. Since 2013, the firm has been reconstructing on the basis of an innovative business model and a sound ethical, governance and legal framework. Arthur Andersen aims to double our presence around the world by the end of 2017. The network is represented in Cyprus by C.S.C. Christodoulou Ltd.

NEW MEMBERS During the period January – March 2017, the following persons were accepted as New Members of the Institute: 4230 4240 4239 4238 4237 4231 4232 4233 4234 4235 4236 4243 4244 4245 4246 4247 4248 4249 4250 4251 4252 4253 4254 4255 4256 4257 4258 4259 4260 4261 4262 4263 4264 4265 4241 4242 4272 4266 4267 4268 4269 4270 4271 4273 4274 4275 4276 4277 4278 4279 4280 4281 4282 4283 4284

STYLIANI POLYVIOU

ACCA

GIANNOS CHRISTOFOROU

ACCA

DEMETRIS PHILIPPIDES

ACCA

THEODOROS GEORGIOU

ACCA

STEPHANOS FRANGOUDES

ACCA

ELENA TSALOUPI

ACCA

ELENA ELIA

ACCA

MARIAN PAPACHARALAMBOUS

ACCA

EVANTHIA TRYPHONOS

ACCA

CHARA RODIA

ACCA

ANDROULLA CHRISTOU

ACCA

ALEXANDRA DEMETRIOU

ICAEW

SARINE KAYAYAN

ACCA

VALENTINA KOMAROVA TSIRAKKI

ACCA

KATARZYNA ANNA ROZANSKA

ACCA

CHLOE RALLI

ACCA

ELENI HADJICOSTI

ACCA

GARYFALIA BELTSOU

ACCA

CHRISTIA GEORGIOU

ACCA

SOFIA SOFOCLEOUS

ACCA

COSTAS MICHAEL

ACCA

ARESTIS DIONISIOU

ACCA

COSTAS SAVVIDES

ACCA

ANDREAS FITIRIKOS

ACCA

MICHALIS KOUTSOFTAS

ACCA

GEORGE PANAGI

ACCA

CONSTANTINOS COMBOS

ACCA

CHRISTOS MICHAEL

ACCA

MELANIE GEORGIOU MICHAELIDOU

ICAEW

ELLI KYPREOU

ICAEW

CHRISTINA SOTERIOU

ICAEW

AGGELOS MICHAELIDES

ICAEW

PANAYIOTIS PANAYI

ICAEW

CONSTANTINOS PATSALI

ICAEW

HAROUT ALBER TOUTOUNTZIAN

ICAEW

CONSTANTINOS PAPADOPOULOS

ICAEW

EVA CHRYSOSTOMOU

ACCA

FLORA PASVANDI

ACCA

PHOTIOU DORA

ACCA

CONSTANTINA LOULLOUPI

ACCA

CHRISTINA PAMPORIS

ACCA

CHRYSTALLA GEORGIOU

ACCA

KYRIAKI EROTOKRITOU

ACCA

ANTRIA LOIZOU

ACCA

NIKOLETTA POULLIS

ACCA

PANAGIOTA VICTOROS

ACCA

MARIOS CHRISTOPHI

ICAEW

CHRISTOS CHRISTOU

ACCA

STEFANOS DIONYSIOY

ACCA

ALEXIS HADJIKLEOVOULOU

ACCA

ANDREAS KYPRIS

ACCA

PARASKEVI NICOLAOU

ICAEW

KALLIOPI SPYROU

ICAEW

LOIZOS POPPOS

ICAEW

SYMEON HADJICOSTAS

ICAEW

Removals

2557

Elena Kyriakou

3923

Marios Philippou

2406

Maria Andreou Kouma

ACCA

1502

Andreas Philippou

AICPA

ACCA ACA

Death

Vyron Stylianou

fca

ACCOUNTANCY CYPRUS

institute news

ACA Graduation Ceremony Cyprus celebrates outstanding results The ACA Graduation Ceremony 2017 took place at the Hilton Park Hotel in Nicosia, attended by 450 people, including ICAEW President Hilary Lindsay, who was the main speaker at the event, which was also addressed by the CEO of Hermes Airports Ltd Eleni Kaloyirou, our contact member, Nicos Syrimis and ICPAC President Demetris Vakis. The graduation ceremony celebrated the achievement of the 160 graduates who, by completing the ACA exams, have completed the first major step of a career in chartered accountancy. In her speech, Hilary Lindsay said “What you can do now, and will have been doing throughout your studying, is help businesses and society build trust”. She noted that this is a rewarding and challenging responsibility which will be a part of the fantastic careers that lie ahead of the graduates. She pointed out that, following the country’s significant economic difficulties, the outlook for 2017 is positive and a great opportunity for newly qualified ICAEW Chartered Accountants. She said that ICAEW’s vision ‘a world of strong economies’ will need to be supported by skilled and ethical finance

Marios Skandalis Named Banker of the Year

The outlook for 2017 is positive and a great opportunity for newly qualified ICAEW Chartered Accountants professionals who will also play a part in strengthening Cyprus’ economic future. Cyprus now has almost 100 authorised ICAEW training employers offering ACA training, with the high demand for ACA students being a good indication of economic growth for 2017. The other speakers referred to the need for accountancy qualifications to remain relevant and up-to-date, and told the new graduates that passing

Marios Skandalis, Director of the Group Compliance Division of the Bank of Cyprus Group, was named Banker of the Year – Cyprus by the internationally-acclaimed Acquisition International magazine earlier this month. “Winning the 2016 Banker of the Year – Cyprus Award is a real honour for me and for the institution I

professional accountancy exams is just the beginning of an exciting and varied professional journey. The high level of results this year demonstrates the skill and commitment of students from Cyprus, who will have the opportunity to make a positive impact on the island. The next step is to complete their practical work experience requirements before they can call themselves Chartered Accountants or become ICAEW members. Special congratulations were given to several global ACA prizewinners: Sofia Papageorgiou (PwC), who won the Financial Reporting prize in September 2016 and Achilleas Papadakis (Deloitte) who won the Financial Reporting prize in the December 2014 Professional Level sitting. From the November 2016 sitting, Martinianos Papadopoulos (PwC) achieved joint first place in Audit and Assurance and first place in Financial Accounting and Reporting; Andreas Constantinou (PwC) achieved joint first place in Audit and Assurance with Charalampia Skordi (KPMG). Hilary Lindsay told the gathering that, “ICAEW Chartered Accountants in Cyprus play a crucial part in rebuilding the nation’s economy... using their skills to create a better future and to drive economic success in Cyprus in the years to come.”

represent,” Skandalis said in a statement, adding that, “at the same time it constitutes yet another independent recognition of the collective effort of all my colleagues at the new Bank of Cyprus for transforming the culture of the largest corporation of our country.” Marios Skandalis is also Vice-President of ICPAC.

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ACCOUNTANCY CYPRUS

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Directors’ Changing Responsibilities ICPAC and ICAEW deliver presentations to Boards of Directors By George C. Kazamias Chairman, Auditing Standards Committee, ICPAC

The Institute of Certified Public Accountants of Cyprus (ICPAC) and the Institute of Chartered Accountants in England and Wales (ICAEW), organized a series of workshops and presentations under the title “False Assurance” and the directors’ changing responsibilities on February 7-9, 2017. The events were primarily addressed to Boards of Directors, Audit Committees and Risk Committees as well as executive management teams of Public Interest Entities (PIEs) in Cyprus. Separate events were held for: • Banks, in cooperation with the Association of Cyprus Banks, • Insurance companies, in cooperation with the Insurance Association of Cyprus, • Listed companies, in cooperation with the Cyprus Stock Exchange and • Audit firms engaged in the audit of financial statements of PIEs in Cyprus.

Workshop objectives The objective of the workshops was to bring together the members of the Boards and the executive management teams of banks, insurance companies and listed companies, in separate sessions, and to present ICAEW’s film “False Assurance” and provoke discussion of the challenging landscape around the responsibilities of directors, audit and risk committees.

Panel discussions and key speakers In addition, an open event was held on February 8 at the Filoxenia Conference Centre whereby the projection of the film was combined with insightful commen-

tary and a panel discussion by Demetra Kalogerou (CySEC), Rea Georgiou (CPAOB) and Demetris Vakis (ICPAC). The keynote speaker at the events was Duncan Wiggets, Executive Director, Professional Standards, ICAEW. Furthermore, presentations were delivered by Kyriakos Iordanou, General Manager, ICPAC on the legislative and regulatory landscape as it is being shaped by the EU’s Audit Reform and George Kazamias, Chairman of the Auditing Standards Committee, ICPAC on the enhanced audit report.

“False Assurance” A highlight of all the events was the

screening of False Assurance, an exciting film drama created to provoke discussion on how Boards of Directors, Audit and Risk Committees and external auditors should deal with difficult decisions and topical issues. In the film, Alex Frayn, former CFO of a fictitious company called D-Merton, tells the story of two turbulent years in the life of the company. He explains how D-Merton was brought to its knees by the actions and inactions of its executive directors, the lack of vigilance and courage by its Board of Directors and the failure of the company’s auditors to identify and investigate red flat issues. The film shows how the main characters

ACCOUNTANCY CYPRUS

Duncan Wiggets

deal with a series of dilemmas and difficult problems they encounter, whether they be cyber security issues, impairment considerations, fraudulent payments or other illegal acts.

Key themes The film is divided into four parts and the intervening breaks provided the opportunity for the panelists and the participants to discuss themes and issues emanating from the action and what they would and would not have done in similar situations. The hypothetical scenarios enabled participants to discuss difficult issues they might not feel comfortable to address in relation to their own work. The film also

provided an insight into the potentially dire consequences that may result from a decision to take the “easy way out” of a dilemma. It also highlights the importance of Boards having the appropriate level of expertise in the specific industry of their company. In the film, D-Merton is a high-tech company and it is evident that the Board does not possess the necessary deep expertise to understand and assess the risks they are facing. The Board’s lack of awareness of fast-evolving cybersecurity risks results in a series of inappropriate decisions which lead to a major cyber security incident, causing the loss of valuable intellectual property by D-Merton and, ultimately, to its demise.

While False Assurance is ICAEW’s first drama production, it is the fifth film written by Duncan Wiggets who joined ICAEW in 2014 as Director of Professional Conduct. Duncan, who led the discussion and posed several insightful questions to the participants during the film screenings, started writing educational film dramas while working as a partner with PwC’s European risk management team in 2005. His second film, Risking it All, was used in training throughout PwC’s international network. After returning to legal private practice, Duncan Wiggets went on to make two more films with more of a corporate focus which were screened in many major US companies as well as in Europe and the rest of the world. He is currently writing his sixth film.

Conclusion This series of workshops and presentations by ICPAC and ICAEW provided a very good forum to discuss topical issues evolving around the role of the Board of Directors. The events attracted a high level of participation by ICPAC’s members, members of Boards and other interested parties. We look forward to Duncan Wiggets’ next film and another series of exciting workshops and presentations by ICPAC.

ACCOUNTANCY CYPRUS

Institute Committees Update

Administrative Services Committee During the first quarter of 2017, the Administrative Services Committee covered the following areas: • Progression of the drafting of the final text of the foundation law. The Committee was updated on the status of the finalization of the text of the law governing foundations and decided to wait until the final text is circulated to provide its comments, if and when it is asked. • Initiation of action to modernize the trust law. The Committee has been active in communicating with STEP to formalize a course of action to have the sections of the legislation revamped to accommodate uniformity on trust issues and compliance with current industry requirements. A narrative with the Committee’s comments on the various areas of the legislative framework was sent to STEP. It is expected that the Committee will be contacted for further assistance on the matter. • Finalisation of sample of disengagement letter. After due deliberation and continuous exchange of ideas, the Committee concluded the final wording of a disengagement letter that was sent to the management of ICPAC for its further review and processing. • Drafting of a sample of an engagement letter for administrative services. Action was initiated to conclude on wording of an engagement letter that will cover the scope of provision of administrative services. The discussion is ongoing and it is expected to continue during the second quarter of the year. • Discussion on the upcoming guidelines of the CRS decree. The Committee Chairman participated in a meeting discussing potential changes to the CRS decree guidelines, aiming to align them with industry practices in Cyprus,

without changing the scope of each and every provision of the guidelines. After due consideration, the Committee suggested a small number of changes that it believed could simplify the requirements imposed on administrative service providers. These changes were subsequently evaluated by the Board of Directors of ICPAC, who have since been in contact with the responsible persons at the Ministry of Finance for the final drafting of the guidelines. The relevant announcement of the guidelines is expected shortly. • Organization of a seminar on duties and responsibilities of directors. The Committee has been active trying to organize a seminar specific to the needs of administrative service providers and in this respect concluded - for the start - to address the duties and responsibilities of directors. The presenters have been identified and the Committee is now in communication with the Seminars Committee to agree on a date, which will most likely be in mid to late spring. • Investigation into the merits of Data Protection questionnaires. Further to the letter from the Data Protection Agency of August 2016, in which all administrative service providers were asked to provide the Agency with information by completing certain questionnaires, the Committee thought it proper to discuss whether the providers had to adhere to the Agency’s requirements. After investigating the matter in detail, the Committee concluded that it was obligatory for providers to fulfil the Agency’s request but the matter is being discussed further. Costas Christoforou, Chairman

accounting standards COMMITTEE During the first quarter of 2017, the Accounting Standards Committee commenced the implementation of its action plan and dealt with the following: Projects Completed • IFRS 16, possible impact on SMEs: Following a request, we provided feedback to the European Financial Reporting Advisory Group (EFRAF) for the possible impact of the adoption of IFRS 16 Leases on small and medium companies (SMEs) in Cyprus. • IFRS 16, IFRS2 and IFRS 15: We provided comments on the Greek version of IFRS 16, Amendments to IFRS 2 and Clarifications to IFRS 15 following a request by the European Commission. • Review of technical circulars: The subCommittee provided its comments on the technical circulars table and is currently in the process of circulating the template to the General Manager of ICPAC. • Articles in Accountancy Cyprus magazine: Members of our Committee published articles relating to IFRS 4 and IFRS 15 in Accountancy Cyprus. Projects in Progress • Revision of Companies Law checklist: The subCommittee is in the process of updating the CompaniesLaw checklist as a result of the recent amendments to the Companies Law which was the result of the transposition of the EU Accounting Directive into domestic law. • Insurance Companies and Solvency II: The subCommittee has concluded that the adoption of Solvency II has no impact on the Financial Statements of insurance companies. The Taxation Committee is dealing with possible tax impact. • Technical circulars 29 and 40: The Committee is in the process of issuing a combined technical circular as a result of the recent amendments to the Companies Law. • Definition of Turnover for the categorization of Companies into small, medium and large: The Committee concluded that a legal consultation from the ICPAC lawyers is required to clarify whether the definition of revenue for the purposes of classification of companies into small, medium or large as per the Companies Law includes dividends and interest. • Restriction on distribution on development costs: The EU Accounting Directive which has been transposed into the Companies Law entails provisions, based on which no distribution of profits takes place unless the amount of the reserves available for distribution and profits brought forward is at least equal to costs of development not written off and recognised under ‘Assets’. The Committee concluded that a legal consultation from the ICPAC lawyers is required for some interpretation to assist in understanding how the above provision affects upstream Oil & Gas companies and how the definition of ‘development costs’ captures other balance sheet items such as costs relating to intangible assets arising in the context of IAS38.

Yiannis Leonidou, Chairman

ACCOUNTANCY CYPRUS

Limassol-Paphos Coordinating Committee

Larnaca-Famagusta Coordinating Committee

Between 1 January and 31 March 2017, the Committee carried out the following activities:

During the first quarter of 2017 the LarnacaFamagusta Coordinating Committee carried out the following activities: • In February, the Committee coordinated the seminar entitled ‘Suspicion Reporting and Presentation of Case Studies by MOKAS’ at the Golden Bay Hotel, Larnaca. • As part of the Institute’s social responsibility programme, the Committee purchased specialist equipment worth €1,000, which was distributed to four charitable organisations. • In attempting to integrate social responsibility into our action plan, the Committee organised the collection of canned and dry packaged foods, which were distributed to three charitable organisations in Larnaca and Famagusta region. • On the occasion of the Institute’s 55th anniversary celebrations, the Committee coordinated an ICPAC presentation on the latest developments of the Institute and the profession. The event was held at the Sun Hall Hotel, Larnaca. Christos Antoniou, Chairman

• On 24 January, the Committee coordinated the seminar on “Suspicion Reporting and Presentation of Case Studies by MOKAS” at the St Raphael Resort in Limassol. • On 15 February, the Committee coordinated the seminar “Holding and Finance Structures: Thinking VAT” at the Carob Mill Complex in Limassol. • On 20 February, the Committee coordinated the seminar “IFRS updates for 15, 9, 4, 16 and 17, as well as Regulatory and EU updates” at the St Raphael Resort in Limassol. • On 24 March, the Committee coordinated the seminar “Common deficiencies identified on Audit Monitoring visits” at the Carob Mill Complex in Limassol. • On 27 March, the Committee coordinated the seminar “On the new Auditor’s Report” at the Carob Mill Complex in Limassol. • On 29 March, the Committee organised a dinner with an address on the subject “Cyprus: The Start Of A New Economic Era - One Year After The Exit From The Memorandum” at the Atlantica Miramare Hotel with Harris Georgiades, Minister of Finance, as guest speaker.

Neophytos H. Neophytou, Chairman

Public Sector Committee During the first quarter of 2017, the Public Sector Committee held three meetings and carried out the following activities: • The Committee met with the Director of the Budget Directorate of the Ministry of Finance. During the meeting, a number of issues were discussed that are of the interest of the Institute’s members who work in the public and the wider public sector, the highlight being the need to harmonise the preparation procedures of the budget of each and every public entity. The Committee underlined its willingness and commitment to cooperate with, and assist, the Ministry in developing procedures that will be commonly used across the wider public sector, to promote transparency and to enhance public financial management. • The General Manager and representatives of the Committee met with representatives of the Ministry of Finance, to exchange views and ideas on the discussion that has been initiated for the reform of occupational pension funds.

This issue will be discussed and explored further with other government officials. • The Committee has sent ICPAC’s comments on the discussion paper issued by the ICAEW dealing with “The future of EU public sector accounting in a global context”. The Committee expects to be actively involved in the discussions, held at European level, on the propose reform of public sector’s financial reporting. • The Committee has agreed with the New Government Team (NGT), a group of professionals under the Institute of Directors promoting better governance in the public sector, to organize a Seminar on “Public Sector Governance” in April for ICPAC members working in the public sector.

Marios Hadjidamianou, Chairman

CFO Committee The CFO Committee was formed in February 2015. In October 2016, a new Committee was formed, with Christos Tavelis appointed as Vice Chairman and Savvas Pashias elected as Secretary. The new Committee is continuing the work done and is building on the foundations laid by the first Committee. The Committee’s main aims are: • To promote ICPAC and the CFO Committee to individuals working as Finance Directors, CFOs, Financial Controllers, Finance Mangers, Chief Accountants, etc. (“individuals acting in a CFO capacity”). • To create a channel of communication with individuals acting in a CFO capacity, who are members of ICPAC, and provide support for technical skills, soft skills, etc. • To promote and enhance the Committee’s LinkedIn page as a means of communication to individuals acting in a CFO capacity. • In association with other Committees and bodies, to organise seminars and presentations for individuals acting in a CFO capacity. • To prepare and distribute relevant articles to individuals acting in a CFO capacity. • To coordinate efforts with other ICPAC Committees on matters relevant and affecting individuals acting in a CFO capacity. During the first quarter of 2017, the Committee has focused on a number of the above aims and, in order to best achieve these, three sub-Committees were created: 1. Training and information subCommittee 2. Promotion and communication subCommittee 3. Liaison and coordination subCommittee The CFO Committee is currently working on expanding its database of individuals acting in a CFO capacity, to enhance numbers and increase its networking capabilities. It is also working on putting together a seminar, aiming for a subject that will be both relevant and current. A number of other actions are being considered and evaluated which will be communicated to ICPAC members in due course.

George Hadjineophytou, Chairman

ACCOUNTANCY CYPRUS

Education Committee

During the first quarter of 2017, the Committee held three monthly meetings to discuss the organization of training seminars. In brief, the Committee organized the following seminars during the aforementioned period: • Suspicion Reporting and Presentation of case studies by MOKAS: These half-day training events took place in Limassol, Nicosia and Larnaca on 24 and 27 January and 3 February respectively. • “False Assurance’’ and the Directors’ changing responsibilities: These three events with the cooperation with ICAEW took place at different venues in Nicosia on 7, 8 and 9 February. • Holding and Finance Structures: Thinking VAT: These half-day training events took place in Limassol and Nicosia on 15 and 16 February respectively. • IFRS updates for 15, 9, 4, 16 and 17 as well as Regulatory and EU updates: These halfday training events took place in Limassol and Nicosia on 20 and 21 February respectively. • CyberSecurity – Are you ready?: These halfday training events took place in Limassol and Nicosia on 7 and 10 of March respectively.

• Common deficiencies identified on Audit Monitoring visits: These half-day training events took place in Nicosia, Limassol and Larnaca on 17 March in Nicosia and 24 March in Limassol and Larnaca. • Upcoming developments at EU for tax matters (CCTB, ATAD,CbCR): This half-day event with the cooperation of ACCA took place in Nicosia on 22 March. Overall, 15 training events were organized in all cities during the first quarter of 2017. Furthermore, the Committee aims to organize the following seminars during the second quarter of 2017: • AML on monitoring visits: in Nicosia, Limassol and Larnaca on 5, 6 and 7 April respectively • Tax updates: in Nicosia, Limassol and Larnaca on 25, 26 and 27 April respectively • Duties and responsibilities of Directors: in Nicosia and Limassol on 9 and 11 May respectively. Akis D. Kolokotronis, Chairman

Taxation Committee

The main activities of the Taxation Committee during the first quarter of 2017 were the following:

We updated our list of issues to be discussed with the Tax Department and sent a request to the Commissioner for a meeting. Our list includes, inter alia, the following: • Finalisation of the return TD4 for 2016. • Finalisation of the updated tax residency and other certificates. • Taxation of benefits in kind. • Fiscal memories. • Tax deductions for medical scheme contributions. • Tax circular 2012/15 on leases registered at the Land Registry Department. • Stamp duty on employment contracts of expatriates upon the submission of a tax clearance request. • Deduction of 10% additional tax for deemed distribution purposes. • Audited financial statements by individuals whose annual income exceeds €70,000 and derives from interest, dividends and rents.

We worked with the Tax Department for the improvement of the procedures in place and various forms in connection with the submission and examination of applications by nondomiciled individuals. We commented and agreed with the Tax Department the tax circular on the application of section 33 of the Income Tax Law. We commented on the draft tax circular on embedded IP income and are currently examining the draft tax circular on bad debts. We are working with the Ministry of Finance and the Tax Department for the preparation of transfer pricing guidelines which are intended to be effective as of 1.7.2017. We followed up with the Ministry of Finance for the swift promotion of the voting of the draft bill addressing tax amendments rendered necessary from the adoption of the Solvency II Directive.

4. 5.

We prepared and submitted a memo on the impact of the CCTB and CCCTB proposals would have on Cyprus for the attention of the Parliamentary Committee on Energy, Trade, Industry and Tourism and have attended a meeting of this Committee for discussion. We studied and commented on the tax aspects of the draft National Health Service bill. We studied, submitted our comments when deemed necessary and attended parliamentary meetings during which tax bills were discussed. We attended a gathering organised by the European Commission Representation in Cyprus during which Turkish Cypriot business organisations were invited to present and discuss the current Turkish Cypriot tax system. We attended a meeting at the Cyprus Chamber of Commerce and Industry during which a representative of LSE Consulting explained the methodology to be followed for the study the Ministry of Foreign Affairs had commissioned them to prepare on the financial cost to Cyprus of Turkey’s restrictive measures on the Republic of Cyprus. We are working with the Cyprus STEP on the improvement of the tax environment of trusts. We continued the revisiting of specific direct tax legislation provisions for the purpose of submitting proposals that would enhance our international competitiveness. In particular, we met with the Ministry of Finance for the possible amendment of our tax residency definition for individuals. We agreed with the Education Committee on the organising of tax update seminars in April. We continued providing technical support to the Ministry of Finance when requested. Members of our Committee continued their involvement with DTT negotiations.

8. 9.

10. 11.

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14. 15. 16.

George Markides, Chairman

104 | Gold | The Business Magazine of Cyprus

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intervie w

Head of the House When Demetris Syllouris was elected Speaker of the House of Representatives last June, he immediately indicated that he wanted to improve parliamentary working practices and bring the House into the 21st century. Here he talks about what has been achieved during his first nine months in the post and what he hopes to do over the course of his term.

Many people wonder why the position of the Speaker of the House of Representatives is considered to be so important. In what way is the Speaker more than just another Member of Parliament? The role of the Speaker of the House is of great importance and it is one that should function in accordance with the Constitution. It is my duty to keep order during plenary sessions and to make sure that everything runs smoothly. In addition, I am required to ensure compliance with the rules of procedure. I am also the official

representative of the House at official events, ceremonies and receptions. Another aspect of my obligations is to act on behalf of the President of the Republic when he is abroad on official business. These are just a few of my duties, which differentiate my position from that of any other Member of Parliament. You stated on your election to the post that you intended to implement a number of reforms. First of all, why are these reforms necessary? Has the House not been working efficiently? On assuming my duties as Speaker and given my vast personal experience

over the years, I realised that there is much room for improvement. I believe that all levels of parliamentary work should be modernised so as to conform to todayâ&#x20AC;&#x2122;s standards. Wishful thinking and prompting are not enough to attain this objective; what is needed is the implementation of modern instruments and processes that can correct the flaws and discrepancies in our current system. This will make better use of our capabilities and facilitate the smooth and effective functioning of parliamentary committees and plenary sessions. It will strengthen the entire House and every MP individually and create the best operating conditions for the legislature.

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intervie w

I believe that the House of Representatives, as a beacon of democracy, should listen to society and act as a compass to inspire respect in institutions and politics in general, and remain close to citizens’ needs and expectations. In June 2016, I announced some of my plans in relation to parliamentary work. I believe in the effective application of decisions, some of which I have already begun implementing. The most recent change has been the introduction of the electronic voting system. How significant is this and are you planning to make a greater use of technology in other areas too? Introducing the electronic voting system to the plenary is significant because not only can votes be officially archived into the system but everyone can see how a particular party and each individual MP has voted. We are proceeding with upgrading eGovernment and, in general, improving electronic communications both within the House and with the public. The goal is to make the House of Representatives digitally user-friendly and accessible to citizens online so that we can maximise results and achieve full transparency. We are continuously holding meetings with consultants and technicians in the relevant field so as to consider all possible solutions, both substantive and practical, to make the House of Representatives a technologically modern parliament. Another of our aims is to reduce paper consumption in the House of Representatives to the lowest possible level. A key element in the implementation of these objectives is our withdrawal from the Government Department of Information Technology Services, which will give the House the flexibility it requires. We need faster Internet, better communication between departments, public consultation with all citizens

and organised groups and, last but not least, an upgraded website with better accessibility. How important is the digitisation of the House archive/library and its accessibility to the public? Digitising and optimising the archive is expected to increase public use. The use of technology for a more efficient, faster and more economical administration, and the ability to search and use documents and other material is essential nowadays. Digitising the old and rare material in the Parliament library is aimed at providing easy access for MPs and staff but also for students and researchers who are interested in studying the material. The library keeps volumes of modern books as well as original copies of rare volumes – primarily material that documents the British colonial period, the minutes of committee meetings, blue books, civil lists, Ottoman codes and more. However, due to age and use, the original documents are not all available to the public. One aspect of the House’s operations that is often criticised concerns the huge number of bills that are passed before the summer recess and it is suggested that MPs don’t have a chance to study what they are voting for. Is this true and, if so, can anything be done about it? Scheduling Friday as the day for the House Plenary session [from Thursday] has given parliamentary committees more time to draft laws to a high technocratic standard. This also means that there is no rush to

submit bills and there is more time to scrutinise them for errors. With this arrangement in place, there can be a proper execution of the House rules, procedures and deadlines – a fact that will improve the quality of the drafted bills. The change of day for the Plenary session has given the committee meetings adequate time for proper planning which, in turn, has brought tangible results in productivity. Furthermore, a new plan has been developed so that the MPs can now be present at all parliamentary committee meetings without any schedule clashes (where an MP is required to be present in two different committees simultaneously). The plan also provides for two-hour meetings. If the discussion of any issue exceeds the two-hour limit, the Committee Chairman is expected to call an extraordinary meeting, provided that the date and time does not clash with any other scheduled parliamentary meeting. You were criticised in certain circles for wanting to impose a dress code on Members of the House and to fine those who fail to attend meetings. How do you respond to such criticism? Have you implemented this plan? The House of Representatives has conducted studies on the dress code based on other parliaments. The result was that, although most of them do not have written rules, there is a general obligation to dress appropriately. In this context, we sent a memo to all staff and associates requesting that they remain

My only aim is to establish new values and principles that will give us prosperity, sustainable development, freedom and true democracy

ACCOUNTANCY CYPRUS

appropriately dressed during their work hours. With regard to absent MPs, it is important to note that the committee secretaries now keep an attendance book to ensure that MPs remain present during committee meetings. You recently announced that you would like to appoint Legal Advisors to the House. What would be the purpose of such appointments? We are in the process of creating two divisions: The Legal Department and The Department of Legal Drafting, supplementing the already existing Department of Parliamentary Committees. Both new divisions are expected to cooperate and assist each other. An ex-President of the Supreme Court of Cyprus, Mr Demetrios Hadjihambis, has been appointed to offer his legal advice and consultation – free of charge – to the Speaker of the House of Representatives. You have also spoken about the need to improve the security systems at the House. What are you planning and in which particular areas? There are already several security systems installed at the entrance of the House, including a metal detector and an x-ray machine. However, a sufficient number of skilled personnel is needed to operate these machines. In addition, all points of entry to House are required to be security checked. You have already made numerous visits to foreign parliaments and received delegations from abroad. Are you confident that the House of Representatives functions as effectively as other EU member state parliaments? The House of Representatives, through the House Committee on the Review and Update of the Rules of Procedure, is considering a num-

The goal is to make the House of Representatives digitally user-friendly and accessible to citizens online so that we can maximise results and achieve full transparency ber of other amendments aiming at further improvements. We have requested comparative data from the Parliaments of other EU Member States and non-EU countries. I also wish to highlight the constructive input that the political parties have contributed to this effort. Additionally, to improve and overcome operational issues concerning the House, I have consulted and met with the European Parliament for advice. The European Parliament is due to send an advisory council to Cyprus very soon to give its expertise, opinions and suggestions in relation to many of these issues, as well as special technocratic support in areas that are found to be lacking. Depending on the outcome, there may be a need for further training of the parliamentary staff, which will be undertaken by the European Parliament, as a part of our future modernisation strategy. With regard to the new House premises, it has been reported that that you have started negotiations on using the old Nicosia Municipal Theatre building. Is this true? Discussions about the use of the Municipal Theatre began long ago when the idea was first proposed by the then Mayor of Nicosia, Ms. Eleni Mavrou. At the time, I supported the proposal which, unfortunately, was not accepted by the other parties and so the idea was abandoned. In my opinion, it would be better to locate the parliament in the Municipal Theatre. Doing so would cost the Government €5-€10 million to connect the two buildings – as opposed to building a new Parliament alto-

gether. In any case, the House needs upgrading in order to be functional and safe and I will be soon be organising a meeting with the Town Planning Department, the Public Works Department, Nicosia Municipality and other stakeholders to discuss the whole matter. However, if there is no unanimous decision, I will also suggest the possible utilisation of the Filoxenia Conference Centre or consider having a new Parliament building at the entrance to Nicosia, close to the Stelios Ioannou Foundation. What has been your biggest challenge as Speaker of the House so far? There are various challenges that we face, both domestically and internationally, and they can be very complicated. However, they may also provide further prospects for the future. For me personally, no challenge is too small or too big. My only aim is to establish new values and principles that will give us prosperity, sustainable development, freedom and true democracy. The biggest challenge for the Parliament is to transform itself into a modern, effective institution which will act as the foundation for a better functioning of the public sector. It will eventually become an exemplary guide for all government services. Given our faith in, and focus on, our values and democratic principles, we can all work together to create a model democratic European state. My goal is to streamline the institutions and to restructure the state machine in order to eradicate corruption and to transform Cyprus into that modern European state.

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cover story

The Future

of audit in cyprus

how new and revised auditor reporting standards will affect the profession. AT THE BRINK OF THE NEW AUDITOR’S LAW

new era is due to start soon, as the House of Representatives discusses the bill on new legislation that will regulate the work of auditors in Cyprus. In the next few weeks, EU Audit Directive 2014/56/EU and Regulation for Public Interest Entities 537/2014 will be fully transposed into domestic legislation, giving rise to the new Auditors’ Law in Cyprus. The new legislation will replace existing L.42(I)/2009, introducing at the same time some serious changes. Pursuant to the EU Directive, the supreme and ultimate authority for the audit profession will rest with the Cyprus Public Audit Oversight Authority. Hence, all powers will be vested in the Cyprus Public Audit Oversight Authority (CyPAOA), which may delegate some of its authority to recognized bodies of auditors (RBAs).

The main new features of the legislation include: - The establishment of the Cyprus Public Audit Oversight Authority (CyPAOA) - The supreme authority for the audit profession to CyPAOA - New conditions for approving a recognized body of auditors - The revised definition of PIEs - Restrictions imposed on the auditors of PIEs, such as: • Mandatory rotation of audit firms • The limitation of the non-audit services provided to PIE audit clients • The fee derived from the provision of non-audit services to PIE audit clients - Increased obligations to the Audit Committees of PIEs - The set-up of disciplinary proceedings by CyPAOA directly. The new Law will allow CyPAOA to delegate almost all of its

By Kyriakos Iordanou, General Manager, ICPAC responsibilities to RBAs, with the exception of the monitoring of the PIE auditors and their disciplinary proceedings. These two functions will be solely performed by CyPAOA and cannot be delegated or assigned to anyone else. ICPAC, which has been a recognized accountancy body by the Council of Ministers since 2002, will automatically be approved as an RBA and assigned with regulatory responsibilities via a delegation agreement. In order to maintain its recognition, ICPAC will be monitored by CyPAOA on a regular basis and will be expected to exhibit high professional standards and adherence to regulations and procedures. It is expected that CyPAOA will focus on the auditors of PIEs and ICPAC will be delegated the task of regulating and monitoring all other audit firms. The EU Directive and Regulation envisage to enhance the quality of audit work, increase transparency and accountability and foster auditors’ independence for the benefit of the investors and the public interest in general throughout Europe. This can also be accomplished as a result of the enhanced cooperation between the various authorities that will be involved in the monitoring of audit firms, as well as PIEs. ICPAC has been closely cooperating with CyPAOA for the new law and is fully aware of its new obligations and responsibilities. All necessary measures and adjustments will be made soon, in order to facilitate a smooth adaptation to the new order. Both parties are committed to the goals of the new legislation and shall work hand in hand for the promotion of the audit profession and towards the excellence of audit work. Hence, the audit profession is about to undergo a major transformation, and ICPAC will take all relevant measures for a smooth transition and adaption to its new role.

ACCOUNTANCY CYPRUS

Adapting to Change George Kazamias, Chairman of the Auditing Standards Committee, ICPAC & Partner, Assurance, PwC Cyprus, describes the work of the Committee and explains what the new and revised Auditor Reporting Standards are and how they will affect the profession in Cyprus.

What are the objectives of the Auditing Standards Committee? The Auditing Standards Committee of ICPAC aims to provide technical support and guidance to ICPAC’s members and its Council on matters relating to auditing that are within its terms of reference. The Committee’s term of reference include the following: • To advise ICPAC’s Council on matters relating to International Standards on Auditing, the application of auditing standards and matters affecting the auditing profession. • To prepare Technical Circulars for guidance to ICPAC’s members in relation to matters arising from International Standards on Auditing. For example, the most recent Technical Circular issued by the Committee on 3 February 2017 was in relation to the new and revised Auditor Reporting Standards and illustrations for the new

audit report. • To suggest topics to ICPAC’s Education Committee for training seminars for ICPAC’s members. For example, the upcoming seminar that will be delivered by the Committee will be in relation to the new enhanced audit report, focusing on the various changes from previous auditor reporting standards. • To monitor developments in the EU Audit Reform Regulation and Directive and the implementing of legislation in Cyprus and advise ICPAC’s Council on related matters. • To represent ICPAC in meetings with Regulators and other interested parties on relevant topics within its Terms of Reference. For example, representatives of our committee participate in the Insurance Working Group that is communicating with the Superintendent of Insurance Companies to determine auditor reporting require-

ments for the regulatory reporting under Solvency II that is required by the Law on Insurance Companies. As Chairman of the Auditing Standards Committee, how do you view the future of auditing in Cyprus, and how important is the role of the Committee to it? The area of auditing and assurance in a broader context has evolved significantly in recent years and significant changes are expected in the future. Statutory audits are currently a requirement for all Cyprus incorporated companies and this should form the basis of adding credibility to the regulatory framework of Cyprus as a centre for international business. This will be further enhanced through the increased level of regulation and monitoring of audit firms by competent authorities in Cyprus. The introduction of mandatory audit firm rotation for Public Interest Entities will result in the rotation of several audit appointments in the next few years. This is expected to increase the level of competition and the need for audit firms to demonstrate the value add they can bring to the external audit appointment in order to successfully compete for audit tenders. Looking at assurance more broadly, audit firms can expand their services to wider assurance services, in addition to the statutory audit, to support their

ACCOUNTANCY CYPRUS

cover story

clients by adding credibility to their reporting to various stakeholders, such as regulators, lenders, potential investors and others. Such services have already evolved in the form of non-audit assurance services, agreed procedures, assurance reports on controls at third party service organisation, and assurance engagements to report on the compilation of pro forma financial information included in a prospectus. The role of ICPAC’s Auditing Standards Committee is to support the development of the audit profession by considering current issues and developments and providing guidance to ICPAC’s members through various technical circulars and training. Recently there have been some changes in the way audit reports of listed companies are prepared. What are the main updates in this area? The International Auditing and Assurance Standards Board (IAASB)’s new and revised Auditor Reporting Standards and International Standard on Auditing (ISA) 720 (Revised) were issued in January 2015 and April 2015 respectively. They became effective for periods ending on or after 15 December 2016. Hence, for companies with calendar year-ends, the Standards should have been applied for the audits of financial statements for the year ended 31 December 2016. A key change of the new and revised Auditor Reporting Standards is a new section of the auditor’s report to communicate key audit matters. Key audit matters are those matters that, in the auditor’s judgment, are of most significance in the audit of the current-period financial statements. This is mandatory for the audits of financial statements of listed entities and voluntary for the audit of financial statements of other than listed entities. The objective of the mandatory inclusion of key audit matters in the audit report for listed entities is to to

shed light on those matters that, in the auditor’s judgement, are of the most significant in the audit of the financial statements. Key audit matters are selected for inclusion in the auditor’s report from matters that the auditor has already communicated to those charged with governance. In terms of content for the key audit matters section, the audit report will describe the key audit matters and why they are considered to be of most significance, provide reference to related disclosures in the financial statements and describe how the matter is addressed to the audit, emphasizing the most relevant aspects of the audit response with an overview of the audit procedures performed. What are the major changes to the Audit of EU Public Interest Entities? EU Audit Legislation includes a Directive which applies to all statutory audits of annual financial statements and a Regulation which only applies to the statutory audit of EU Public Interest Entities (PIEs). The Regulation applies for the first financial year starting on or after 17 June 2016. The Directive needs to be transposed into each member state’s law through local legislation. According to the European Commission, the EU Audit Reform Regulation and Directive aims to improve audit quality and restore investor confidence in financial information by

The area of auditing and assurance in a broader context has evolved significantly in recent years and significant changes are expected for the future

reinforcing the independence of the statutory auditor, contributing to a more dynamic audit market in the EU and reinforcing the role and competences of the audit committee. These objectives aim to be achieved through a series of actions and legislative measures, including the following: • Mandatory firm rotation - Article 17 of the Regulation requires that all PIEs in the EU must rotate their auditor after a maximum period of 10 years with a member state having the option to extend this period once for a further period of 10 years on the basis of tender, or 14 years in the case of a joint audit. If this member state option is enabled, the extension is only possible on the recommendation of the audit committee and approval of the Board of Directors’ proposal by the Annual General Meeting of shareholders. • Article 16 of the Regulation lays down requirements for the selection and appointment of the auditor. The audit committee has overall responsibility for the selection procedure. The new legislation gives clear guidance for a fair and transparent selection and appointment process of a new auditor. • The Regulation treats all “services other than statutory audit” as nonaudit services and includes a list of prohibited services, which statutory auditors, audit firms or any members of their network may not provide to audited PIE entities in the EU, nor to their EU parent or controlled undertakings. • Audit Committees have to review and monitor the independence of the statutory auditor, including the appropriateness of the provision of non-audit services. The Regulation requires approval from the audit committee of a PIE for the provision of any permissible nonaudit services. The auditor needs to discuss with the audit committee any threats to its independence and applicable safeguards.

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The introduction of mandatory audit firm rotation for public interest entities will result in the rotation of several audit appointments in the next few years • The EU Audit Legislation introduces a new audit report for PIEs, aimed at providing increased transparency and insights into key judgments taken in the audit, as well as additional information on the independence of the auditor or audit firm. • The new Audit Regulation requires auditors of PIEs to provide a written detailed report to the audit committee on the results of the statutory audit. This report is required to be submitted to the audit committee no later than the audit report. The content of this report is prescribed in the Regulation. The audit committee will therefore need to discuss the timing of its proposed meetings with the auditors so that there is sufficient time to reflect on the matters in the auditor’s additional report to the audit committee. How does the EU Audit Reform affect the operation of Audit Committees? The EU Audit Reform introduces various changes to the composition, operation and governance function for audit committees, including the following: The Audit Committee must: • As a whole have competence relevant to the sector in which the audited entity is operating. A majority of members of the audit committee need to be independent of the entity. • Inform the Board of Directors of the audited entity of the outcome of the statutory audit and explain its contribution to the integrity of the financial statements. • Monitor the financial reporting process and submit recommendations to ensure its integrity. • Monitor the effectiveness of the un-

dertaking’s internal quality control and risk management systems and, where applicable, its internal audit, regarding the financial reporting of the audited entity, without breaching its independence. • Review and monitor the independence of the audit firm and the appropriateness for the provision of permissible non-audit services. • Be responsible for the selection procedure for the external auditor. The audit committee should submit a recommendation to the Board of Directors for the appointment of an audit firm. What are the key issues that Audit firms need to take into consideration in order to improve quality? Audit quality is of paramount importance and it is at the heart of EU audit reform. Audit firms need to focus their efforts on driving continuous improvement to audit quality. Some key areas of focus are the following: • Real-time quality assurance: Audit firms can develop a real-time quality assurance programme which is a set of quality review procedures and tools that is used to assess engagements during the performance phase of the audit rather than after the issuance of the audit opinion. The main objective of such a programme is to support audit teams to get the “right work” done during the audit. • Root cause analysis: This analysis aims to understand the root causes of issues identified with audit quality. The root cause analysis aims to getting to the “why of the why” by analyzing data in relation to the audit engagements being analyzed and interviewing the affected engagement teams. Drilling

down to the causal factors the root cause analysis aims to take into account various causes of areas that can improve audit quality including sufficiency of staffing levels, appropriateness of tone at the top, challenges around doing the “right work, at the right time, by the right people”. • Audit quality indicators: Audit firms can develop a set of audit quality indicators, in essence a set of key performance indicators that measure and monitor various aspects of performance for quality both at firm level and at engagement level. • Accountability: Under an appropriate accountability framework, audit firms monitor the performance of engagement teams and engagement leaders in relation to audit quality indicators and engagement performance with respect to quality. Based on such an accountability framework, engagement teams are rewarded on their performance judged against audit quality indicators • Investment in people: Continuous investment in people is of critical importance. Such investment involves appropriate technical training on industry-specific matters, continuous developments in auditing and accounting standards as well as training in softer skills such as coaching, professional skepticism and people management skills. • Investment in technology: Given the tremendous evolution of technology, which is seen to be disrupting traditional business models, there is an increasing need for investment in technology. For example, the latest technology developments in the areas of data analytics enable the processing, analyzing and reporting on whole client data sets. This is bringing about a rapid evolution in the way auditors can gain assurance from automated data processing and data analytics techniques, which can significantly contribute towards improving audit quality.

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Promoting Continuous Improvement Rea Georgiou, Chairwoman of the Cyprus Public Audit Oversight Board (CyPAOB) discusses her role and the challenges currently facing the audit profession.

What are the role and objectives of the CyPAOB? The CyPAOB has a strategic objective to promote justifiable confidence in the audit profession in the Republic. The CyPAOB aims to promote continuous improvement, taking action when necessary and focusing on areas of higher risk to the public interest. The CyPAOB is determined to make a success of its competent authority status and, in liaison with the professional body, ICPAC, will promote further improvements to audit quality. In doing so, we will work with auditors, audit committees and other regulators to highlight good practice and advocate continuous improvement. As Chairwoman of the CyPAOB, what do you find the most challenging aspect of you role? The Board’s major challenge is to ensure that strong foundations are established in Cyprus, thus securing a healthy auditing profession with proper oversight.

How is the CyPAOB organised and resourced? It was established based on the Auditors Law of 2009 and the Board currently comprises five members: The Accountant General of The Republic and the Deputy Accountant General (both ex-officio) plus three members appointed by the Council of Ministers. However, a change to the structure of the Board is due to occur when a new bill is enacted and the Board will then consist of seven members: The Accountant General, the Deputy Accountant General and the Chair of the Cyprus Securities and Exchange Commission (CySEC,) plus four members appointed by the Council of Ministers. The CyPAOB is currently resourced with personnel of the Treasury Department and Quality Review Inspectors. What type of monitoring of audit firms does the CyPΑΟB carry out? The CyPAOB performs annual monitoring of the professional

body, ICPAC, which, by delegation, performs certain activities, for which ultimate responsibility lies with the CyPAOB in the following areas: the registration of new members and of practicing members and firms; the continuous professional development of members; disciplinary procedures and the monitoring of audit quality by auditors. In addition, the CyPAOB’s own inspectors perform monitoring visits to audit firms that perform audits of public interest entities (banking institutions, insurance companies and listed entities) at least once every three years. With which European Bodies does the CyPAOB cooperate and what is its contribution? The CyPAOB currently attends meetings of the Committee of European Auditing Oversight Bodies (CEAOB) which ensures the effective coordination of new public oversight systems of statutory auditors and audit firms within the European Union. It may also provide technical input in the preparation of possible measures by the European Commission implementing the Directive on statutory audit, such as the endorsement of the International Standards on Auditing or the assessment of third countries’ public oversight systems. The CyPAOB is an active member of the steering committee of CEAOB, which is responsible for organising the inspections sub-group’s meetings. Moreover, the CyPAOB is a member of the KPMG and Deloitte colleges, which meet with the KPMG and Deloitte Global teams on audit quality matters, and of the CEAOB auditing standards subgroup, which has the responsibility of harmonising auditing standards within EU member firms and engaging in a constructive dialogue with the Standard setters.

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What are the key challenges faced by the audit profession in Cyprus? The key challenges are the following: • To ensure consistent audit quality amongst over 500 members and firms that hold practicing certificates • Amendments to the audit report requiring additional transparency and disclosure over the Key Audit Matters of the audit, which is applicable to audit reports of Public Interest Entities • Enhanced communication with, and reporting to, audit committees • Compliance and regulatory matters, especially as a result of the new EU Regulation and Directive as the latter has been transposed to National legislation and which imposes, amongst others, mandatory audit firm rotation requirements, the prohibition of certain non-audit services and a cap on non- audit services by Public Interest Entities auditors. What are the recommendations of the CyPAOB for addressing these challenges? • The implementation of recommendations as a result of CyPAOB and ICPAC monitoring visits • Assistance by the firms’ technical departments to ensure consistency and appropriate transparency through audit reports • Continuous communication with audit committees and education of the audit committees on their new role and responsibilities • The risk and quality departments of the audit firms should spend more time on compliance and regulatory matters and provide training and guidance to their audit teams. • Presentations by the CyPAOB on thematic findings from inspections and aspects related to the new EU Regulation and Directive.

GABRIEL ONISIFOROU

Board Member, Professional Practice Director – Assurance, EY Cyprus

What are the main forthcoming changes to the audit process and how do you think your business will be affected by them? The world is changing fast. We are facing a future characterised by unprecedented organisational and informational complexity across business, with corporate and business reporting evolving rapidly. Existing and emerging challenges for auditors are numerous. Auditors are dealing with increasingly complex issues, regulations and public expectations. The annual external audit has long been a cornerstone of corporate governance and the operation of equity and debt markets. However, corporate scandals and the financial crisis around the globe have led some to question whether audit remains fit for purpose in modern society given the increasing complexity of business. These challenges have led to certain developments driven by both regulation and market forces as well as by stakeholder demand for increased transparency: these developments will result in some significant changes to the way audit is performed and to the role of audit. Recent revisions to the International Standards on Auditing and the EU Audit Directive and Regulation include the fol-

lowing: • Introduction of enhanced and extended audit reports • Audit reports to include discussion on Key Audit Matters/Risks for Public Interest Entities • Extension of auditor’s responsibility on other information contained in the annual report • Extended Audit Committee reports and potentially other reports such as corporate governance, strategy and viability, corporate social responsibility, sustainability and other corporate information such as Alternative Performance Measures (APMs). All the above will entail increased auditor involvement. Also, as stakeholders demand more transparency and value added products, the range of information that will be subject to audit or assurance will expand. In particular, there will be a focus on more forward-looking and narrative information within the annual report. There is little doubt that what is required of auditors is more than the previous consistency check between the narrative information contained in the annual reports and that featured in the financial statements. There will also be a focus on new types of (added-value) assurance, for example by providing wider assurance on client’s business models and risks. Much of this information will be more subjective in nature than that featured in a traditional financial statements audit, requiring auditors to exercise more judgment and business knowledge. There is also increased demand from a wide range of stakeholders for engagements that combine reasonable assurance, limited assurance and non-assurance. For example, regulators, funding and granting bodies, creditors, banks governmental authorities and others ask for reports to support or complement financial and non-financial information such as audited financial statements, regulatory reports or loan or grant/funding applications, tax returns and applications etc. The rate of change in the global tax landscape is accelerating. EC and

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There is growing understanding in the profession that current auditing standards are not an efficient and cost-effective “one-size-fits-all” regime worldwide tax developments, such as the proposed EC package of corporate tax reforms, OECD/G20 BEPS project, transfer pricing, CRC (country-by-country reporting), MLI (Multilateral Instrument) and other tax reforms announced around the world also impact the international tax and business environment, resulting in the need to better integrate the tax experts’ work into the audit process. Furthermore, technological developments, such as the use of data analytics techniques, as well as robotics, process automation and continuous controls monitoring, but also cyber security and reputational risk, have highlighted that the role of audit, and indeed, how it is undertaken, will continue to evolve. That evolution will be both demand- and supply-led: demand, as users seek assurance over new types of information; and supply, as audit firms seek to utilise technological advances to increase the effectiveness and efficiency of the audit. Embedding the application of technology and data analytics in audits also leads to the need to access and develop specialist skills and resources. Lastly, other forthcoming changes that affect the audit process include: • increased competition due to higher levels of rotation and retendering; • increased risk complexities and globalisation of business; • increased complexity of financial reporting standards; • increased complexity of regulations including anti-money laundering etc. Audit firms need to ensure capability needs are met by their business models to take into account all the above. Also consideration needs to be given to firms’ audit methodologies, technology and tools, adapting them to promote fully integrated audits taking into account regulatory and

technological developments. The above may seem overwhelming but one thing is certain: despite the many challenges, the importance of auditors and the perceived value of audit are growing, thus affecting positively the audit and other assurance business. Are there any other major challenges or problems currently facing the audit profession? As discussed above, there are a number of changes that are taking place in business and in society that will continue to impact the role of the auditor. These developments will require a continuous change in the skills required by the auditor. Audit quality relies on quality people delivering the audit. Attracting and educating the next generation of auditors will remain a challenge – they will need to be armed with strong technical skills and interpersonal competencies – identifying risks, challenging assumptions, exercising professional skepticism and judgement, dealing with increased and complex amounts of data, dealing with technology and data analytics. The globalization of business, combined with technological advancement, will also require auditors to be equipped with softer skills in dealing with different international cultures on multi-national audits and multi-disciplinary teams on more complex audits – a skill that may potentially not develop as it should, given the ability nowadays of working remotely. The complexity of the issues and the specialization that is needed (and sometimes required by enhanced ethical and independence standards on non-audit services) has led to the need for more experienced auditors and for multi-disciplinary teams of individuals with specific specialism, e.g. IT, due diligence and

valuation experts, actuaries etc., but also with industry specialism, e.g. geologists, engineers, etc. being brought together on audit teams. This will have an impact on recruitment and it may also impact the traditional pyramid model. Recent research identifies a concern that the current levels of commoditization of the audit and global standardization, where an auditor needs to follow a firm’s methodology through its audit software to better apply laws and regulations and auditing standards, may inhibit the exercise of professional judgment and therefore audit quality. It is also argued by researchers that regulatory inspections impact on firm methodologies, resulting in a documentation rather than a judgment focus. In addition, there is now growing concern that the unintended consequence of increased regulation and inspection is to make the audit less attractive and thus to act as a barrier for the profession to attract as well as to retain and promote the best people. The implementation of the new EU Audit Regulation for Public Interest Entities, as from this year, is also a challenge for both auditors and their clients; mandatory firm rotation and retendering, prohibition of certain non-audit services to audit clients and cap on non-audit fees: all these will impact business models and strategies as well as audit resources. There is a growing understanding in the profession that current auditing standards are not an efficient and cost-effective “one-size-fits-all” regime. IAASB is aware of the need to address the needs of the SMEs and their audit firms. In addition to introducing proportionality into the audit process (as well as in the professional and regulatory inspection process), there is also increased demand for the development of alternative auditing standards for SMEs including the need for other type of engagements for audit-exempted entities. Cyprus recently removed the audit exemption but is expected to introduce it more formally in the future. In addition to globalization and the opening of the profession pursuant to

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EU directives as well as increased competition and pricing pressures due to the economic climate, the audit profession faces an increasingly litigious and regulated environment. If there is an appetite for new types of assurance and value added products as well as more forward-looking assurance, can this be met without a change to the auditor liability regime? If there is a need for more regulation, compliance, monitoring and inspection, can this be met without driving out judgment and discouraging best talent? If, after all, there is a need to change and adapt so as to maintain the quality of the audit and to attract, develop and retain the best people, can this be met without further increasing costs? And are entities (and their Board/ Audit Committees) prepared to pay higher fees if they perceive an audit firm to have higher quality? How are Cypriot auditors and their clients affected by these challenges? As an international business centre, all the above unavoidably affect Cypriot auditors and their clients. In addition, the events of March 2013 and the economic adjustment programme that ensued, have brought about a new era in regulatory reforms, corporate governance and transparency in Cyprus that affect Cypriot auditors and their clients, domestic and international. Surely the perceived value of the audit and the auditors has been enhanced. However, if audit is to evolve to keep pace with these changes and to meet the needs of stakeholders, including investors and society, now is the time for review; all bodies (the audit profession, the Government, other regulatory, supervisory and professional bodies as well as institutions and associations of companies) should consolidate the knowledge acquired and engage in a debate on the challenges that Cypriot auditors and their clients face as well as on the future of the audit in Cyprus, taking into account the risks that Cyprus faces and the needs of our economy as well as the opportunities arising in this rapidly changing and interlinked world.

LIAKOS M. THEODOROU Head of Assurance & Advisory Services PwC Cyprus

What are the main forthcoming changes to the audit process and how do you think your business will be affected by them? Over the past few years the audit process had been increasingly on the radar of a wide spectrum of stakeholders, spanning investors, analysts, regulators as well as the broader public. It was indicatively claimed that the audit reporting in its standardised format provided limited insight over and above the binary conclusion as to the truth and fairness of the financial statements. Recent reporting developments, both at the EU and international level, seek to address this apparent shortcoming. Audit reports, especially for Public Interest Entities, will now be structured in a manner that provides additional insight by delineating key audit matters, the approach adopted in addressing them and the basis for conclusions thereon. Admittedly, this will enhance the transparency of the audit process, as the audit reports rendered will now be considerably more bespoke, entity-specific and, consequently, more relevant. This imposes an imminent need on audit firms to effectively structure their comprehensive audit delivery

models, proactively anticipate issues and engage in timely dialogues with their clients. At the same time, there is a need to revamp their internal quality control procedures to ensure that the transition to the new reporting regime is smooth. Furthermore, the audit landscape is undergoing a significant reshaping through the recent EU audit reform legislation, which, amongst others, imposes a requirement for mandatory audit firm rotation that will lead to considerable reshuffling in the marketplace, as traditional client relationships will be affected. In turn, tighter restrictions on the provision of non-audit services and the imposition of fee caps will dictate a new commercial reality for audit firms that will need to redesign their broader business strategy and channel choice targeting models. The aforesaid developments are only an indicative subset of the new wave of changes impacting the audit profession. We look forward to embracing these changes with the aim of restoring public confidence and building trust in the communities in which we operate. Are there any other major challenges or problems currently facing the audit profession? The business models of our clients are becoming increasingly more complex in the midst of a global economic landscape that is characterised by high volatility and multiple interdependencies. There is also a growing need to process and analyse vast volumes of data in a much more disaggregated manner, often due to onerous regulatory requirements, with a corresponding need to invest heavily in more sophisticated information technology infrastructures. Consequently, as audit professionals, we need to ensure that we have the right processes in place to facilitate the continuous upgrade of the skills and competencies of our people, to retain a close match and respond effectively to the needs of our clients.

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It is becoming increasingly necessary to change the way we, as auditors, deliver our services In a world of rapid technological advances, the audit process is and will be disrupted even further by digitalisation and new trends. The audit profession is developing sophisticated tools to address the evolution of ‘big data’ and generate meaningful data analytics via computerassisted audit techniques with a view to enhancing the effectiveness of audit testing. We are gradually moving away from traditional audit processes towards more advanced ones that are capable of drawing deeper, more meaningful and robust conclusions. At PwC, we have been proactive and we have recognised these trends for some time now and today we are pleased that we are driving audit innovation with technology. In particular we are using three unique cutting-edge technologies Aura, Halo and Connect. • Aura is our global software audit system, driving global quality and consistency. It enables a systematic risk-based approach, meaning that we focus on the things that matter. It provides realtime monitoring of engagement quality and progress available on mobile devices, anytime, anywhere. Within Aura other systems are available which help auditors provide their audit work more efficiently. • Halo is our market-leading data auditing technology which enables greater assurance and deeper insight using our clients’ data. It scans huge volumes of business-critical data, enabling improved risk assessment, analysis and testing. Halo was named ‘Audit Innovation of the Year’ by the prestigious International Accounting Bulletin. • Connect is our collaborative workflow tool, allowing fast, efficient and secure information sharing with our clients at every stage of the audit. At the same time, the increasingly

globalised nature of the operations and geographical spread of our clients dictates a need to sharpen the global acumen of our people, while blending it effectively with their local expertise. In turn, our clients are confronted with heightened global regulatory compliance needs on numerous fronts, as well as increased challenges to implement appropriate safeguards around cybersecurity, as large volumes of sensitive data move across servers into and out of multiple jurisdictions. Overall, the higher pecuniary and time costs imposed by tighter regulatory regimes and the increasing sophistication of the marketplace impose greater pressure on both auditors and their clients to build up lean delivery models, embracing, amongst others, opportunities for outsourcing, exploration of shared service centres, automation and digitisation in order to maintain efficiency and safeguard the viability of their respective business models. How are Cypriot auditors and their clients affected by these challenges? The local environment is not immune to the multiple challenges that characterise the global economy. The information explosion, as previously described, has taken transparency to a new level, requiring corporations in Cyprus to identify new manners of communicating their performance and building trust among their stakeholders. For many years, our clients concentrated on providing their shareholders with historic financial information. In the current landscape, they must engage with a broader set of stakeholders, each focused on specific, often non-financial, information. Stakeholders want to feel confident that the information they are provided is relevant and reliable as it is only

then that they will bestow their trust. As the aforesaid information expectations are changing, assurance must change, too, by becoming much broader and more adaptable. To this end, Cypriot audit firms will be forced to utilise the professional expertise, scepticism and judgement that they apply to the historic, statutory audits and replicate it with other sets of data and different processes and controls. Such an extended view of assurance would inject additional rigour into other areas such as people development, environmental impacts, community involvement, tax contributions and many more. The expanded role of assurance will provide additional insight to stakeholders seeking a more holistic and integrated information set to evaluate more meaningfully the performance of businesses and their sustainability prospects. Accordingly, with the rapid evolution of technology and the changes our clients are making in their own businesses and operations, it is becoming increasingly necessary to change the way we, as auditors, deliver our services. Our focus will inevitably be on investing in technology (automation, simplification and streamlining), improving processes/ approaches and strengthening the experience of our people. There is no doubt that the skills required by our current and future staff will require change over the near term. Training and educational requirements are already being influenced by things like data auditing, data analytics/analysis, cloud computing and data security. Our people will also need to sharpen their review, supervisory and project management skills earlier in their careers to effectively respond to the new reality. With this in mind, audit quality has been and will continue to remain at the centre of all initiatives. The multiple challenges that our profession is facing represent a unique opportunity to use them as a platform for building trust and confidence back into the system.

20th Annual Global CEO Survey Key findings in Cyprus

Forces shaping the future of business The results will be available on our website on 9 March 2017 www.pwcceosurvey.com.cy

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ment – notably the introduction of mandatory rotation of auditors along with new rules governing the provision of non-audit services – opens up attractive opportunities for middle-tier firms.

CHRISTODOULOS LOULLOUPIS

Director of Audit & Assurance Services, Baker Tilly in Cyprus

What are the main forthcoming changes to the audit process and how do you think your business will be affected by them? The global economy has dramatically changed over the past few years and companies have been trying to evolve, one might argue, in order to survive in this dynamic environment. The auditor needs to be wellequipped in terms of knowledge, technology and skills in order to be able to respond to the increasing requirements and demands of both clients and of the regulatory framework. Furthermore, the auditor’s report for listed companies has had one of its most significant changes, with the introduction of key audit matters, which require the enhanced application of the auditor’s judgment in identifying information to be reported to the users of the financial statements. Bearing all of the above in mind, it is certain that there will be a shift in the focus of the audit process to deliver more qualitative reports. Further to this, the ever-changing EU regulatory environ-

Are there any other major challenges or problems currently facing the audit profession? The major challenge of the audit profession is to work through the ever-increasing demands of the regulatory framework, improvement of standards of reporting and auditing, along with managing audit risks. At the same time, audit firms must efficiently perform their work while controlling resources and costs. They have realized that they must improve through the effective use of technology and the tools it has to offer. This will ultimately lead to an enhanced quality of audit services, provided with the most efficient use of resources at hand. Baker Tilly is well equipped with its newly developed global audit methodology for the Baker Tilly International network, which allows tailoring of the audit process to fit the individual requirements and needs of clients. It provides our clients with a consistent, high-quality approach to their services anywhere in the world and ensures a common understanding of the audit approach and procedures. This new tool is underpinned by advanced technology

which uses intelligent software and risk registers to highlight the areas of greatest risk and provides efficient documentation tools for an electronic approach to the audit process. How are Cypriot auditors and their clients affected by these challenges? As mentioned before, standards of reporting and auditing continue to improve but the regulatory framework governing our profession is becoming more demanding. This increases competition among audit firms and drives the big ones to develop and enhance their quality of services. In addition to this, audit firms are moving their focus to the development of non-audit services. Firms and clients that cannot keep up with these rapid changes will suffer a significant reduction in their business. On the other hand, clients can only benefit in this competitive environment as the standard of services they will receive will only become better. Further to this, clients need to be more proactive to the ever-changing economic situation of the Cyprus market, and grasp opportunities that will appear as the market recovers. The auditor’s function and role in this is expected to be enhanced as clients will seek guidance from audit firms, beyond their statutory obligations.

It is certain that there will be a shift in the focus of the audit process to deliver more qualitative reports Further to this, the ever-changing EU regulatory environment – notably the introduction of mandatory rotation of auditors along with new rules governing the provision of non-audit services – opens up attractive opportunities for middle-tier firms

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AVGOUSTINOS PAPATHOMAS Assurance and IBC Director, Grant Thornton

What are the main forthcoming changes to the audit process and how do you think your business will be affected by them? A new Auditors’ Law is expected to be enacted to legislate for specific requirements regarding the statutory audit of Public Interest Entities (PIEs), based on the corresponding new EU Regulation. The requirements of the new Law are applicable to PIEs, and to audit firms only insofar as they carry out statutory audits of PIEs. The main changes introduced by the new Law are the following: • PIEs will be required to change their statutory auditor at least every 10 years, which can be extended up to 20 years where a company conducts a public tendering process for the audit, or up to 24 years if a company uses more than one auditor (joint audit). The extension must be approved by shareholders. Transitional provisions in relation to the phasing in of these requirements apply. After the expiry of these periods, neither the statutory auditor nor any members of their network within the EU will be able to undertake the audit of the company within the following four-year period. • The provision of certain non-audit

services, such as specific tax, consultancy and advisory services, to a PIE by its auditor is prohibited. Certain of the prohibited non-audit services may be provided by the auditor if they have no direct or have immaterial effect, separately or in the aggregate on the audited financial statements. Such services may be provided to a PIE by its auditor only where the provision is approved by the audit committee and any threats and potential safeguards to the auditor’s independence are properly assessed and documented. • There is a cap of 70% of the audit fee, averaged over 3 years, on the level of allowable non-audit services which a PIE’s auditor is able to provide to the company. • New reporting requirements by the auditor to the Audit Committee are introduced. The auditor will also be required to report more comprehensively to the Audit Committee, including on areas such as the audit methodology used, the quantitative level of materiality and judgments about the entity’s ability to continue as a going concern. • Audit Committee responsibilities are expanded to include the procedure for the selection of statutory auditors and the recommendation as to which statutory auditor should be appointed. The goals of enhanced audit quality, improved competition and a more diverse large company audit market will realistically only be met over the long term. The new law is a package of measures, and should be judged collectively. Firm rotation is grabbing the headlines but should not be

We need to look outside our own borders, think further ahead, act faster and seize opportunities

judged in isolation. Enhanced audit reporting (better information for users) and non-audit service restrictions (enhanced perception of auditor independence, more companies using more firms) are also important changes. An early sign from rotation in Europe is that large audits are moving from one large firm to another but at least those engagements are up for public tender when previously they were appointments for life. Regarding non-audit services, reducing the volume of services provided by the statutory auditor, would provide a means for audit committees and companies to test other firms without taking a perceived bigger risk on a public commitment. Innovation and getting to know and trust more firms through non-audit services will take time to have an impact. The new law is an enabler to a solution but is not the solution. On its own it will not have the desired effect. Firms like Grant Thornton must continue to improve and demonstrate their sector and technical knowledge if they are to be part of the solution to investor and regulatory concerns about an overly concentrated market. And investors need to keep telling Audit Committees that they need quality auditors but that auditor size does not necessarily equate to audit quality – so use a wider range of firms for all services and contribute to a more diverse market for the long term benefit of companies and their investors. Are there any other major challenges or problems currently facing the audit profession? How are Cypriot auditors and their clients affected by these challenges? The audit profession is increasingly facing new challenges, not only due to regulatory or professional standards’ changes, but also from audit clients’

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The new law is an enabler to a solution but is not the solution. On its own it will not have the desired effect business and risk environment changes. Such challenges include increased complexity in the IT environment in which businesses now operate, with new or higher information technology and cybersecurity risks. Businesses need to realise the potential costs, which could be both monetary or not, from the loss of confidential data, and therefore invest in advanced information technology and cybersecurity systems and protection. Auditors, on the other hand, need to continue investing in specialists in the field that will allow them to obtain the necessary understanding of their clients’ business and assess their clients’ risks accordingly. New reporting requirements by the auditor to shareholders of listed entities have been introduced by the revised International Standards of Auditing (ISA). Based on the new requirements, the content of an audit report is extended to include a summary of the most significant risks of material misstatement (key audit matters) and a summary of the auditor’s response to those risks. The additional requirements in the publicly available audit report are likely to necessitate additional review and communication by the audit committee and by the auditor, particularly where there are sensitive or complex issues to be reported. Another challenge derives from the continued globalisation. All the evidence suggests that today’s domestic clients will be global businesses tomorrow so we need to look outside our own borders, think further ahead, act faster and seize opportunities.

CHRISTOS CHRISTODOULOU Managing Partner, Moore Stephens (Limassol) Ltd

What are the main forthcoming changes to the audit process and how do you think your business will be affected by them? During the past few years a number of changes were initiated in the legal and regulatory environment, directly affecting the audit profession. Changes were driven by various global financial and accountancy failures that had an adverse effect on the trustworthiness of the audit opinion. • Changes at European level The 2014 EU Audit Regulation and EU Directive refer to statutory audits of annual accounts and consolidated accounts and specific requirements regarding statutory audits of Public Interest Entities (PIEs), respectively. The Directive should have been transposed into local law by 17 June 2016 but it has not been yet ratified by the House of Representatives. It is expected to be ratified soon. The regulation is applicable and effective for accounting periods after 17 June 2016. The major changes concentrate on ethical requirements with the aim of safeguarding the independence of the auditor in relation to the audit of the PIE. These can be summarized as follow: • Restriction on duration of the audit engagement to the maximum of 10

years. Under certain conditions this can be extended to 20 or 24 years at the maximum. This is a major change compared to the absence of any such restriction in the past. • The EU regulation prohibits the provision of certain non-audit services to PIE clients. Services representing threat to the independence of the auditor like the ones giving to the auditor a management role are prohibited. The list, amongst others, includes tax services, management or decision making, bookkeeping and preparation of accounting records and financial statements, payroll services, designing of internal control or risk management procedures, legal services, valuation services, internal audit function services and human resource. • The total level of non-audit fees charged to a PIE client (including group companies) by the audit firm cannot exceed 70% of the total fees charged. • The Audit Committee is now given extended responsibilities which, amongst others, are to act as a guardian for the compliance of the auditor to all the above mentioned and other ethical requirements. • Following the implementation of EU Audit Regulation and Directive, the activities of European Audit Inspection Group (EAIG) have been transferred to the various sub-groups of the Committee of the European Oversight Boards (CEOB), of which the Cyprus Public Oversight Board (CyPAOB) is a member. This means that the PIE auditing network firms are monitored at a European rather than a national level. Requirements of improvement are now implemented at a European level and affect all the firms in a network. In this process the network firm is requested to provide a Root Cause Analysis (RCA). RCA is an in-depth exercise to identify the real causes of

ACCOUNTANCY CYPRUS

the weaknesses and corrective action to be taken at network level. These action plans will be delivered to the network firm members in Cyprus, which will have an obligation to implement all imposed corrective actions. As a result, this will lead to additional quality and audit procedure requirements from network firm members in Cyprus. • Requirements of an enhanced and more lengthy audit report. • Changes at global level The International Auditing and Assurance Standards Board (IAASB) has responded to calls from investors and others that it is in the public interest for an auditor to provide greater transparency about the audit that has been performed. The most notable enhancement is the new requirement for auditors of listed entities’ financial statements to communicate “Key Audit Matters” (“KAM”) – those matters that the auditor views as most significant, with an explanation of how they were addressed in the audit. The introduction of KAM for listed entities is a significant enhancement that will change not only the auditor’s report but, more broadly, the quality of financial reporting and therefore the informative value to investors and other key stakeholders. The new audit report requirements are, except for KAMs, applicable to any audited entity. • Changes at national level With the revision of Companies Law Cap 113, applicable since 23 September 2016, the audit exemption for small companies was abolished. Therefore, all companies incorporated in Cyprus, even if dormant, are obliged to have their annual financial statements audited by an auditor holding a practicing certificate in Cyprus. Audit firms are now operating in an increasingly demanding regulatory environment. They will need to react as quickly as possible in order to adapt to changes and avoid any unpleas-

ant situations due to non-compliance. Firms will have to update their systems and procedures, train their personnel, find ways to stay as efficient as possible in order to face the increased costs due to the more demanding regulation and, at the same time, be competitive. The increased requirements will work as a barrier to entry for smaller audit firms regarding PIEs audits. Smaller firms that are part of a network will need to take advantage of its expertise and experience in order to be able to survive in this environment. I doubt whether the other smaller audit firms will be able to enter the PIE market or continue to be auditors of PIEs. Are there any other major challenges or problems currently facing the audit profession? There have always been challenges for the audit profession. This time, audit reform was driven by the international financial and accounting failures which had an impact on the trustworthiness of the profession. This is one of the few instances where the audit firm will need to work hard in order to protect its reputation by restoring the trust of the users of the financial statements and the public in general. As auditing becomes a more and more demanding and competitive business, with professional firms facing considerable pressure to keep audit fees low, firms are looking to find more cost-efficient means of carrying out the audits. This can be done through the use of technology (e.g. automated data analysis tools), and, at the same time, ensure that quality is maintained, in-

Audit firms are now operating in an increasingly demanding regulatory environment

creased regulation requirements are met and risks are properly addressed in this fee-pressured environment. The various international accounting scandals, the issues that Cyprus had to face following the partial collapse of the banking sector in 2013 and the various other financial scandals that have recently come to light, either in the public or private sector, have contributed significantly to the erosion of trust in audit reports. The aforementioned changes will be the main driver to restore trust to the audit report. The global economy continues to experience difficult conditions as the effects of the financial crisis persist. Volatility in capital markets continues to create uncertainty, resulting in wideranging financial reporting implications. Furthermore, complying with the changing regulations on national, regional and international levels is becoming an ever more complex undertaking. The auditor, being part of this complex situation, will have to address any risks arising by taking appropriate action through compliance with the new legal and regulatory requirements. The audit expectation gap – a difference in opinion or understanding among the participants in the financial reporting process as to what the management’s duties and responsibilities are regarding the financial statements, as opposed to those of the auditor – was one of the main reasons for the audit reform process which led to the abovementioned changes. With the changing business environment, new laws and regulations and the ever- increasing occurrence of fraud, auditors were often blamed for not detecting fraud, errors or noncompliance with laws and regulations – responsibilities that reside with management. Such misunderstandings not only resulted in a loss of confidence in the auditing profession but often gave rise to lawsuits against audit firms, resulting in legal fees and productive management and auditors’ time lost in litigation.

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cover story

MARIOS PASHIAS

challenges. The major problems are the following: • Audit clients are concerned about the data security and are very conservative about how much data to share. • The high cost of implementing such a technology (e.g. Data analytics). • Use of the right, experienced and qualified personnel for analyzing the data (e.g. hiring qualified personnel, training for existing professionals).

What are the main forthcoming changes to the audit process and how do you think your business will be affected by them? Data analytics, the major forthcoming change to the audit process, will enable auditors to identify and assess the main risks (e.g. business, financial reporting, fraud and operational) and tailor their audit approach to reduce the audit risk. Using powerful analytics software, auditors will have the capacity to analyze larger volumes of data and identify any inconsistencies or anomalies for further testing/examination. Auditors will focus their resources on analyzing high risk items and unique transactions that require more attention. New technology will enable audit teams to analyze data/information at the planning stage for a more efficient risk-based approach. Using the latest technological advances will speed up the audit process and audit quality will be improved. Embedding new technologies into the audit process is a major change that will not be without

Are there any other major challenges or problems currently facing the audit profession? Yes. They are the following: • New standards and regulations The response from governments and regulators to various corporate collapses in the late 1990s and 2000s, was new legislation and regulations/ standards for the strengthening of the auditor’s independence and quality of the audit work. Furthermore, the introduction of the new International Financial Reporting Standards IFRS 9, IFRS 15, IFRS 16 and IFRS 17 will improve the quality of financial information to users but it will make life for auditors more difficult and complicated. • Lack of resources Audit firms might lack competent personnel to allocate to their external assignments. The failure to employ and/ or retain high-calibre staff prohibits firms from expanding to new client industries. • Competition in the audit profession Attracting new business is the top priority for all audit firms. Attracting new clients across different industries is very challenging. The demand for audit in Cyprus has increased due to the mandatory audit requirement for all companies, which should lead to an increase in audit revenue. However, the financial crisis has pushed audit clients

Now the auditor is given the necessary tools, through transparency and clear communication with management and the public, to clearly address the responsibilities arising from his role as an auditor and make himself as understandable as possible to all stakeholders. How are Cypriot auditors and their clients affected by these challenges? Challenges might evolve into significant threats if not appropriately addressed. On the other hand, timely and appropriate action, if taken, will definitely lead to the identification of new opportunities for audit firms and to the increase of trust in the financial reporting of clients. Therefore, audit firms and their clients need to take immediate and adequate action in order to respond to these challenges. Firms will have to update their systems and procedures, educate their personnel and find ways to stay as efficient as possible. The challenge of increased costs will have to be overcome through efficiency since it will be extremely difficult to recover them from clients through additional charges. However, clients should be ready to bear some of the increased auditor’s costs. In the process of achieving efficiency, audit firms must invest in technology, which will enable them to carry out their work more efficiently and, therefore, at less cost. Clients should be willing and committed to provide all additional information required by the auditors under the new regulation and to be more transparent with them. Audit firms will need to find ways of overcoming the above challenges to stay in business. What we might see happening soon are mergers of small audit firms, in order to be able to take advantage of economies of scale, share responsibilities, tasks and knowledge, and small firms entering an established network firm, in order to take advantage of its knowledge at the minimum possible cost.

Senior Audit Manager, ECOVIS Karaolis Assurance Limited

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to seek lower audit fees, irrespective of the audit quality being offered in return. As a result, audit firms are struggling to keep their fees as low as possible in order to avoid losing clients. How are Cypriot auditors and their clients affected by these challenges? The introduction of new standards and regulations improves the audit quality and financial information provided to the users but as a consequence the costs of carrying out the audit are much higher. These costs must be passed on to clients. Auditors’ required skills and knowledge have significantly increased over the last decade. The new regulations and standards require auditors/ audit firms to provide employees with the right professional training to overcome new challenges. Hiring and training costs, as well as higher remuneration packages to retain high-calibre personnel, lead to higher costs for audit firms and, inevitably, to higher audit fees. However, audit clients are reluctant to accept increases in audit fees and, as a result, audit firms have been forced to find new ways of reducing the time spent on each audit engagement. Nowadays, auditors may attempt to perform their audit work based on lower budgets and not in accordance with the audit risk. Audit fees should be set in such a manner that will ensure efficient and effective high quality audit work based on audit risk.

Using the latest technological advances will speed up the audit process and audit quality will be improved

The environment for auditors in Cyprus and, consequently, for their clients is changing dramatically COSTAS GEORGHADJIS Head of Audit, Deloitte

What are the main forthcoming changes to the audit process and how do you think your business will be affected by them? With a rapidly changing regulatory environment, increasing client demands, and new technologies, the profession is in a state of change, challenging the profession to deliver a differentiated audit. The “audit of the future” is no longer conceptual. Advances in cognitive technologies, including artificial intelligence, are presenting new opportunities to enhance audit quality, automate processes, and ultimately transform how an audit is performed. Natural-language processing, advanced data analytics, and machine-learning technologies are examples of how automation is used to streamline labour-intensive processes. This provides more opportunities to allocate time to higher value-added areas, enabling auditors to apply their professional judgment and uncover new insights to deliver value beyond compliance. Examples of innovative audit tools expected to become an integral part of the audit process include: • Powerful artificial intelligence

applications that interrogate client electronic documentation using advanced machine-learning techniques and natural-language processing to quickly identify, analyze and extract key information; • Mobile apps that enable physical inventory observations from smartphones – including barcode scanning and voice-to-text technology – that transmit results in real time, allowing corporate audit teams to monitor and review location counts as they happen; • Diagnostics tools that use visualization to understand and identify issues in clients’ finance functions and benchmark results against their competitors and the market; and • A suite of analytic solutions with built-in tests for a range of risks and account balances that can be applied throughout the audit. This includes support for extracting and analyzing client data and automating relevant reconciliations, completeness, and integrity checks, simplifying many of the pain points that have historically plagued the acquisition of data. These tools support viewing and testing large amounts of data in a way that allows for quick and easy identification of unusual patterns, providing a more robust understanding and analysis. The visualizations make it easier to identify risks, spot trends, anomalies, and uncover other pertinent information that can lead to valuable client insights. These advanced capabilities allow client data to be brought to life, telling more compelling stories, en-

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cover story

hancing the risk-assessment process, and revealing hidden patterns, outliers, and insights. Audits that are broader and deeper will require professionals with expanded skills. This means developing auditors with the experience in specialized areas – including those not covered by a traditional audit – as well as advanced skills such as data science, analytics, and visualization. Are there any other major challenges or problems currently facing the audit profession? Other than the impact of emerging technologies on the audit, the major challenges and problems faced are those emanating from the increasing regulation, application of new auditing standards and increasing expectations from stakeholders. In terms of regulation, the new European Union (EU) statutory audit legislation effective from June 17, 2016 containing requirements that include mandatory firm rotation and prohibited non-audit services for public interest entities (PIEs) is expected to have a profound effect on the profession. In addition during 2016, the Cyprus Public Audit Oversight Board (CyPAOB) commenced its oversight and inspection on audit firms that perform audits of PIEs, leading to additional compliance and regulatory workload. Auditing around the world has gone from an essentially self-regulated profession to one that is now highly supervised by independent regulators as is now the case in Cyprus. We at Deloitte see audit regulators as having had a positive impact on audit quality globally and we will continue to find common approaches for the protection and benefit of stakeholders. Meanwhile with the continuous evolution of standards the International Audit-

ing and Assurance Standards Board (IAASB) issued new and revised auditor reporting standards in 2015 which are applicable for periods ending on or after 15 December 2016. After many years of purely binary pass/fail report, the revised auditor’s reports represent a significant shift in practice, providing investors, analysts and other users of the financial statements with a level of transparency and informational value not previously achieved through the auditor’s report. Traditionally the auditor was principally reporting on the accuracy of historical financial information whereas stakeholders are increasingly more interested in understanding the risk drivers behind an organisation and expect their auditors to inform them of what can go wrong as opposed to reporting on past results. The revised ISA 700 requires the auditor to read and consider information published alongside the financial statements which places more onus on the auditor to consider the overall quality of the annual report. The new auditor’s report is seen by us as an opportunity to provide greater insights to shareholders and other stakeholders How are Cypriot auditors and their clients affected by these challenges? The environment for auditors in Cyprus and, consequently, for their clients is changing dramatically. Although the changes to regulations and standards are structured to en-

Audits that are broader and deeper will require professionals with expanded skills

hance investor confidence, the challenges for auditors around the world and in in Cyprus to meet the additional expectations and demands will reach unprecedented levels. The vast majority of PIEs in Cyprus tend to be small entities whilst the changes introduce additional complexities. Whilst mandatory rotation is not expected to have an immediate impact as there are transitional provisions, the prohibition of non-audit services will have an almost immediate impact both on auditors and their clients. The provision of advisory type services to audit clients has served to raise efficiency and to retain talent. This will now change. The role of auditor as we have known it to provide an integrated package of services is no longer with us. At the same time, clients will have to seek to strengthen their finance teams or seek services from multiple firms. Many of the increased expectations from auditors apply equally to finance teams and Audit Committees of PIEs. Traditionally in Cyprus, very few organisations have had Audit Committees and these are seen internationally as having a pivotal role to play in enhancing audit quality. Cyprus PIEs will now have to form Audit Committees and these will play a critical role in improving financial reporting, combating rapidly evolving risks such as those from Cyber Security and overseeing the work of auditors. Among other things, Audit Committees need to understand the audit strategy, be satisfied that it addresses the major audit risks, and make sure the auditors exercise appropriate professional scepticism. The requirements to adopt to a rapidly changing environment, increased regulation and higher expectations from stakeholders apply equally to Cypriot auditors and their clients.

Strength in numbers!

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ACCOUNTING & AUDIT

2017 Accountancy Profession Strategic Forum

By Dr Martin Manuzi, ICAEW Europe Region Director

CAEW is delighted to be working with ICPAC to organise this year’s Accountancy Profession Strategic Forum (APSF) on 4 May. Now in its sixth year, the APSF annual meeting brings together Professional Accountancy Organisations (PAOs) from across the Baltics, Balkans and Central Eastern and Southern Europe for a one-day roundtable discussion on strategic challenges and opportunities. The aim of the APSF is to encourage proactive strategic planning and innovation so that PAOs can enhance their relevance and contribute to market needs and the public interest. This can often best be pursued in the context of sharing and learning with others. This was the underlying rationale when the APSF was first developed as part of ICAEW’s growing engagement in the Europe Region. In addition to participating PAOs, the APSF has benefitted from senior input from guests from the International Federation of Accountants (IFAC), Accountancy Europe (formerly FEE),

the World Bank Centre for Financial Reporting Reform, the European Commission and the European Group of International Accountancy Networks (EGIAN). The innovative roundtable format is designed specifically to encourage active open and constructive discussion and engagement by all participants. Key issues raised over the past years have been enhancing quality assurance in audit and for accountancy services; the growing role of the profession to achieve sustainable public finances; necessary changes in education and professional development; and the opportunities for professional bodies beyond traditional accounting and statutory audit. In all these spheres, the emphasis has been on the proactive strategies needed for PAOs to benefit from such opportunities. The APSF initiative has always been based on a partnership approach with the participating PAOs. A very important part of this collaborative approach is the organisation of the annual meeting with a trusted co-host. Running

this year’s APSF with ICPAC is a great honour, given our close relationship over many years. Co-organising the APSF provides the host national body with the opportunity to input into the agenda, showcase its achievements and, very importantly, demonstrate proactivity to national stakeholders and regulators. In addition to participation in the roundtable discussions, guests from government and the wider stakeholder community will be invited to the formal APSF dinner hosted at the Presidential Palace under the auspices of the President of the Republic. This year we have also invited observers from PAOs from the North African, Eastern Mediterranean and Middle East regions. Kyriakos Iordanou, ICPAC General Manager, explains the benefits he sees the APSF brings: “ICPAC has participated at the APSF meetings from the very start and immediately recognised the value to be gained by the forum. Personally, I have attended these meetings since 2014 and I would like to thank ICAEW for giving me the opportunity to share with other colleagues the experiences and thoughts of the Cyprus profession. “APSF is a terrific opportunity for PAOs to come together, discuss issues of mutual interest, exchange ideas and explore ways to continually enhance the accountancy profession. As PAOs are evolving, their role and scope today expands outside the traditional accounting and auditing functions. Key issues now on the agenda include taxation, anti-money laundering and compliance, technology and the reputation of the profession in general. “One of the core advantages of APSF is that it gathers all major issues in an innovative and dynamic roundtable format to provoke discussion and thinking, as well as to promote collaboration and interaction, in a friendly environment. “I am certain that the Cyprus APSF will be as successful as the previous fora and we are delighted to be the co-hosts of such a remarkable event”. The Accountancy Profession Strategic Forum (APSF) takes place at the Hilton Cyprus on 4 May, 2017.

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professional economy services

Professional Services and the Economy A resilient sector has contributed substantially to Cyprusâ&#x20AC;&#x2122; economic recovery but much still remains to be done, says Christis M. Christoforou, CEO, Deloitte Cyprus

ow would you describe the present state of the Cyprus Economy and what are your predictions regarding GDP growth in 2017-18? It is well-known that, since 2016, the Cyprus economy has managed to achieve significant improvement, which has resulted in GDP growth of 3%. This alone indicates that our economy has escaped from the long recession and has started moving on a positive course. However, one should not forget that this growth comes on the back of significant double-digit GDP retractions, and recognize that we have a long way to go to reach pre-2013 GDP levels. Two contributory factors to this positive course have been the improvement of public finances and private sector recovery. In fact, it is due to these factors that Cyprus has managed to exit the Troika programme, to successfully address foreign markets and to be upgraded by the international rating agencies. In this context, it is expected that we will soon be upgraded to the desired investment grade, which will enable the state to cover its financial needs with more positive terms. If this course continues, I believe that in 2017-18, GDP growth could surpass 2.5%.

What are the main economic challenges that lie ahead? I believe that, despite improvements in the numbers, there are still significant problems

caused by the crisis which need to be addressed, such as the high level of unemployment, which currently stands at 12%. Unemployment in

Cyprus has never been so high (apart from the period after the 1974 invasion) and this high rate affects young graduates who have no other option than to try to find a job abroad, with the country missing out on valuable resources for future growth. Another major problem is that of non-performing loans (private and corporate). According to the latest data by the Central Bank, the total amount of nonperforming loans is â&#x201A;Ź24 billion and it is extremely alarming, as it represents 43% of total credit. Apart from the problems attributed to the crisis, the economy needs to face several other challenges, such as public service reform, privatization, new largescale development projects and energy planning projects. These are of great significance and the earlier we implement them the more positive response will our economy demonstrate in the competitive international market. Which sectors of the economy, in your opinion, have the potential to see growth in the next two years? In the next couple of years, development may be apparent in all major fields of the economy. This was obvious in 2016 when all sectors had positive growth. Nevertheless, we could

experience better prospects in the fields of tourism, professional services, shipping, energy (if plans for Cyprusâ&#x20AC;&#x2122; Exclusive Economic Zone are implemented), as well as in other smaller sectors, such as healthcare and private education. How much does the broader professional services sector contribute to the economy of Cyprus and to society as a whole? Undoubtedly, the contribution of the professional services sector to the economy has been significant. This sector is behind all major FDI in recent years and it is this sector that has succeeded in bringing foreign businesses and foreign investments to Cyprus. The professional services sector is active on multiple levels both in Cyprus and abroad,

Professional services have managed not only to keep foreign investors in Cyprus but also to attract new ones to the island

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something which has led to the current positive outcomes. The resilience shown by the sector following the tragic events of 2013 was fundamental to the recovery that followed. Due to hard work and effective coordination and collaboration, professional services have managed not only to keep foreign investors in Cyprus but also to attract new ones to the island. What are the main challenges faced by the sector and what steps are being taken to overcome these? The challenges are dynamic, as they are influenced by external factors, which are constantly changing. For example, at the moment we are concerned about Brexit, since nobody knows the expected outcome with regard to relations between Britain and the European Union. Moreover, the EU has started reconsidering the implementation of a common corporate tax rate for all EU member states. These are challenges that affect both our sector and our economy. We are trying to find solutions in the interest of Cyprus, yet this is not always an easy task. In addition, there is a feeling of uncertainty at the level of international trade, caused by decisions by the new US President, Donald Trump. Given growing global objections to tax avoidance schemes, how important is it for Cyprus to insist on issues of transparency and compliance so that it maintains its good reputation and the trust of clients? Since our accession to the EU, Cyprus has always tried to comply with transparency and regulatory issues. We have always strived to keep our good reputation and trustworthiness, especially towards our clients, not only in the field of investments and taxation but in all sectors. Our economy’s reliability is the key to any successful financial operation. Hence, we try to promote our competitive advantages abroad and the positive features of the economy, as well as our strict compliance with transparency regulations and ethical conduct. Cyprus is a transparent, well regulated,

low tax jurisdiction with a highly skilled labour force and an environment which is conducive to business. This is Cyprus today: targeting serious businesses that want to base themselves in a jurisdiction which offers them value added and gives them a competitive advantage. How can professional services assist the Government in implementing best practices? The cooperation between the private professional sector and the Government has always been positive and constructive. In recent years, this cooperation has

Cyprus is a transparent, well regulated, low tax jurisdiction with a highly skilled labour force and an environment which is conducive to business been upgraded and, with satisfaction, we are seeing the implementation of the private sector proposals. One thing that is still missing is the speed at which these proposals and reforms are implemented. However, we will continue to work with the Government and push hard to make Cyprus a better place to do business. In your opinion, how will recent events like the Brexit vote in the UK and the Trump presidency in the US impact on the global economy? Will they influence the performance of the Cyprus economy too? As I have already noted, Brexit and Trump’s election have both created a

feeling of uncertainty about the future. Uncertainty is bad for any economy and there can be no doubt that both events have created some turmoil and the results are still unpredictable. When it comes to potential effects on Cyprus, I believe that Brexit may have a greater impact (especially on tourism) than Trump’s new policies. However, in both cases we should wait to see the developments first rather than making up scenarios and spreading panic. What are your expectations for Deloitte Cyprus in 2017-18? Deloitte Cyprus is one of the largest and fastest growing professional firms, operating from all major towns on the island with nearly 650 professionals. We provide high quality professional services to thousands of clients in Cyprus and abroad. With global revenues in 2016 of US$36.8 billion, we are the largest professional services network in the world. The primary drivers of our growth continue to be the high-quality professional services that our people provide and the value they give our clients and our other stakeholders. At Deloitte we are always looking ahead. We are always prepared to take advantage of the best opportunities, aiming to be the best in all we do – serving clients with distinction as they pursue their ambitions, maximizing the potential of our people, and making a difference to our communities. Deloitte combines global capabilities with a deep knowledge of local markets. Our growth plans for our local practice includes generating more business via the targeted selling of legacy services and, at the same time, exploring new international markets to promote Cyprus and bring more international businesses to our island. At the same time, we shall place greater emphasis on new services, as we continue to invest in innovative products and practices. Deloitte is a successful organisation, with exceptionally positive prospects that allow us to be optimistic and look to a bright future.

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economy

Economy Recovering, Competitiveness

Falling By Theodore Panayotou,

Director, Cyprus International Institute of Management (CIIM)

yprus’s successful exit from the Economic Adjustment Programme, following our €10 billion eurozone loan, was a major event for Cyprus in 2016. The Memorandum restrictions helped keep our policies, public finances and the banking system in check, but vulnerable groups, those on low incomes, and small businesses, were adversely affected by the austerity package. Those restrictions have now been lifted and our freedom is greater now but so are the risks. Exiting the Memorandum is positive if we use our regained freedom intelligently, sending the right message to international capital markets and investors, showing

them that Cyprus has succeeded in a short time (shorter than expected) to correct its public finances and stabilise its banking system. But the fact that we are already beginning

to ask for salary increases, hiring more public sector staff and spending freely, without buffers in place, sends the opposite message. Investors are more likely to be confused. With pressure for reforms now off, legislation for public service reform and the National Health System, among others, are stalling in Parliament. This is a serious problem, while we still have high numbers of non-performing loans, high unemployment and high levels of bureaucracy. Our growth rate is not what it should be; it looks impressive but we fell so low during the crisis that 2.5% from a very low level is hardly sufficient. We should be growing at a higher rate, say 4-5%, as Ireland did when it exited its own EU programme. Growth of 2.5% is not enough to recover the ground we lost during

the preceding 5 years. Far from being expected to rise in the near future, it might fall during 2017, as a result of the continued high private and public debt, the slowing-down of reforms and the increased demands for salary increases and new hiring in the public sector, which are difficult to resist in the midst of an election campaign. Cyprus has always managed to benefit from external chance events or ‘serendipity’. In the past, it was the Gulf war, mad cow disease, and the Arab spring; now it’s Syria. These crises in neighbouring countries send us more

ACCOUNTANCY CYPRUS

tourists; this year we had three million arrivals, the highest number ever, but not because we suddenly became more attractive as a destination; it is rather that others had become less attractive because of their problems. We may turn out to be lucky this year too if our competitors have more problems than we do and more tourists are channelled our way, as has happened time and again, including last year. But pursuing and attaining prosperity on the back of others’ misfortune is an odd way of going about things. Moreover, nothing is certain. With Brexit in

our midst, Trump in the White House and Erdogan on our back, uncertainty has multiplied over the last few months to the point that little is predictable. Uncertainty is always bad

With so much sun, all our electricity supply could and should come from solar energy

for the world economy and especially bad for small open economies. Cyprus needs a new model for a more competitive and sustainable economy. We have steadily lost competitive ground. Our ranking in the World Economic Forum’s Global Competitiveness Report 2016 dropped by 18 places, whilst Malta climbed 8 places. And this despite our economic recovery. We need an economic model based on technology, innovation and entrepreneurship to build our long-term competitive advantage,which improves both the performance of our business

in the global economy and the living standards of our citizens sustainably. We need to invest in new technology, to upgrade and develop educational tourism; Malta attracts tens of thousands of visitors in this sector. Why not Cyprus? We are larger than Malta, more centrally located and more attractive as a destination. But we prefer the ‘easy come, easy go’ way of making money, rather than developing opportunities for long-term investments. Our economy has previously benefited from short-lived, opportunistic ways: offshore companies, the banking sector, shelf companies, foreign invest-

ACCOUNTANCY CYPRUS

Clearing goods at Limassol port can take up to three weeks. In Singapore, it takes an hour! ments and money from Yugoslavia, Ukraine and Russia. That was luck. But we cannot always be lucky. A new economic policy for Cyprus would promote education, research, innovation and new technologies. With so much sun, all our electricity supply could and should come from solar energy; it is better for our pockets and for our economy. We should be leaders in the solar energy industry. Instead of importing solar panels from Germany and China, we should be exporting solar technology to the rest of the world. We need to educate and train people in technology and social media and make sure they have the tools and resources to innovate, to become entrepreneurs, to create their own jobs and businesses. Our university graduates dream of getting a public sector job; instead, many will stay out of work for years; our investment in education is depreciating. They are highly educated but, are their skills relevant to the market needs? We live in a globalised market economy, an economy based on information and communication technology. I would like to see all Cypriot students learn to code, to

write software, to use IT, to build businesses online. Python is such an easy coding language that, in other countries, it is taught in elementary schools; we don’t contemplate introducing it even in high schools. Our tourism is of the low level, mass market type, focused on sun and sea. Why not develop higher value tourism? What about tourism based on our history, culture, archaeology, nature, sports, and conferences. What about medical tourism, for example, promoting post-surgery recuperative stays in Cyprus? Our shipping industry is strong but it could be further promoted. Our climate is perfect to develop high-value, lowbulk agricultural crops like organic fruits, vegetables and herbs for international markets. If I had a magic wand I would eliminate bureaucracy and send many people home with a cheque in hand and more productive jobs than serving as speed bumps to slow investment and growth. Bureaucracy prevents investors from investing. I would create a one-stop shop for foreign investors. Consider that it can take up to 40 separate permits in order to make a solar energy investment

here. Or clearing goods at Limassol port can take up to three weeks. In Singapore, it takes an hour! Our court processes must be simplified; five years to resolve a legal dispute is unacceptable. Why would anyone want to do business here? In the past, the big fish ate the small fish. Today, the fast fish eat the slow fish, regardless of their size. I expect 2017 to be better than we fear but worse than we hope. Growth will continue, between 2% and 2.5%. There will be some overseas investment; unemployment, which fell from 16% to 12% and climbed back to 14% in the last quarter, will drop back to 11%-12%, not a satisfactory state of affairs and a disaster for those unemployed for over 2 years. Non-performing loans will fall modestly and more lending may take place but do not expect miracles. With the private debt in the stratosphere, both the demand for loans will continue to be low and the supply even lower. The internal environment is unpredictable.

A couple of months ago, many were convinced that a solution to the Cyprus problem was just around the corner. Today, no one will risk a bet even with the chance of a high payoff. The hopes that an imminent solution will make people feel more positive and take more risks, fuelling economic growth to 4-5 %, have evaporated once again. The external environment is just as unpredictable. Look at Syria and ISIS; Russia and Ukraine; the refugee crisis; Trump; Brexit, the Italian referendum, France elections, the Greek debt. There is uncertainty and risk but, remember, in times of crisis, opportunities do exist. The ancient Chinese curse “May you live in interesting times” has come to pass. ‘Crisis’ in Chinese is represented by two pictures, one of danger and one of opportunity. Every crisis has both. I hope this year we have more opportunities than dangers, and we are in position to capitalize on them, not opportunistically but competitively and sustainably.

Increased demands for salary increases and new hiring in the public sector are difficult to resist in the midst of an election campaign

Email: info@elyabeachsuites.com I Tel: 99584210

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economy

Protectionism: A Blow to World Economic Growth

By Marios Mavrides, MP, Professor of Economics, European University Cyprus

rotectionism is back in the world economy with unforeseen consequences, since no-one can predict the reaction of the countries affected. Free trade is at risk, as well as economic growth and millions of jobs, especially in countries like China, India, Brazil and Mexico, which depend on trade. Great Britain is expected to exit the European Union, into a highly uncertain environment, with respect to the rules that will apply afterwards. It is well known in economics that uncertainty is a major threat to economic growth, as households and businesses spend less money in conditions of uncertainty. There is, however, no doubt that the freedom movement of goods and services will be subject to tariffs and other restrictions, while the free movement of persons will be restricted. After all, the free movement of persons is the major reason why the British voted to leave the European Union. The truth is that they would like to be in and out of the European Union at the same time, something that is not acceptable to the other members of the Union. The new President of the United States, Donald Trump, has already demonstrated the intentions of his administration to implement strong protectionist measures for the United States economy. He has signed presidential orders which impose restrictions on free

trade and on the free movement of people. President Trump has ordered the withdrawal of the United States membership form the Trans-Pacific Partnership free trade agreement, which provides for the free movement of goods within 12 countries, including the United States. President Trump has also stated that he would like to renegotiate the North America Free Trade Agreement (NAFTA) between Canada, the United States and Mexico, which has been in force since 1994. My opinion is that if NAFTA is cancelled, all three countries will fall into a recession because 22 years after the inception of the agreement, the three economies are taking full advantage of this free trade. As a result of NAFTA, trade among the three countries has quadrupled and has created millions of jobs. In addition, Trump wants to build a wall along the US border with Mexico to prevent illegal immigration from Mexico, and he wants to impose a 20% tax on imports from Mexico to finance the construction of the wall. It is worth noting that the United States government has

already said that it is not against free trade, as long as it doesnâ&#x20AC;&#x2122;t include unfair practices, and it refers to China as an example. China is accused of maintaining an undervalued currency in order to boost its exports and limit its imports. This practice is also popular among developed countries, with Great Britain being the latest example. Protectionism is not new to the world economy. Recently, however, it has been on the rise, due to the global financial crisis, which lasted for a few years. There are many countries imposing restrictions on trade in order to protect their producers at the expense of their consumers. A recent report prepared for Global Alert, on behalf of the G20 Summit, outlines the protectionist measures taken by many countries. Protectionism poses a threat to the world economy which cannot be measured, especially if the countries affected proceed with retaliatory measures. We face the possibility of a fullscale trade war, which will have negative consequences on consumers and workers.

ACCOUNTANCY CYPRUS

economy

Quality Over Quantity Changes introduced by the EC’s Directive 2013/50/EU are geared towards engendering more transparency in financial reporting, and thus the encouragement of long-term investment performance

The Directive amended its 2004 predecessor (2004/109/ EC) with regard to the harmonisation of transparency requirements in relation to information about issuers whose securities are admitted to trading on a regulated market. The changes introduced with Directive 2013/50/EU were recently transposed into local legislation through Law 35(I)/2016 and incorporated into the existing legal framework (Law 190(1)/2007). Below are the key changes.

The issue of issuers There has been an amendment to the definition of the issuer so as to include natural persons, and legal entities governed by private or public law, whose securities are admitted to trading in regulated markets, as well as issuers of securities represented with depositary receipts that are admitted to regulated markets.

Changes have also been made with regards to the methodology used to determine the home member state of issuers.

Reporting requirements In a bid to deter the short-term focus of investors – which was thought of as being influenced by the nature of financial reporting, hitherto done on a quarterly basis – the requirement demanding publication of interim management statements has been abolished. It is widely believed that with the abolition of interim statements, longer-term vision by investors will be adopted. In addition to the above, it is understood that these reporting requirements constituted a significant financial burden to the issuing companies without necessarily contributing to investor protection. These changes have resulted in issuers in Cyprus no longer needing to publish interim management statements or quarterly reports,

pose in cases of violations. Thus, whereas the previous legislation permitted administrative fines of up to only €170,000, the new legislation provides for administrative fines of up to €2 million for natural persons and up to €10 million for legal persons. The provision for administrative fines up to two times the gain generated from the infringement or a loss avoided (if applicable) remains unchanged.

Ongoing information

By Demetra Kalogerou, Chairwoman, Cyprus Securities and Exchange Commission

imiting short-termism in the financial markets is widely understood to benefit investors globally. As such, transparent communication from issuers to encourage long-term investment performance should continue to underpin the European capital market. On October 22, 2013, the European Commission (EC) published Directive 2013/50/EU precisely to this end.

and indicative results, which previously had to be published two months from the year’s end. One extra month has also been provided for the publication of six-month financial reports, which must now be published within three months of the end of the relevant period. The requirement for submission of annual financial reports within four months of the end of the relevant period has remained unchanged. An additional amendment with regard to financial reporting is the requirement to keep both the six- and 12-month reports publicly available for 10 years, as opposed to five. Furthermore, the new directive has introduced a reporting requirement with regards to payments made to governments. Specifically, it is stipulated that issuers active in the extraction or logging of primary forest industries have to prepare a report on payments made to governments and publish it within six months of the culmination of the relevant financial year. This report must also remain publicly available for 10 years.

Financial penalties Taking a hard-line stance on non-compliance, the new directive allows regulators to increase the financial penalties they im-

A similar approach has been adopted with regard to ongoing information requirements. Whilst the quantity of information required to be released has decreased, the caps for administrative fines in case of non-compliance have increased substantially. Specifically, the responsibility of the issuer to inform the Cyprus Securities and Exchange Commission (CySEC) – as well as the relevant market – of every draft proposal prepared for the amendment of its instrument of incorporation or statutes, and of any new loan issues, has been waived. However, the cap has been raised for administrative sanctions that may be imposed in case of violations. Thus, fines incurred for non-compliance in ongoing reporting requirements may match those sustained in the case of violating periodic information requirements. Overall, the dictates of the new regulation can be thought of as ameliorating the burden of reporting requirements in terms of quantity. However, the significant increase in the applicable administrative fines clearly indicates that no ‘discounts’ should be made in terms of the quality of information provided. As such, CySEC will not hesitate in upholding its commitment to investor protection, a fundamental component of which remains transparent financial reporting and its consistent implementation.

ACCOUNTANCY CYPRUS

economy

The Cyprus Stock Exchange It is once again a viable organisation, ready to continue its contribution to the development of the country

By Nondas Cl. Metaxas Director General – CEO, Cyprus Stock Exchange

n recent years, our Exchange has found itself on a very difficult journey, one that, on many occasions, could have created problems concerning its very viability. In response to recent comments and articles in the media, I have concluded that now, a few months before my retirement, is the right time for me to express my own opinion about the CSE. It is progressing and developing. Its qualified personnel work private sector hours in an excellent environment and, whenever needed, they have shown a great deal of self-denial.

It’s a fact that things have not been easy since the very first day of the Cyprus Stock Exchange’s (CSE) existence. I remember how the first Council of the organisation tried to find a suitable logo and, following a competition and discussions, we selected the Kyrenia Ship, depicted sailing through stormy waters. Apart from the symbolism and the opportunity to inform visitors

about the national issue and about Kyrenia, when asked to explain the logo, there are plenty of substantial reasons why it should show our ship amid rough seas. The fact that most of the CSE’s income was from the banking sector was never a secret, just as it was never a secret that the most substantial part of the transactions carried out were by the country’s three largest banks.

In 2013, catastrophe struck the CSE, for reasons far beyond its control and it saw its biggest companies either disappear or substantially contract. As economists have noted, the offer of securities to the public decreased considerably and at the same time, demand for securities was absent due to the wider crisis in the banking sector. One might have expected that this would signal the end of the Cyprus Stock

The fact that most of the CSE’s income was from the banking sector was never a secret Exchange but those who know their job, are loyal and persevere, will gradually find a way to survive. This is what has happened in our case. Through

planning, coordination and a joint effort by the Council, Management and Personnel, all working in close cooperation, a new organisation has been created. By setting up a new framework, in which other experts were also involved at a later stage, we hoped that our Exchange would slowly restrict or get rid of its deficits and once again become viable and able to play its proper role within the economy. In reality, this ‘proper role’ of an Exchange in an economy that wants to grow, is unique and irreplaceable. Investing in the Stock Exchange is not a game of chance; it’s not gambling. The Stock Exchange is an Institution with its own regulations and a plethora of legislation related to its operations and, above all, it is for those who are well-informed and familiar with the environment. The Exchange is an irreplaceable source of alternative financing for the development of a country, for small and medium sized enterprises; it is an alternative

ACCOUNTANCY CYPRUS

source of funds and investments but, above all, a catalyst for growth. An economy cannot depend solely on the banking sector. As experience has shown in Cyprus, this can be very dangerous. I will never tire of pointing to what Hong Kong, Singapore, Luxembourg and, recently, Malta have achieved. It is obvious that

of the ECM Market of the Exchange which is mostly addressed to medium-sized, innovative enterprises in a more flexible institutional framework and with a lower pricing policy than that of regulated markets. At the same time, we proceeded to make all the necessary arrangements to facilitate the listing of Collective

the role of such an organisation beyond this framework could lead to an undesirable situation. The characteristics of this new organisation are the following:

Investment Funds on the Exchange. Simultaneously, we expanded the range of our activities and services with regard to the public sector, supporting the Ministry of Finance through the CSE’s new services.

Eliminating or Minimising Bureaucracy We emphasised the introduction of new online procedures, the use of advanced technology, e.g. the possibility of submitting electronic applications for listing securities, the standardisation of announcements through the OAM System, and being able to respond to market participants with flexibility, speed and adaptability.

The Creation of New Products Within the Traditional Framework of the CSE In recent years, emphasis was placed on the development

The Creation of New Products Outside the Traditional Framework of the CSE We promoted legislative amendments enabling the Exchange to maintain Registries of non-listed Companies in its Central Securities Depository. We also undertook the auctioning of Emission Allowances (EUAs) on behalf of the Republic of Cyprus. The CSE, in collaboration with the Ministry of Agriculture, Natural Resources and Environment, has developed all the relevant procedures for auctioning EUAs.

Cost Savings In addition to the introduction of new initiatives aiming at increasing the organisation’s revenues, in recent years we have achieved savings aiming at improving the CSE’s financial situation.

Reductions in Personnel With regard to savings achieved, the Exchange introduced new, innovative practices, which were a breakthrough in the broader public sector, enabling its personnel to temporarily support other organisations with their experience and knowledge, while helping improve the finances of the CSE. Specifically, Memoranda of Understanding were prepared in order to provide services to the Cyprus Securities and Exchange Commission (CySEC) and to the Department of Registrar of Companies and Official Receiver (insolvency section), to whom CSE personnel provide services.

Modernisation of Laws We are continuously promoting the necessary changes to Legislation and our Regulations, through the adoption of new European Directives and practices. At the same time, we review and strengthen the Corporate Governance Code in cooperation with, and under the strict control of, CySEC, aiming at further shielding the institutional financial framework.

Strategic Partnerships The Cyprus Stock Exchange has signed a number of Memoranda of Understanding with other Exchanges and proceeded with a number of consultations on wider cooperation as well as on matters related to the listing of se-

curities. During the last few years, we have continuously been studying these options of cooperation with strategic partners worldwide, which could provide value to the organisation. Within its legislative framework, the Cyprus Stock Exchange has worked with major companies in order to help them rationalise their plans. The case of Bank of Cyprus is well known but the CSE has also managed to list a significant number of foreign companies with multiple benefits and has managed to open up vast prospects for the economy, through the financing of large-scale projects and the creation of Collective Investments Funds. Today, the CSE actively participates in a number of international organisations and is in discussion with other stock exchanges in the region for wider regional cooperation, with important benefits for the country and its economic prospects. Everyone needs to recognize the correct role of the Exchange and to understand how valuable it is to our economy. I would like to thank everyone who has collaborated with me over the years in difficult conditions, in order to keep our Exchange a healthy organisation, free of corruption at every level. All CSE employees can feel proud to have handled everything that the State has given them with transparency and in a dignified manner. Today the Cyprus Stock Exchange is once again a viable organisation, ready to continue to contribute to the development of our country. Let’s utilize it!

ACCOUNTANCY CYPRUS

economy

The Economics of Electricity Markets The ongoing financial crisis that Cyprus has been enduring has highlighted the importance of taking responsibility for one’s actions, and the pressing need for a strict regulatory and supervisory framework tasked with effectively – fairly – protecting citizens’ wealth

By Dr. Andreas Poullikkas, Chairman, Cyprus Energy Regulatory Authority

nderstanding the basics economics and technologies of electricity markets can help us understand the behaviour of energy prices in general. On the supply side of the business, the following technologies currently dominate electricity generation: • Steam turbine using nuclear fuel • Steam turbine using coal

• Steam turbine using oil • Combined cycle using natural gas • Open cycle gas turbine using natural gas • Hydropower • Renewable energy sources for power generation Different countries have different mixes of technologies, the most prevalent being coal, nuclear and natural gas-based technologies. The last category is quickly gaining in importance, since almost all substantial new generation is based on natural gas. The importance of natural gas lies in its relative environmental advantages, high efficiency and low cost. In certain seasons, hydrological resources can be of significant importance in certain countries. The characteristics that determine the cost of generation are listed below:

• Capacity: Maximum power output of the unit expressed in MW. • Heat rate: A measure of efficiency of the unit, that is, its ability to convert fuel energy content, expressed in kJ, into electrical energy, expressed in KWh. • Variable operational and maintenance (O&M) costs per unit of generation. • Min/max generation level: Maximum generation level is the unit’s installed capacity. Minimum generation level is the technically feasible minimum level. For steam units, the minimum levels are around 30% to 50% of total capacity. For

some gas turbines they can be as high as 80%. This characteristic has a major impact on a plant’s flexibility, and consequently its optionality. • Scheduled outages: Planned downtime for maintenance. Units typically require 2 to 4 weeks of downtime annually. • Forced outages: Unplanned downtime caused by a technical failure of the unit. Expressed as equivalent forced outage rate, which

Outage rates can have a substantial impact on the risk profile of a unit’s cash flow

ACCOUNTANCY CYPRUS

is defined as the number of outage hours in a measurement period divided by the number of available hours in that period. Outage rates depend on the unit’s technology, its age, and its operating conditions. The outage rate can run from 3% to more than 20% for some units. In general, the timing of individual outage events can be influenced to some degree by operating decisions and individual outages can be delayed by certain actions. However, this can entail substantial cost down the road or a higher outage rate later. Outage rates have an impact on the value of the plant, because they limit the total amount of energy available from a unit. More importantly, out-

age rates can have a substantial impact on the risk profile of a unit’s cash flow. • Ramp rates: The rate at which the generation level can be changed, expressed in MW per minute. Fast-ramping units have rates of around 5MW/min. This characteristic has a major impact on the flexibility of a plant, and consequently on its ability to capture hourly and other short-term optionality. • Startup/shutdown costs: The costs of starting up or shutting down a unit can be of three types: (a) fixed cost per event, (b) fuel consumed in a start-up and (c) electricity consumed in a start-up. For large baseload units, fixed start-up costs can run into tens of thousands of euros,

and must be differentiated between various start-ups. Depending on the state of the unit, a start-up can be cold, warm, or hot. This classification refers to the state of the boiler in steam--powered units. The colder the boiler is, the more expensive it is to heat it up again, so the cost of start-up increases accordingly. The size of these costs has a substantial impact on the value of flexibility associated with the unit. It tends to have a disproportionately high impact on the risk profile of the unit cash flow, and it can also tend to induce significant hedging costs. • Min/max runtime, min/ max offline time: For technical reasons, various restrictions on the length of

runtime and/or offline time can be present. These restrictions can significantly affect a unit’s flexibility and thus its ability to exploit optionality. Although a number of technologies are used in generating electricity, the technology itself is usually not of much interest. The main technical characteristics that impact valuation and hedging, such as start-up costs, ramp rates, heat curves, fuels used and emission rates will be sufficient to characterize the financial impact. Using these categories, we can distinguish between three main families of thermal generating units, such as, (a) Baseload, (b) Cycling and (c) Peaking. The technology used in different classes of generation

ACCOUNTANCY CYPRUS

units can be based on a variety of principles. Some power plants have multi-fuel capabilities, that is, the ability to switch between different fuels, depending on operational or cost considerations. In some cases, the switch can be made without delay and at a low cost but, in others, it might involve a shutdown and all the consequent costs. Operational costs of units are affected by the following items: (a) fuel costs, (b) variable O&M, (c) emissions costs/ emissions restrictions (they can have cumulative instead of marginal character) and (d) transmission costs (depending on the market design). Knowing the unit characteristics and the cost items above, the marginal cost of generation for all the units in a given region can be calculated. By stacking the units in merit order, that is, from the lowest to the highest cost, we can form what we call a supply stack. The marginal cost of a unit depends not only on current fuel costs, but also on the previous states of the unit. The operating characteristics mentioned above (startup costs and minimum runtime) can create dependencies between different unit states at different points of time. This obviously suggests that the marginal cost will be path-dependent. If we ignore the above subtleties, we can form the supply stack by considering only the marginal fuel costs (and variable O&M). The supply stack is then a potentially multidimensional surface that shows us the marginal fuel cost for the different system generation levels and fuel prices. In almost all countries, the

marginal fuel (the fuel that sets the price most often) tends to be natural gas. The marginal fuel cost stack surface (generation stack) may not necessarily be equivalent to the actual bid stack submitted for optimization in different pools. For certain regions, we have at our disposal the actual bid stack used. Consequently we can compare the marginal fuel stack with the actual bid stack used in determining system price. The importance of this exercise lies in the fact that the structure of the stack helps us understand the behaviour of power and fuel prices. For that to be a viable option, we must reasonably expect that the structure of the marginal fuel stack is close to the actual bid stack. The differences in the fuel and bid stack are due to several factors. The actual marginal costs of the different generators can be influenced by a number of physical constraints, and in some situations, this might make fuel cost an insufficient proxy for the actual marginal cost of generation. Furthermore, the

differences can be induced by strategic behaviour by the bidders. Depending on the structure of the market, the dispatch of a generation unit can be significantly different. In pool markets, where we have one market clearing price (at least for energy), the optimization of dispatch is greatly simplified. The optimization of generation assets is independent of any load obligation, storage facilities, and any financial (or even physical) contractual arrangements. It follows that the operation of a unit is by and large not affected by any hedges the generator might hold. This is strictly true only for risk-neutral operators. For certain market designs, hedging strategies can influence operational deci-

sions through the impact of risk-reduction on the optimal dispatch decisions. For example, if an operator enters into contracts that guarantee that at least the start-up and no-load (minimum generation level) costs will be recovered the operator will be willing to start up the unit more frequently. This consideration, however, depends on the specifics of the pool design. In bilateral markets, dispatch involves optimizing generation, given contractual load constraints and fuel prices. It can also involve selling excess power or buying needed resources in the cash market. The problem in purely bilateral markets is that the price discovery process can be quite inefficient.

The colder the boiler is, the more expensive it is to heat it up again, so the cost of start-up increases accordingly

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economy

Globalization and World Trade Have Stalled By Tasos Anastasiades, Economist, Editor, Accountancy Cyprus

lobalization represents the opportunity for the free movement of goods, capital and persons. The opportunities presented by globalization are significant and the world economy cannot achieve a high growth rate if each country remains isolated from the rest of the world. Studies have shown that the development of emerging markets such as Brazil, China and India over the last thirty years has led to the greatest decrease in inequality since the industrial revolution. However, this income expansion in developing countries has come at the expense of other countries, especially the rich ones. But a recent study by researchers of the World Bank has shown that, since the crisis of 2008, inequality among countries has actually been reduced, with the big industrial countries also being winners. As the researchers state, between 2008 and 2013 the number of countries that reduced income inequality was double the number of countries where inequality widened. World trade and globalization have been wrongly blamed for Brexit, the election of Donald Trump to the presidency of the US, and the rise of the extreme right populist parties in Europe. Branko Milanovic, economist and a former senior officer of the World Bank, argues that low-income workers have been adversely affected by the development of emerging markets, especially of China in the last thirty years, while the rich have benefited. However, a recent study by the Resolution Foundation, which supports the interests of the lower middle classes, has rejected Milanovicâ&#x20AC;&#x2122;s findings. As Resolution Foundation Director Torstme Bell says, globalization has led to challenges for low-income families but,

in general, increased income depends on national policies and blaming globalization is a way of avoiding criticism of government policy. Two other factors contributing to lower incomes for unskilled labour are new technology and automation. In a separate study, Milanovic shows that, in 2008-2011, there was a higher increase in income, compared to the stalling of income of the same classes over the previous thirty years and a smaller increase in profits for the higher income classes. Milanovicâ&#x20AC;&#x2122;s revised conclusions also show that the richer classes worldwide suffered some reduction in their income during the financial crisis which started in 2008 and which has led to a decrease in inequality. In the meantime, an analysis by the Peterson Institution of International Economics argues that the relationship between international trade and world production has stagnated since 2008, making it the longest period of stagnation since World War II. As a consequence, further integration also stagnated and, in some respects, regressed while globalization has ceased to be the motor of world economic growth. It is stated, however, that it is not the first time that

With the election of Donald Trump to the presidency of the US, there is danger of protectionism worsening stagnation in world trade has taken place. A period of globalization was recorded towards the end of the 19th century, which ended with World War I and worsened with the financial crisis of the 1930s. However, US economic and foreign policy since 1945 led to the return of globalization. The global financial crisis, which started in 2008, led to regulatory measures, many of

ACCOUNTANCY CYPRUS

which will reduce world trade. Now, with the election of Donald Trump to the presidency of the US, there is danger of protectionism worsening. To avoid this, the cooperation of all leading countries is needed and, at the same time, a major power must take the lead as, for example, Britain did before 1914 and the USA before 1945. Today, with a low rate of growth in the leading countries and with growing inequality, there is a danger of greater protectionism. However, China may be the country to take the initiative in preventing the world economy from falling into protectionism. Globalization has led to economic growth in emerging markets, and in turn to the drop of the first decrease in

inequality since the industrial revolution. No rise in populism has been recorded in emerging markets, in contrast to the wealthier countries where xenophobic nationalist trends have been observed. Immigration and the fall in traditional manufacturing are considered as two of the reasons behind the UKâ&#x20AC;&#x2122;s Brexit vote, although the data shows that inequality in Britain has not changed since the beginning of 1990s. Similar populist movements are growing in Europe, again as a result of immigration. While low growth, protectionism, the financial crisis and inequality as well as mass immigration surely need coordinated international solutions, the leaders of the G20 prefer to let each country take its own

measures and do not pursue international cooperation, something which would lead to higher economic growth and international trade. For the G20 member countries, the organization should take measures which are international and common to all. We should emphasize, however, that there is a different approach between those who accept a well-regulated control of globalization and those who oppose coordinated action, either because they would like a globalization without conditions or simply because they are populists and thus they are against globalization and in favour of protectionism. We must note, however that, due to the influence of protectionism for 40 years, there

has been no success for the forging of a free international trade agreement, substitutes such as the Asia Pacific Trade Agreement (APTA) among 12 countries and TTIP between the US and the EU are no longer being pursued. The situation is expected to worsen as a result of the election of Donald Trump, who has stated that he will not ratify APTA and is seeking to amend the NAFTA agreement between the US, Mexico and Canada. A study of 40 countries by Pablo Fujelbaum of the University of California and Amit Khandelwal of Columbia University concludes that, if a country promotes protectionism and closes its borders to free trade, those with high incomes will lose 28% of their purchasing power and those with low incomes will lose 63% of their purchasing power. This is because they buy relatively more imported cheap goods. The study also shows that international trade is in favour of the poor in all 40 countries, including 13 developed countries. It is noted that the integration of China into free international trade has brought better and more permanent results than expected. However, in the US and other countries, very little has been done and very little money spent on those who have lost their jobs due to new technology/ automation and increased imports. This has given â&#x20AC;&#x2DC;justificationâ&#x20AC;&#x2122; to the populists, who promote protectionism to suggest solutions that will actually damage the poor much more than the rich.

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Figure 1: Eleven-month post-January Frequency of Positive and Negative Returns and January Barometer Accuracy (1988-2016)

economy

The January Barometer: Leading Stock Market Indicator or Myth?

Note: TOPIX 100 data spans 1990-2016. Sources: Author’s own calculations; FactSet

Figure 2: Eleven-month post-January holding-period Index Returns (1988-2016)

According to Yale Hirsch’s 1972 Stock Trader’s Almanac, January can be seen as a leading indicator of stock market direction for the rest of the year, in what is known as the ‘January Barometer’. With this year’s 2% gain in January, it pays dividends to investigate the predictive power of this non-random walk theory.

Note: TOPIX 100 data spans 1990-2016. Sources: Author’s own calculations, FactSet

By Antypas Asfour Board Member of the CFA Society of Cyprus, Lecturer at the Cyprus Institute of Marketing

n analysing data from the past three decades, we can infer that the January Barometer’s success rate is akin to that of a coin toss, being 59% right for the S&P 500 and the FTSE 100 indices, 55% right for the Euro STOXX 50 Index and only 44% right for the TOPIX 100 Index (see Figure 1). Focusing on the likelihood that the Barometer is better suited at identifying ‘up’ years rather than ‘down’ years – in light of the number of times a positive February to December period followed gains in January – we draw the same randomness conclusion. Although there was a positive return in the S&P 500 for the February to December period in 82% of the cases where a January gain preceded, this can be attributed to the fact that the index in the long-run is trending upwards with 79% of years showing positive return between February and December. Similar findings are evident in the other three major indices: the Barometer’s 72% accuracy in foretelling a positive Euro STOXX 50 year (February to December) is based on a January gain matching the 72% of years there is an uptrend; in TOPIX 100, the indicator’s 42% accuracy in prognosticating an ‘up’ year in fact trails the 48% frequency the Index moves higher in the year, and the FTSE 100 fares even

better with an 80% success in predicting a bullish year based on a positive January when the Index is positive 72% of the elevenmonth post-January periods. Shifting our attention from the Barometer’s frequency of accuracy to the average returns in different scenarios, it emerges that the performance of January does not seem to have a bearing on eleven-month post-January periods ending positive (see Figure 2). The average February to December return for the S&P 500 Index when the Index was up overall and January was positive was 16%; when January was negative, this drops marginally to a 14% gain, with the Euro STOXX 50 Index figures being 19% and 15% respectively. For the TOPIX 100 Index, which had the poorest Barometer accuracy results as aforementioned, a positive January led to a 26% average return for positive years whereas a negative January led to a 17% average return. Finally, investors in the UK would have been

worse off from an eleven-month post-January average return perspective by following the Barometer as returns averaged 11% in positive years which started off with a positive January, relative to a 16% return when bullish years started with a poor January. On average, negative eleven-month post-January returns seemed to be more pronounced following a ‘down’ January, as shown in Figure 2, although these results are based on a much smaller sample of data points. We can thus conclude that, at least based on data from recent decades, the January Barometer lacks predictive value. Investors and traders looking to use the January Barometer should remember that past performance does not guarantee nor predict future performance. Irrespective of the underlying motivation, any investing or trading should be done with prudence, following thorough analysis or with the help of a qualified professional, as there are a myriad of factors that drive markets.

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economy

Shackled and Drawn Despite having completed its economic adjustment programme, the heart of the island’s economy remains shackled by unresolved fundamental issues. But breaking free from these bonds is easier said than done, and until this happens real and sustainable development will remain elusive.

By Savvakis C Savvides, Economist & former Senior Manager, Cyprus Development Bank

lmost four years after the bail-in of March 2013, the fundamentals of the Cyprus economy remain dire. Despite the completion of the island’s economic adjustment programme, and the seemingly good economic indicators – including a growth in GDP of above 2% in the past year – the huge private debt (private debt to GDP was over 350% in mid-2016) remains stubbornly unchanged and is affecting all attempts to rebuild the economy. Moreover, the banking system remains bloated (more than three times GDP) and rather unstable, with about half of exposures still in non-performing loans. Not surprisingly, unemployment remains high (over 12%), with local demand feeble, and projected to remain so for the foreseeable future. Last but not least, the economic agents of the country (namely, companies and households) are highly indebted, with their balance sheets suffering from depleted equity and in grave need of repair. These conditions are not conducive to new capital investment, which is badly needed now more than ever. Real and sustainable development will not come about before there is a solution to the ailing fundamentals in the economy. If we fall into a beautification exercise and pretend that we have turned the corner, we allow dangers to lurk. The prime and most imme-

diate danger is to inadvertently create conditions whereby – to coin a phrase from research professor of economics, Michael Hudson – so-called parasites set to work on slowly but surely killing the host. In his latest book, Hudson explains how financial parasites and debt bondage destroy an economy. The foremost concern of the government should be how to protect the assets held by systemic banks from being plundered. In an economy burdened by an unbearable private debt, where economic agents struggle to deal with enormous and fundamentally irreducible debts, the likelihood that the relatively small stakeholders currently in charge of the banks will commit to taking the long-haul ride –

which may lead towards future but highly uncertain returns from normal banking business – is very slim. In such circumstances, it is far more probable for them to try to make the best of the control they still have in order to maximise the return on their initial investment through balance sheet deals. In addition, the current shareholders in control of the large systemic banks in Cyprus know full well that in order to remain at the wheel, they will need to provide additional capital to offset upcoming losses stemming from the banks’ unsustainable and under-provided debt exposures. Ahead of the expected and inevitable need to recapitalise, the Bank of Cyprus has already used the leverage it has to start implementing a complicated (and rather dubious) plan for putting itself in a predominant position. Hellenic Bank may soon follow suit, while the Cooperative Bank is embarking on an aggressive effort to privatise, where the main apparent attraction for potential investors is its balance sheet rather than its long-term prospects. This is a very unhealthy foundation upon which to build the economy and to sow the seeds for future econom-

ic growth. In a recent paper co-authored with Les Manison (Manison, Leslie G. and Savvides, Savvakis C., Neglect Private Debt at the Economy’s Peril, December 1, 2016), it is highlighted how – given the unsustainable level of private debt – Cyprus has succeeded in postponing a balance sheet recession by the twin effect of households using their savings to maintain consumption levels and enjoying an exceptional year in tourism. However, when the inevitable happens – that is, households’ savings deplete, no longer able to support further consumption – a balance sheet recession is will be imminent. Moreover, a significant investment is needed (but apparently not forthcoming) to expand capacity and upgrade tourist accommodation and supporting services and infrastructure. To be able to put the economy on a sound footing and to support sustainable growth, it is necessary to pave the way for both public and private sector capital investment into viable projects and companies with healthy balance sheets. Through government-led initiatives, such as the introduction of an independent development and finance agency – charged with aiding the reconstruction process to arrive at a healthy balance sheet, and therefore financeable business entities – commercial banks will also be given the opportunity to play a key role in the proper assessment of credit risk, and the financing of viable projects and businesses. Banks will thus be able to refocus their efforts and longterm strategic outlook (attaining a good return on investment for their shareholders, no less), and facilitate the creation of new wealth rather than simply transferring and profiting from existing wealth.

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economy

At Your Service We live in a services economy. As such, any barrier to trade in services threatens growth and is at odds with unfettering the potential of European companies to thrive on a global stage. But what if the full force of the Single Market was effectively unleashed?

By George Markopouliotis, Head, Representation of the European Commission in Cyprus

he services sector is the largest component of the EUâ&#x20AC;&#x2122;s economy (constituting 70% of GDP), generating some 90% of jobs, with 40% of the value of EU manufactured products stemming from services inputs. Nowadays, manufacturing activities also increasingly depend on, and are bundled with, many services. No good is manufactured and marketed without important services inputs, be they research and design, accounting and advisory services, computer and information services, marketing services, or after-sale services. The performance of EU manufacturing is increasingly linked to the competitiveness of services. Barriers to trade in services in the Single Market are therefore barriers to the competitiveness of EU manufacturing, and thus to job creation and growth. Giving a fresh impetus to the services sector is at the heart of the Single Market Strategy: a roadmap to deliver on European Commission (EC) President, Jean-Claude

Junckerâ&#x20AC;&#x2122;s political commitment to unleash the full potential of the Single Market and make it the launch pad for European companies to thrive in the

global economy. The EU has already agreed on rules to make it easier to provide services in the Single Market. But in practice, obstacles to the growth and exchange of services in the EU still remain, including complex administrative procedures.

Taking the initiative This is why the EC recently put forward four concrete initiatives that will make it easier for companies and professionals to provide services to a potential customer base of about 500 million people in the EU. These proposals include:

A new European Services e-card A simplified electronic procedure will make it easier for providers of business services (e.g. engineering firms, IT consultants, organisers of trade shows etc.) and construction services to complete the administrative formalities required to provide services abroad. Service providers will simply have to liaise with a single interlocutor in their home country and in their own language. The home country interlocutor would then verify the

necessary data and transmit it to the host member state. The host member state retains the current power to apply domestic regulatory requirements and to decide whether the applicant can offer services in its territory. The e-card would not affect existing employer obligations or workersâ&#x20AC;&#x2122; rights.

A proportionality assessment of national rules on professional services Around 50 million people (22% of the European

Obstacles to the growth and exchange of services in the EU still remain, including complex administrative procedures labour force) work in professions to which access is conditional upon the possession of specific qualifications or for which the use of a

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specific title is protected, e.g. pharmacists or architects. Regulation is often warranted for a number of professions, for example, those linked with health and safety. But there are many cases where unnecessarily burdensome and outdated rules can make it unreasonably difficult for qualified candidates to access these jobs. This is also to the detriment of consumers. The EU does not regulate or deregulate professions: this remains a national prerogative. But under EU law, a member state needs to establish whether new national professional requirements are necessary and balanced. To ensure a coherent and consistent approach, the EC is proposing to streamline and clarify how member states should undertake a comprehensive and transparent proportionality test

before adopting or amending national rules on professional services.

Improved notification of draft national laws on services EU law already requires member states to notify changes to national rules on services to the EC, providing the EU executive and other member states with the opportunity to raise potential concerns about possible inconsistencies with EU legislation early in the process. The EC is proposing improvements to this mechanism to make the process more timely, effective and transparent.

Reaping the benefits Various studies confirm the positive effect of improved regulation of professions on job creation, the com-

petitiveness of the business environment, improved productivity, and GDP growth. Regarding job creation, one study estimates that between 3 and 9% more people can access a given profession if requirements are made less complex, For example, according to a report by the French Inspection GĂŠnĂŠrale des Finances (IGF), estimated reforms in 37 selected professional services could increase GDP by 0.5% and create more than 120,000 jobs over five years in France alone. Furthermore, according to a World Bank paper,

reducing barriers in European services could improve productivity by 5%.

What happens next? The draft legislative proposals on the services e-card, proportionality test, and services notification procedure will now be sent to the European Parliament and Council for adoption. The implementation of the guidance will be the responsibility of the member states. The EC will monitor and assess progress, and may turn to other enforcement measures if progress is unsatisfactory.

Giving a fresh impetus to the services sector is at the heart of the Single Market strategy

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economy

As You Sow, So Shall You Reap The ongoing financial crisis that Cyprus has been enduring has highlighted the importance of taking responsibility for one’s actions, and the pressing need for a strict regulatory and supervisory framework tasked with effectively – fairly – protecting citizens’ wealth

By Demetris Georgiades, Chairman, Fiscal Council

eaknesses, gaps, and overall deficiencies in both the regulatory and supervisory frameworks of the pension, financial and banking sectors have allowed for the destruction of wealth for thousands of Cypriot citizens. The root of these deficiencies can be credited to inexperience, negligence, and even criminal actions. Over the past few years, experts and associations – including the Fiscal Council – have repeatedly called for the

radical reform of regulatory frameworks in Cyprus, as well as the strengthening of associated institutions. Since its first report (published in Autumn 2014), the Fiscal Council has repeatedly signalled the unacceptable weaknesses of – in particular – the supervisory and regulatory frameworks for pension schemes in Cyprus. Whilst the most recent actuarial valuations of civil servants’ pension schemes and of the Social Insurance Fund indicate that – thanks to a series of reforms – they are now viable and pose little threat to fiscal stability, their adequacy (in other words, their capacity to provide pension benefits so that their members can maintain a minimum acceptable standard of living during their pensionable life) still cannot be considered sound. It is disconcerting and saddening to see that most of the proposals submitted and discussed during the post-crisis years do not aspire toward the creation of a strict and effective regulatory framework, one that would

encourage savings over the working life of employees and thus guarantee the adequacy of pension benefits for all citizens through a properly and strictly supervised environment. Instead of taking tangible steps towards these much-needed reforms, the proposals being discussed risk inducing the exact opposite of the desired goal. Proposals calling for full compensation of all losses suffered by pension and provident funds, and by bondholders and depositors, during the bail-in period, will not only serve to impose a burden on already stressed public finances, they will also serve as the springboard from which such past bad practices can and will be repeated, thus leading to a new – yet just as severe – crisis.

At your own risk Both personal and professional risks can be categorised into two groups: those that can be mitigated and/ or insured for, and those that can be avoided entirely. For any free and democratic society to function and prosper, it is important that its citizens are able to recognise and evaluate potential risks, prepare for them, and – if necessary – bear their consequences. Ignorance cannot be considered an acceptable excuse in a modern and free society. No one should be in a position to claim 100% of the profits derived from his or her investment decisions, and at the same time expect that the taxpayer will cover any

Ignorance cannot be considered an acceptable excuse in a modern and free society

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losses, especially when those resulted from his or her own free actions. If allowed, such practices will cause more social inequalities and, more importantly, create moral hazard issues, with long-term undesirable consequences. This does not imply that all those who suffered losses have no way of recovering their losses or at least part of them. All those who have been misled or who fell victim to fraudulent actions can and should seek the protection of their own interests through normal legal channels. This is another area in desperate need of reform with politicians bearing a responsibility to put forward proposals tasked with protecting the rights of citizens in a timely and effective manner.

Judgment day All those responsible – from consultants, stockbrokers, and bankers, to members of management committees of

pension and provident funds – and all those who held key positions in either the public or private sectors and failed to fulfill their duties, should be held accountable. The taxpayer should not be forced to cover all or a great part of the losses suffered. If this happens, public pressure for justice and reform will weaken substantially: all those responsible will not be brought to justice and will not face the necessary consequences, and – more importantly – the impetus towards creating much-needed reforms tasked with establishing effective and properly regulated frameworks will lose momentum. It can’t be stressed enough that all those who suffered losses from risks knowingly taken, or from actions whose risks ought to be apparent to the average citizen, should not be allowed to pass the burden onto the taxpayer to bear. Taking full responsibility for one’s own actions, in-

cluding bearing the cost and the penalty, is probably the best mechanism mankind has created to help confine the behaviour of all members of a society within the latter’s legal and ethical codes. This goes for members of a family, a team, a town, or a nation. This is how we improve our social behaviour and how we progress. Another argument against covering the losses described above is that it would make citizens less tax-disciplined. States neither produce nor utilise wealth: citizens do. If the state decides to cover these losses, then this can only be achieved by transferring wealth through taxation among its citizens. Tax conscious individuals will have every right to question whether it is morally just for them to be taxed in order to cover speculative losses suffered by people who acted negligently or with a lack of seriousness. If an investor believes that it is unjust for him or her to suffer these losses, how then should a taxpayer react, who has a much lower – or even zero – level of responsibility, if he or she is forced to cover these losses?

Social support With a high degree of certainty, one can anticipate that even once all legal or other appropriate proceedings end, a large number of citizens will not be able to recover their losses. As a result, a number of them could find themselves in a very difficult financial situation. The state already has in place social support schemes that apply to all citizens, and which can help alleviate the difficulty of said situations. If it becomes apparent that appropriate schemes do not

exist, then either the existing ones can be enhanced, or new ones created. These new schemes need to be based on the same principles as all other social support schemes, namely, that those in need receive assistance from those who can provide it. We should always bear in mind that even unemployed citizens pay taxes through VAT and duties. Thus, transferring wealth from an unemployed person to cover the damages suffered by a highly paid bank employee because of poor investment decisions made by the pension fund he or she participated in cannot be considered just and should never be allowed to happen (this is all the more imperative if that person was actually a member of a possibly negligent pension fund administrative committee, and thus should be held accountable for his or her actions). After all the pain suffered over the past four years, it is distressing that we are still ostensibly failing to focus on the real source of the crisis. Instead of addressing these issues, we submit proposals that lay the foundation for new and even bigger crises with far worse consequences. I truly hope that public interest and reason will prevail, and that proposals for much-needed reforms will be submitted soon: reforms that will improve the regulatory framework, discourage bad practices, and incentivise good behaviour, with the ultimate objective of providing adequate pensions for all citizens.

The opinions and views expressed in this article exclusively reflect those of the author.

ACCOUNTANCY CYPRUS

economy

The World in 2050 Global Economic Outlook Projections suggest that emerging markets will take centre stage in the global economy in the years to come, presenting both challenges and opportunities alike

he long-term global economic power shift away from established, advanced economies is set to continue through to 2050, as emerging market countries boost their share of world GDP (despite recent mixed performance in some of these economies): this is one of the key findings from the latest report produced by PwC economists, entitled, World in 2050 â&#x20AC;&#x201C; The long view: how will the global economic order change by 2050? The report presents projections of potential GDP growth up to 2050 for 32 of the largest economies in the world, which together account for around 85% of global GDP. These projections are based on the latest update of a detailed long-term global growth model first developed by PwC in 2006.

The report projects that the world economy could double in size by 2042, growing at an annual average real rate of around 2.5% between 2016 and 2050. This growth will largely be driven by emerging markets and developing countries, with the E7 economies of Brazil, China, India, Indo-

nesia, Mexico, Russia and Turkey growing at an annual average rate of around 3.5% over the next 34 years, compared to only around 1.6% for the advanced G7 nations of Canada, France, Germany, Italy, Japan, the UK and the US. When looking at GDP measured at market ex-

change rates (MER), there is not quite such a radical shift in global economic power. China still emerges as the largest economy in the world before 2030, with India still being demonstrably the third largest in the world by 2050. But the spotlight will certainly shift to the newer emerging markets as they take centre stage. By 2050, Indonesia and Mexico are projected to be larger than Japan, Germany, the UK and France, whilst Turkey could overtake Italy. In terms of growth, Vietnam,

India and Bangladesh could be the fastest growing economies over the period to 2050, averaging growth of around 5% per year as illustrated in Figure 1, which also shows how growth breaks down between population and GDP per capita. Nigeria has the potential to move eight places up the GDP rankings to 14th by

The world economy could double in size by 2042, growing at an annual average real rate of around 2.5% between 2016 and 2050

ACCOUNTANCY CYPRUS

to sit above the E7 in the rankings of GDP per capita in 2050. Emerging markets are projected to close the income gap gradually over time, but full convergence of income levels across the world is likely to take a lot longer, well beyond the 2050 point of reference.

Global growth projected to slow

2050, but it will only realise this potential if it can diversify its economy away from oil, and strengthen its institutions and infrastructure. Colombia and Poland also exhibit great potential, and are projected to be the fastest growing large economies in their respective regions of Latin America and the EU (though if we consider a wider definition of Europe, Turkey is projected to grow faster).

Average incomes One bit of good news for todayâ&#x20AC;&#x2122;s advanced economies is that they will continue to have higher average incomes: with the possible exception of Italy, all of the G7 continue

PwC economists project global economic growth to average around 3.5% per annum over the years to 2020, slowing down to around 2.7% in the 2020s, 2.5% in the 2030s, and 2.4% in the 2040s. This will occur as many advanced economies (and eventually also some emerging markets, like China) experience a marked decline in their working-age populations. At the same time, emerging market growth rates will moderate as these economies mature and the scope for rapid catch-up growth declines. These effects are projected to outweigh the impact of emerging economies having a progressively higher weight in world GDP, which would otherwise tend to boost average global growth.

To realise their great potential, emerging economies must undertake sustained and effective investment in education, infrastructure, and technology Challenges for policymakers To realise their great potential, emerging economies must undertake sustained and effective investment in education, infrastructure, and technology. The fall in oil prices from mid2014 to early 2016 highlighted the importance of more diversified emerging economies for long-term sustainable growth. Underlying all of this is the need to develop the political, economic, legal, and social institutions within emerging economies to generate incentives for innovation and entrepreneurship, creating secure and stable economies in which to do business.

Great opportunities for business Emerging market development will create many opportunities for business. Said opportunities will arise as

these economies progress into new industries, engage with world markets, and as the economiesâ&#x20AC;&#x2122; relatively youthful populations get richer. They will become more attractive places to do business and live, thus attracting investment and talent. However, emerging economies are rapidly evolving and often relatively volatile, so companies will need operating strategies that have the right mix of flexibility and patience to succeed in these markets. Case studies in the PwC report illustrate how businesses should be prepared to adjust their brand and market positions to suit differing and often more nuanced local preferences. An in-depth understanding of the local market and consumers will be crucial, which will often involve working with local partners.

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economy

Cyprus’ Technological Advancement: A Brief History In our modern world, technological advancement and economic development go hand-in-hand. A brief history of Cyprus’ endeavours to this end highlights its setbacks, successes and – if correctly capitalized upon – potential for the future By Dr Iacovos Aristidou Former Minister of Labour & Social Insurance

It should be noted that in most EU countries the bulk of expenditure was funneled into the business sector. Only Greece, Cyprus, and three other countries departed from this trajectory, with tertiary education instead absorbing the bulk of expenditure (academics clearly have quite the burden to bear, with the fate of the technological upgrading of our country resting on their shoulders).

Knowledge is power

ccording to a recent report by Eurostat (the statistical office of the European Union) Cyprus spends the lowest percentage of its GDP on research and development (R&D) among all EU countries. In 2015, Cyprus’ spending on R&D constituted just 0.46% of its GDP, compared with an EU average of 2.03%. This equates to €80 million, and reflects a minute increase from the €55 million – 0.37% of GDP – Cyprus committed to R&D in 2005. In the span of a decade, the island increased its spending on R&D by just 0.09%!

I have repeatedly stressed the need for the technological advancement of the economy, as I am convinced that this is the only way to sustain progress and thus safeguard the welfare for our people. For example, even if current exploration efforts of the oil and gas resources in Cyprus’ exclusive economic zone (EEZ) are successful, the benefits of exporting oil and gas as raw materials will be limited (one need only look at the

ACCOUNTANCY CYPRUS

The technological advancement of the economy is the only way to sustain progress and thus safeguard the welfare for our people fate of the utilisation of some of our mineral products – e.g. asbestos – in the past). Rather, we should look to the manufacturing process as presenting an opportunity for the technological upgrading of our economy, thus propagating more meaningful, far-reaching value. Pioneering American economist and Nobel Prize winner Dr. Robert Solow began work in the 1950s – prompting various studies thereafter – on proving how the annual growth of both the total economy and individual sectors is much higher than the increase in the inputs of production. This extra factor of production was named ‘technical change’. Many later studies carried out attributed this finding to the continuous improvement to the skills of workers and the technological improvement of the economy’s various sectors. Thus, the catalytic importance of know-how and technology for steady economic growth was established. So far, so good: but just how does a country plan and coordinate its development activities so as to create the conditions for its technological advancement?

Laying the foundations Creating the conditions for the technological upgrading of the country began many years ago. Cyprus’ second five-year plan (1967-1971) and third five-year plan (1972-1976) both stipulated concrete policies for the introduction of new technology. Indeed, the second plan even envisaged the computerisation of the civil service, which – though still a work in progress – is a very important weapon in the fight towards

technological advancement. The third plan, meanwhile, specified that foreign investment would continue to be encouraged as a means of both supplementing local savings, and importing modern technology and knowhow into the economy. Another important step came with the establishment of the University of Cyprus in 1988, followed by the Cyprus International Institute of Management (CIIM), and – most recently – the Cyprus University of Technology, along with a series of private universities. With the necessary set-up and human resources needed to embark on a path of technological advancement of the economy having been established, what was needed concurrently was a systematic effort to formulate and implement an integrated policy, which would encourage and facilitate activities and investments beyond the scope of tertiary education.

The foreign factor In order to quell the very serious repercussions of the Turkish invasion of 1974 (namely, loss of areas from which 75% of Cyprus’ GDP was generated, increased unemployment of up to almost 40%, and up to a 25% decrease of emoluments of those employed), foreign companies were invited to establish operations in Cyprus, with the Government focused on implementing capital- and technologyintensive projects in a bid to reactivate the economy. A number of action plans were instigated, which were capital-intensive, high valueadded, and export-oriented, resulting in the creation of more competitive products and services, better quality, and the much-needed technological upgrading the country desired. Though these principles applied to all sectors of the economy, they were particularly relevant to those sectors based on scientific

knowledge (this is what would later become known in the EU as the ‘economy of knowledge’). As a consequence of these action plans, the Free Industrial Zone of Larnaca was established, in which some large international industrial companies commenced preliminary operations (for example, Japan’s Hitachi, and India’s Tata). Unfortunately, citing the fact that they didn’t feel welcomed, these companies’ stay on the island was short-lived. Nevertheless, the idea of a free industrial zone was thereafter introduced in any part of Cyprus for foreign companies that secured the appropriate license. Another important action plan – albeit, failed – was the creation of a technology park in Cyprus, with a mission from the science and technology park, Sophia-Antipolis (Nice, France) even visiting Cyprus and submitting a proposal for the establishment of a similar park on the island. In the meantime, Cyprus proceeded to conclude bilateral economic/technical cooperation agreements with a number of countries, encouraging foreign companies to establish themselves in Cyprus. Finally, the Organisation for the Promotion of Foreign Investment was set up. The Government approved a new policy (focusing on criteria for

The island is within reach of fulfilling one of the aims set out in the emergency plans of the 1980s: that is, to gradually turn Cyprus into a regional medical centre

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approval of new requests, areas of investment, and increased percentages of participation) on foreign investment in 1986. The peak of these efforts came with the submission of Murray’s report, Strategy for the Industrial Development of Cyprus, and Kaplinsky’s report, Strategy for Technological Development in 1988. In summary, both studies concluded that: the scientific/ technological approach could play a crucial role in the development of the economy, the geographical location and the size of Cyprus require concrete policies relating to export, technology, and informatics, and efforts needed to be intensified to strengthen local technological potential through the concurrent development of educational and training systems. The experts suggested a council be established tasked with the following: the creation of the necessary technological culture; finding more successful ways to transfer technology and, eventually, export it; encouraging technological agreements; the utilisation of government and semi-government technology, and the development of strategies for the technological upgrading of activities regarding agriculture, water resources, imported energy resources, production of energy (renewable resources), and the proper handling of issues regarding natural environment.

Cyprus’ third five-year plan specified that foreign investment would continue to be encouraged as a means of both supplementing local savings and importing modern technology and knowhow into the economy

Success in health and medicine There have been many steps taken in the field of public health and medicine in Cyprus. Of the latter, the results regarding combating various zoonosis (such as echinococcus and brucellosis) have been particularly encouraging, with Cypriot specialists even being invited on many occasions to share their expertise in developed countries. As for public health, combating plant diseases, garbage collection, and the development of sewerage systems have all proven successful. With the construction of new modern government hospitals and

the encouragement of the private health sector to establish polyclinics, the island is within reach of fulfilling one of the aims set out in the emergency plans of the 1980s: that is, to gradually turn Cyprus into a regional medical centre. Several important initiatives to this end worthy of mentioning are the Cyprus Institute of Neurology and Genetics (established in 1990), the Cyprus Institute (established 2005 as a nonprofit research and training institution), and the work of the Research Promotion Foundation since 1996 in assisting with

scientific research activities, technological developments, and innovation in Cyprus. Having been pending for decades, the recent announcement signalling a positive development toward the establishment of the Science and TechnologyPark at Pentakomo – a basic instrument for the evolution of the Cyprus economy – has raised new hopes for the island’s scientific and technological advancement. My suggestion? Invite the mission from Sophia-Antipolis to come back, and make sure they get involved this time!

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taxation

Anti-Tax Avoidance Directive By Savvas M. Klitou,

Supervisor, Tax Consulting Services, Baker Tilly in South East Europe

he conclusions of the European Council held on 18 December 2015 cited “an urgent need to advance efforts in the fight against tax avoidance and aggressive tax planning, both at the global and European Union (EU) levels”. Following this, the European Commission pushed and quickly launched the first steps towards an agreed EU approach. This norm was also adopted by the Organisation for Economic Cooperation and Development (OECD), which finalised its work on defining the global rules and standards to these ends. The Anti-Tax Avoidance Directive, which was adopted by the Council on 20 June 2016, lays down the rules against tax avoidance practices that affect the functioning of the internal market. The member states have until 31 December 2018 to transpose the provisions of the Directive into their national laws and regulations, except for the exit taxation rules for which they have until 31 December 2019. The Anti-Tax Avoidance Directive lays down common minimum rules in the following areas:

General Anti Avoidance Rules (GAAR) Companies engaged in aggressive tax planning continue to try and find ways of bypassing rules and finding loopholes in tax laws. GAAR gives EU countries the power to tackle artificial tax arrangements if it is not covered in other legislation. The rule, which is intended to reflect EU case law, will require Member States to ignore arrangements that do not comply with the standard, which consists of both a motive test and a substance test.

Controlled Foreign Entities CFC rules, unlike hybrid mismatches, apply to both EU and

non-EU CFCs and have been extended to permanent establishments. When or if certain thresholds are met, the CFCs income would become taxable in the ‘home’ country. The most important thresholds are those of ownership (50%) and level of tax compared to what have been payable in the ‘home’ country.

There are many examples of large companies that spend a lot of time and energy developing new products, which are subsequently moved to a notax country, resulting in lower taxes on profits within the EU. The new exit tax rules ensure that Member States can impose tax on the value of the product that is moved out of the EU.

Interest Limitation

Hybrid Mismatches

The interest limitation rule in principle sets a ceiling on the amount of interest expense that can be deducted. The rule, among others, includes a group ratio rule and an option to exclude loans which were concluded before 17 June 2016 provided they have not be modified following that date. Member States which have existing legislation relating to interest limitation are equally effective and may continue to apply their own rules up to 1 January 2024.

The Anti-Tax Avoidance Directive covers only intra-EU situations involving hybrid entities and hybrid instruments. To the extent that a hybrid mismatch results in a double deduction, a deduction shall only be provided in the source state of the payment. If a hybrid mismatch results in a deduction without inclusion, the deduction shall be denied.

Exit Taxation The exit taxation rule applies to specific cross-border transfer of assets or residence within the EU or to non-EU countries.

Following the adoption of the proposal for automatic exchange of country by country reports, this is the second legislative proposal by the European Commission which provides a strong indication of the EU’s strong political to combat tax avoidance.

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Throughout the years, our team of experienced developers have worked closely with accounting professionals in order to create a state of the art business software. Our main field is business software development, specializing in Financial Statements, Bookkeeping, Invoicing, Timesheet, Payroll, Caller ID Station and customized solutions according to the client’s needs.

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The goal of business performance analysis is to identify improvement opportunities, understand their root causes, and take action. We have created software to help business visualize their performance issues or areas of the business that perform extremely well and can be leveraged even further and take better decisions through our business analysis performance tools Report Generator

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taxation

Treatment of Trusts in the OECD’s CRS From definitions and criteria, to application of rules and reportable information, read on for a meticulous, detailed breakdown of what the OECD’s Common Reporting Standard (CRS) will mean for trusts By Christina Themistocleous, Manager, Risk Advisory, Deloitte Ltd

he OECD’s Common Reporting Standard (CRS) – adopted as of January 1, 2016 – will impose reporting obligations between jurisdictions, and trigger automatic exchange of information, thus changing the world of international tax planning. Trusts have been targeted in particular, and may be obliged to report information under the CRS. The CRS applies to trusts in two circumstances: (i) When a trust is a reporting Financial Institution (FI); and (ii) When a trust is a Non-Financial Entity (NFE) that maintains a financial account with a reporting FI.

1. Determining whether a trust is a reporting FI or an NFE As a trust is considered to be an entity in the CRS, it may be either an FI or an NFE. • The most likely scenario in which a trust will be considered an FI is if it falls within the definition of an investment entity. • If a trust is not deemed an FI, it falls within the realm of NFEs, which are either active or passive, depending on their activities. A trust that is a regulated charity and a trading trust carrying on an active business are two examples of how a trust could qualify as an active NFE. • If a trust is not an active NFE, it will be considered a pas-

sive NFE. Moreover, if a trust holds a financial account with an FI, said reporting FI must treat the trust as a passive NFE if it is an investment entity that is not resident or located in a participating jurisdiction. Any trust classified as a passive NFE must disclose certain information to the FI in relation to its controlling persons e.g. the beneficiaries, settlors, protectors and trustees and any other natural person(s) exercising ultimate effective control over the trust. If the settlor, trustee, protector, or beneficiary is an entity, the reporting FI must identify the controlling persons of said entity.

2. Trusts as Reporting FIs Definition of trusts as FIs A trust is an FI if it falls within the definition of an investment entity. This is the case when a trust has gross income

primarily attributable to investing, reinvesting, or trading in financial assets and is managed by another entity that is an FI. This also includes trusts that are collective investment vehicles or other similar investment vehicles established with a strategy of investing, reinvesting, or trading in financial assets. Criteria for reporting FIs A trust that is an FI will be a reporting FI if it is resident in a participating jurisdiction and does not qualify as a nonreporting FI. A trust may be a non-reporting FI, such as a Broad Participation Retirement Fund or Narrow Participation Retirement Fund. A trust is considered to be resident where the trustee(s) is resident. If there is more than one trustee, the trust will be a reporting FI in all participating jurisdictions in which a trustee is resident. In other words, if the trustees are each resident in different jurisdictions, the trust will be a reporting FI in each of these participating jurisdictions, and each will have to separately report with respect to their reportable accounts.

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2.1. A Trust as a Reporting FI: Identifying Financial Accounts Where a trust is a reporting FI, it must identify its financial accounts. If the trust is an investment entity, the CRS defines its financial accounts as the debt and equity interests in the entity. Financial Accounts: Debt Interest Debt interest is not defined in the CRS. Therefore, debt interest will be determined under the local law of each implementing jurisdiction. Financial Accounts: Equity Interest The equity interests are held by any person treated as a settlor or beneficiary of all or a portion of the trust, or any other natural person exercising ultimate effective control over the trust. The reference to any other natural person exercising ultimate effective control over the trust, at a minimum, will include the trustee as an equity interest holder. Furthermore, a discretionary beneficiary will only be treated as an account holder in the years in which it

receives a distribution from the trust. If a settlor, beneficiary or other person exercising ultimate effective control over the trust is itself an entity, said entity must be looked through, and the ultimate natural controlling person(s) behind that entity must be treated as the equity interest holder.

2.2. Applying the due diligence rules The reporting FI must apply the due diligence rules to determine if the account held by the trust is a reportable account. Reporting FIs may rely on information collected pursuant to AML/KYC procedures to identify the controlling persons. In respect of pre-existing entity accounts, reporting FIs may rely on the information collected in connection with the account pursuant to their AML/KYC procedures. In respect of new entity accounts, reporting FIs can only rely on AML/KYC procedures to determine the identity of controlling persons.

2.3. Reportable information A trust that is a reporting FI

will report the account information and the financial activity for the year in respect of each reportable account. The account information includes the identifying information for each reportable person (such as name, address, residence, taxpayer identification number, date of birth and account number), and the identifying information of the trust (name and identifying number of the trust). It is possible that a trust that is an FI may not have an account number for each of the equity interest holders. In that case the trust should use a unique identifying number that will enable the trust to identify the subject of the report in the future.

3. Trusts as NFEs If an NFE holds an account with a reporting FI, the latter may be required to report the trust for purposes of the CRS. The same steps will apply: reporting FIs will review their financial accounts to identify their reportable accounts by applying the due diligence rules, and then will report the relevant information.

3.1. Identifying a Reportable Account The account held by a trust that is a passive NFE is a reportable account if: a) The trust is a reportable person; or b) The trust has one or more controlling persons that are reportable persons. The trust will be a reportable jurisdiction person only if it is resident for tax purposes in a reportable jurisdiction. In many cases a trust has no residence for tax purposes. In that case the trust is not considered to be a reportable person. The account held by a trust will also be reportable if the trust has

one or more controlling persons that are reportable persons.

3.2. Reporting the Relevant Information Where a trust is a reportable person, the reporting FI will report the account information and the financial activity for the year with respect to the account of the trust. The account information includes the identifying information for each reportable person (such as name, address, residence, taxpayer identification number, date of birth and account number), and the identifying information of the reporting FI (name and identifying number). In respect of a trust that is a passive NFE, the reporting FI must report the controlling persons of the trust. Where the reporting FI has information available that identifies the type of each controlling person (e.g. whether it is the settlor, trustee, protector or beneficiary), this information must also be reported. Including this information in reports will significantly increase the usefulness of the data to the receiving jurisdiction and benefit the controlling persons themselves due to the increased clarity in relation to their status. With respect to new entity accounts, requiring the identification of the settlor, trustees, beneficiaries, protectors and any other natural person exercising ultimate effective control of the trust, reporting FIs should have this information available. The financial information to be reported will be the account balance or value of the account held by the trust and payments made or credited to the account. Each controlling person is attributed the entire value of the account, as well as the entire amounts paid or credited to the account.

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taxation

Transfer Pricing on our Doorstep In an era of endless cross-border trade and complicated cases of recognising income streams, traditional tax frameworks needed an upgrade in order to keep pace with the ongoing transformation of the worldwide economy. Subsequently, the world’s 20 biggest economies joined forces to develop the Base Erosion and Profit Shifting project (BEPS) By Petros Krasaris, EY Cyprus

International Tax Services, and Charalambos Palaontas, EY Cyprus Transfer Pricing Services

BEPS is divided into 15 distinct but related actions that can be summarised as three key themes: consistency, substance and transparency. According to the OECD’s Final Report on Action 13, a three-tiered standardised approach to transfer pricing documentation and country-by-country (CbC) reporting should be followed. This consists of a Master file, a Local file and a CbC reporting template. Action 13 focuses specifically on multinational organisations (MNE) and requires them to be able to – at any point in time, and at the request of local tax authorities – provide up-to-date documentation of their transfer pricing policies as well as details of their global operations and taxation. In a nutshell, the two primary goals of Action 13 are: • To increase transparency with regards to the tax affairs of MNEs by forcing them to provide information to tax authorities regarding their global allocation of income, taxes paid, and indicators of economic activity among various tax jurisdictions. This will be done through the CbC template; and

• To simplify transfer pricing documentation and make it more valuable for tax authorities. During an ECOFIN meeting on May 25, 2016, EU member state finance ministers unanimously voted to pass amendments to the EU directive (2016/881 amending Directive 2011/16/EU, with regards to mandatory automatic exchange of information in the field of taxation), to be able to enact the recommendations of OECD BEPS Action 13 on CbC reporting.

CbC reporting Under the Directive, MNE groups which operate in EU member states and report a consolidated revenue of €750 million or greater at a group level, have an obligation to report information about: • Revenues; • Profits; • Taxes paid and accrued; • Capital, earnings;

• Tangible assets; • Number of employees (on a country-by-country basis); and • Main business activity. Such information must be reported to the tax authorities of the member state where the group’s ultimate parent entity (UPE) is tax resident. If the UPE is not resident in the EU the report must be filed – under certain conditions – through a surrogate parent appointed by the group for CbC reporting purposes or through an EUbased subsidiary of the group in each jurisdiction (such filing is called ‘secondary filing’). Each member state would be obliged to exchange the CbC reports received with any other member state where the group has a subsidiary or a permanent establishment.

Legislation in Cyprus On December 30, 2016 and in

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raise questions as to whether inappropriate tax planning has been taken. Therefore, one could argue that the report might provide an audit roadmap for the tax authorities to look into issues addressed under other BEPS action items.

Master File The aim of a Master File is to provide an overview of the MNE group business, its overall transfer pricing policies and its global allocation of income and economic activity. In producing the master file, taxpayers should use a prudent business judgment in determining the appropriate level of detail for the information supplied. This would ensure the provision of a high-level overview of the MNE’s global operations and policies to the tax administrators. As per the Final OECD Report, the information required in a Master File can be grouped in five categories: • The MNE group’s organisational structure; • A description of the MNE’s business or businesses; • The MNE’s intangibles; • The MNE’s intercompany financial activities; and • The MNE’s financial and tax positions.

Local file

The CbC report could also be used as a risk assessment tool by tax authorities accordance with the EU Directive, the Cypriot Ministry of Finance issued a Decree pursuant to Article 6 (16) of Assessment and Collection of Taxes Law implementing the CbC reporting obligation for MNE Groups with annual consolidated group revenue exceeding €750 million, effective as of January 1, 2016. The Decree requires that Cypriot constituent entities of MNE Groups (either tax resident companies or permanent establishments of foreign companies) to notify the Cypriot tax authorities with the identification of the reporting entity by October 20, 2017 for the fiscal year 2016. In case the UPE of a MNE

is tax resident in Cyprus, the CbC report of such MNE must be submitted to the Cypriot tax authorities. In addition, as of November 1, 2016 Cyprus is a signatory to the OECD Multilateral Competent Authority Agreement (MCAA) on the exchange of CbC reports. Hence, any CbC report submitted in Cyprus will be exchanged with the tax authorities in those jurisdictions that a group operates on the proviso that such jurisdictions have also signed the MCAA. The CbC report could also be used as a risk assessment tool by tax authorities. It is possible that any inconsistencies on the information provided could

Whereas the Master File provides a high-level overview, the objective of a Local File is more specific and aims to provide detailed information in relation to material inter-company transactions. Consequently, the information required in the Local File supplements the Master File and helps in assessing whether the taxpayer has complied with the arm’s-length principle in its material transfer pricing positions affecting a specific jurisdiction. As per the Final OECD Report, individual country transfer pricing documentation requirements should include specific materiality thresholds that account for: the size and the nature of the local economy, the importance of the MNE group in that economy, and the size and nature of local operating entities, in addition to the overall size and nature of the MNE group. With regards to transfer pricing documentation, the information to be included in the Master and Local files relates to the substantive changes developed under Actions 8–10 on aligning profits with value creation. The Master/Local file information is intended to provide tax authorities with details on issues such as intangibles, the functions of asset-owning entities, and risk allocation.

Considerations for Cyprus Notably, in a post-BEPS environment with an unprecedented disclosure of information, it is crucial for all governments to be consistent with the OECD’s objectives. The introduction of CbC reporting in Cypriot legislation is clearly a sign that the Government is determined to be at the forefront of transparency and exchange of information. Nonetheless, the introduction of CbC reporting requirements combined with the expected documentation requirements for both Master and Local Files will – relatively – be a major change to the current legislation and practice. Therefore, MNEs using Cyprus for the cross-border operations need to be prepared and be in a position to gather requested information in order to support their policy for intra-group arrangements.

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BUSINESS in cyprus

interview

A Healthy

Telecommunications Sector Requires a Level Playing Field More than 55 years after it was founded, Cyta remains the leading player in the Cyprus telecommunications market, despite increased private sector competition and a stringent regulatory framework. The organisation’s Deputy CEO, Michalis E. Achilleos, believes that reform is now needed if the telecommunications sector is to thrive and grow.

Cyta was established in Cyprus in 1961. What challenges did the organisation face during the first years of its existence and how do they compare to those it is facing nowadays? The challenges we face have always been intertwined with the history of our country. Thus one of the main initial challenges was to establish reliable global communications to keep people in touch with their loved ones who had been forced to emigrate abroad. Today, almost 60 years later, the dramatic refinement and proliferation of global telecom and IT solutions and increasingly liberalized trade highlight a new reality and targeted transformations in order to ensure economic value. We are well aware of the latest trends, growing digitalization and changing consumer habits which are shaping the future of our industry. The telecom industry internationally, being a traditional sector, is faced with the dilemma of new technologies optimization and

alternative communication services, which have a direct impact on revenues, slowing down growth and undermining sustainability. Beyond all the change that lies ahead, a single certainty remains: the importance of ICT as pervasive and fundamental to sustainable socio-economic development. Does Cyta’s long history give it a competitive advantage or does it make things more difficult in today’s market? The fact is that we are among the few telecommunication companies in Europe owned 100% by the state yet still among the top 20% in terms of profitability. Being the dominant incumbent operator, we face fierce and sometimes unfair competition and stringent regulation but we have always stayed ahead, thanks to our proactive customer orientation, supported by the business intelligence necessary to understand consumers’ wishes before our competitors.

Having prevailed over the years and despite increasing competition, we have dealt efficiently with the challenges and capitalized on our strengths. Cyta’s considerable competences have been intertwined with developing and maintaining state-of-the-art networks, platforms and infrastructures, boosting the technological capacity of Cyprus and ranking our country on the list of countries with the highest instrumental infrastructures. By taking timely advantage of technological developments and the convergence of telecommunications and IT, Cyta has pioneered a broad range of innovative services and ICT solutions. As the leading service communication provider in Cyprus, Cyta enjoys a trusted position in the value chain and long-term intimate relations with home and business customers alike. This determines enormously the commercialization capability of any new initiative and defines success in rolling out new services to the market. What would you identify as the main factor that has led to the organisation’s enduring success? Cyta’s enduring success has been about capitalizing on its assets and, first and foremost, on its high-calibre human resources, laying down the foundations

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for a strong comparative advantage. Although a semi-government organisation, we have always stayed ahead of the competition through a proactive customer orientation, supported by high-end quality infrastructures, which compare favourably with the highest international standards. And these efforts can be credited to our expert personnel, who are capable of enduring demanding conditions and mastering huge projects. How would you describe the telecommunications sector in Cyprus and what has been – and still is – the role of Cyta in its development? Telecommunications play an essential role in influencing major trends in the economy of a country, such as unemployment, the mobility of capital and the dematerialization of the economy. Cyta’s considerable experience in developing and maintaining state-of-the-art infrastructure has played a decisive role in boosting the technological capacity of Cyprus. As a keen player in the continuing trend towards convergence and integration, we were in the market very early with the launch of bundled services, mobile and fixed, enhanced with high-speed Internet and IPTV services, providing a range of benefits to customers, including simplicity, flexibility and cost efficiency. And at the same time, we have made numerous innovative digital and media applications available online and via mobile devices, which, combined with the changing consumer habits, support new lifestyles and more efficient ways of competing and doing business. What are your recommendations if we are to see healthy and sustainable growth in the telecommunications sector in Cyprus? As the dominant operator in the market, Cyta faces stringent regulation, enforced by a common European framework, which aims to promote competition in the market. This, in my opinion has led to a market paradox

Cyta’s enduring success has been about capitalizing on its assets and, first and foremost, on its high-calibre human resources and growth of the telecommunications market in Cyprus.

that disqualifies telecommunications from being an example of perfect competition. Excessive regulation inevitably creates distortion, whilst attempts are being made to increase the level of competition by increasing the number of operators. The resulting situation is inefficient fragmentation and price wars, as opposed to the economies of scale achieved in the US. This is obviously reflected in the squeezed margins generated by European Operators which, on average, are one third of the levels achieved in the US, seriously undermining the investment potential necessary to support the demand for new services. Thus, I believe that, after more than a decade following the liberalisation of the market, a reformed regulatory framework towards a level playing field will work in favour of safeguarding the sustainability

What are your expectations for Cyta in 2017-18? High-end networks in support of the 4th generation mobile technology and fixed broadband fuelled by fibre are well underway, constituting a sound base for integrated communication offerings, both in technical and commercial terms, enhanced with content more ubiquitous than ever before, with open access enabling interaction with any device in any place. Services that foster mobility, collaboration and unified communications present an opportunity and a strong differentiation factor, embedded in the quality of our network. These services have the potential to substantially impact business development as they have become an important factor in how the economy works and functions. In doing so, we need to move from traditional telco services and instil continuous improvement initiatives, so as to capture efficiency and effectiveness gains to the maximum. Additionally, we seek talent and markets beyond our current boundaries. We are involved in new partnerships and innovative business models, establishing solid ground in new ecosystems, such as the e-health and smart home initiatives which introduce new revenue streams. All these major projects will enhance Cyta’s operational capacity and provide a sound base for our country to prevail in the in the digital age that lies ahead.

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BUSINESS in cyprus

The New Face of Tourism By Dr Sotiroula Liasidou, Lecturer, Cyprus University of Technology, Faculty of Management and Economics – Department of Hotel and Tourism Management

People – their wants, needs, and desires – lie at the heart of tourism and, as such, Cyprus should look to activate its citizens as its most powerful tool and asset in strengthening its tourism product

n seeking a means of escape – from routine, hardships, monotony, and more – people find their salvation by engaging in touristic activities. Following World War I and World War II, tourism was perceived as a luxury and a privilege reserved for the aristocracy. Today, tourism is enjoyed by the masses and, as such, tourism destinations are aspiring to develop and evolve their product so as to be able to cater to all people and niche markets.

Historically, tourism in Cyprus has been the island’s main economic driving force. According to the World Travel and Tourism Council’s Travel and Tourism: Economic Impact 2015 report, the industry contributes 19.3% to Cyprus’ GDP, is an employer of 73,500 people, and generates €273.7 million in investments. In 2016, Cyprus received more than three million tourists. Whilst Cyprus is already a well-established destination, tourism authorities – led by the Cyprus Tourism Organisation (CTO) – have come to appreciate the ever-changing

face of tourism, and are aspiring to respond accordingly.

A new strategy The first structured tourism policy in Cyprus was launched in 2000, with a new, revised one thereafter being implemented up until the present day. Just recently, it was announced that a new tourism strategy would be introduced to cover the period 2017-2030. The new strategy is based upon the same enduring pillars: to further strengthen the island as a high quality destination, which offers value-for-money products and experiences alongside

absolute guest satisfaction, and to instigate a substantial increase in tourism arrivals and thus revenues. Due to the multifarious nature of the tourism industry – a complex composition of companies from various sectors – implementation of tourism policies can be difficult, due to the inability of stakeholders to agree upon, and pursue, the same aims. To ensure successful implementation, it is vital that a tourism culture be developed, that infiltrates every facet of society. Resting on our laurels risks the failure of our new tourism strategy for 2017-2030.

All for one and one for all So how might successful implementation be achieved, and thus the enhancement of Cyprus as a high quality destination? The key to success is tourism education for all: only then will tourism in Cyprus reach its highest potential and become competitive, engendering vital economic and

social benefits. Firstly, primary school children should be exposed to teachings pertaining to tourism culture as a way to help them understand the vital role tourism plays in our country. Secondly, a serious approach to training and educational programmes should be adopted, targeting businesses active within tourism. Via the CTO, the Government should develop educational material, and offer programmes, seminars, workshops, and presentations, delivered by those with the depth of knowledge about tourism required. Thirdly, the island’s tourism policy should be made available to be studied by all, in an attempt to make all people in Cyprus aware of the overall benefits of tourism. By getting everyone involved in the island’s tourism effort – from seasoned veterans to unassuming citizens – we create ambassadors capable of delivering the most unique component of Cyprus’ tourism product: sincere Cypriot hospitality.

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BUSINESS in cyprus

United We Stand, Divided We Fall By Haris Stavrinides, Fund Manager & Financial Analyst, OSYS Global Diversified Investment Fund (OGDIF)

Ongoing economic developments and the intensification of the refugee crisis have shattered the illusion of unity within the EU. And as fractures grow ever deeper and wider, will its members be able to effectively come together before they reach the point of no return?

Undoubtedly, Cyprus’ accession to the European Union was one of the greatest achievements in the brief history of the Republic. Whilst the primary reason behind our application to join the EU was to strengthen our negotiating position for resolving the political problem, we also ostensibly benefited from the adoption of the euro in 2008, with this ‘hard currency’ succeeding in shielding our economy from the aggressive moves of currency speculators, as well as reducing fluctuations in periods of crisis. Ultimately, we were enamoured by the image of Europe as a beacon of solidarity: a force to which we wanted to belong. And yet it quickly became clear that the Europe of solidarity and unity that we wanted, expected and had anticipated proved to be an illusion. One need look no further than its treatment of our country in 2013, as well as the severe and unremitting Memoranda of Understanding imposed on Greece since 2010, as proof.

eurozone woes Of course, our belonging to the eurozone has been ben-

eficial, and no-one can blame the latter on Cyprus’ financial deterioration: still, there are weaknesses in the eurozone’s structure that cannot be overlooked. In total, 19 countries share a common currency and yet each country has a different financial rating. Still, the euro reflects the value of all eurozone economies. In the case of Germany, for example, this proves beneficial. For a net exporting country, the euro is undervalued – and essentially cheaper – compared to the Deutsche Mark, meaning that it benefits from cheaper exports, resulting in a trade surplus. Borrowing costs

highlight another discrepancy in the structure of the eurozone. Despite sharing the same currency, Germany pays much less when borrowing in comparison to Greece, Italy, and other countries belonging to the so-called ‘south’. Moreover, because of the risk difference in each country, southern European countries’ deposits often end up in the northern countries’ economies. Surely this cannot be considered healthy competition. It is, rather, exploitation of the euro’s economic model.

Countries in crisis The refugee crisis has also highlighted discrepancies in the overall structure of the EU. Greece and Italy have been disproportionately burdened by the refugee crisis, with other European countries turning their backs on this vital humanitarian issue (some, even, deciding to close their borders entirely). A prime opportunity for Europe to display its muchlauded solidarity, the refugee crisis has, instead, given way to populism which, in turn, has fostered an uprising of nationalist sentiment. As a result, we’ve witnessed the UK vote in favour of a so-called Brexit and the strengthening of power by nationalist parties across several countries, including France, Greece, Holland, and Austria.

The face of a new Europe So what might a new and better Europe look like? For starters, it is a Europe with

greater economic and political cohesion and a more integrated fiscal and investment strategy, and a Europe that displays more understanding and solidarity with its southern countries. Greece and Italy should receive more support – including financial assistance, and the deployment of technical personnel – to be able to effectively tackle the refugee crisis. Another recommendation would be the issuance of a Europeanwide bond – the ‘Eurobond’ – which would allow countries such as Greece, Italy, Spain and Portugal to borrow at lower interest rates. Fearing the loss of its AAA rating, and the lower cost of borrowing it enjoys, Germany is opposed to such a development, instead preferring the enforcement of memoranda and deposit haircuts. However, as the biggest economy in the EU, Germany must set the tone for reforms that are sensitive to the idea of a united Europe, as opposed to simply distancing itself from the problems other countries are currently facing. Indeed, if it continues to follow a policy concerned purely with its own interests in a bid to protect itself, Germany may end up – conversely – endangering itself, as the risk of European-wide economic collapse becomes much more real. Overall, if the EU – and especially Germany – stands united, it may succeed in healing its ever-growing, apparent fractures: but it must act now, before it’s too late.

Accountancy_Kaniklides Doc Manag Ad (1) 2017.pdf

CMY

17/02/2017

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You CAN Always Get

What You Want By engaging in neuro-linguistic programming’s ‘Well-Formed Outcomes’ process, the realisation crystalizes that – contrary to what we are led to believe – we can always get what we want.

By Demetris Stylianides Internationally Certified NLP Trainer

etting goals is one of the most important, rewarding, and easiest tasks. Certainly, it’s much easier to get what you want if you know what you want. It turns out that people who easily get what they want have a special way of thinking about and establishing their goals. Perhaps you’ve heard of the SMART acronym used in management, which stands for Simple, Measurable, Achievable, Realistic and Timed? In neuro-linguistic programming (NLP), we take it one step further: the ‘Well-Formed Outcomes’ process allows you to more thoroughly and rigorously design goals and outcomes.

Turning thoughts into actions The ability to create and maintain an outcome that meets certain well-formed conditions is an essential application of NLP. This process is one of the most powerful tools in NLP because it precedes everything else. In order to get what you want, you must first know what you want, and this process lets you define your goals in a way that actually makes them easier to achieve. Once you know what you want, it’s very important to write it down. Seemingly insignificant, writing your goals down rather than just thinking about them compels you to take action. Motivation is a special mental state whereby thoughts become action. Being motivated does not simply mean that you feel excited about what you want to do: being motivated means you just get up and do it. Writing down your goals is the first practical step toward achieving

your goals, in which you are expending energy to change your environment. It may seem like a small step, yet it tips your whole mindset and physiology from one of ‘thinking’ to one of ‘doing’.

What is a well-formed outcome? A well-formed outcome is like an opening gambit in chess. It sets the scene for the rest of the game, and the level of attention given to plotting the outcome has a direct bearing on the ease with which desired results are achieved. A well-formed outcome describes something that its user wants in sensorybased, positive terms, and makes the difference between wanting something in theory, and being able to go and get it in practice. It is valuable at this point to make the distinction between the effect of asking the questions ‘Why?’ and ‘What for?’ in establishing a well-formed outcome. To ask ‘why’ someone

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wants something invites justification. The answer often starts with ‘because...’ and continues on from there. The question ‘why’ directs the listener’s attention backwards in time to what has already taken place. In the context of a desired result in the future, backward-directed attention has limited use. What is wanted is forwarddirected attention towards the desired future: attention placed on how the user can influence that future in meeting their personal specification. One of the features of a well-formed outcome is that it includes consideration of the result the user

wants it to produce: that is, the purpose, the broader perspective, and the overview of the desired state. It stems from asking the question, ‘What is this for, and what does it do for you?’ Answers to these questions are more likely to elicit responses beginning with phrases like ‘to make’ or ‘to provide’ or ‘to do’. They contain an element of action, of purpose, of forward momentum and direction. Intent is presupposed, and information is brought into the system to facilitate action.

All in the process So what can one do with this process? When would

it be useful to develop a well-formed outcome, and what constitutes suitable subject matter? There is much to gain from using this process to help shed light on unclear matters. Often, people are clear on what they don’t want, with the answer to the question of what they actually do want remaining evasive. By asking questions such as ‘What would happen if...?’, and making statements like, “I want to avoid at all costs’, the thinker is inspired to ascertain what he or she actually wants. Thus, said persons thoughts are refined and transmuted from negative to positive scenarios.

Having established a desired outcome, the process calls for parameters to be set – so-called ‘evidence’ – to help ascertain the success or failure of the outcome. When defining what would constitute evidence that the desired outcome has been achieved, it needs to be done so in sensorybased terms of what can be seen, heard, and felt. Next comes the question of control and other people’s consent, which is designed to draw attention to the required preparation prior to embarking on the path of achieving the main goal set. If an outcome depends on someone else’s blessing, or on the involvement of a third party, it is deemed not well-formed. Any third party consent needs to be obtained as soon as possible, or made the subject of another outcome to be completed before the main one can begin. Outcomes can be ‘nested’: that is, if it becomes apparent that parts of someone’s main outcome are subject to preparation, smaller outcomes can be established to this end, thus making the whole project possible. Separating a goal in this way often facilitates the overall passage and completion of the latter within a shorter timeframe, no less. The final step in the process is that of ‘ecology’. This is the word used to describe whether an outcome has acceptable costs, time frame, and consequences. There are two parts to the question of acceptability of costs and consequences: firstly, is the outcome worth the effort, time, and other costs involved in getting there, including strain and incon-

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BUSINESS in cyprus

venience on valued third parties, and, secondly, is the end result worth having and keeping, and does it support the owner’s chosen lifestyle, relationships, and other important factors?

A valuable professional tool In engaging in this process, it becomes clear that well-formed outcomes can be used to achieve both personal and professional goals and – if utilised correctly – can be a valuable project management tool. The well-formed outcomes process is a tool worth applying to consultancy projects and mediations. If it is used with clients prior to engagement, it can become the basis of a contract of sorts, which is sufficiently detailed to ensure that the client’s expectations and work delivered are congruent. It can provide a clear description of the results the client wants, while leaving you, the consultant, free to use your expertise to get them there. Most clients have a less than sensory-based idea of what they want you to do for them, and provided this process is used at the briefing stage, you can save them – and yourself – a great deal of time.

Well-Formed Outcomes is a process taught as part of the NLP Practitioner Certification training in Neuro-Linguistic Programming. This comprises seven days of intensive training sessions and is approved by ABNLP (USA) and ANLP (UK).

Step by Step: How to Develop a Well-Formed Outcome What do I want? Ask this question about a specific situation. Your answers should be stated in positive terms, covering what, why, where, and when. Is it achievable? Is it possible for a human being to achieve the desired outcome? If someone else has achieved the outcome you desire, then – in theory – you can achieve it too. What will I accept as evidence that I have achieved my outcome? Ensure that your criteria are described in sensory-based terms: that which you can see, hear and/or touch that

proves to you and/or third parties that you have done what you set out to do. Is achieving this outcome within my control? Consider if the desired outcome is under your control. Can you personally, do, authorise or arrange it? Anything outside your control is not ‘well formed’. Instructing your broker is within your control, as is buying in expertise. On the other hand, asking your employer for time off is not; the time off will only become well formed if it is granted. Are the costs and consequences of obtaining this

outcome acceptable? Ensure that the outcome is worth the time, expenditure, and effort involved in achieving it, and that any impact on third parties or the environment is accounted for. Do I have all the resources I need to achieve my outcome? Resources include knowledge, beliefs, objects, premises, people, money, and time. Ecology: If I could have it now, would I take it? Are all costs and consequences of achieving your outcome, including the time involved, acceptable to you and anyone else affected by it?

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face tomorrow’s challenges with yesterday’s software

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BUSINESS in cyprus

Hidden Growth within Family Businesses European Family Businesses put growth high on the agenda, dispel the myths about inherent barriers to success, and make effective strategic choices

As for other issues, family businesses skillfully navigate through them. They note the improving image of the sector helping to recruit and retain talents. Among the positive characteristics: genuine entrepreneurship, a dynamic spirit, efficient decision-making, faster responsibilities and stability. Backed by solid financial reserves and long-term vision, family businesses learn to operate under the reigning political and regulatory conditions. In addition, family companies increasingly demonstrate a “neutral” approach when selecting candidates for management positions, and are increasingly hiring nonfamily executives.

Key strategies

By Demetris S. Vakis, Board Member, KPMG in Cyprus & President, ICPAC

n September 2016, European Family Businesses (EFB) and KPMG joined forces once again to publish the fifth edition of the European Family Business Barometer. The latest report showed that family businesses in Europe continue to demonstrate a high level of confidence in their future prospects and business performance and are optimistic, determined and skillful at navigating through challenges and adapting to market changes. With only limited data available on the sector’s real economic weight and family businesses owners staying discreet about their successes, the family business would seem to be an enigma and solicits numerous questions. In fact, family-owned businesses put growth high on the agenda and they do indeed grow. The proof is all around us. One third of all companies in the S&P 500 Index are defined as family businesses (The five attributes of enduring

family businesses, McKinsey & Company, 2010) and some 30% of all companies worldwide with over US$1 billion in sales are family-controlled enterprises (What You can Learn from Family Business, HBR, 2012).

Stability, not stagnation Although stability is sometimes mistakenly confused with stagnation, the two have nothing in common. Stability means stable growth: the long-term orientation and “safer thinking” of family businesses steer their growth strategy, where yield tomorrow is more important than return today. Family business owners demonstrate a moderate risk tolerance, prioritizing high profitability over turnover increase, and they run their companies as a business project, serving customers first, and not the family.

Major challenges A number of issues are often cited as potential obstacles to the family business’ long-term success. Among them: a poor strategy, talent shortage, unstable political environment, and the lack of a successor. Bad management can definitely impact a company’s operations. Examples abound and they concern family businesses as often as non-family ones.

Family businesses, more than any other, know how to stay successful over years and decades. They chose two key strategies: innovation and international development. Family businesses’ long-term outlook entails their greater desire to enter long-term projects. In addition, they benefit from a “natural generational input” leading to a constant exchange of ideas. When going abroad, family businesses take decisions quickly and rely heavily on local partners and family networks. However, the key strategy of family businesses is to stay true to their principles and follow their own way in everything they do. Family businesses have many specific characteristics: long-term vision, patience for returns, agility, flexibility, shared values and ethos. However, their real advantage is that they have the courage to follow their own way instead of chasing fads. Uniqueness, strong leadership and commitment to core principles build their long-term success.

The European Family Business Barometer is based on the reflections of 26 prominent family business owners in eight countries: France, Germany, Luxembourg, Malta, the Netherlands, Slovakia, Spain, and the United Kingdom, which were gathered in qualitative individual interviews conducted face-toface or by telephone.

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Regulatory Challenges for the Banking Sector in 2017

By Marios Lazarou, Board Member, KPMG Limited

nother year has passed with Cyprus banks continuing their efforts to survive and at the same time to become profitable in a difficult financial environment. In recent years, the regulatory and supervisory framework has been a significant – if not the most important – tool for the improvement of financial strength, the reduction of possible failure and also the enhancement of the banks’ internal governance and risk management systems. These challenges are expected to continue in 2017. On the one hand, banks will have to comply with a number of new regulatory requirements and, on the other, they will have to continue their efforts to recover (and improve their profitability), mainly through the reduction of their Non Performing Exposures (NPEs). The most important challenges are the following:

the Standard brings is the way in which the impairment is calculated. This means that the P&L charge will include expected losses and not only incurred ones, as with the existing accounting requirements. Even if the implementation of the new Standard is expected to bring some increases to the impairment charge (in our opinion not as big as expected worldwide), it is also expected to bring big changes to the infrastructure for the management of credit risk, e.g. the development of statistical models, the design of detailed documentation, technological infrastructure and the collection and storage of data. The new framework will have to be implemented by 1 January 2018 but it is expected that banks will have to report the possible quantitative effect in their interim results of 2017.

Changes to the capital adequacy framework (Basel 4) Basel 3 focused mainly on the numerator, i.e. the definition and quality of capital, the introduction of capital buffers as well as the introduction of a new ratio, the “leverage” ratio and two other liquidity indicators. Basel 4 focuses on the denominator, by changing the calculation of risk-weighted assets on credit, operational and market risk. The new framework is expected to become more sensitive to the risks and, at first sight, it seems to lead to higher capital requirements.

International Financial Reporting Standard 9 (IFRS 9)

Minimum Requirements for Eligible Liabilities (MREL)

The European Central Bank has already included this in its priority list for supervision in 2017. The most important change that

2017 will also be the year in which we expect the authorities to decide on the best approach to the resolution strategy to be

followed when a bank cannot survive (at least for systemic banks in the eurozone). This strategy relates to cases where banks fail to implement their recovery plans effectively. The MREL relates to the minimum requirements of liabilities (or capital) which the banks must have so that they can utilise them for a bail-in. Although MREL requirements, based on the preferred resolution strategy for each bank, will be known in 2017, the time they will be given for compliance is not yet known and is likely to be after 2018. Nevertheless, MREL will certainly become a regulatory issue preoccupying the Bank Boardrooms.

Priorities of the European Central Bank (ECB) The supervisory authority has set three key priorities for 2017 in terms of supervision of the banking sector: • The management of credit risk with emphasis on Non-Performing Exposures. Relevant to this priority is the draft of guidelines which were issued in September and are expected to be finalized within the first quarter of 2017 and provide recommendations to the management of NPEs and impairment practices; • Review of the business model sources of profitability of banks; • Risk management. It is more than evident from the above topics that 2017 will continue to be another interesting year for the banking sector with respect to regulatory compliance.

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BUSINESS in cyprus

Stand Up for Your By Christos Makedonas,

Manager, Enterprise Risk Services, Discovery & Digital Forensics, Deloitte Ltd

The new EU General Data Protection Regulation: Challenges and Opportunities

he new EU General Data Protection Regulation (GDPR) has finally been completed, and it promises data protection rules that will not only remove red tape for businesses but also tighten privacy protection for users. Ambitiously, all EU member states and businesses will need to be in line with this regulation by 2018.

While seemingly positive, questions still abound that require answering: what are the significant changes? What are the challenges and opportunities inherent in this new regulation, and how will these affect both individuals and our business world as a whole? Only a few of the significant changes in the privacy rules are presented here. However, the GDPR will undeniably affect the way that individuals and – more specifically – organisations treat, manage, and maintain user (namely, employees and clients) data.

Data breach notification The security of personal data is important and every organisation that processes such data needs to make sure that it has established the appropriate safeguards against data loss, unauthorised access, and theft. Consequently, the GDPR includes a personal data breach notification rule. That is, when a security breach occurs, this should be reported to the supervisory authority within 72 hours. Moreover, if this incident leads to a high privacy risk for an individual,

said individual should also be informed of the breach. Where the EU’s Data Protection Directive simply stipulated that sanctions had to be defined by EU Member States, the GDPR specifically details what administrative fines can be incurred for violating its articles. The fines depend on the category in which the violation occurs: for less serious violations, the maximum is €10 million, or 2% of the total annual worldwide turnover of the preceding year (whichever is higher); for more serious violations, this number goes up to €20 million, or 4%!

right that individuals have to control their own data. The right of portability states that an individual has the right to transport his or her personal data from one organisation to another, even a competitor. Therefore, organisations must provide personal data in a structured, common, and machine-readable format. It is also specified that when technically feasible, the electronic transfer of personal data from one organisation to another should be facilitated, if requested by an individual. This could have a great affect on both the procedural and technical processes of an organisation.

Data portability

Right to be forgotten

The GDPR strengthens the

Another data subject right

Sanctions

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(Data) Rights tained regarding the reasons for processing, whether or not the personal data is exported, as well as details of all possible third parties receiving the data.

Data protection by design In essence, this change stipulates that when designing a new system or service tasked with processing personal data, it will be compulsory to ensure that data protection considerations are taken into account, starting from the early stages of the design process. Indeed, organisa-

is the right to be forgotten. Under the new regulation, a set of six conditions has been developed to protect individualsâ&#x20AC;&#x2122; data. Organisations that process personal data are required to remove all of said data if any one of the conditions is violated. The list of conditions includes when data has been processed unlawfully and when a data subject withdraws previously given consent.

Inventory Organisations must keep an inventory of all personal data processed. The minimum information of what should be in the inventory goes beyond just knowing what data the organisation processes: details should also be main-

processing will be exempt from this obligation.

Security Confidentiality, integrity, and availability of processing systems and services have always been a part of privacy legislation. The GDPR builds on this further by specifically mentioning the value of data encryption as a security measure. Moreover, it is stressed that security should be based on a risk assessment, which evaluates the threat that an individualâ&#x20AC;&#x2122;s privacy might be compromised.

All EU member states and businesses will need to be in line with this regulation by 2018 tions need to be able to prove that they have actually done so. Moreover, the system or service being designed must include choices for the individual on how much personal data he or she shares with others.

Data protection officers If handling significant amounts of sensitive data or monitoring the behaviour of many users, organisations will have to appoint a data protection officer. This requirement affects organisations spanning a variety of industries. However, in a bid to avoid creating red tape, firms whose core business activity is not data

Approved certification mechanism The GDRP has introduced data protection certification mechanisms, and data protection seals and marks, in response to the acknowledgement by many organisations that being able to prove adherence to the GDPR may lead to a competitive advantage. The GDPR even refers to the possibility of having a common European Data Protection Seal.

Local deviations It is important to clarify that the GDPR is a regulation, not a directive. Where the Directive 95/46/EC (per-

taining to the protection of individuals with regard to the processing of personal data and on the free movement of such data) was transposed into local laws in each member state, the GDPR will be directly valid. This will be quite convenient for many organisations that operate in multiple countries within the EU, since there will be no requirement to adapt so as to comply with the various particularities and data protection requirements of each member state. However, it must be noted that legislators have provided local governments the ability to add or adapt provisions to better assimilate with local data protection and local cultural habits and views.

What are the next steps? Organisations will be affected differently depending on the industry they serve, and should promptly identify how this new legislation may have an impact on their core services and daily operations (it must be noted that the focus should not only be in addressing the legal aspects of privacy). The GDPR stresses that organisations should be proactive and organised in order to effectively deal with privacy matters. Most importantly, organisations should make sure that they have the technical ability to support themselves in undertaking this significant step in data protection.

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meet the cfo

Tassos Marathovouniotis Although the Chief Executive Officer (CEO) of a company or organization is the person with ultimate responsibility for ensuring that it functions properly and implements the strategy set out by the Board, the Chief Financial Officer (CFO) is becoming increasingly important and powerful. We spoke to Tassos Marathovouniotis, Chief Financial Officer of PHC Franchised Restaurants Public Ltd

There have been numerous reports over the last 2-3 years which suggest that the role of a company’s Chief Financial Officer (CFO) is changing rapidly. Is this your experience? The role of CFO has indeed been changing rapidly over the last years. It has changed from being that of a typical accountant charged with the company’s bookkeeping and regulatory compliance to being the company’s guardian, its liquidity’s defender and the person who can protect and maximize the company’s value. This new role has mainly come about due to changes in the worldwide economic environment, which have resulted in a higher risk operating environment, a more demanding financial sector and the minimizing of margins.

It has been suggested that the CFO is perhaps the one person in an organisation who sees the ‘big picture’. This suggests that the roles of CEO and CFO are growing closer. Would you agree? It’s like a partnership. The CFO and the CEO share the same vision and have the same target of maximizing the company’s wealth. CFOs are not only required to construct meaning out of the meaningless data provided to CEOs, but they are also actively looking for ways to protect the company against possible risks which may arise from the CEOs future strategic plans. Have you had to develop certain new skills for your position in today’s changing corporate world? Technology is the major area of de-

velopment in which I have had to invest time so as to be able to follow the changing corporate world. Data has always been available but what has changed is the way we use data. This is where technology plays its part, by transforming the data into useful information, which will not only give a snapshot of the current position but will also assist me in advising on the future plans of the company. How much pressure is placed on the CFO these days due to stricter regulation and compliance requirements? The pressure on the CFO is growing exponentially. Stricter deadlines, more frequent reporting demands and, a lot of times, bureaucratic procedures arising from compliance requirements can result in a work overload and additional pressure on top of his/her business-oriented tasks. In your personal role at PHC Franchised Restaurants Public Ltd, are there aspects of the work that are very specific to the company and the sector or is a CFO doing pretty much the same thing in any company or organisation? Of course there are specific aspects that are directly related to the industry that PHC operates in but the overall role of the CFO should be the same in any organisation.

t h

N I C O S I A

ECONOMIC C O N G R E S S

Harris Georgiades Minister of Finance

Constantinos Petrides Under-Secretary to the President

George Pamboridis Minister of Health

Mehran Eftekhar Director, World Trade Center Cyprus

Yiorgos Lakkotrypis* Minister of Energy, Commerce, Industry and Tourism *invitation

THE STATE AND PROSPECTS OF THE CYPRUS ECONOMY Thematology • Cyprus Economy Forecasts 2017-2019 • The Economy and Foreign Investment in Cyprus, Prospects and Opportunities in Cyprus – A view from Abroad • The future of the Cyprus Economy and Business as seen by Entrepreneurs and CEOs • Transforming the Economy of Cyprus • Achieving economic growth through adding value to the standard of living • How are the major European and global trends affecting Cyprus, as a business center

Tuesday 25 April 2017 | Hilton Park Hotel | Nicosia For further information contact: IMH, 5 Aigaleo Str., 2057 Strovolos, P.O.Box 21185, 1503, Nicosia, Cyprus Tel. +357 22505555 Fax. +357 22679820, E-mail: events@imhbusiness.com, website: www.imhbusiness.com