NQ September 2014 by PQ magazine

SEPTEMBER 2014 Written by

THE VOICE OF ALL NQs

Intelligence Unit

UK country report – Capitalising on the art & science in decision making: Exploring the agenda for big decisions in 2014-15 and the process that UK business leaders will go through in making these decisions.

Gut & gigabytes

email: graham@pqaccountant.com twitter: @pqmagazine facebook: pqmag.com call: 020 7216 6444

P20

www.pwc.co.uk/data-analytics

GUT FEELING Instinct and the knack of making the right decisions

ALL THE NEWS YOU NEED and a whole lot more Pages 4 and 7

DIVERSIFICATION PAYS DIVIDENDS Page 10

COULD YOU BE OUR NEXT NQ OF THE YEAR? WE LAUNCH OUR SEARCH FOR BRITAIN’S BRIGHTEST NEWLY QUALIFIED – SO WHAT ARE YOU WAITING FOR? ENTER TODAY – STAND UP AND BE COUNTED! P12

P8 ACCOUNTABILITY

The way big firms account for tangible assets is a cause for concern, says Dr Steve Priddy

POWER TO THE PEOPLE

ETHICAL DILEMMA Dealing with a time pressured situation! Page 14

Deloitte explains why it is making its workforce ‘agile’

P16

Your jobs board I need to find pqjobs.co.uk now!

PQ jobs pqjobs.co.uk

COMMENT NUMBER CRUNCHING

6,962 EDITOR’S COMMENTS Change is your middle name The world of work is always changing. Hey, I started my journalist career on a typewriter – remember those? Probably not! The latest trend is agile working – flexi-time to you and me. The Big 4 are pioneers here, and Deloitte is leading the way. Staff there can now request a block of four weeks off, unpaid of course, each year. Interestingly, the move has been promoted by Deloitte’s desire to build its female pipeline of talent. Its target for female partners is 25% by 2020, and it looks set to hit that target. Of course, as from 30 June, all employees now have the right to request to work flexibly. Big data is another area accountants need to master. The ‘Gut & Gigabytes’ research from PwC shows that most executives are still prepared to back their own experience and intuition over data and analytics. They will even put the experience of others ahead of the ‘gigabytes’. Interestingly, in the UK the reason for this is that they have been burnt before – relying on data analysis has been detrimental to their business in the past. Adding technical modelling and data science skills to your skills set has to be the way to go. As PwC says: “The leaders of the future need to be familiar with data analysis, with 81% of UK executives calling it a prerequisite for senior management.” Now if we can reduce the problem of data overload and improve the quality of data then I am sure business leaders will start leaving their gut feelings in the pub (see page 20 for this feature). Finally, it appears we live in an ever-increasing intangible world! For the S&P 500 companies intangible assets accounted for over 80% of their value. This compares to 17% in 1975. Wow, there is a lot of good stuff in this issue. Happy reading. Graham Hambly, Editor (graham@pqaccountant.com)

accountancy firms registered in the UK (in 2013), a 4% drop on the previous year P4

56,000

number of people who have told HMRC what they owe offshore P7

$17,895m

value of Facebook’s tangible assets in 2013 P8

25%

Deloitte UK’s target for percentage of female partners by 2020 P16

1 January 2018 the mandatory effective date of new standard IFRS 9 P18

41%

percentage of business leaders concerned about data quality and information overload P20

NEWS

Firms disappearing No hiding place from the high street The decline in the number of accountancy firms is accelerating, says the latest research from LDF, a leading finance provider. Latest figures show that there are now just 6,962 accountancy firms registered in the UK (in 2013), a 4% drop on the previous year when there were 7,239. There is a worry that although there has been a sustained downward trend since the credit crunch, the latest figures shows firm closures appear to be picking up speed again. LDF’s Peter Alderson said one of the key reason is that the impact of new rules loosening the requirements for businesses to carry out an audit is starting to filter through, adding the financial pressures that many, particularly smaller firms were already feeling. He went on: “Audit is a core revenue stream for many accountancy businesses, so any drop-off in this type of work is going to have a significant impact on profitability.” The research found that firms with between two and six principals have seen the biggest decline, with a total of 2,997 registered firms in 2013 compared with 3,264 in 2012. However, the number of firms with 7-10 principals has actually increased to 202, up from 191 the previous year.

A £2,000 set-up fund The Chartered Accountants’ Benevolent Association (CABA) is offering unemployed chartered accountants who want to set themselves up in business support worth up to £2,000. The funds can be used to cover a range of start-up costs and is aimed at helping members of the profession to make a move that would not otherwise be possible. To qualify, chartered accountants need to meet a range of criteria and also be assessed by CABA on their likelihood of success. Natalie Worth, head of operations, said that demand for help to deal with unemployment had been the charity’s biggest growth area during the past 12 months. Selfemployment is a popular solution, and 11% of chartered accountants who had undergone CABA’s Career Coaching have become self-employed. Worth said: “Eventually, we would like CABA to be the ‘go to’ organisation whenever chartered accountants need any kind of help or information about their well-being.” More details on all of CABA’s career support services can be found at www.caba.org.uk/career 4

The first seven elements of the Organisation for Economic Co-operation and Development’s (OECD) action plan to combat tax avoidance by multinationals have been put forward to the G20. Among the key recommendations is the move for country-by-country tax reporting. The new rules also highlighted the fact that the digital economy cannot be ring-fenced from the wider economy. Secretary General Angel Gurria said: "The G20 has identified base erosion and profit shifting as a serious risk to tax revenues, sovereignty and fair tax systems worldwide. Our recommendations constitute the building blocks for an internationally agreed and co-ordinated response to corporate tax planning strategies that exploit the gaps and loopholes of the current system to artificially shift profits to locations where they are subject to more favourable tax treatment." At the request of the G20 leaders the OECD's work is based on a BEPS Action plans. So what are the first seven elements? They are: ● Ensure the coherence of corporate income taxation at the international level, through new model tax and treaty provisions to neutralise hybrid mismatch arrangements. ● Realign taxation and relevant substance to restore the intended benefits of international standards and to prevent the abuse of tax treaties. ● Assure that transfer pricing outcomes are in line with value creation, through actions to address transfer pricing issues in the key area of intangible. ● Improve transparency for tax administrations and increase certainty and predictability for taxpayers through improved transfer pricing documentation and a template for country-by-country reporting. ● Address the challenges of the digital economy. ● Amend bilateral tax treaties and look at feasibility of developing a multilateral instrument. ● Counter harmful tax practices.

FRC consults on FRSSE

The FRC’s existing Financial Reporting Standard for Smaller Entities (FRSSE) has been withdrawn. Following changes in EU law small companies need to include less information in their accounts and fewer mandatory disclosures. The FRC is proposing to issue a new accounting standard for microentities, companies typically turning over less than £632,000 a year. The Financial Reporting Standard for Micro-entities (FRSME) will make accounts for these entities simpler. The FRC will also introduce a new section into FRS 102. NQ Magazine September 2014

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NEWS

Offshore evaders face criminalisation A new criminal offence of failing to declare taxable offshore income and gains has been set out in an HMRC consultation paper, launched in mid-August. HMRC appears to be targeting those who move their assets from one offshore centre that has tightened its taxinformation sharing laws to another which hasn’t. The 20-year rule limiting how far back HMRC can look at a taxpayer’s affairs could also be suspended. The majority of offshore cases will continue to be dealt with through a civil approach. However, the penalties will change. For example, anyone seeking to evade inheritance tax by hiding assets offshore will be liable for penalties of up to 200% of the tax. Finance Secretary to the Treasury David Gauke said: “The minority who use offshore secrecy to evade UK tax are making a big mistake. There is nothing wrong with holding assets offshore but investors must pay the tax they owe here.” He said some 56,000 people have already told HMRC about what they owe offshore.

Women, we want you! Big 4 firm KPMG has promised it will do much more to recruit women to the higher echelons of its business. In early September, the firm announced it had appointed 52 new partners. UK chairman Simon Collins revealed that currently 15% of its partners are female. “This is not where we want to be,” he stressed. However, he said he was pleased that KPMG has seen more than double the number of successful female partner candidates this year, compared with 2013. That means a third of the firm’s newly promoted partners are women, which Collins feels is a testament to a significant effort to remove any barriers to the best talent coming through the firm. To help increase diversity in the number of external hires, Collins has introduced assertive diversity benchmarking on all agencies its uses, comparing the level of diversity in the candidates they supply. NQ Magazine September 2014

Lawyers Pinsent Mason said that HMRC intends to introduce the new criminal offence as a ‘strict liability’ offence, which means there doesn’t have to be any evidence that the individual intended to evade tax – the individual can be convicted even though they: ● Failed to understand tax law. ● Were poorly advised by a friend or acquaintance. ● Genuinely forgot to report a relevant gain. HMRC wants the offence to come with a penalty of unlimited fines and up to six months in prison that could be imposed at a magistrates’ court. This, says Pinsent Masons, represents a slightly more measured approach than the original proposals for the offence, which suggested the potential for longer prison terms. There is also the suggestion of a defence of reasonable care for individuals who have followed professional tax advice.

Where’s your viable statement?

The Financial Reporting Council (FRC) has confirmed that boards must include a ‘viability statement’ in their strategic report to investors. This, says the FRC, will provide an improved and broader assessment of long-term solvency and liquidity. It is expected that this statement will look forward significantly longer than 12 months. The updated version of the UK Corporate Governance Code (the Code) has also been changed in relation to remuneration. Boards of listed companies will now need to ensure that executive remuneration is designed to promote the long-term success of the company and demonstrate how this is being achieved more clearly to shareholders. The FRC’s Stephen Haddrill said changes to the Code were designed to strengthen the focus of companies and investors on the longer term and the sustainability of value creation. The revised Code will apply to accounting periods beginning on or after 1 October 2014. Don’t forget to get your nominations in for NQ of the Year. All we want is 250 words. Find out how to nominate on page 12.

INTANGIBILITY

Tangible benfits The way big firms account for tangible assets is a cause for concern, says Dr Steve Priddy

ne of the fascinating aspects of research into the world of business and finance is the way received assumptions are repeatedly turned on their heads. In the years I have been supervising MBA and MSc students in their dissertation research I have been constantly surprised at the counterintuitive findings that often emerge. A case in point is my student Maria Sigacheva’s research into technology stock valuations. As a topic this could not be more relevant, with even the Chair of the US Federal Reserve, Janet Yellen, expressing concern about the growing evidence of a bubble in the markets earlier this year. While most commentators accept we are not in the ‘wild west’ of the dotcom valuations seen around the turn of the millennium, there are many investors and financial intermediaries who may well find their portfolios vulnerable to highly optimistic and volatile stock price movements based on unproven intangible valuation methodologies. Now, one of the things that we think we know is that corporate balance sheets are becoming increasingly intangible. This is a trend that has grown inexorably over the past two or three decades. Such intangibility may be measured in several ways. The most straightforward is simply to compare the market capitalization of one of the world’s foremost listed exchanges to the sum of the tangible assets recorded on the balance sheets of the individual members of those exchanges. The difference may be construed to be the intangible value of the stock. A relatively recent research note which does just that (1) showed that intangible assets accounted for over 80% of the S&P 500 companies in 2010; in 1975 the comparative was 17%. Much of this is thought to be centred on IP, trademarks and the like, but further research is necessary to demonstrate 8

whether this might be the case. So when Maria told me that as part of her research she would be exploring the balance sheets of three major technology players – Facebook, Twitter and LinkedIn – I fully expected to have my prejudices confirmed and to find three balance sheets dominated by intangible assets. Certainly in the case of Facebook how wrong I was, as the table below shows:

FB Total Assets US$ millions FB Goodwill and Intangibles US$ millions

2013

2010

17,895

2,013

1,722

Source: Facebook financial statements To be sure there has been an increase in goodwill and intangibles as a percentage of the overall Facebook balance sheet, from 3.2% three years ago, to 9.6% in 2013. But these figures are dwarfed by the tangible assets of which cash and short-term investments are the most important. In 2013, these stood at $11,449 million, in 2010 they were a mere $1,785 million. What does this mean, and why is it important to the readers of NQ who are the future leaders of the accounting profession? Firstly, one cannot generalize from the specific circumstances of the Facebook colossus. As has been discussed in previous NQ opinion pieces, there certainly are some crazy things going on in technology stock valuations, and these need to be addressed as a matter of urgency. However, more importantly, this casts an interesting light on the principalagent problem at the heart of corporate governance discussions. From the

perspective of the ‘agents’ – the board of directors of Facebook, they are doing a good job in terms of cash generation and building a sustainable balance sheet. The problem is more to do with the ‘principals’ the stockholders of Facebook equities, and their various advisors, since it is they who are actively generating the valuations that are now leading to significant concerns among regulators and market commentators. It is the market for stocks, rather than those who act as custodians of the underlying assets and liabilities of the organisation, who should be asking themselves serious questions about what stocks are actually worth. In my view, this simple observation reinforces the rhetorical point made by Milton Friedman against advocates of corporate social responsibility; namely, that the role of the corporation is to maximize profitability within the rules of the game set by markets. Precisely. Markets are made by men and women in constant interaction, and it is in all our interests to ensure those markets function as efficiently and as sensibly as possible. NQ

● Dr Steve Priddy is Head of Research at London School of Business and Finance (LSBF) (1) Ocean Tomo (2011) Intellectual CapitalIntangible Asset Market Value Study – available online at http://www.oceantomo.com/ productsandservices/investments/intangiblemarket-value

NQ Magazine September 2014

INTANGIBILITY

NQ Magazine September 2014

GOING IT ALONE

Variety is the spice of life This month Heather Miller finds that her hard work away from the accountancy sphere pays surprising dividends I know, right? Bleurgh. I’d become a ‘creative’. But then something interesting happened. The first time I started to notice it was just after my website went live. People started to comment, “Oh, I love your site by the way, who did the copy?” Well, I did. Perhaps my degree was starting to pay off in unexpected ways. I mean, it makes sense that by practising the art of writing more often, my writing would improve somewhat. Then I was asked to provide the quarterly newsletters and blog for an accountancy firm who just didn’t have the time or, in their words, the skill set to create this kind of thing. For MONEY and everything!

his month I’m thinking about diversification. It’s funny, isn’t it? You work like a dog for three or four years until the day finally arrives; you get your exam results and the misery of study (missed nights out with friends, failing to celebrate your own birthday because it clashes with revision, and generally being an insufferable bore) is over. This is it! Free at last! Now you can concentrate on the very thing you’ve worked so hard to become an expert in. Except if you’re anything like me, about six months later you will be BORED BORED BORED! As a result, I decided to do a degree. As you do. Having done everything in my life completely arse about face anyway, it made total sense to me to do a degree in something I was passionate about at the ripe old age of 27. A BA in Creative Writing would be my little baby, my escape from the corporate world. People with puzzled faces would ask me what I wanted to get out of it and, while adopting a dreamily wistful expression, I would look into their eyes and sigh: “Nothing at all, it’s just for me, to express my creativity.” 10

Next came a couple of commissions from a trade journal, one a technical article, another simply offering up my opinion on the future of billing in the tax industry. I thought back to February this year and I laughed. I laughed at how naïve I had been to assume that I would spend all my time attempting to make money purely from tax returns. The simple fact is my business would never have survived if I hadn’t been open to these new opportunities as and when they came along. Upon this realisation, I vowed that I would take every new opportunity that presented itself to me over the coming months. And it’s not even just about the money. As a result, I’m currently chair of the CIOT’s ‘Generation Y’ committee, I am a member of the Communications and Branding Committee, and I also present a radio show every Thursday from 12 till 2pm on my local community radio station. Yep, I’m now a radio host as well. I don’t get paid for any of these roles but they are great fun, I’ve met some fantastic people and I’ve brushed up on my presentation skills no end. So the lesson for this issue is simply this. Become a ‘yes’ person. It’s way more fun than the alternative. NQ NQ Magazine September 2014

Going it alone

NQ Magazine September 2014

Time to

NQ OF THE YEAR

Do you know someone who could be our next NQ of the Year?

o how do you make your CV stand out from the hundreds of other CVs hitting employers’ inboxes? Well, one sure way would be to become the 2015 NQ of the Year, awarded each year by our sister publication PQ magazine. It couldn’t be easier to nominate (and yes, you can nominate yourself). All we need is 250 words on why your nominee deserves to be the NQ of the Year. All those short-listed will be invited to a funpacked awards night at London’s famous Café de Paris. You may have left PQ magazine behind (or soon will be), but landing this prize really can still give your career a big boost. Remember, there are lots of other categories up for grabs too, including Training Manager of the Year and Accounting Team of the Year. Deadline for entries is Friday 19 December 2014. So, how do you enter? You can download an application form directly from our website – click on the ‘pqawards’ button at the top of the page. Or you can email your 250-word entry direct to awards@pqmagazine.com, or you can write to: the Editor, PQ magazine, 4th Floor, Central House, 142 Central Street, London EC1V 8AR 12

MEET OUR NQS OF THE YEAR 2014 EMILY HAMBLIN Emily Hamblin is a star pupil at CIMA. In September 2012, she attained 84% at the T4 exam, the highest mark of any student in this exam around the globe. From university she joined the Civil Service via their graduate Fast Stream programme. She spent two months on secondment working with a small charity in Mid-Western Nepal, supporting them with financial management, while also Sky’s Nath broadening her own knowledge. She an Condu it was the winne is now working as the senior private r in 2008 secretary to the Secretary of State for Business, Innovation and Skills.

Riley The 2007 winner Niki g nin eve the for st with ho Shaun Williamson

Mike Nelson, the 2009 winner, with star turn Richard Blackwoo d

NQ Magazine September 2014

NQ OF THE YEAR

OUR SPONSORS No award ceremony is possible without the sponsors. And we have only the best…

2013 JONATHAN SIMONS (JOINT WINNER) At the time Jonathan Simons was a newly qualified with Grant Thornton. Since then he has moved on to Costa Coffee, which is part of Whitbread plc. He is an internal audit manager there. This ACCA showed that at work he really could add value, which attribution helped him pick up the prize in 2013. Consistently taking on roles for colleagues at a higher level, he became a firm ‘champion’ for Grant Thornton’s audit software.

2013 SAAD MIR (JOINT WINNER) Saad Mir was our winner in waiting. He had already won the Deloitte Pakistan Trainee of the Year award in 2011 – and now he has a NQ of the Year Award to go with it. At only 22 years old he had extensive work experience and held a key financial role at the Big 4 firm.

NQ Magazine September 2014

PQ jobs PREVIOUS NQ WINNERS 2012 2011 2010 2009 2008 2007 2006

Victoria Hitchcock Khurrum Beg Danny Taylor Mike Nelson Nathan Conduit Niki Riley Kevin Wall

ETHICAL DILEMMA

NQ Magazine September 2014

ETHICAL DILEMMA

Working quick time We outline a case about a restructure and working with limited resources. Thanks to CCAB for this article

ou are a qualified accountant. You have been asked by your line manager to complete a costing exercise with a very short deadline and limited resources. You think that the president of the company is planning to use this information to restructure the company, including making some of your close colleagues redundant. You are worried that your work cannot be robust enough to be used for such a big business decision, but your line manager is putting you under a lot of pressure to complete the work quickly.

Key fundamental principles ● Objectivity: Could you maintain an unbiased stance throughout, in view of your close relationship with your colleagues? ● Professional competence and due care: Can you realistically produce a costing, with the time and resources available, without compromising the standard of your work? ● Confidentiality: Given the sensitivity of the situation, you should maintain discretion and not share your concerns with other staff, who may not be aware of the president’s intentions.

Considerations ● Identify relevant facts: The company may be restructuring, and the president needs to have the most up-to-date and complete financial information to inform any decisions. As a professional accountant, you must ensure that any financial information you provide is robust. ● Identify affected parties: Key affected parties are you, your line manager, the president and anyone else who may use the results of the costing exercise. Other stakeholders in the company may also be affected, including those employees who might suffer redundancy. ● Who should be involved in the resolution: Is there anyone else in the company with whom you can raise your concerns? Is there a senior finance officer who could advise you, or another member

NQ Magazine September 2014

of the board with whom you can discuss your dilemma? Should you approach the president directly?

Possible course of action You think that the president of the company is planning to use the information you produce to restructure the company. As a professional accountant, you have a duty to make your line manager and other users of the information aware of the limitations in the scope of your work. With this in mind, you should attempt to obtain certainty regarding the use of the information. You should arrange a meeting with your line manager and explain that you are unwilling to do the work to the deadline requested, with the resources available, because the work could not be relied upon. You could ask for more time to complete the work to the required standard, or ask for the work to be outsourced. This would have the added benefit of enhanced objectivity. The process of clarifying the intended use of the information and expressing your concerns regarding its reliability is likely to enhance your credibility. You could suggest that your line manager discuss the issue with the president or other members of the board, as appropriate. If your line manager is unsympathetic to your concerns, you should not allow yourself to be associated with information that may be misleading. You should consider the most appropriate way in which to make your concerns known to the board. This may be through the president or the company secretary. If, after exploring all these routes of communication, you still find yourself under unreasonable time pressure, you may have to make clear your refusal to conduct the work, and possibly resign from the company. You should document, in detail, the steps that you take in resolving your dilemma, in case your ethical judgement is challenged in the future. NQ

FLEXIBLE WORKING

Power to t Deloitte explains why it is making its workforce ‘agile’

eloitte UK recently launched a new approach to agile working in order to provide its 12,000 employees with the power to choose where, when and how they work. The firm has introduced a range of ‘arrangements’ to incite a change in the day-to-day culture at the UK firm. Deloitte offers all employees the right to request a formal flexible working arrangement; it also now allows them to request a block of four weeks unpaid leave each year, without reason or justification. These arrangements support the wider measures that encourage a more agile workplace, including the introduction of collaborative and adaptable working spaces, an environment that supports open conversations about agile working and improvements to technology that make it feasible. Supporting agile working has long been a priority for Deloitte, but has taken increasing precedence as the firm seeks new ways to build its pipeline of female talent and thus improve future female leadership at the firm. David Sproul, chief executive of Deloitte UK, said: “We have set ambitious targets of 25% female partners by 2020 and 30% by 2030. In order to achieve these we must

improve our pipeline of future female leaders by making Deloitte a place that offers the opportunity to be successful while maintaining a healthy work-life balance. This is about more than doing the right thing – a clear business imperative has been identified. As recognised by the Lord Davies review, female leadership can improve organisational performance. Deloitte is making sure it is best placed to improve and increase opportunities for female talent and benefit from the wider, more empowered group.” The changes announced go beyond the traditional flexible working allowances and give employees the power to manage their own working practices. Beyond facilitating a NQ Magazine September 2014

FLEXIBLE WORKING

the people

greater pipeline of future female leaders, they are designed to benefit the firm and its people by: ● Attracting and retaining top talent at all levels. ● Increasing productivity and commitment. ● Making more effective use of office space. ● Offering employees choice and power in relation to how and where they work. Business Minister Jenny Willott explained: “Employees want to be able to balance their work life with their home NQ Magazine September 2014

commitments without losing out in the workplace. Part of achieving this is being able to work flexibly. As of 30 June all employees have the right to request to work flexibly. Deloitte UK has shown that it is already ahead of the curve when it comes to nurturing talent and improving diversity at the very top of their organisation. “Research shows flexible working makes good business sense. Deloitte’s new flexible working arrangements provide an excellent benchmark which I hope other businesses will look to match”. NQ 17

IFRS 9

Welcome No 9 Big changes are ahead for banks’ accounts as a new standard on bad debts completes response to the financial crisis. Here’s how KPMG sees it…

he IASB has issued the fourth and final version of its new standard on financial instruments accounting – IFRS 9 Financial Instruments. This completes a project that was launched in 2008 in response to the financial crisis. The new standard includes revised guidance on the classification and measurement of financial assets, including impairment, and supplements the new hedge accounting principles published in 2013. Chris Spall, KPMG’s global IFRS financial instruments leader, said: “The new standard is going to have a massive impact on how banks account for credit losses on their loan portfolios. Provisions for bad debts will be bigger and are likely to be more volatile. “After long debate about this complex area, it is good that we finally have a complete standard and that the implementation effort can begin in earnest. We had hoped that the IASB and the US FASB could have achieved a single converged solution for banks and other entities globally, but this hasn’t been possible. Having different rules under US GAAP and IFRS will mean a lack of comparability for investors between the results of banks reporting under the different frameworks, and increased costs for those banks that have to prepare figures under both accounting frameworks.” Colin Martin, head of KPMG UK assurance services, banking, added: “Adopting the new rules is going to mean a lot of time, effort and money for banks.” Martin added: “A major issue for banks and investors in banks will be how adoption of the new standard will affect regulatory capital ratios. Banks will need to factor this into their capital planning and we expect that users will be looking for information on the expected capital impacts.” Insurers will also be significantly impacted by IFRS 9. Joachim Kölschbach, KPMG’s global IFRS insurance leader, said: “Insurers have to plan for adopting new standards on both financial instruments and insurance contracts over the next few years. The overall effect cannot be assessed until the insurance standard is finalised over the next 12 months, but we can expect a sea-change in financial reporting for most insurers.” Spall added: “Other corporates should not automatically assume that the impact of the classification and measurement and impairment requirements of the new standard will be small, as it depends on the exposures they have and how they manage them. We expect that planning for IFRS 9 adoption – including implementation of the new hedge accounting requirements published in 2013 – will be an important issue for corporate treasurers and accountants generally.” 18

AT A GLANCE ● PROVISIONS FOR BAD DEBT – LARGER & MORE VOLATILE ● BIGGEST IMPACT ON BANKS, ALSO SIGNIFICANT FOR INSURERS ● NO CONVERGENCE WITH US RULES – LACK OF COMPARABILITY FOR INVESTORS AND INCREASED COSTS FOR COMPANIES ● BIG IMPACT ON SYSTEMS AND PROCESSES – COMPANIES NEED TO START ADDRESSING NOW

New expected credit loss model In the past, concerns have been raised about ‘too little, too late’ provisioning for loan losses. The new expected credit losses model aims to address these concerns, and accelerates the recognition of losses by requiring provisions to cover both already-incurred losses and some losses expected in the future. Spall said: “The new standard is a step change in accounting for impairment and will give rise to new challenges.” One such challenge is the increased need for judgement. Spall explained: “Estimating impairment is an art rather than a science. It involves difficult judgements about whether loans will be paid as due – and, if not, how much will be recovered and when. The new model widens the scope of these judgements.” A new threshold is applied to determine whether there has been significant increase in credit risk – and this in turn is used to assess whether a loan should have an allowance to cover credit losses expected in the next 12 months, or to cover all expected credit losses over the life of the loan. Spall added: “Preparers will have to make new judgements, auditors will have to review them, and users of financial statements, including prudential and securities regulators, will have to understand them.” Spall encouraged companies, in particular banks, not to delay in assessing the impact of the expected credit loss model on their business: “Credit risk is at the heart of a bank’s business and applying the new standard will depend heavily on a bank’s credit systems and processes.”

Classification and measurement The final standard clarifies the principles already in IFRS 9 and introduces a new ‘fair value through other NQ Magazine September 2014

IFRS 9

comprehensive income’ measurement category for financial assets. Spall said: “The new category aims to accommodate concerns that the standard did not cater for business models where assets were held both to collect cash flows and for sale – for example, certain liquidity portfolios of banks – and that it would have created accounting mismatches for insurers. However, the amendment means that the classification and measurement requirements of the new standard are at least as complex as the current IAS 39 standard that it will replace.”

Disclosures The standard introduces extensive new disclosures to address the concerns raised by users for transparency. Martin commented: “The new disclosures introduced by IFRS 9 are extensive, and entities – in particular banks – should not underestimate the effort that will be required to apply the new requirements, including having the systems and processes in place to collect data. Entities will need to think through how to incorporate the new information into their financial reporting to make sure that disclosures do not just add volume to the annual report but are part of a clear communication process with investors and other stakeholders. Preparing for the new disclosure requirements should be a key part of transition planning.” NQ Magazine September 2014

Transition The new standard has a mandatory effective date of 1 January 2018 but can be adopted early. As the standard has been completed in stages, the relatively few companies that have adopted previously released versions of IFRS 9 can continue using them until then. In addition, companies can adopt in isolation the part of the standard that would allow them to reflect the effects of changes in credit risk on certain marked-to-market liabilities outside of profit or loss. Spall commented: “Companies need to think about when they plan to adopt the new standard. Many banks may need the whole three and a half years up to 2018 to prepare for adoption of the expected credit loss requirements. However, the possibility of early adoption of only the ‘own credit’ amendment would provide some welcome relief from profit or loss volatility caused by fluctuations in a company’s own credit risk. “The long lead time to mandatory adoption and the different possibilities for IFRS 9 adoption could mean a protracted but temporary period of diversity. In many jurisdictions, including the European Union, companies will not be able to adopt the new standard until it is legally endorsed or permitted by regulators. Given the significance of the standard to the financial services sector, the road to endorsement may be longer and more winding than usual.” NQ 19

DECISION-MAKING

Still going with your gut? Written by

Intelligence Unit

Gut & gigabytes

The use of data and analytics is superseeding intuition when it comes to making the big decisions, but going with your gut still plays an important part of business

usiness leaders are taking major strategic decisions about the future of their businesses based on their gut instinct and experience in preference to the use of data and analytics, according to a new report published by PwC and written by the Economist Intelligence Unit. The report, ‘Guts & Gigabytes’, explores the changing nature of corporate decision-making and the use of data by companies across the globe. It shows that senior business leaders in the UK are using their intuition and experience, as well as the advice and experience of others in their companies, over and above data and analytics. When asked about how they make major decisions, they ranked data and analytics as the third most important factor (23%) behind their own intuition and experience (41%) and the experience of others (31%). The report is based on a survey of over 1,100 senior executives worldwide, across a range of industries and public, private and family-owned businesses. Some 83% of senior executives from the UK report that their big decision-making has improved in the past two years

In the digital age, as business becomes ever more complex and data becomes ever more available, business leaders need to ensure they know how to quickly make decisions based on their analysis of data. 20

www.pwc.co.uk/data-analytics

– with 32% of this group saying there has been a significant improvement. For 40% of businesses, the use of internal and external data and analytics is the aspect of big decisionmaking that has changed the most. Yann Bonduelle, PwC consulting data analytics partner, said: “Business leaders have long used their own tried and trusted intuition alongside more scientific and financial factors to make decisions and this has served them well in the past. As data become more pervasive, algorithms become more accurate and visualisation more intuitive, business leaders are realising they can make better decisions through using data and analytics more systematically.”

Growth is top priority but costs will be shared by working with competitors British executives are feeling positive about the future of their businesses, with 24% choosing growing the existing business as the most important decision they expect to make in the next year and an additional 21% picking entering a new industry or starting a brand new business. However, because costs and margin pressure are identified as the main strategic motivations for big decisions, the most common big decisions involve competitive collaboration and corporate restructuring. Indeed, more than half (52%) of UK business leaders expect to make big decisions to collaborate with their competitors in the next year – compared with 36% as a global average.

Is data at the heart of decision-making? Despite a generally positive attitude towards the use of data and analytics, many UK business leaders remain concerned about data quality and information overload. 41% say they are concerned about quality, accuracy and completeness of data and 41% find it difficult to access useful data. Most telling, however, is the influence of negative past experiences. British executives reveal greater scepticism about the value of data analysis, compared with their NQ Magazine September 2014

DECISION-MAKING

overseas counterparts. 61% say that relying on data analysis has been detrimental to their business in the past, compared with 34% in Western Europe and 46% globally. By contrast, there are few concerns about whether their organisations have the right people and the right skills to make the most of data and analytics. 87% say they have a sufficient pipeline of people to analyse the data collected. Our PwC’s own experience suggests that many organisations are currently rising to the challenges of recruiting and developing technical modelling and data science skills, but shortages are rapidly emerging. However, the more senior leadership roles that understand business decision-making and are able to bridge the gap with analytics and technology have always been a bottleneck and will increasingly become so – especially in data-hungry industries such as retail, financial services and telecommunications. NQ Magazine September 2014

Finally, business leaders share a recognition that the leaders of the future need to be familiar with data analysis, with 8 out of 10 of UK executives calling it a prerequisite for senior management. Tom Lewis, PwC head of data analytics, said: “The role of data and analytics in our corporate enterprises continues to grow in importance, with 81% of executives recognising a familiarity with data-driven decision making as a prerequisite for senior management roles. It is clear that data quality and data overload have been historical issues for some companies but this will reduce as the level of data awareness grows in the senior levels of an organisation. “In the digital age, as business becomes ever more complex and data becomes ever more available, business leaders need to ensure they know how to quickly make decisions based on their analysis of data.” NQ 21

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