www.miamalta.

org

Winter 2011

Keeping Up
WITH THE

Times

Interview with IAASB Chairman Prof. Arnold Schilder

Beyond Marks & Spencer

ECJ case law dealing with the freedom of establishment

Accounts Receivable Management

Integrity and Expertise

Winter 2011

&

LOCAL NEWS

Local
e
t
a
d
p
U

MIA
N ew s

MIA ISSUES CPE PROGRAMME FOR THE PERIOD

JANUARY TO JUNE 2011

compares these with the corresponding recognition, measurement and

disclosure requirements in the IFRS for SMEs, with a view to identify any
similarities and differences between the two standards.

The Malta Institute of Accountants (MIA) has issued its Continuous

Professional Education (CPE) Programme for the period January to June
2011. The programme offers participants high quality training, given by
experts in the respective field, both in Core and Professional Competency
areas.

The publication is freely downloadable by MIA Members and Students

from the GAPSE e-library on the Members/Students area of the
Institutes website.

The Programme can be viewed on the MIA website www.miamalta,org/

Calendar.aspx and prospective participants can plan and book their CPE
courses online 24x7. For more information one may contact Catherine
Mallia Bonavia on 21323991 or cmbonavia@miamalta.org.

MIA ISSUES TWO TECHNICAL RELEASES ON

AUDITOR REPORTING
The MIA has issued two Technical Releases dealing with auditor reporting.
Both pronouncements were issued by the MIA for public comment on 12
October 2010 and were recently issued as final.

MIA ENHANCES TECHNICAL DEPARTMENT,

RECRUITS TECHNICAL OFFICER
Ritianne Cassar Soler has joined the Institutes Technical Department as a
Technical Officer.
Ritianne holds a Bachelor of Accountancy (Honours) degree from the
University of Malta and a Diploma in VAT Compliance from the Institute of
Indirect Taxation (UK). Over the past years, she worked with established
consultancy firms focusing on accounting, consultancy and tax related
services, particularly in the international context. In May 2009, Ritianne
was appointed Manager Finance of the National Agency responsible to
regulate telecommunications in Malta.

The first of the two Technical Releases, AUDIT 02/10, deals with
engagements to report on Undertaking Size Declarations prepared for
the purposes of financing under the Training Aid Framework financed
through the European Social Fund. The scope of the Technical Release
is to lay down professional requirements, and provide guidance on the
auditors professional responsibilities, when a Member undertakes such
engagements.

BANIF BANK SIGNS A COOPERATION

AGREEMENT WITH MIA

The second Technical Release, AUDIT 03/10, deals with engagements

to report on Form 4.7 Financial Statement submitted for public
procurement tendering purposes. In fact the scope of AUDIT 03/10 is to
lay down professional requirements with which Members shall comply
when undertaking engagements to report on the Financial Statement
form submitted by bidders as part of the selection criteria which must
be satisfied when tendering for public procurement contracts with the
Department of Contracts.

This collaboration agreement reaffirms our commitment to be an active

player in the market and to support important initiatives that can add
value to the local community. We believe that Banif can make a valid
contribution at all levels of the economy from employees to professionals
like accountants and auditors, commented Mr. Joaquim F. Silva Pinto,
CEO of Banif Bank (Malta) plc in the presence of Mr. Bernard Scicluna,
President of the Malta Institute of Accountants.

Both pronouncements are freely downloadable by MIA Members and

Students from the Technical Releases e-library on the Members/
Students area of the Institutes website.

Banif Bank and the Malta Institute of Accountants have signed a

collaboration agreement in relation to the 2010 Conference entitled The
Accountant: evolving World evolving Role.

Banif Banks CEO, Mr. Joaquim F. Silva Pinto has also participated in one
of the discussion panels which discussed the perception of accountants
from the point of view of other professions.

MIA ISSUES GAPSE - IFRS FOR SMES

COMPARATIVE ANALYSIS

MIA PUBLISHES COMMENT LETTER ON AUDIT

POLICY GREEN PAPER

The MIA issued a technical publication entitled General Accounting

Principles for Smaller Entities (GAPSE) and IFRS for SMEs: A
comparative analysis.

The MIA has published on its website the Institutes Comment Letter on
the European Commissions Green Paper Audit Policy: Lessons from the
Crisis which the Commission issued in October 2010.

The publication summarises the recognition, measurement and disclosure

requirements set out in the Accountancy Profession (General Accounting
Principles for Smaller Entities) Regulations, 2009 (GAPSE) and

The Institutes Comment Letter was filed with the European Commission
on 7 December 2010.

Winter 2011

LOCAL NEWS

Autumn 2010

MIA 2010 CONFERENCE THE ACCOUNTANT: EVOLVING WORLD EVOLVING ROLE IN PICTURES

NEW MIA MEMBERS AND UPGRADES

AIA

Diane Cauchi
Adrian Chircop
Sharon Ciangura
Steven Marinelli
Reginald Meli Attard
Andrew Mifsud
Sean Vassallo

MIA

Christine Frendo
Paul McKenna

UPGRADES
Nadia Arrigo
Justin Axiaq
Graziella Cassar
Clint Chetcuti
Mariestell Dalli
Francesca Ellul Castaldi
Etienne Formosa
Christabelle Gauci
Raymond Grech
Pauline McKay
Maris Micallef
Kristina Raggio
Angelo Said
Pamela Saliba
Alexie Tabone
Pierre Vella

Winter 2011

INTERVIEW

KEEPING UP WITH THE

TIMES

INTERVIEW WITH IAASB CHAIRMAN PROF. ARNOLD SCHILDER

The International Auditing and
Assurance Standards Board (iaasb),
the body which issues International
Standards on Auditing (isas) that
set the global benchmark for external
auditing, and which are applicable
in Malta through direct reference in
our legislation, met in Malta with a
50-strong team at the invitation of the
Malta institute of Accountants.
At the end of the week-long meeting
Mia President Ben Scicluna and
Jonathan Dingli met with the Boards
Chairman Prof. Arnold Schilder and
Technical Director James Gunn to
discuss the completion of the Clarity
Project and the effect this is expected
to have on the quality and cost of an
audit, as well as to acquire first hand
information on the main projects
currently featuring on the Boards
agenda in particular its work on
Compilation and Review engagements
which are being revised to assist
practitioners in providing services to
smes that may not be required to have
their financial statements audited.

12

Photos: D. Aquilina

INTERVIEW

Winter 2011

The IAASB has just finalised a nearly five year long Clarity
Project which resulted in 36 newly updated and clarified
ISAs and a clarified International Standard on Quality
Control. To what extent has this project enhanced the
quality of the ISAs, and therefore audit quality?

Project is expected to have on audit quality - we cannot

enough bring that message to the outside world. The clarity
ISAs have been very proactive in addressing the critical
questions that now lure on one hand from the crisis on the
other hand from recent audit inspections.

On the main enhancements to the standards from the Clarity

Project I would characterise them in three points.

We have already seen what the new ISAs point to: its
about communications, its about estimates, its about risk
assessment and typically judgmental issues, and its about
quality audit evidence. These areas have been explicitly
addressed in the revised ISAs. We now have stronger
standards, for example, on estimates and fair values, and
two standards on communication including a new one on
communication of internal control deficiencies.

First, the Clarity Project has certainly enhanced the readability

and structure of the ISAs. Before the Clarity Project, the
requirements and guidance of an ISA were intermingled,
with the guidance found in between paragraphs specifying
requirements. So an ISA seemed pretty much like a long
story, which had to be read till the end to be understood. The
feedback we received from the users of the ISAs (in particular
the SMP community) showed that it was difficult to get a
grasp of all the requirements that are expected of them. Users
said they wanted an effective tool - they need to know what
the requirements are (and in that regard they said it would
be helpful if all the requirements are put in one place) and to
be able to source relevant application material in an effective
way. And thats how weve actually structured the clarified
ISAs because thats how they are used.
Secondly, the Project has enhanced clarity with respect
to responsibilities. Our new conventions now help from
both an inspection point of view, but equally important
from a practitioner point of view, in that they clarify what
is exactly required of the auditor. We heard from different
stakeholders (regulators, practitioners) that the old standards
had ambiguity. The Clarity Project looked at those ambiguous
conventions and the new standards are now more precise in
the specification of requirements. We also identified that
one area that we would like to highlight in our standards
are considerations specific to audits of smaller entities. The
previous standards did not have those within the text of the
standards, leaving users to look elsewhere for that. So we
included in the application material of the Clarity standards
those specific considerations that deal with audits of SMEs.
The third change or enhancement to the standards really goes
to the substance of the standards. Weve not only redrafted the
standards but weve also revised about half of them, which
resulted in having stronger ISAs on a number of key areas in
the audit such as:
Reporting: what the auditor says in the auditors report and
when communicating with those charged with governance
or management.
Audit of financial statement areas that typically require
significant management judgement: accounting estimates;
fair value estimates; identification and disclosure of related
parties.
Risk assessment when an organisation uses other entities
(service organisations).
Audit evidence, in areas such as external confirmations and
written representations, and when using the work of others
such as experts and component auditors in the case of group
audits.
ISA 200 and a number of other ISAs strengthen provisions
on professional judgement and professional scepticism.
So all in all there are a number of areas which have been
revised which strengthen the quality of the standards and
thereby the quality of audits.
Moving on to your second question the impact the Clarity

It is argued in certain quarters that requirements have

increased by over 50% as a result of the Clarity project. Has
there been any impact assessment on how much more time
will you need to conduct an audit in accordance with the
clarity ISAs?
One cannot here but refer to the impact study that the EC
commissioned from the University of Duisberg-Essen
entitled Evaluation of the possible adoption of International
Standards of Auditing (ISAs) in the EU in which they have
addressed the issue of cost-benefit. And their conclusion was
clear - benefits outweighed the costs by far.
Of course there is a learning curve to climb in the beginning
because a practitioner needs to invest time and resources in
understanding the revised and redrafted ISAs. However, the
end result should be very rewarding. Theres a clear conclusion
in the Duisberg-Essen study that adoption of the clarified ISA
through the EU would contribute to the credibility and quality
of financial statements and to audit quality in the EU, and to
a greater acceptance of audit reports outside of their home
jurisdictions within and outside of the EU.
So were pretty confident that therell be a net impact of
benefits over cost.
Moreover its been noted that while theres an increase in the
requirements overall, and that increase in requirements will
have an impact on the cost of audits, those requirements are
scalable in relation to the size and complexity of the audited
entity. In fact what we are hearing from members around the
Board that are small practitioners is that if you carefully think
about how to approach your audit, the impact will probably
not be that significant particularly for micro entities - the less
complex the audit, the simpler it is, and the less requirements
will be applicable to that audit. So careful thinking and
planning together with effective engagement management
minimises the time required to do an effective audit. Having
said that I guess the test has to be the application of the
standards by the practitioners in practice; only through that
exercise will we know the true impact of the Clarified ISAs.
We have also learned from our implementation monitoring
projects that it makes a lot of difference whether smaller
practitioners are being helped by their member bodies and
institutes and by fellow SMPs, and whether they are making
use of any training material.
With over 600 requirements, is it possible to do an affordable
audit?
Yes. This was the very first issue that I have been confronted

13

Winter 2011

INTERVIEW

with soon after I took chairmanship of the Board. I remember

I gave my first presentation at the SMP Committee Forum
in Berlin in front of a rather sceptical audience of German
practitioners who could not come to grips with the fact that
such a big book could also be applied for small audits. I was
then able to quote many of the Considerations Specific to
SMEs now included in the Clarity ISAs and we had a resulting
debate. Of course I cannot say that I convinced everybody but
they started opening up for recognising that there is a lot of
special attention in the ISAs for SMEs.
We had further discussion on the issue, which was then
followed up by the IAASB staff with the publication of a
staff Q&A on the proportionality of the ISAs, which I believe
to be a very important publication. I really need to mention
here my fellow board member Phil Cowperthwaite who is an
SMP himself he is one of the two partners in a small firm
in Canada and Phil is advocating very strongly that while
every practitioner should have an understanding of the ISAs,
one should ask the question which of those 600 requirements
is typically relevant for my practice? And Phil has sorted
that out for his own practice and estimates that one third will
hardly be applicable anyhow: for example, group audits,
using the work of internal audit, service organisations, etc.
Another one third of the requirements may or may not be
applicable, depending on your clients, the complexity of the
audit, etc. So you need to know that there is a standard on
using the work of an expert, and how to audit fair values,
but those standards may not always be applicable. Then of
course there are the main requirements thats in the ISA
200, risk assessments, communications, etc. If you have that
understanding, you know what to do.
Having obtained that understanding and knowledge of what
to use and when, according to Phil the next step is for one
to organise his or her practice in a very efficient manner,
including using software for documentation, etc. And then it
is possible to do an audit in accordance with the Clarified
ISAs but nonetheless in a very cost effective manner.
Is it possible to conduct a full ISA compliant audit without
the use of audit software?
Yes of course, but thats more a cost efficiency question.
I think it would be difficult and inefficient to carry out an
audit by going through all the ISA requirements without
the use of audit software, but nonetheless it is doable. Audit
software would definitely increase audit efficiency and cost
effectiveness and we know of several initiatives around
the world being undertaken to develop audit software in
accordance with the Clarified ISAs.
Having said that, this is not directly related to the Clarity
Project. How efficient was it to carry out a paper audit with
no methodology and no software under the old standards?
So this was, is, and will remain a cost efficiency question. I
think in todays world to do an efficient audit it is imperative
to invest in tools and software. So it is not really a question
of whether you can comply with the Clarified ISAs without
the use of audit software, but rather one underscoring the
importance of software in todays world.
Many countries are introducing audit exemptions
thereby exempting certain entities from having an audit
requirement. Is this an indication of perhaps the audit
becoming less universally relevant?

14

I believe the pressure for audit exemptions is coming from

a different direction, which is reduction of administrative
burdens for smaller entities. So thats where the discussion
started. The next question, however, is for who is an audit
useful? And that is the subject of ongoing discussions.
You would certainly agree that an audit is extremely relevant
to public interest entities with public shareholders who need
independent assurance on the financial information presented
to them. Following from that, legislators have themselves
asked the question whether it is necessary to mandate an audit
for privately held companies, and arguably the decision to
have an audit or not for such entities should be left to the
shareholders discretion. So its not a question about the value
of an audit its more about not burdening smaller entities
that have private shareholders.
But on the other hand many ask whether such companies
could then benefit from having a different and lower level of
assurance then an audit provides. And in fact such companies
tend to go for alternative assurance services.
And thats actually what kept us quite busy in Malta as we are
revising two of our existing standards on review engagements
and compilation engagements, which could be used by
practitioners in providing services to SMEs that may not be
required, or do not elect, to have their financial statements
audited. Following these revisions we will also look into
further issues and standards for other engagements such as
agreed upon procedures.
In fact those two projects took a considerable amount of time
during our meeting this week. We had for instance a very
good discussion one of them quite difficult on what is
limited assurance compared to reasonable assurance. On the
other hand we also covered a lot of ground on the compilation
engagements project. I must say we had both a fascinating
and exhausting discussion. Ultimately we were successful in
approving an exposure draft by the end of the week.
As you said the Board was busy this week working on
the revision of the review and compilation engagements
standards. Is that one step back from the position that an
audit is an audit?
No definitely not. The revision of these standards is not
conveying that message. The outlook there is that every audit
needs to be a high quality audit and therefore in conformity
with the clarity ISAs.
In fact we have already seen that ISAs are scalable to the size
and complexity of the audit at hand and ones professional
judgement comes into play when planning and carrying out
the audit. So an audit is an audit does not mean that you
have to do it all the time in the same way. If that were to be
true, you could fully understand small practitioners concerns
that ISAs cannot be applied proportionately to SME audits
as they would have to do the same level and amount of work
irrespective of whether one is auditing a local hardware store
or carrying out an international audit. And thats obviously
non-sense.
So, within the audit arena, the professional already
differentiates his or her audits by making decisions and
judgements on what needs to be done on the particular
audit at hand: the extent of understanding of the client, the
complexity of the nature of the client, risk assessments for

INTERVIEW
further procedures that need to be carried out. And that ties
in to the other issue of documentation; an auditor needs to
have appropriate documentation about significant judgements
made during the audit, but does not need documentation about
every detail - the audit is not a mechanistic approach. Its
basically having sufficient documentation that would enable
an independent reviewer (i.e. an experienced professional
rather than someone who doesnt know anything about
audit) to understand the nature, timing and extent of the audit
procedures performed, the results of those procedures and the
audit evidence obtained, and significant matters arising during
the audit, the conclusions reached thereon, and significant
professional judgments made in reaching those conclusions.
As a former practitioner I could say its most beneficial to the
practitioners themselves to have such documentation available;
unfortunately there are always cases in which you can get in
trouble or your client has a problem, like going concern, taxes,
whatever. And at that point such documentation would be
extremely handy. In the case of small entities it usually takes
no more than an hour or two just to sit down and to write it.
What drove the IAASB to put the review and compilation
projects on the agenda?
Id probably say we were listening. As we came out of
our Clarity Project, after having spent 4 or 5 years focussing
solely on audit, we thought it was due time for us to place
attention on those circumstances where an entitys financial
reporting need is not going to be met by the audit; where the
audit is not what is needed in the circumstances. Certainly
audit is not the only offering that the profession can provide
in terms of assisting SMEs in their financial reporting needs.
Weve always had a compilation standard. But the message
to the IAASB as it set out on its new strategy was to explore
standards for further services, other than an audit, which

Winter 2011

practitioners can provide to help meet the financial reporting

needs of SMEs. It was not self-serving in the sense of
promoting more services but the Board was trying to respond
to a need. We were in fact charged with sort of an ambitious
task: explore the types of engagements that will help meet
those needs and design standards to ensure those engagements
are conducted with quality and the public interest in mind.
And we reflected and we carefully considered what would
be the best approach. We contemplated starting with a clean
white sheet of paper - completely exploring all the different
possibilities, different engagements, different combinations of
engagements. We asked whether we should create something
new, or whether we should go down to where market practice
exists? What we heard at the time is that a lot of countries, a
lot of jurisdictions, were asking absolutely the same questions:
how do we create a project that will help service our needs?
And after quite a bit of research but before we went into this
project we issued a consultation paper to really understand
what the international environment is with respect to reviews.
Finally we thought how best can we get to the market as
quickly as possible and identified some standards that would
help deliver services to meet the needs.
We came down to the fact that since we have two existing
standards that are used in a number of jurisdictions, it may be
more efficient to start off with a platform that we understand.
In fact we detected a number of areas which are currently
being revised in those standards to see if we could further
meet the markets needs. Once were through the revision
of the review and compilation standards, were planning
to make an assessment to identify whether there are any
remaining needs. That I think will help us focus on what the
new engagement standards might be. Without that it would be
shooting darts against the wall and hopefully you hit the need;
I think our approach is logical and likely to move us forward
faster towards getting a product which people can understand.

15

Winter 2011

INTERVIEW

Now with the clarity project over and done with, and
with the review and compilation engagements at a fairly
advanced stage, are there any other projects on the Boards
agenda for the next two to three years?
First we need to follow-up on the implementation of the
Clarified ISAs. The standards are complete as far as lets
say their production is concerned. But are they being
implemented consistently in practice? Weve spent a lot
of time already providing support. For example there are
a number of video modules and implementation material
available on the IAASB website.
Review and compilation engagement standards are also
expected to take a considerable amount of time before we are
at the finish line. Assurance on sustainability reports will also
feature on the Boards agenda: what kind of assurance should
be given, what kind of work effort should be done, and what
should be emphasised in the practitioners report.
Then the Board will have to deal with the more explorative
projects that will have an effect on the future of the profession
and on our future. These include auditor reporting, audit
quality, auditing financial statement disclosures, etc.
Most definitely the Board will have an enticing and equally
challenging agenda for the years 2012 2014. I am pretty
sure that, as we were ahead of the curve when kicking off
our Clarity Project before the global crises, the Board will
keep its leading edge in the development of high quality
auditing and assurance standards that will be needed not only
by todays but also by tomorrows companies in meeting their
financial reporting needs.

Winter 2011

FEATURE

TRANSFORMING MANAGEMENT SYSTEMS

AND ACCOUNTING FUNCTIONS
TO MEET THE CHALLENGES
OF INFORMATION AGE COMPETITION

Part 1

The emergence of the information era, however, in the last decades

of the twentieth century, made obsolete many of the fundamental
assumptions of industrial age competition. It is very unlikely that
todays best financial frameworks capture all the dynamics of
performance in todays knowledge-based competition.

INTRODUCTION
Various management systems and methodologies have been developed
to address the multitude of issues facing organisations from one
decade to another. At the on sought of technological and industrial
developments, numerous books have been written full of advice and
suggestions about how to manage one business issue or another.
For the benefit of the readers, whom I appreciate, are constantly
bombarded with information from a multitude of sources, this two-part
article seeks to condense much management thinking and effectively
organise diverse insights in a practical manner.

The impact of the information era is even more revolutionary for

service organisations than for manufacturing companies. Many
service organisations, especially those in the transportation, utility,
communication, financial, and health care industries, existed for
decades in comfortable, non-competitive environments. They had
little freedom in entering new businesses and in pricing their output.
In return, government regulators protected these companies from
potentially more efficient or more innovative competitors, and set
prices at a level that provided adequate returns on their investment
and cost base. Clearly, the past two decades have witnessed major
deregulatory and privatisation initiatives for service companies
throughout the world as information technology created the seeds of
destruction of industrial-era regulated service companies.

As the first decade of the twenty-first century comes to an end,

contemporary management thinking has been profoundly reshaped
by the conviction that developing necessary skills to manage
organisational knowledge effectively is a prerequisite for sustainable
competitive success.
INDUSTRIAL AGE COMPETITION VS INFORMATION AGE
COMPETITION
Companies are in the midst of a revolutionary transformation. Industrial
age competition is shifting to information age competition. In the
industrial age, technology mattered, but, ultimately, success accrued to
companies that could embed the new technology into physical assets
that offered efficient, mass production of standard projects. During
the industrial age, multinationals such as General Motors, DuPont,
Matsushita, and General Electric developed an integrating device such
as the Return on Investment metric to facilitate and monitor efficient
allocations of financial and physical capital 1.
An overarching financial objective such as return-on-capital-employed
(ROCE) or Return on Investment (ROI) could direct a companys
internal capital to its most productive use whilst monitoring the
efficiency by which operating divisions used financial and physical
capital to create value for shareholders.
By the mid-twentieth century, multidivisional firms were using the
budget as the centrepiece of their management systems. In the 1990s,
companies had extended the financial framework to embrace financial
metrics that correlated better with shareholder value, leading to
economic value added (EVA) and value-based management metrics.
Today these principles are firmly entrenched in most industries.
Whilst the ROI calculation of dividing net income by assets employed
ignores a capital charge, EVA adjusts accounting net profit to factor in
an explicit capital charge by applying a business-specific and perhaps
even an asset-specific cost of capital. Businesses that are earning
above their risk-adjusted cost of capital are considered to be creating
shareholder value, whereas businesses earning less than their cost of
capital are destroying shareholder value. EVA addresses the defect in
a pure accounting income calculation that ignores the cost of assets
employed to generate accounting profits.

18

By: Anita Aloisio

Sustainable competitive advantage is no longer gained by merely

deploying new technology into physical assets rapidly and by managing
financial assets and liabilities. To steer todays organisations toward
excellent future outcomes it is vital to obtain an accurate understanding
of:
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FEATURE

Strategies that are not financially feasible or that do not yield adequate
financial returns cannot be appropriate strategies.
There three different strategies 2 used by organisations to differentiate
themselves in the market place are:
i. Product leadership.
ii. Customer intimacy.
iii. Operational excellence.
Organisations following a product leadership strategy must excel
at the functionality, features, and performance of their product
or service. Organisations following a customer intimacy strategy
will stress the quality of their relationships with customers and the
completeness of the solution offered to customers. Organisations
following an operational excellence strategy need to excel at measures
of competitive price, customer-perceived quality, and lead-time and
on-time delivery for purchasing.
At stage 2, organisations today need a language for linking vision with
strategic business planning. The building blocks are in communicating
strategy, managing roll-out and gaining feedback about the strategy.
The overarching mission of the organisation provides the starting
point; it defines why the organisation exits or how a business unit fits
within a boarder corporate architecture. Ultimately, success comes
from having strategy become everyones everyday job.
Accounting reports constitute one of the important ways that strategy
gets communicated throughout the organisation. Good accounting
reports in this early stage of the process are thus reports that focus
attention on those factors that are critical to the success of the strategy
adopted.
At stage 3, strategy needs to be translated to operational terms.
Michael Porter describes the foundation of strategy as the activities
in which an organisation elects to excel: Ultimately, all differences
between companies in cost or price derive from the hundreds of
activities required to create, produce, sell, and deliver their products
or services. Differentiation arises from both the choice of activities
to be undertaken and how they are performed .
It follows then that specific tactics as well as processes and systems
must be developed in support of the overall strategy. Financial analysis
is one of the key elements in deciding which tactical programs are
most likely to be effective in helping an organisation meet its strategic
objectives. At a tactical level, the critical issue is to understand what
the key value and cost drivers are.
Organisations can benefit considerably if management has a detailed
understanding of the value creation processes within the organisation
itself and the wider value network. An important factor to consider is
that costs and value creation are spread unevenly across the activities
in the value chain and value network. So some activities are more
crucial to value (or cost) creation than others but this will vary with the
type of business and with the circumstances in which it is operating.
Diagram 2 gives some examples of key cost and value drivers that
vary in line with strategic considerations dependent on the source.
Key cost and value drivers may change over time. For example, during
the introduction of a new product the key factor may be establishing
sales volume. Once the product is established in the market place,
prices and unit cost may be more important. During decline, improving
cash flow through stock and debtor reduction may be essential to
support the introduction of the next generation of products.
At stage 4, controls must be developed and introduced to monitor
the success of the implementation steps and continuously align the
organisation to strategy to succeed in meeting the strategic objectives.
Rather than having managing control systems, contemporary thinking
calls for a paradigm shift towards the implementation of strategic

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sub optimisation at the expense of broader organisational goals. It
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investment in an area that wasnt its core competency and later the
newly developed capability was outsourced. Such reengineering
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between different stakeholders and in relation to different strategies.
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implementation.
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drivers as illustrated in Diagram 4.

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Winter 2011

resource intensive than manufacturing underlining the importance

of salary structures. On the other hand, retailers are concerned with
stock turnover and sales volume per square metre, reflecting two major
drivers.
The extent to which assets and working capital are being stretched
is also a key consideration. Highly competitive organisations develop
competences in supporting much higher levels of business from
the same asset base than others. The mix of capital in the business
between debt and equity will determine the cost of capital and also the
financial risk.
The issues facing the public sector are very similar. The problem for
most public sector managers is that their financial responsibilities
are usually confined to managing their budget. They will usually
be doing this with little understanding of the other financial issues,
normally managed by the corporate financial function. There is a real
need for managers to be much more familiar with the impact of their
day-to-day management decisions on the wider financial health of the
organisation.
More importantly, due to the inter linkages and intertwined
complexities of todays economy, organisations have to move away
from management systems linked exclusively to financial frameworks.
New opportunities for creating value are shifting from managing
tangible assets to managing knowledge based strategies that deploy an
organisations intangible assets.
Navigating to a more competitive, technological, and capabilitydriven future cannot be accomplished merely by monitoring and
controlling financial measures of past performance. Realistically,
however, it is difficult to place a reliable financial value or measure on
an organisations value-creating activities from its intangible assets.
Undeniably, these are the very assets and capabilities that are critical
for success in todays and tomorrows competitive environment:
process capabilities; employee skills, competencies and motivation
and flexibility of employees; customer loyalty and relationships; data
bases and information technologies; efficient and responsive operating
processes, innovation in products and services and systems as well as
political, regulatory, and societal approval.
In the 1990s, the groundbreaking work of Kaplan and Norton 4 brought
to managements attention the need to measure performance in a more
holistic way. Therefore, organisations have to replace any narrow or
specific focus with a comprehensive view in which strategy becomes
a continual and participative process and the heart of management
systems. Kaplan and Norton came up with four perspectives for
strategic mapping 5 and a balanced scorecard was emerging as a
possible solution to the performance measurement problem. Parmenter6
recently increased the four perspectives to six.
The balanced Scorecard provides a new framework to describe a
strategy by linking intangible and tangible assets in value creating
activities. The old adage what gets measured gets done is still true.
Although, the scorecard does not attempt to value an organisations
intangible assets, it measures these assets, but in units other than euros.
The scorecard allows innovative organisations to build a new kind of
management systems having three distinct dimensions:
1. Making strategy the central organisational agenda through effective
communication
2. Creating incredible focus through a continual process of aligning
resources and activities to strategy
3.
Organising logic and architecture to establish linkages across
business units, shared services and individual employees
The Balanced Scorecard seeks to translate a business units mission and
strategy into tangible objectives and measures. The measures represent
a balance between external measures for shareholders and customers,
and internal measures of critical business processes, innovation and

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Winter 2011

FEATURE

contributions of the Balanced Scorecard is to highlight the opportunities

for driving financial performance through two basic strategies: growth
and productivity. The revenue growth strategy focuses on developing
new sources of revenue and profitability. On the other hand, the
productivity strategy focuses on cost reduction and efficiency by
focusing on the efficient execution of operational activities in support
of existing customers. Organisations that are in early-stage start-up
mode or see opportunity for extremely rapid growth will emphasise
objectives and measures from the revenue growth strategy.

The next perspective that needs to be considered is the customer

segment or niche market that the organisation chooses to serve.
Deciding which target group of customers, varieties, and needs the
company should serve is fundamental to developing a strategy. But
so is deciding not to serve other customers or needs and not to offer
certain features or services 7 .

Moreover, investing in, managing, and exploiting the knowledge

of every employee whilst maintaining employee satisfaction has
become critical to the success of information age companies. Both the
development of unique resources and core competences in parts of an
organisation may provide the springboard from which new strategies
are developed.
The second and final part of this article to be shown in the next (Spring
2011) issue of the Accountant will address the process to build a
scorecard; give practical examples of aligning objectives and measures
to organisational strategies and strategic maps; propose methods for
evaluating accounting functions whilst tests for evaluating investments
in technological change to meet the challenges of the information age
will be explored.

About the author

Anita Aloisio heads Nexia BTs advisory services department. Anita is a restructuring specialist with broad experience in cost-modeling and
the development and implementation of strategic management systems. Anita obtained an Executive Masters in Business Administration
from ENPC in Paris and the University of Edinburgh Business School in 2002. She also holds a degree in Accountancy from the University
of Malta. Anita holds a practicing audit warrant and is a Fellow of the Malta Institute of Accountants. In 1995, Anita was awarded the CIMA
prize for the best dissertation in Management Accounting. Prior to joining Nexia, Anita held a number of senior management and advisory
positions, in the private as well as the public sector and for several years was also heavily involved in the communications industry.
Part 2 of this feature will be carried in the forthcoming (Spring 2011) issue of the Accountant.

References
A. D. Chandler, Jr., The Visible Hand: The Managerial Revolution in American Business , Cambridge, Mass.:Harvard University Press, 1997and T. H. Johnson and R. S. Kaplan,
Relevance Lost: The Rise and Fall of Management Accounting, Boston: Harvard Business School Press, 1987
2
M. Treacy and F. Wiersema, The Discipline of Market Leaders: Choose your customers, Narrow your focus, Dominate your Market, Reading, MA: Addison-Wesley, 1995
3
M. Porter, What is strategy? Harvard Business Review, Nov/December 1996
4
Robert S. Kaplan and David P. Norton, The Balanced Scorecard: Translating Strategy into Action, Boston: Harvard Busiess School Press, 1996
5
Robert S. Kaplan and David P. Norton, Strategy Maps: Converting Intangible Assets into Tangible Outcomes, Boston: Harvard Business School Press, 2004.
6
David Parmenter, Developing, Implementing and Using Winning Key Performance Indicators, New Jersey: John Wiley & Sons, Inc., 2007
7
M. Porter, What is strategy?, Harvard Business Review, Nov/Dec 1996
1

21

FEATURE

BEYOND

Winter 2011

Marks & Spencer

By: Jeanette Calleja Borg

ECJ CASE LAW DEALING WITH THE FREEDOM OF ESTABLISHMENT

that the Court has initially confirmed already accepted ECJ doctrine. In
paragraph 312 the Court underscored that Member States should abide by
the freedom of establishment and in no way should they hinder companies
from establishing their business in another Member State.

INTRODUCTION
In the absence of direct tax
harmonisation rules, the European
Court of Justice (ECJ) has been
deciding on a number of cases in
relation to cross-border activities by
groups of companies. This article
will discuss a selection of ECJ Court
cases dealing with the principle of the
Freedom of Establishment in relation
to cross-border surrendering of losses
between Groups of Companies,
including permanent establishments,
as well as cases dealing with
deductibility of expenses/ charges
incurred by parent companies in
relation to their shareholdings in crossborder subsidiaries. Furthermore,
the ECJs approach in adopting the
principles developed in Marks and
Spencer1 will be examined.

THE ECJS DECISION IN

MARKS AND SPENCER
In Marks and Spencer the court
argued that it is discriminatory and
against the freedom of establishment
to restrict group loss relief of nonresident subsidiaries, when it is
available to groups of companies
wholly resident in the UK. When one
reads the ECJ decision in Marks &
Spencer it is immediately apparent

The Court however went further by imposing some restrictions and criteria
that need to be met by the subsidiaries before relief for their losses may be
claimed by the parent company in its host state. The Court felt it necessary
to create these restrictions so as to safe guard against the possibility of
double non taxation of income. The Court held that such restriction could
be justified if it was necessary to preserve the balanced allocation of taxing
powers between Member States, if the restriction was a means of preventing
double deduction of losses and if it safeguarded against tax avoidance.
These three criteria needed to be all present together and the restriction must
be proportionate. In Marks and Spencer the Court upheld that the UK rules
present at the time were not proportionate to the objective being pursued.

ECJ CASE LAW IN RELATION TO INTRA-GROUP TRANSFER

OF LOSSES IN EU MULTINATIONAL COMPANIES
Following the Marks and Spencer Case the ECJ has decided on two other
cases in relation to cross-border transfer of losses between groups of
companies, these being the case of Socit Papillion3 and that of X Holding4.
The circumstances in the X Holding case were very similar to that of
Marks and Spencer given that the case related to a Dutch company and
its Belgian subsidiary. Opposingly in the Socit Papillion case the Court
from the very beginning stressed that the question referred by the Conseil
dEtat (Administrative French Supreme Court) did not relate to the tax
consolidation of the intermediate holding, the Dutch company, itself, but of
the lower-tier subsidiaries. It is only in the X Holding case that there is a
situation of cross-border consolidation.
In both cases the Court held that the relevant French and Dutch regimes
were in breach of the freedom of establishment. The Court however did
not accept the French justification that the French regime was in place to
preserve the balanced allocation of taxing powers. The Court contended
that unlike the issue in Marks and Spencer this case concerned the taking
into account of losses recorded within a single Member State. Moreover
the Court emphasised that the restriction exceeded what was necessary
to achieve the coherence of the French tax system, i.e. the Court found
the restrictions present in the French regime as being disproportionate.
The French authorities also argued that by allowing tax consolidation in
this circumstance there was a risk of double deduction. The ECJ however
argues that there were other means to prevent this double deduction, such as
requesting the necessary information from the tax payer, or the French tax

25

FEATURE
authorities could utilise mutual assistance procedures to verify such
information.
Contrary to the decisions in Marks and Spencer and Socit Papillion,
the Court ruled in favour of the Dutch authorities in X Holding. The
residing argument was the fact that the Dutch fiscal unity allows the
parent company the liberty to decide which subsidiaries to include
or exclude from the fiscal unity. The Court referred to Marks and
Spencer (paragraph 46) and held that giving the companies the option
to choose in which Member State their losses would be deducted
would seriously undermine the balanced allocation of the Members
States to impose taxes.5 The Court thus found the Dutch tax regime
restriction proportionate in order to safeguard the balanced allocation
of taxing powers.
While in Socit Papillion the Court held that it was contrary to the
freedom of establishment to refuse the deduction of losses from a
group subsidiary, even if these were held through a company not
resident in France, in X Holding the court acknowledged that it was
contrary to the freedom of establishment to restrict the inclusion in
the fiscal unity of a non-resident subsidiary, but this restriction could
be justified in order to protect the Member States taxing powers.
In the latter case the Court has applied the argumentations brought
forward in Marks and Spencer to accept the concept of the balanced
allocation of taxing powers to satisfy the proportionality test. The
Court seems to be implying that the concept of balanced allocation of
taxing powers, even though this has never been properly defined, is
now enough to satisfy the test of proportionality.

ECJ CASE LAW IN RELATION TO SURRENDERING OF

LOSSES BETWEEN COMPANIES AND PERMANENT
ESTABLISHMENTS
The ECJ rulings dealing with losses of permanent establishments
(PE) to date have shown a trend in Court decisions in relation to loss
relief. The Court is perceived to accept the following circumstances
as justifiable reasons under community law for which loss relief can
be disallowed:
1. Restricting relief to losses from third countries is not against the
principle of freedom of establishment;
2. When the country where the PE is established allows for the
carry forward of losses against future profits.
Point one above was established in Stahlwerk6, where the Court
decided that when third countries are involved the principle of
freedom of establishment cannot be invoked. In Stahlwerk, a
German company had two loss-making permanent establishments in
the United States. Germany refused the deduction of the US losses
from the profits taxable in Germany. This was only accepted as a
justification by the Court since the US is not a Member State.
The Lidl7 and Krankenheim8 cases give rise to point two above. The
deciding factor in the Lidl case was that Luxembourg allowed for the
carry forward of losses by the PE that could be used against future
profits. In this case a German company was denied the deduction
of losses from a permanent establishment in Luxembourg on the
grounds that, according to the Luxembourg-German double taxation
convention (DTC), income from such a permanent establishment is
not subject to taxation in Germany. The Court first stressed that a
Member State cannot impose a measure which restricts the freedom
of establishment where a non-resident subsidiary has exhausted all
possibilities to offset, carry forward or carry back the losses incurred
in the Member State where it is situated. When the resident parent
company demonstrates to the national tax authorities that those

Winter 2011

conditions are fulfilled, it is contrary to the freedom of establishment

to preclude the possibility for the parent company to deduct from its
taxable profits the losses incurred by its foreign subsidiary.
Luxembourgs tax legislation, however, provides that a company
can carry forward its losses. In this case, Lidl Belgium benefited
from such a carry-forward in a subsequent year when its permanent
establishment generated profits. Accordingly, Lidl Belgium did
not demonstrate that the conditions for establishing the situation
in which a measure constituting a restriction on the freedom of
establishment goes beyond what is necessary to attain legitimate
objectives recognised by EC law were satisfied. Therefore, the tax
regime at issue was considered not to be in breach of the freedom of
establishment.
On the other hand in the Krankenheim case, the ECJ ruled in favour
of the country by allowing reintegration of losses of the PE being
previously deducted against the income of the parent, when the PE
makes a profit. The deciding factor in this case was that Austria did
not allow for the carry forward of losses. In this case the ECJ held that
when a permanent establishment makes a profit, a Member State may
provide for a tax re-integration of any losses which were previously
incurred by the permanent establishment and which were taken into
account by the parent company situated in a different Member State
when calculating tax due on its income. This is only acceptable when
the state, where the permanent establishment is situated, does not
confer any right to carry forward losses incurred by a permanent
establishment whose parent company is situated in a different
Member State, and where, under a convention for the prevention of
double taxation between the two states concerned, the income of such
an entity is exonerated from taxation in the state in which the parent
company has its seat.
The deciding factor for PEs seems to be whether carry forward of
losses is allowed. This factor is determined by the PEs Member
States tax legislation and not on the tax legislation of the Member
State where the parent is established, even though this latter Member
State is expected to provide relief for the losses incurred by the PE.
In practice this does not allow for a fixed set of rules as the Member
State where the parent company is established would need to look
at the legislation of the Member State where the PE is resident. This
creates an administrative burden which is very hard to maintain in
practice.
The availability of rules allowing for the carry forward of losses
seems to be crux of the Courts decision. One may argue that
harmonisation of rules in relation to carry forward of losses might
provide the solution. If the PE is considered by all Member States as
an extension of the parent company in another state, thus implying
that its profits/losses all belong to the parent company, then it would
be logical to tax all profits or give relief to losses in the Member State
where the parent company is resident. When sustaining that the PE is
an extension of the parent company one is stating that the PE cannot
exist without the parent company and therefore it is not a physical
entity on its own but must be considered as an integral part of the
parent company. It follows from this argument that the Member State
where the PE is resident cannot tax the PE as it has no taxing rights
over the parent company.
Member States might argue that the PE is earning source income in
their country and thus they have a right to tax that source income. It
is evident that a more focused and clear direction still needs to be
provided in order to assist multinationals with their strategic and tax
planning.

26

Winter 2011

FEATURE

CASES DEALING WITH DEDUCTIBILITY OF EXPENSES

AND CHARGES INCURRED BY PARENT COMPANIES
IN RELATION TO SHAREHOLDINGS IN CROSS-BORDER
SUBSIDIARIES
Following the decision on the landmark case of Marks and Spencer
in February 2006 the ECJ decided on the Keller9 case. Here the ECJ
held that non-deductibility of expenses related to exempt dividends
from a second-tier subsidiary located in another EU Member State
under the old imputation system is incompatible with the freedom
of establishment. In the Keller case the parent company tried to
deduct the interest on loans raised to acquire its immediate subsidiary
together with other administrative expenses. The German tax
authorities disallowed such a deduction, as the expenses mentioned
had an immediate and economic connection with tax-exempt income
received from the second-tier subsidiary.
The Rewe Zentralfinaz10 case is similar to the Keller case since it
also deals with a Member State, Germany, disallowing deductibility
of expenses. In this case Rewe Zentralfinanz, a German resident
company was the sole shareholder of a Dutch holding company,
which in turn had subsidiaries in other EU Member States. Rewe
Zentralfinaz depreciated at market value, the going concern book
value, of its participation in the Dutch company. The German tax
authorities however, denied such a write-down as a deduction for tax
purposes as the German tax rules restrict depreciation of holdings
in non-resident subsidiaries. This case was referred to the ECJ and
the Court held that this denial of immediate deduction for passive
participation violated EC law.
More recently in the Deutsche Shell case, the ECJ held that it is
contrary to the freedom of establishment for a Member State to deny
a head office the possibility to deduct a currency loss resulting from
the repatriation of the start-up capital of its permanent establishment
situated in another Member State, as such a loss can never, by its very
nature, be taken into account in the Member State of the permanent
establishment.
In this case a German company with an Italian PE suffers currency
losses with regards to the depreciation in the value of the start-up
capital. This currency loss was not deductible under German law
since it was deemed to be an expense directly attributable to the PE
income which was exempt under German law. The Court held that
while there was no duty of harmonisation in that a Member State is
not expected to draw up its tax rules on the basis of those of another
Member State, in order to ensure that there are no disparities in any
circumstances11, in this case the tax disadvantage related to a specific
operational factor which could only be taken into consideration by the
German tax authorities. The ECJ refused the German tax authorities
arguments on the grounds of cohesion of the tax system, balanced
allocation of taxing powers and double deduction and ruled in favour
of the company.
In all of the above mentioned cases (Keller, Rewe Zentralfinanz and
Deutsche Shell) the ECJ ruled in favour of the company making the
claim and held that a Member State should allow deductibility of
expenses as a result of a direct or indirect subsidiary even when the
expenses arise as a result of activities in another Member State.
On the other hand in OY AA12 the ECJ held that it is permissible for
a Member State to allow a resident subsidiary to deduct a transfer of
profits made under the intra-group financial transfer system only when
the receiving parent company is resident in the same Member State.
Although the non-deductibility of financial transfers made to parent
companies of other Member States constitutes a restriction on the
freedom of establishment, it is justified by the need to safeguard the

27

balanced allocation of taxing rights between Member States and the

prevention of tax avoidance and it is proportionate to those objectives.
OY AA applied to make a group contribution to its parent company,
however the advance ruling from the Finnish Central Tax Board stated
that such a contribution could not be tax deductible for OY AA. The
case was referred to the ECJ which decided in favour of the Finish
authorities on the grounds that the restriction was proportionate in
order to safeguard the balanced allocation of the taxing powers of the
Member States and also to prevent tax avoidance.
In all the cases mentioned the Court is recognising that the restriction
by Member States on the cross-border deductibility of expenses
and charges constitutes in principle a restriction on the freedom of
establishment as portrayed in article 43 of the EC Treaty. However,
the Court is reserving the right to scrutinise such a restriction in
terms of proportionality and the right of a Member State to safeguard
the balanced allocation of its taxing powers. Therefore, one might
argue that a restriction on the freedom of establishment arises when a
Member State cannot prove that the restriction was imposed in order
to safeguard the balance allocation of taxing powers and the Court
finds such restriction not to be proportionate in order to attain this
objective.

CONCLUSION
Member States have retained their sovereignty on the imposition of
direct taxes in their respective countries. However, Member States
need to exercise such power consistently with Community law. Apart
from the requirements of Community Law, Member States are also
finding that their power to impose direct taxation is being constrained
by ECJ decisions. This article has mainly focused on case law in
relation to cross-border group loss relief, surrendering of losses
between companies and their permanent establishments and cases
dealing with deductibility of expense and charges in cross-border
situations.
Marks and Spencer has left a number of unresolved issues. The
Court has failed to debate whether the decision in Marks and Spencer
refers only to tax regimes similar to the UK-pre Mark and Spencer
or whether the same reasoning can be extended to other tax regimes
or permanent establishment. Also, in Marks and Spencer the Court
only discussed terminal losses thus avoiding all argumentation with
regards to losses recapture.
It is immediately noticeable that in defending the freedom of
establishment the ECJ was not always consistent with the principals
established in Marks and Spencer. A case in point is the OY AA case
were the ECJ failed to consider the exhaustion of possibilities test as
developed in Marks and Spencer, resulting in a stricter enforcement
of Community Law, also taking into account the decision in the
Deutsche Shell case were the Court actually decided on the basis that
the PE could not utilise the currency losses in its resident Member
State.
In the Rewe case the court held that the balanced allocation of taxing
power was considered in Marks and Spencer in conjunction with
tax avoidance and double deduction and could not be taken on its
own merits, while the same Court accepted this argumentation as
providing the lack of proportionality in X Holding.
The Court applied the exhaustion of possibilities test as developed
in Marks and Spencer in the Krankenhein case in order to allow
the reintegration of the permanent establishment losses. The same
concept is also applied in the Lidl case. One can argue that principles
established in Marks and Spencer with regards to subsidiaries, are also
applicable for permanent establishment. Thus, it would be logical to

FEATURE
assume that the reverse is also true, that is principles applicable to a permanent establishment
situation would also be applicable to a subsidiary situation. However, the court in X Holding
held that that non-resident permanent establishments and non-resident subsidiaries were not in
an objectively comparable situation.
Indirect harmonisation resulting from ECJ decision is only targeting those Member States
whose tax regime or provisions are brought under the scrutiny of ECJ, either by the national
courts referring the case to the ECJ or by the Commission launching infringement proceeding.
Thus, one Member State might be subject to amend its tax legislation to conform with EC law
while other Member States would still hold back until their particular legislation is challenged.
A case in point are Malta and Cyprus whose legislation on group loss relief still reflects the UK
provision pre Marks and Spencer. Another important point is that the ECJ leaves it in the hands
of the national courts to interpret its decision, which may result in different interpretations of
similar if not the same issues.
As discussed above, leaving harmonisation for cross-border group loss relief in the hands of
the ECJ might result in stricter application of EC law for some Member States, which can
be considered as discriminatory. It is the authors opinion that a more direct and structured
approach needs to be adopted at EU level in order to harmonise cross-border direct tax issues.

Winter 2011

References:
1. Marks & Spenser Plc V Halsey (Inspector of Taxes)
(C-446/03) 13/12/2005, ECR I-10837.
2. Ibid. para 31Even though, according to their
wording, the provisions concerning the freedom of
establishment are directed to ensuring that foreign
nationals and companies are treated in the host Member
State in the same way as nationals of that State, they
also prohibit the Member State of origin from hindering
the establishment in another Member State of one of
its nationals or of a company incorporated under is
legislation....
3. Socit Papillion V. Ministre Du Budget, Des
Comptes Publics Et De La Function Publique C-418/07.
4. X Holding v Staatssectretaris van Financien (Case
C-337/08 ) 25/02/2010
5. Ibid para 29;
6. Stahlwerk Ergste Westig V Finanzamt Dsseldorf
Mettman C-415/06 06/11/07.
7. Lidl Belguim Vs Finanzamt Heibrown C414-06
15/05/08.

About the author

8. Finanzamtfr Krperschaften III in Berlin V

Krankenheim Ruhesitz Case C-157/07 23/10/08.

Jeanette Calleja Borg holds the position of Assistant Manager in the Business Tax Compliance and Reporting
Services Department of one of the largest professional services firms in Malta. Ms. Calleja Borg obtained a
Bachelor of Commerce, a Bachelor of Accountancy (Hons.) and subsequently a Masters in Financial Services
from the University of Malta. Currently reading for a PhD in International Taxation at the School of Law,
within the Centre for Commercial Law Studies at Queen Mary, University of London under the supervision
of Prof. David Southern and Dr. Christiana Panaji, she is also carrying out a research scholarship at the
Institute for Austrian and International Tax Law under the supervision of Prof. Michael Lang. Ms. Calleja
Borg is a certified public accountant and a member of the Malta Institute of Accountants, the Malta Institute
of Management and the UK Society of Legal Scholars.

9. Keller Holding V Finanzamt Offenbach Am MainLand C-471/04, 2006.

10. Rewe Zentralfinanz eG V Finanzamt Kln-Mitte
C-347/04, 2007.
11. Deutsche Shell GmbH V Finanzamt Fr
Grossunternehmen in Hamburg C-293/06, 2008, para. 43.
12. Oy AA C-231/05, 2007.

Cover:
www.miamalta.org

Winter 2011

Keeping Up
with the Times
Interview with IAASB
Chairman Prof. Arnold
Schilder

Photo: D. Aquilina

www.miamalta.org

Keeping Up
WITH THE

Times

Interview with IAASB Chairman Prof. Arnold Schilder

Beyond Marks & Spencer

ECJ case law dealing with the freedom of establishment

Winter 2011

Accounts Receivable Management

Integrity and Expertise

NEWS

The Accountant is published by

Network Publications Ltd
on behalf of
The Malta Institute
of Accountants.

8 Local Update & MIA News

32 IFAC, IASB and FEE News

INTERVIEWS AND LIFESTYLE

12 Keeping Up with the

Issued quarterly
Editor: Jonathan Dingli
Design: Vincent Ellul
Nicola Cherry
Sales Manager: Margaret Brincat

8NEWS

Times

Interview with IAASB Chairman Prof. Arnold

Schilder

30 Bitter Sweet!
36 A Walk Down Memory

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Lane ( 4 ) Interview with MIA Past

President Joseph N. Tabone

44 The SMP Point of View

Interview with William Spiteri Bailey

54

Spotlight on... Pierre

Cordina

18

25

Transforming Management Systems & Accounting

Functions...
By: Anita Aloisio

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FEATURES

12 INTERVIEW AND LIFESTYLE

54

50FEATURES

25

Beyond Marks &

Spencer - ECJ Case Law
Dealing with the Freedom of
Establishment
By: Jeanette Calleja Borg

39

Investment Appraisal: A
Refresher (Part 2)
By: Ray Sladden & Stephen Muscat

50

Accounts Receivable
Management
By: Josef Busuttil

TECHNICAL

58 Accounting solutions
60 IFRS, IAS, ISA Update
ADDRESS

4 Evolving World Evolving Role

Ben Scicluna

STUDENTS

62 ACCA Students notice

board

Winter 2011

LIFESTYLE

BITTER

SWEET!

By: Dr Gerald Buhagiar

Sugar and spice and all things nice springs to mind in this festive season as I settle down to write this
article. But come January, as we survey the damage done when we try to squeeze into a pair of trousers that
fitted so neatly in December, many of us begin to rue our feeding frenzy, like no tomorrow existed. These
thoughts bring me to the subject of todays article which concerns diabetes mellitus (DM).
DM, for the uninitiated, is a condition whereby the blood sugar is
higher than it should be. There are different forms of DM which
are broadly categorised into Types 1 and 2.
In Type 1, the insulin-producing cells suffer damage by a selfdestructive mechanism by the body called an auto-immune process.
This condition, affects a minority of diabetic patients, is generally
sporadic in whom it afflicts, tends to affect the younger patient
and generally has a rapid onset and progress, always requiring the
patient to go onto therapy with insulin. Insulin is essential for the
survival of such patients. As it is not the purpose of this article to
discuss the management of this condition, and there being little
that one can do to forecast or to prevent it happening, I will not
dwell further on this subject.
In Type 2, the insulin-producing cells in the pancreas fail to keep
up with the increased demands placed upon them. The condition
tends to become more common in the older patient, is often related
to overweight issues, often has a family history of the condition
and, whilst it may require insulin for better control, insulin is
rarely essential for the survival of the patient. The progress of this
condition is a fairly indolent one, starting several years previously
in a way that allows the patient to have a substantial say into the
direction of his future health.
The control of blood sugar forms a continuous variable during
ones lifetime and anyone destined to develop diabetes shows a
steady rise to the sugar level over a given time frame. In other
words, one isnt fine one day and poorly the next, although it may
seem to be so to the patient who depends on symptoms such as
tiredness, weight loss, itching, excessive thirst and urination to
guide him towards his doctor. For this latter sort of patient, it is
estimated that the state of diabetes would have been around for
up to 10 years, before the patient realises that something is very
wrong. Most regrettably this means 10 years of lost opportunities
and of bad health investments.
Ideally, DM should be a biochemical diagnosis, picked up the
condition in its earliest stages by blood testing, at which point
no clinical features are apparent. A normal fasting sugar is up
to 6mmol/ l but levels greater than 5.5 mmol/ l are considered
to fall in the pre-diabetes range. In DM, the fasting blood sugar
is greater than 7 mmol/ l. At this latter the seeds for the further
complications of diabetes begin to be sown.
Not all patients whose levels are pre-diabetic become diabetic
and medicine still isnt that accurate at forecasting an individuals
future. Notwithstanding, some people are more prone than others
to take this misdirected step. The enabling factors tend to be
situations where other family members have diabetes, where
the individual concerned demonstrates too much weight around
the waist (so, if the measuring tape reads more than 80cms in
a female or 94cm in a male, beware!), and especially so, if the

30

excessive weight is accompanied by a blood pressure greater

than 135/ 85, or there is an excessive amount of triglyceride fat
in blood (>1.7mmol/l) or a lack of good HDL cholesterol (<1.3
in women and <1.0mmol/l in men). These tell-tale values suggest
increasing stresses on a body already groaning under its workload. Diabetes is the body equivalent of pancreatic bankruptcy, in
which the whole purpose of medical management becomes one of
damage limitation.
The diagnosis of diabetes is often a shocker to patients, many a
time because many patients belong to families where diabetes
already exists and, they may have experienced the nastiness of
the disease complications. The prevention and control of these
complications necessitate tight and early control of DM. For every
day that passes in which the sugar is not controlled, an indelible
stain is left on ones health bringing one ever closer towards
complications. In full knowledge that complications can set in at
fasting levels >7, this is adequate reason to try and pick up diabetes
in its earliest stages. At these sort of levels, and probably even
at twice these levels, most patients would be blissfully unaware
of the fact that diabetes exists and that is why a regular blood
check-up might be the only way of highlighting the presence of
this insidious disease.
And what dreaded complications are we talking about? DM is
capable of affecting ones eye sight and leading to blindness; it
is a major cause for kidney failure accounting for most cases that
end up on dialysis; it impairs patients ability to fight infections;
it is a major contributor to problems with blood supply to such
important organs as the heart and brain, being a major contributor
to pre-mature heart disease and strokes; and, finally, it also affects
the health of ones nerves resulting in painful conditions of the feet
and legs, apart from risking that simple skin lesions go unnoticed
with possible loss of limb.
I may well imagine the reader squirm under the weight of
so much doom and gloom but, if youll excuse the pun, here
comes the sweetener. These complications are in large part
preventable but prevention depends on early diagnosis and
persistent tight control, not just of the blood sugar but also
of blood pressure and blood fats. Control is often assessed
through such blood markers as the HbA1c which should be kept
below 6.5%, whilst the bad LDL-cholesterol needs to be less
than 2mmol/ l. These are ambitious levels to aim for and it is
very common to resort to an armamentarium of medications
in order to fulfil these criteria. Notwithstanding the quantities
of medications necessary, lifestyle remains a crucial part of
medical management and this means strict adherence to a
diabetes diet which is essentially a low sugar and low fat diet,
adequate exercise, often to the tune of 5 hours per week, and
avoidance of smoking.
I wish you all good health!

Winter 2011

NEWS-GLOBAL
of the future at the World Congress of Accountants
2010.

New members appointed to the

IAASB
The Public Interest Oversight Board (PIOB), an
independent body that oversees the International
Auditing and Assurance Standards Boards (IAASBs)
activities, has confirmed a number of new and
reappointed members of the IAASB. The appointments
were recommended by the IFAC Board and are
effective January 1, 2011.
The new members of the IAASB are: Jean Blascos
(France), a practitioner in a transnational firm; Jianshen
Chen (China), a practitioner in a large national firm; and
Merran Kelsall (Australia), a non-practitioner and chair
of a national auditing standards setter. JohnArchambault
(United States), Jon Grant (UK) and Caithlin McCabe
(Australia) were reappointed for an additional term. In
addition, Diana Hillier was reappointed as deputy chair
of the IAASB.

IAESB proposes clarified standard

on Continuing Professional
Development
The International Accounting Education Standards Board
(IAESB) released for public exposure a proposed revision
of International Education Standard (IES) 7, Continuing
Professional Development: A Program of Lifelong
Learning and Continuing Development of Professional
Competence.
IES 7, drafted in 2004, introduces the concepts of
continuing professional development (CPD) learning
that develops and maintains competence to enable
professional accountants to perform their roles effectively
as relevant, verifiable, and measurable learning activities
and outcomes. The proposed redrafting aims to assist the
ongoing worldwide development of CPD systems and
compliance mechanisms. IAESB expects to increase
the opportunity for mobility of labour, and in so doing to
contribute to the global economy through these revision
efforts.

The World Congress closed with the final plenary

session titled Accountants in the Next Decade
Embracing Change and Seizing Opportunities,.
Chaired by IFAC CEO Ian Ball, the session looked
into how the recent global economic crisis changed the
environment for the accountancy profession; the impact
that increased globalisation will have on the profession;
how should the audit evolve to meet new needs; how
might the skills and competencies of accountants
change in the years ahead and whether accountancy
will remain an attractive option for young people in the
future.
Other items on the World Congress agenda included
integrated reporting and sustainability; the roles and
responsibilities of professional accountants; XBRL
and the communication of business information;
governance and international standards; the role of and
challenges for SMPs; IFRS and the convergence of
accounting standards; and Islamic finance.

IFAC announces GranTidstrm

as its new President;WarrenAllen
elected as Deputy President
IFAC announced that Mr. Gran Tidstrm of Sweden
has been appointed president of IFAC for a two-year
term ending in November 2012. The IFAC Council
also approved the nomination of Mr. Warren Allen of
New Zealand for deputy president, a role previously
held by Mr. Tidstrm.
A European representative to IFAC since 2000, Mr.
Tidstrm became a member of the IFAC Board in
2003, served as chair of the Planning and Finance
Committee and is a member of the IFAC Regulatory
Liaison Group. Mr. Tidstrm has more than 30 years
of experience as a public accountant with PWC in
Stockholm, Sweden, where he is a senior partner and
former chair.
Mr. Allen will serve as deputy president for a two-year
term, and also takes the role of chair of the Planning and
Finance Committee, which in conjunction with staff
develops the strategic plan for IFAC. He is a resident of
New Zealand and is a partner at Ernst & Young.

IASB and FASB report continued

progress in their work to converge
IFRSs and US GAAP and consult
on effective dates for convergence
accounting standards
The IASB and the US Financial Accounting Standards
Board (FASB) recently published a progress report
on their work to improve IFRSs and US generally
accepted accounting principles (US GAAP) and to
bring about their convergence. Since the last progress
report was published June 2010 the boards have
jointly issued major exposure drafts on Leases and
Revenue Recognition, completed the first phase of the
Conceptual Framework project and begun discussions
to seek to align their respective Financial Instruments
accounting proposals. The boards have also further
prioritised board time available to discuss convergence
projects. The progress report is available on www.ifrs.
org,
The IASB and the FASB also published documents
seeking views on when new financial reporting
standards resulting primarily from their convergence
work should become effective.
When finalising an IFRS, the IASB will identify a date
from which entities will be required to start applying
the new requirements (known as the effective date).
This date is often 12-18 months after the date the IFRS
is published. With a number of major projects planned
to be completed in 2011, the boards are seeking views
on whether or how to sequence effective dates in order
to reduce the burden to interested parties. In deciding
how to proceed, the IASB will consider the needs
of jurisdictions already using IFRSs as well as those
planning to do so. Feedback from the consultation
will inform the boards as they jointly develop an
implementation plan for those new standards that
helps stakeholders to manage both the pace and cost of
change.

IASB and EFRAG meet to discuss

work plan
The IASB and the European Financial Reporting
Advisory Group (EFRAG) met to review the IASBs
ongoing work. EFRAG is the private sector body
responsible for stimulating debate in Europe around the
evolution of IFRSs and providing input to the work of the
IASB, after appropriate due process, on behalf of Europe.

World CEOs say accountants Must

Embrace Change and Seize Opportunities,

Led by Sir David Tweedie, chairman of the IASB, and

Franoise Flores, chair of the EFRAG, the meeting
focused on the main projects that the IASB intends to
finalise in 2011. EFRAG recommendations on the
projects on Revenue Recognition, Leases, Financial
Instruments, Consolidation and Insurance Contracts
were discussed, with a particular focus on the need to
deliver high quality standards on a timely basis.

Chief executive officers of accounting institutes from

around the world shared their visions on the accountants

Representatives of the IASB and the EFRAG

emphasised their continued support for a single set of

World Congress ofAccountants:

Accountants in the next decade

32

Winter 2011

NEWS-GLOBAL

high quality global accounting standards, and noted

the role that the European Unions adoption of IFRSs
has played in encouraging other jurisdictions to adopt
international standards. They also highlighted the
importance of broad engagement in the standard-setting
process in pursuit of high quality standards that reflect
input from all stakeholders.

Trustees appoint Hans Hoogervorst

to succeed Sir DavidTweedie
The Trustees of the IFRS Foundation, the oversight
body of the IASB, announced the appointment of Hans
Hoogervorst as chairman and Ian Mackintosh as vicechairman of the IASB.
Mr Hoogervorst will succeed Sir David Tweedie on
his retirement as chairman of the IASB at the end of
June 2011. He is currently chairman of the Netherlands
Authority for the Financial Markets (AFM), the Dutch
securities and market regulator, chairman of the Technical
Committee of the International Organization of Securities
Commissions (IOSCO) and co-chair of the Financial
Crisis Advisory Group (FCAG), an independent body
of senior leaders formed to advise accounting standardsetters on their response to the global financial crisis. He
will step down from all his present positions in order to
join the IASB.
Mr Mackintosh, a former chief accountant of the
Australian Securities and Investment Commission,
has more than 30 years experience of national and
international accounting standard-setting. He is currently
chairman of the UK Accounting Standards Board and
chairman of the group of national accounting standardsetters, a body in which more than 20 national and
regional accounting standard-setting organisations
participate.

Wales (ICAEW, UK) as FEE President, and Andr

Kilesse from Institut des Reviseurs dEntreprises
Instituut der Bedrijfsrevisoren (IBR-IRE, Belgium) as
Deputy President, for a two-year term.
The General Assembly welcomed the activity report
of President Hans van Damme and expressed its keen
appreciation of his achievements over 2009-2010.
Philip Johnson praised Hans van Dammes
accomplishment and said I am delighted and honoured
to be elected as President of FEE: an organisation that
truly represents the whole accounting and auditing
profession in Europe. The next two years will be both
exciting and daunting. Changes in the profession
which will be brought about by the outcome from
the EC consultation into Audit Policy as detailed
in their recently published Green Paper, along with
developments in Integrated Reporting, XBRL, Review
and Compilation together with the implementation
of ISAs and the changing environment in Financial
Reporting, Ethics and Audit Oversight will all be
very demanding. However, these challenges will also
provide immense opportunity for the profession. I am
sure that my experience which has been acquired during
some 48 years in the profession will stand me in good
stead to influence the outcome of these matters over the
next two years. I very much look forward to rising to
the challenge and, through FEE, leading the profession
in Europe during this time of change. In the secretariat
at FEE, and through the volunteers from our member
bodies around Europe who work with the secretariat,
we have a very talented team with which to continue
our work to enhance the reputation of the European
profession around the world.
Philip was a senior partner in Deloitte LLP in the
UK until his retirement on 31 May 2007, where he
specialised in providing advisory and assurance services
to a number of significant audit clients. Philip was also
a member of the Deloitte team which investigated the
failure of Banco Ambrosiano in Italy and in 1991, he
was based in Abu Dhabi where he led the Deloitte team
investigating the collapse of BCCI.
Andr Kilesse was the President of the Belgian Institute
of Registered Auditors from 2004 to 2007 and was
elected as FEE Vice-President in December 2006.
Andr is chairman of BDO Belgium and is active in
different BDO worldwide committees.

FEE invites all stakeholders to debate

their expectations from statutory
FEE General Assembly Elects Philip auditors as part of its commitment to
Johnson as President and Andr advance the dialogue on audit policy
Kilesse as Deputy President
FEE (Fdration des Experts-comptables Europens
Federation of European Accountants) held its General
Assembly where the leaders of 43 accountancy
professional bodies from 32 European countries met
and unanimously appointed Philip Johnson from the
Institute of Chartered Accountants in England and

33

Following up from the release of its submission to the

European Commission consultation on audit policy,
FEE organised a seminar on stakeholders expectations
from statutory audit at the occasion of its General
Assembly. The accountancy profession welcomed this
constructive dialogue with high-level representatives
from the business and regulatory communities and sees

it as an essential step to continue enhancing audit value.

The seminar follows up from the Commissions
Green Paper on Audit Policy. In its response to the
Commission, FEE shared the objective of reassessing
and enhancing the value of audit and already indicated
a number of proposals that would contribute to that end,
including, for instance, the EU adoption of international
standards in the fields of auditing, quality control and
ethics.
FEE supported the further development of multidisciplinary audit firms to secure high-quality human
resources and properly advise businesses and public
authorities, more communication between external
auditors, internal auditors and the audit committee or
supervisory board, and, in regulated industries, better
three-way communication between external auditors,
supervisors and the business.
FEE agreed that the role of the auditor can be expanded
in the future and noted in particular the importance of
integrated reporting to help in the move to a sustainable
economy. FEE outlined that a well-founded discussion
with all stakeholders involved in audit policy will only be
achievable if it is based on a careful analysis of the current
audit model and its integration within the entire regulatory,
financial reporting and corporate governance system.

Public Debt and Cash Management

critical to sustainable economic
recovery says FEE
FEE issued a Paper on Public Debt and Cash Management
to increase stakeholders understanding, highlight the
importance of public sector accounting and call for
transparent and accurate reporting by governments.
In the current economic climate, governments have
introduced financial packages to ensure the stability of
financial institutions and ultimately the stability of their
economies. This has resulted in a significant aggravation
of budget deficits that need to be financed. This situation
is currently highly visible and has been worsened by the
funding problems that certain European countries face
and the necessity for the European Union to put in place
significant support programs.
As a result it has become even more important that
the implications of these measures on the current and
future financial health of governments are understood
and transparently reported. FEE has therefore looked at
public debt management, how it is operated by European
countries, and what the accounting and accountability
arrangements are.
The FEE Paper looks at how public debt and cash
management are organised, what the underlying strategies
and objectives are, how performance is measured and
what the reporting and audit requirements are across
Europe.

Winter 2011

INTERVIEW

A walk down

By: Catherine Mallia Bonavia

MEMORY LANE (4)

Interview with Joseph N. Tabone, MIA Past President in 1966 and 1982 1985
I used to study and work at the Bank from
where I left in 1952 to join Turquand Young
which was the only firm of Chartered
Accountants in Malta. I started studying
ACCA on my own which was very tough as
there was no study leave and no subsidies
to go abroad.
At the time there was the MIA and the
Malta Corporation of Accountants. The
Institutes members had positions of book
keepers and positions at the government
departments, such as the Inland Revenue.
The corporation was made up of a younger
generation of accountants, more active and eager to establish
the profession in Malta.
First I joined the Corporation and later the Malta Institute of
Accountants. I joined the Institute because there were more
members with connections in the profession. I had a vision
to have a strong image of the profession in Malta and started
making efforts to merge the two bodies. First I brought the
matter up with the Corporation who were agreeable, subject
that they will have equal conditions to the members of MIA
and that it will be one body. Then I approached the MIA and
they also accepted the idea, provided that the merged body
would retain the MIA name. And the rest is history Both
bodies substantially benefited from the merger. It would
have been extremely difficult for the government to have
talks with the two bodies and reach consensus on the issues
at hand. The merger was accepted by both sides and hence it
resulted in a united front.
The newly merged Institute continued to make progress in
regulating the profession. At the same time the Institute came
up with the idea that it was essential to develop courses and
introduce exams and it did not take long for the Institute to
have courses and exams in place. The intake of members and
students was subject to passing the Institutes exams.
In the early 80s, the Government set up a unit course for
BA Hons. in Accountancy. At that time, the Government was
sponsoring students from various departments and during the
summer holidays these students were attracted to work in
Government departments in non-accountancy related work.
As a result of this scheme, accounting firms were neither
sponsoring nor employing BA Accountancy graduates.
Various discussions were held with Hon. Wistin Abela, then
Minister responsible amongst others for the profession, in
which it was explained that the profession was preferring to
employ students who had the ACCA qualification.

36

The Government wanted the Institute to

go along with University in providing one
examination route. If we had to accept
this proposal, that would have meant
the end of our Institute - the Institute for
which we worked so hard to establish. In
fact, we had in my time started talks with
ACCA with the intention of having a joint
examination scheme. Following various
meetings and Council discussions, the
Institute had approached the University
for a closer working relationship but on
the principle of retaining two qualification
routes. Finally, a consensus was reached
that the Institutes syllabus would as far as possible mirror
that of the University and that of the Association of Certified
Accountants on condition that the Institute would be the only
body recognised by the government.
The Government then created the Accountancy Board and set
up a number of requisites including examinations on legal
subjects before issuing warrants. We also requested that the
Institute would be represented in the Accountancy Board and
to this date all Chairmen of the Accountancy Board have been
Members of the Institute. Here I wish to mention also that
although we were a very small body the Council has always
been made up of people with suitable qualifications eager
to consolidate the profession and to expand membership in
view of the fact that our small country now had to expand its
economy and the services of the Institutes members could be
very useful to the prospering of the economy.
It is very satisfactory to look back and being able to associate
your contribution to the role of the Maltese Accountancy
profession.

The Institutes first Members, 28 May

1965.

FEATURE

Winter 2011

a Refresher

PART 2

INVESTMENT APPRAISAL

AN OVERVIEW OF THE MORE COMMONLY USED TECHNIQUES

By: Ray Sladden and Stephen L. Muscat

This feature gives an overview of the various investment appraisal techniques.

The first part of this feature was published in the previous (Autumn 2010) issue of the
Accountant. The authors are Members of the Malta Institute of Accountants Professional
Accountants in Business (PAIB) Committee.
NPV PROFILE CHART

A conflict may result, as there could be a mis-match in the

results. One investment evaluation gives a higher NPV but
lower IRR while the other gives a higher IRR but a lower
NPV. These results are dependent on what discount rate is
being used. Thus, above certain rate one project seems to
be more rewarding in NPV terms then the other and viceversa below a particular rate.
If we are considering, say two projects with the same risk
profile but with different cash outflows and inflows, and
perhaps a different time period over which these will arise,
then one has to strictly:

The DCF technique will produce a NPV figure and an IRR

result. At this stage it is worthwhile constructing a NPV
Profile Chart. The Y axis showing the NPV, while the X
axis shows the Discount Rate. Reading the point where the
NPV value itself cuts the horizontal (Discount Rate) axis
gives the value of the IRR. At the point where the NPV
graph crosses the X axis it will produce the IRR; that rate
which the project will earn over its lifetime. Therefore, if
the cost of funds is known, then for any rate of interest
which the company has to bear, it would know whether
the project under review is worthwhile pursuing and what
margin of safety (the difference between the IRR and the
WACC) is available to the company. It follows from this
that, if the rate of interest being borne (WACC) is less than
the IRR, the NPV of the project is positive; on the other
hand if the WACC is greater than the IRR, the NPV is
negative. In brief:
The NPV approach asks if the NPV of cashflow less the
investment is positive at the current WACC
The IRR approach asks if the IRR on the project is greater
than the WACC
A further refinement upon the above is when a company
is considering two mutually exclusive projects, both
producing a positive NPV and an IRR over the WACC.
Which project should the company go for?

The preference should be for the project with the higher

NPV - this can be proven by working on the incremental
yield of the entire cash being invested. If the resultant NPV
for an incremental investment is positive at the companys
WACC the additional investment is justified by the
incremented benefit which represents the additional IRR
over and above the WACC for the increased investment
being made and of course the extra cash return being
earned.
The issue here however is the weakness of the IRR method
which is that it measures a return in relation to the size
of the investment, but it does not consider the size of the
investment itself and hence the size of the return.
To quote Carsberg, the weakness of the basic IRR
calculation is that the IRR may be regarded as an average
with respect of size. It suffers from the disadvantages of
averages as indicators of performance, that, the addition of
the good to the very good is worthwhile, but will lead to a
lower value of the index. (IRR)

39

Winter 2011

FEATURE

INVESTMENT APPRAISAL A REFRESHER

Of course as long as both IRRs (that of the basic case and

the incremented cash outflow) exceed the WACC then both
investments are justified. This, as opposed to the alternative
project where IRR overall is higher.

40

In conclusion where there are mutually exclusive projects

of the same risk profile and there is no capital rationing the
project to be chosen is the one with the higher positive NPV
discounted at the companys WACC.
Yet another positive factor for the NPV method over the IRR
one is when it comes to projects with outflows and inflows
that are mixed, so that the project will require inflows and
provide outflows at regular times during its life. In this
case the project will have more than one IRR and this will
definitely be confusing. The NPV method will give clear
advice and hence prove superior to the IRR method, which
at times is seen under a more favourable light as most
entrepreneurs can readily grasp the concept of rate of return.

OTHER RELEVANT ISSUES

Terminal Values
When working out future cashflows one is faced with the
dilemma of how further into the future to forecast. Things
may get so nebulous that any long term future forecasts may
be no more than guesstimates. Moreover, the further out one
goes the more the figures are prone to the economic vagaries
and cycles we by force have to face up to. Many a time
these circumstances can play havoc to the terminal sum
being forecasted. An even more difficult number is the rate
at which to discount this figure at. This is usually calculated
as the net cash inflows for the last year of project operation
being forecasted, discounted at the WACC less the perceived
inflation rate (growth rate). The resultant number may
have a heavy influence on the NPV result and hence on the
investment decision being taken. This should represent what
the investment is worth at that point in time (the estimated
re-sale value) discounted to todays value.

IAS 36 Impairment of assets

The DCF technique is also frequently used when assessing
an investment for impairment. IAS 36 deals with and
necessarily utilises DCF techniques to measure the value
in use of the asset being valued and tested for impairment.
As the basic principle here is to ensure that assets are not
carried at more than their recoverable amount, the value in
use of such an asset represents a pivotal point. The approach
normally resorted to, i.e. the DCF method, brings us back
to the importance of being as accurate as possible when it
comes to forecasting future cashflows and the discount rate
itself.

Behavioural Analysis
One cannot conclude this article without bringing into play
the qualitative aspects in dealing with investment analysis.
This represents the analysis process based on data and
judgement on risk and uncertainty. Our emotive instincts
play an important role in this decision making process,
possibly in a very automatic and subconscious manner we
will find ourselves intuitively using what is after all human
nature. Behavioural analysis therefore lies at the centre of
investment analysis.

One has therefore to be on guard when judging and deciding

on investment alternatives as the psychology within us will
be playing a role. By way of example it is assumed that we
are rational in our analysis without a bias, dispassionate
and logical with perfect information coming our way as the
catalyst to make our decisions. In actual fact this is hardly
true as we are influenced by preferences, connections,
personal interests, etc., and the data at our disposal is usually
far from perfect.
One other factor worth keeping in mind is that we are
usually deciding on an investment route by comparing one
alternative against another and at times, what you see is not
always what you get. We need to look behind the figures
produced and use our emotional intelligence in a productive
yet unbiased fashion hard to judge at times.
Our objective in dealing with investment decisions is to
optimise on the return in the shortest possible time assuming
risk which perennially comes into play. The three constant
factors, Money, Time and Risk are intertwined in all
investment decisions so the cumulative effect of these three
elements needs to be in the investors favour if one is to
make the correct decision. This itself needs to cater for the
particular position the investor is in, and the time horizon one
has at his disposal. A long-term investor may be considering
a company with a competitive advantage in a stable industry,
producing growth over the foreseeable future. On the other
hand, a day trader will be looking at fast moving securities.
Therefore, to better understand investment decision-making
and the required technical analysis the astute investor needs
to better decipher the individual investors perception,
sentiment and emotive instincts as these combine with
financial analysis in order to reach the best outcome.

Uncertainty
We have dealt with risk, however, we also need to pay
particular attention to uncertainty which is somewhat
different to risk. Each project has its own risk parameters,
but the outcome of that project can also be uncertain as to the
extent it will generate the result forecasted with that given
level of risk. This result with its relative level of risk can still
be above, or below the most likely outcome. Uncertainty is
therefore a perennial issue and affects both cashflows and
discount rates. This phenomenon represents situations
where probabilities of outcome are unknown. The cashflow
forecasts produced are always subjective, but they are more
so because of uncertainty. One therefore needs to assess or
quantify a projects level of uncertainty and thus provide
more relevant information to the decision maker. This
can be achieved through either a probability or sensitivity
analysis approach.
An example would be, varying the risk premium attached
to the project being evaluated through the Equity Market
Risk Premium Rate. Alternatively, one may take the
approach of evaluating the most likely, optimistic and
pessimistic alternatives and allocate occurrence probability
to each outcome thereby identifying the risk attached to
each possibility. Through quantitative methods one can
also produce a standard deviation and the coefficient of
variation for the project being analysed thereby assessing the
dispersions around which one would consider the most likely
outcome and hence the level of uncertainty. Of course, the
higher the results the more uncertain the projects outcome.

FEATURE
Carrying out sensitivity analyses by varying one element
of the proposed projects uncertain yet material variables
and comparing outcomes, will enable the decision maker
to judge the consequences of any of the elements being
varied occurring in real life, hence the risk being carried
when judging in favour of one project versus another.

CONCLUSION
Generic Issues
Malta is no different to other countries. Investors, use
the same methods and tools available as amply described
and discussed in this article. Maltese companies, both
with local as well as foreign shareholders apply the tools
available to different levels of extent, mostly depending
on the quantum of the investment as well as the size of the
organisation concerned.
Most companies in Malta are small and medium enterprises
(SMEs) and some do not even having their own accounting
department and hence rely on individual accountants or
firms for services including investment analysis. In most
cases, those responsible at the SMEs would have run their
own numbers using the crude payback period approach.
Sometimes the information and results of these workings
would be fuelled into the models discussed above and
advisors would then be able to give a more analytical
precise result to the exercise. The results may confirm
or otherwise the original sense of direction, however, the
decision would ultimately lie with the owner/s.
There have been, and will continue to be, instances when
an owners decision would bypass any financial advice.
Despite this, at times projects may still be successful,
proving the originators instinctive pull, although this may
not be the correct way of going about matters. In the case
of the larger Malta based companies, where one usually
finds a mix of foreign and local shareholders and large
local companies with very strong entrepreneurial skills
these would run similar workings to those for SMEs,
however, their wider experience of the market as well
as professional advice they seek would make for a better
investment appraisal exercise. In the case of the foreign
owned organisations, especially those that form part of an
international group of companies, these would most likely
have guidelines and policies for investment appraisals,
complete with indicative IRRs. Some would also provide
intricate models to be completed that would give resultant
payback periods, discounted cash flows, etc.
The main issues however will always be similar, i.e.
collation of all the required data to be able to make a
correct adjudication, together with the assumptions made.
Most accountants working in Malta would have at
some stage in their working experience been exposed to
investment decisions, being either machinery or equipment
to be acquired, or projects to be developed. The role of
the accountant is to assist stakeholders in making the right
decisions. In fact, a quick glance at the websites of some
local accountancy firms shows that they are active in this
field. Seeking advice is always commendable particularly
in case of large investments.

Winter 2011

Specific Issues
Some personal experiences, applying the above to everyday
life situations brings to the fore some practical difficulties.
To start with when computing the cost of equity, on the
way to arriving to the WACC one has to factor in Beta.
Due to lack of proxy comparatives locally one has to resort
to international data and indexes which may not mirror the
local experience. Therefore, a compromise will have to
be made when computing the cost of equity for the project
being considered. The Beta chosen is usually a mere
approximation.
In our strategic approach to investment appraisal we will
be running a quantitative model towards a commercial
decision making process, in so doing we have to be
careful to consider only those relevant cashflows which
will impact our analysis. Past events and cash outflows
often referred to as sunk costs will not affect a decision
of whether to pursue an investment alternative and should
therefore be ignored. We must be capable of filtering out
the data at our disposal so that we make use of only the
information that is directly relevant towards the decision
to be taken. Opportunity costs need to be considered, these
are usually priced at market values and represent the cost
of using a resource for the proposed investment and not
for an alternative, such as, the choice between using a real
estate asset for a manufacturing process as opposed to
building and selling the property.
One other factor needing deep consideration is that of
valuations prepared based on Value In Use ignoring the
alternative use to which the asset being valued can be
made to. This issue is extenuated during periods of high
economic volatility when the value of the asset (typically
real estate during the more recent economic crisis) is
depressed because of the state of the market. Ignoring
other possible uses will not do justice to the asset being
valued and will dent the financial statements of the
company concerned through a possible provision for
impairment or may even lead to the wrong decision being
taken as to where to invest.
Another case which would need dealing with in a manner
which adds onto what we stated in the previous paragraph
refers to when one is considering the acquisition of a
business which may have other assets which are not actually
being used for the creation of the business. This may take
various forms, by way of example, consider a company
being sold as a going concern with a mature business, yet
also enjoying other assets not put to the business use. It is
suggested that in valuing the business these assets are cast
aside when producing a DCF of the business cashflows. In
addition if the company being taken over has debts, these
also need to be analysed as to what refers to the business
and what if any, refers to the idle assets not forming part
of the business. Once this is established the NPV of the
business needs to be adjusted for the debt attributable to it.
If the idle assets are also being taken over, then these too
must be adjusted by deducting the debt element used for
their financing. The asset value used for the latter assets
refers to the market value of these assets, which value may
be more or less than the carrying value in the accounts.
Finally there is the herd effect which at times we may all
fall victim to. The investment world is replete with cases

41

where investors blindly follow a trend to invest in areas

where their peers may have been successful. This is not
necessarily so. Big time investor Warren Buffett pointed
out You always have three Is in investment circles, first
the Innovator, then the Imitator, then the Idiot so let us
all be mindful.
There are numerous examples and the above are only a few
of these. There is no recipe-style of analysis and each case
has to be diagnosed on its own merits. Yet the principles
set out above are applicable to a very wide spectrum of
circumstances and this makes the techniques described
above so useful.

Winter 2011

INVESTMENT APPRAISAL A REFRESHER

FEATURE
References

1. Investment Appraisal Techniques - Australia

Institute of Accountants
2. International Federation of Accountants Project
Appraisal Using Discounted Cash Flow June
2008
3. Property Valuation, the Carsberg Report 2008
4. Behavioural Technical Analysis an introduction
to behavioural finance and its role in technical
analysis Paul V. Azzopardi - 2010

About the authors

u Ray Sladden is a Certified Public Accountant and a fellow of the Malta Institute of Accountants. He is also an
associate of the Institute of Financial Services, a member of the Association of Corporate Treasurers and has
undertaken post graduate studies in finance and management. Ray is the Group Finance director and company
secretary of all the companies within the Tumas Group, sits on the board of three of the Groups subsidiaries and
is an executive member of the Group companies management committees. He has also held a number of other
directorships in various companies within the airline, hospitality, insurance and finance sectors.

u Stephen L. Muscat is a Fellow of the Malta Institute of Accountants, and a certified public accountant. He is the

Chief Financial Officer and Company Secretary of Liquigas Malta Limited and Gasco Energy Limited and he spent
over fifteen years in the manufacturing industry prior to that. Stephen also holds a number of directorships in other
companies and is currently on the Council of the Malta Employers Association, where he also holds the post of
Honorary Secretary.

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42

Winter 2011

INTERVIEW

THE

SMP

POINT OF VIEW
Interview with
William Spiteri Bailey
By: Catherine Mallia Bonavia

William Spiteri Bailey, 44 years old, married to Karen, with three children,
Jeremy aged 14, Martina aged 13 and Mikela aged 11, residing in Pembroke for
the past 19 years since he got married.
What was your dream job when you were a young boy? Was
the accountancy profession always your preferred option?
Have you ever considered another profession?

When I was promoted to a senior level, I took full responsibility

for the conduct of a particular audit, reporting straight to the
supervisor or assistant manager in charge of the job.

When I was young I was always better in the number subjects.

So somehow, it came natural when I was going up to Form 3
to choose Accounts. However during 6th Form, I was a student
worker at Mid-Med Bank and at the time I started considering
a career in banking.

On being promoted to supervisor, I started building up

a portfolio of different jobs for which I was completely
responsible and on which I reported directly to the partner or
manager concerned. During 1991 I was also responsible for an
audit of an American oil drilling company which had set up a
branch to drill in Maltese waters.

At what point in time did you opt for a career in the

accountancy profession?
After our term at Mid-Med Bank was over and we had not been
offered an indefinite contract, I opted to go back to my Form 3
decision and pursue a career in accounting.
Any previous work experience prior starting your own
business?
Following the student work phase at Mid Med Bank where I
was assigned to the Hamrun and Bugibba branches, I joined
Perfecta Advertising Limited, one of the largest advertising
agencies, as an accounts clerk. It was at this point in my life
where I started my MIA course. Three years later, when I was
advancing in my exams, I decided to join Naudi, Giorgio,
Leone Ganado which eventually became PriceWaterhouse. I
started off as an audit assistant and was assigned to clients in
a wide range of industries, in particular, the manufacturing,
tourist, shipping, and banking sector.
Following my promotion to semi-senior my work responsibility
increased drastically as, in addition to the duties of an audit
assistant, I was also in charge of preparing the relevant audit
programmes for the particular section(s) of the job to which I
was assigned. I was also at times responsible for a team of audit
assistants assigned to the relevant section(s).

44

The firm had also introduced me to computer assisted audit

techniques and other computer applications.
In February of 1992, I joined Big Bon Group of Companies
as a Financial Controller. My responsibilities included
senior management, financial and administrative duties,
and coordinating and supervising the groups financial and
management accounting functions. Further to the above, I
was also in charge of eleven companies coming from various
industries varying from the manufacturing industry to the retail
industry, from the import industry to the construction industry,
and the tourist industry; preparing and interpreting final
accounts for audit purposes, periodic management accounts and
reports, cashflow projections and feasibility studies, reviewing
and advising on improvements to control systems, attending
meetings and liaising with third parties such as banks on
financial matters and advising management on the best possible
alternatives on investments and business opportunities.
What gave you the plunge to start your own business? Did you
take long to decide?
I had been considering going into private practice for quite
some time, but it was exactly in 1996, when our first child
Jeremy was born and my wife was still working as a Financial
Controller with another group of companies. We both reached a

INTERVIEW
mutual consensus that it is a now or never decision. I resigned
from the post of a Financial Controller and set off to start
the practice in a small room within my brothers office in
Birkirkara with a desk and a cabinet and just two small audit
clients.
What were the challenges that you faced at the time? Did
they go beyond your expectations?
To be honest, due to the fact that I started off with only two
clients, I thought that the challenges would be bigger and
it would be more difficult to establish myself. Through my
previous employments, I had made a number of contacts with
different bank managers and other business individuals and I
ventured into going round making contacts and offering my
professional services. Moreover, whilst sitting down in my
office I embarked on preparing a number of templates which
I would use in the future during audits, feasibility studies, etc.
It only took a few months and within a year I was working
long hours including weekends.
Are those challenges, the same challenges that you have
today?
The challenges today are quite different from the challenges
in the 90s. From 1995 onwards, that is after the introduction
of VAT, our profession started to advance and become more
specialised at a faster rate. Today the main challenge is to
keep abreast of the changes happening in the different spheres,
that is VAT, Tax, Accounting, Audit, etc. All have their own
rules and regulations, which are constantly changing due to
circumstances happening around us. At the same time, clients
expect us to be up to scratch and give them the right advice
and in a timely manner. This is not always an easy task.

Winter 2011

price tag. The good thing about this is that it is only available
to MIA members.
When I attended the FEE/CNDCEC SME/SMP Congress in
Venice, I conceived some other interesting projects for the
Institute and for SMPs. I am still formulating these in my
mind while being on the lookout at what other countries are
doing.
Work, chairperson of the SMP Committee & family life. How
do you strike the balance?
I must say that I have great support from all the staff members
at the office and that includes my wife who is also my partner
in the Firm.
Although I work long hours during the week and balance
between work and the Institutes Committees, I leave the
weekends - that includes Saturdays and Sundays for family.
Usually Saturday morning means putting my chauffeurs hat
and driving our son Jeremy to and from football training, our
daughter Martina to and from swimming, and our daughter
Mikela to and from basketball. Usually there is also an Under
15 Youth FA League match which I attend to watch my son
play for Melita FC every other weekend. Sunday is usually
a more relaxed day where we spend the time together as a
family.

Apart from your work, you are also the Chairperson of the
SMP committee.
Yes, I am also Chairperson of the SMP Committee besides
a member of the Council and of a number of other subcommittees within MIA. I have been a member of the SMP
Committee since its inception quite a number of years back
now. However when I was appointed Chairperson, my main
aim was to get the SMPs closer to the Institute and help the
Institute give value to the SMPs. In this regard, there were
a number of initiatives including the organisation of SMP
Forum, the launch of the ACCA help line and last but not least
the collective Professional Indemnity Insurance which will
mainly benefit SMPs.
The idea of initiating the SMP Forum for SMPs on a yearly
basis was to provide a listening platform for SMPs, where the
Institute listens and identifies the challenges and worries of
SMPs and explore how it can assist. Following the first SMP
forum which took place in February 2010, five SMPs were
invited to attend a specifically dedicated Council meeting to
discuss the outcome of the Forum and in which various actions
were taken by the Institute to address these issues. The second
SMP Forum will take place on the 16 March 2011.
I consider the Indemnity Insurance project as my baby,
towards which I spent quite a number of hours meeting with
different insurers and insurance brokers. Together with the
other committee members, a series of meetings were held with
Mediterranean Insurance Brokers (MIB) to create a package
which includes as many areas of the accountants professional
services as possible, while making sure that the premium is
kept lower than others in the market. We finally managed, and
today we have a package which offers better cover at a lower

What is the motto in your life that keeps you going?

Life is short, do what you have to do, however always do so
with honesty and integrity. This is something I learnt from
my parents who always practised what they preached in the
different roles they led.
Any advice that you wish to share with other people in the
profession
It takes long to build yourself, but everything can fall apart
in seconds. The trick is never to fail being honest and to do
everything with integrity. Moreover, never let your position /
qualification / post get to your head and forget those around
you. Treat everyone as a person, with respect and if possible
with a smile!

45

EVOLVING WORLD EVOLVING ROLE

Winter 2011

ADDRESS

It was a pleasure to see so many of you at the Institutes sixth Biennial

Conference last month, which focussed on the evolution of the role of
the local accountant over the last fifty years or so. To assist in this
endeavour, we had an outstanding line up of forty local and foreign
speakers and panellists. The objective of course was not to organise
a nostalgic trip down memory lane. More importantly the objective
was to provide guidance to the Institute as to the manner in which the
local accountants role should continue to evolve in the coming years
in order to remain relevant and effective within the context of an ever
changing economic, regulatory and professional landscape.

It is sometimes said that it is not the most intelligent among

us that succeed, but the ones most responsive to change. In
briefly running through the long list of key professional and
regulatory changes over the last 20 years or so, it strikes me
how great a challenge it has been for all of us to keep afloat
when on the receiving end of the seemingly never ending
waves of change, and probably particularly so for small and
medium sized firms in general practice.
The conferences opening session included a tribute to
the pioneering years of the local profession leading to the
establishment of the Malta Institute of Accountants as we
know it today. The 200 participants were most appreciative
of the participation of John Falzon who recalled in his
address the work that he and his colleagues performed in
establishing the Malta Corporation of Accountants in 1954,
the background that led to the subsequent merger of the
Corporation and the Malta Institute of Accountants, and
how to his surprise he was elected as the first president
of that newly merged body in 1965. Joseph Tabone,
another pioneer of the Institute, followed by recounting his
contribution to the merger as a result of his membership of
both bodies, and how the Institute immediately set about

working hard to establish a professional examination

scheme for aspiring accountants in 1967, and the difficulties
and challenges that were encountered in achieving and
maintaining that goal. With reference to more recent years,
Tonio Zarb outlined the developments in establishing the
Institutes joint examination scheme with ACCA and the
Institutes partnership with BPP on tuition services in 2003,
while Frederick Mifsud Bonnici concluded by recalling the
Institutes leadership on the adoption of IFRSs and ISAs in
Malta in 1995.
The second conference session sought the perceptions
of the business community on the role and relevance of
the accountant. A series of interviews with sole traders,
medium sized and large businesses was used to introduce
this session and to serve as a basis for debate by a panel
consisting of professional accountants in business, large
employers, SMPs and partners in larger audit firms. A
number of interesting points were raised in this session,
in particular on the positive perception of the value added
provided to business by professional accountants, and
the importance of soft skills in creating the successful
professional accountant. On the latter point, the Institute

ADDRESS
will ensure the inclusion of appropriate content in the Institutes continuous
professional educational programme.
The conference session that followed sought the perceptions of members of
other professions who interact with accountants in the ordinary course of
their work. Accordingly the panel consisted of prominent representatives
from the notarial, architectural, banking and legal professions. During this
session, the President of the Kamra tal-Avukati (Chamber of Advocates)
mentioned the advanced stage of preparation of a proposed Bill to regulate
matters affecting the legal profession. This is partly to react against any
possible excessive commercialisation of legal services as is happening in
some overseas countries whereby legal services are made available within
premises such as supermarkets, a development at times informally referred
to as the Tesco effect. He also expressed strong reservations on the
legality of the provision by lawyers employed with audit and accountancy
firms of legal services that go beyond the accountants traditional scope of
services such as taxation. No doubt, such matters may be the subject of
further debate and discussion over the near term.
Integrity and expertise are the two pillars on which our profession is built,
balancing the private interests of members with the public interest of those
whom they serve. Accordingly it was fitting for the fourth conference
session to focus on professional ethics. This was introduced by a keynote
speech delivered by His Excellency the President of the Republic, Dr.
George Abela. It was indeed an honour for the Institute to welcome His
Excellency to the conference. Dr Abela has had a long and distinguished
professional career in the legal field, and he serves as a role model to
those who wish to aspire to the qualities of integrity and expertise, while
remaining close to those within society who are in need of help.
Day two of the conference opened with a focus on EU developments.
The panel consisted of MEP Louis Grech, the Deputy President and the
CEO of the European Federation of Accountants (FEE), the Chairman of
the Accountancy Board and the Maltese representative on the European
Commissions Accounting Regulatory Committee. As anticipated, the
EC Green Paper on Audit Policy: Lessons from the Crisis dominated

Winter 2011

the debate. This helped to bring the far-reaching effects of some of the
proposals in the Green Paper to the attention of MEP Grech, who also
holds the role of Vice Chair of the Committee on the Internal Market and
Consumer Protection in the European Parliament.
The closing session considered the way in which accountants overseas
have adapted to their own changing professional landscape, for example
by promoting alternative service offerings and developing tools such as
dedicated practice software to help them give a better service. Dr Helmut
Klaas from the German Institut der Wirtschaftsprfer gave an overview of
a forward-looking project that the German Institute has undertaken in this
regard. Dawn McGeachy from CGA-Canada spoke about the Canadian
experience, in particular on review engagements which have been provided
in Canada as an alternative to a full scope audit for many years. Philip
Johnson, FEE Deputy President, spoke in the main on the future of XBRL
and the role that the profession will have in that respect. Sylvia Tsen,
Director Quality and Member Relations at the International Federation of
Accountants, spoke on the importance of SMPs in servicing SMEs, how the
former should adapt to match clients expectations and perhaps consider
specialisation, and how IFAC is supporting SMPs in this evolution through
its Member Bodies.
All of the above provides a vast amount of quality input to the Institute to
inform and influence the formulation of its priorities and policy direction
over the short, medium and long term. This is a challenge on which past
Councils have delivered successfully, and to which the current Council
is committed to deal with responsibly in order to further advance the
Institutes profile and effectiveness in the years to come. As I mentioned in
the opening conference address, Maltas auditing and accounting standards
have been ranked by the World Economic Forum as the 8th best in the
world in its latest annual Global Competitiveness survey comprising 139
countries. This is an outstanding benchmark that is the result of the hard
work put in by the profession and the Institute in past years, and is to serve
as a guiding beacon as to the level of excellence that we are to strive to
continue to achieve as a profession.

Winter 2011

FEATURE

ACCOUNTS
RECEIVABLE
MANAGEMENT
By: Josef Busuttil, Director General
Malta Association of Credit Management (MACM)

INTRODUCTION
Money costs money. Granting credit to customers does not come for
free. It is an expense to the supplier granting it or to the customer
receiving it, or to both. Credit carries also an element of risk which
the supplier should take into account prior to saying yes to credit
applicants.

There are four major components, which consist of:

1. Credit Sales Approval
2. Invoicing / Billing
3. Past Due A/R Management
4. Communication
The Sanchez Profit System Credit Cycle Mode

But, can businesses do without granting credit?

Statistics show that:

- 80% to 90% of business-to-business transactions (depending on
the industry) involve payment at a later date and credit terms
are often extended.
-
Accounts Receivables are one of the largest liquid asset
representing on average 40% of the total assets of the
organisation (depending on the industry).
- A major concern for Maltese businesses, especially SMEs, is
late payment which is affecting their cash flow and profit. Late
payment is also hindering economic growth in a number of
sectors and industries.
- Credit is becoming more rationed by the finance houses and
hence it is becoming more expensive.
- More customers are demanding and expecting credit from their
suppliers.
-
Credit has become an important factor for differentiation
purposes in order to gain and sustain competitive advantage in
todays markets.
This clearly shows that businesses cannot refuse to grant credit as
they would lose sales and would not stay in competition.
The name of the game in todays business is innovation and to focus
on customers needs in order to gain and maintain long-term customer
relationship and hence, sustain market share. If a business organisation
does not sustain competitive advantage in the marketplace, it will lose
sales, thus, have a negative impact on its profit.
Therefore, the credit functions role should be more focused on
achieving profitable sales that would otherwise be lost.

50

Credit Sales Approval

GOALS:
MAXIMISE SALE
MINIMISE RISK

Communication
GOALS:
IMPROVE
MEASURE
PERFORMANCE

PRIMARY
PURPOSE

SALES SUPPORT
Invoicing / Billing
GOALS:
FACILITATE PAYMENT

Past Due A/R Management

GOALS:
COMPLETE THE SALES

The Sanchez Profit System Credit Cycle Model illustrates the activities
and hence, the four major components of the credit function. These
components form a loop, a complete cycle, one component leading to
another according to the sequence of events or activities carried out
by the credit function.
CREDIT SALES APPROVAL
The approval of credit sales is the priority of the credit function and
therefore, the necessary resources required to carry out this activity
should be allocated as appropriate. Deploying adequate resources
for the approval of credit sales would result in taking effective and
efficient credit decisions in order to close the sale profitably in a
timely manner.
MACM provides the Maltese business community with the required
tools and up-to-date databases of information that would assist local
suppliers to make profitable credit decisions. Thanks to todays
technology, MACM Members avail themselves of comprehensive
credit reports on every entity registered in Malta.

However, profitable sales can only be achieved if the credit function

supports sales and provide good customer service from the time of
the credit approval to payment facilitation and past due management.

MACM collects information both from its members by means of

exchange of information and also from other sources on a daily basis
to ensure that its Members are proactively informed and equipped
in order to minimise credit risks and costs and therefore, assist its
members to turn these risks into credit rewards and better profit.

The importance of effective and efficient A/R management implies

having policies in place that provide specific guidelines for each and
every major component of the credit function.

Hence, the policy for Credit Sales Approval is finding a way of saying
YES to profitable sales while remaining confident of payment in
order to maximise profitable sales and manage risk.

FEATURE

Winter 2011

INVOICING

COMMUNICATION

The second major component of the credit function is invoicing. An invoice

is a request for payment made to customers. One should not expect to get
paid on time if the invoice is not sent on time by the supplier. Likewise,
one should not expect to get paid if the invoice is not clear, incomplete or
inaccurate.

The fourth major component of the credit function is communication. In

this context, communication is defined as:
a. Process Monitoring;
b. Performance Measurement;
c. Identifying areas of opportunity for improvement.

It should be appreciated that issuing invoices that are not clear, incomplete
or inaccurate drives up the cost of doing business for both the supplier and
the customer alike due to time wasted to reconcile and to revise the invoice
document.

During the course of approving credit customers and managing A/R, the
credit function interacts with almost every aspect of the business. The credit
functions role has to relate to customers, salespersons, finance people,
lawyers, distribution, inventory, and other business units that collectively
make a sale happen to the full satisfaction of the customer.

Hence, an invoice should be:

- properly dated and addressed;
- clear, providing description of goods and delivery address;
- accurate, showing exact quantities, prices and any discounts applicable;
- complete, incorporating the agreed payment terms and conditions of sale;
- informative, making reference to any matter pertaining to the sale or
payment, as agreed in the conditions of sale, e.g. Interest and Charges in
case of late payment.
MACM provides template of an invoice which consists not only of the
appropriate layout but also incorporates commercial and legal caveats for
better effectiveness.
The Policy for invoicing is to facilitate payment of credit sales.

PAST DUE A/R MANAGEMENT

The third major component of the credit function is the management of
past due accounts receivables (A/R). Against all odds, it is important to
learn that past due A/R management is not collections, or enforcement of
payment but it is simply part of the process to complete the sale.
Managing past due A/R is critical as it would ensure sound cash flow which
is the lifeblood of a business concern. Unless a firm has the cash reserves to
meet all the costs regularly and on time, it will be unable to deliver its side
of the bargain, receive payments, and make a profit.
This would entail identifying potential losses at an early stage and closely
monitoring past due customers to keep losses to a minimum.
Here again MACM Members have the facility to monitor their A/R on a
daily basis, hence take proactive action as appropriate.
The Policy for Past Due A/R Management is to keep good customers
current and buying, whilst identifying, managing and controlling customers
who may represent a potential for loss in a proactive manner.

Therefore, the credit function is perfectly positioned to have a birds

eye view of the whole business process. Hence, it can detect internal
inefficiencies and identify areas of opportunity for improvement.
Days Sales Outstanding (DSO) has been the tool widely used by businesses
in all the four continents to measure the performance of the credit function.
However, in todays commercial world, if a credit department uses DSO
as the only measuring tool, it will be neither effective nor profitable to the
business organisation as it only focuses on risk.
The DSO ratio on its own has little or very limited value. It does not account
for customer retention, nor does it measure customer satisfaction, which is
required to sustain long-term customer relationship.
Therefore, it is suggested to make use of other measuring tools that would
assist the firm to gain and sustain competitive advantage in the market; to
continuously improve the internal systems; and to provide good customer
service. A suggested measuring tool is the Balanced Score Card developed
by Kaplan and Norton in 1992. This tool takes into consideration not only
the financial aspect of the credit function but also customer satisfaction,
internal processes and procedures, and innovation and learning.
MACM organises seminars, workshops, conferences and other events
throughout the year to educate and to suggest good credit management
practices to the local business community. MACM is also the accredited
centre of the Institute of Credit Management - ICM(UK) for Malta. MACM
offers the opportunity to Maltese credit practitioners to read Diplomas in
Credit Management.
CONCLUSION
The credit functions purpose is far from crunching numbers and mitigation
of risk. It is a core business function that helps the organisation to identify
profit opportunities, sustains long-term customer relationship through
larger and repeat sales, and minimise operational costs through internal
efficiencies.

The Malta Association of Credit Management (MACM) is a not-for-profit organisation, providing a central national organisation for the
promotion and protection of all credit interest pertaining to Maltese businesses. MACM represents the credit profession across all economic
sectors. It is a centre of expertise for all matters relating to credit management in Malta. MACM offers a range of services to the local
creditors, including, credit management information systems, credit management education, training, conferences, seminars, and lobbying
activities. It is the ICM (UK) accredited Training Centre for Malta. MACM is a member of the Federation of European Credit Management
Associations FECMA.
MACM is the distributor of Graydon International Credit Reports in Malta.
Josef Busuttil Dip. M. MCIM., FICM, MBA (Henley), Chartered Marketer is Director General of the Malta Association of Credit
Management and Vice President of the Federation of European Credit Management Associations. He obtained his MBA from Henley
Management College and is a Chartered Marketer and Member of the Chartered Institute of Marketing (UK) and Fellow of the Institute
of Credit Management (UK). He has contributed with intuitive presentations to a number of business seminars and conferences organised
by different organisations worldwide. Josef is a regular contributor of business articles to local and foreign business press. For further
information please visit www.macm.org.mt The author can be contacted on jbusuttil@macm.org.mt

MACM is celebrating its 10th Year Anniversary of its establishment.

51

Winter 2011

FEATURE
CreditManagementWallChart

Buildlongtermcustomerrelationship,whilstprotectingyourcashflow

Thebestwaytolearngeographyisonfoot

Bepositive

Clearyourmindof
cant

Cooperatewith
yourother
colleagues
Wearedealing
withpeople
&peopleare
different
=

Creditcostsmoney

Beproactive

Creditcarriesan
elementof
Risk

Youcan:

1.
2.
3.
4.
5.
6.
7.
8.

Remember:

Thesalespeopletriggerandmakethesale,andthecreditpractitioners
completetheprocessbyagreeingcompetitivecredittermswiththecustomers

Ensure:
Youlistentoyourcustomer
Youknowyourcustomerscreditneedsandrequests
Youvisityourcustomerwheneverpossible.Facetofacerelationshiplasts
Youarethefirsttoknowthatyourcustomerneedsassistance

Always:
UseaCreditApplicationFormsignedappropriately
Besureofthestatus:Consumer;SoleTrader;Partnership;LimitedCompany
IdentifythecustomerIDCardNumber/CompanyRegistrationNumber
Askforthecontactname/s&forwhowillbereceivingthegoods
Explainandaffirmclearlythestatedcredittermsandconditionsofsale
SendWelcomeLettertogetherwithcopyofthecreditagreementto
customer
Minimisetherisk:

Segmentthemarketandtargetthepotentialprofitablecustomers
AskyourpotentialcustomertoprovideBankandTradeReferences
Askyourpotentialcustomertoproviderecentreceiptsofutilitybills
MakeuseoftheMACMWebsitewisely
InterprettheinformationprovidedbyMACMcorrectly
IfitisaLimitedCompanycheckforanyotherdirectorsinvolvements
UseFinancialRatios&CreditScoringToolsprovidedbyMACM
RequestGraydonCreditReportthroughMACMifaforeigncompany

www.macm.org.mt

Analyse

TheScienceand
Artof
Invoicing

enhancecustomerservice
buildlongtermcustomerrelationship
maintainloyalcustomerbase
increaseprofitablesales
minimisetheriskassociatedwithcredit
protectcashflow
ensurelongtermprofit
maintainsynergywithotherbusinessunitssales,distribution,finance

Invoicesshouldbelegal,showing:
Date,FullSuppliersName&Address,VATnumber,InvoiceNumber
CorrectCustomerName&Address,VATnumber
Cleardescriptionofgoods&deliveryaddressifdifferentfromtheabove
AccurateQuantities,Prices(Net&Gross)&anyDiscountsapplicable
PaymentTermsandPaymentDueDate
MakereferencetointerestchargingincaseoflatepaymentLN233of2005
IncludeCaveatprovidedbyMACMtogetthenecessarycustomerconsentin
accordancetotheDataprotectionAct

Relentlessly:
Issueaninvoiceassoonasyoudeliverthegoodsorprovideservices
Allthecustomersrequestsshouldappearontheinvoice
Dealwithdisputesimmediatelyandresolvequickly
Keeprecordofalldisputes.Identifycustomerswhologindisputesrepetitively
Useanefficientandeffectiveaccountingsoftware

52

FEATURE
Timechanges

Monitor
Accounts

Bediligentby:
SendingMonthlyStatementstoallcustomers
SegmentingaccountsaccordingtotheCreditAmountsforgetaboutABC
Identifyingthelargeaccountsandestablishingtheirtotalvalue
Establishingthemajoraccountsaccountingfor80%ofthetotalvalue
Visitinglargeaccountsfrequently
MonitoringeverymajoraccountdailybyusingMyAccountsfacility:
MACMwebsite
Communicatingwiththesalesteam&discussingaccountswiththem
ProducingDebtorsReportsshowingaccountsmovements
CalculatingDSO(DaysSalesOutstanding)inrelationwiththeTurnover
Takingproactiveactionwhenandasnecessary

Alwayskeepgoodrelationswithallcustomersinvestinloyalcustomerbase

SetTargets

Measure
Performance

Establish

Measure:

Calculate:

Thecostofthecreditperiod;
Thecostoflatepayment;
Thecostofbaddebtlosses
DaysSalesOutstanding(DSO)inrelationwithRevenue;
CurrentRatio;
QuickRatio;
OperatingCashFlowRatio
TheAveragePaymentPeriodforallaccounts;
WorkingCapital

VisitMACMwebsitetocalculateFinancialRatios:www.macm.org.mt

Beefficientandreducecosts:Improvesystems,proceduresandprocessesby:

Flatteningtheorganisationalstructure
Soundinternalcommunication:HorizontalandVertical
Employeescontinuousdevelopment
Customerfocusattitudeandculturethisshouldincludeinternalcustomers
Teamwork:Synergybetweenthesalesandthecreditteams
Settingdeadlinesandpriorities
Staffincentivestomotivateemployees

Collectionof
Dues

CollectionofCash
ishighly
competitive

Theoperational
costcanonlybe
paidby
Cash

Winter 2011

Continuous
Improvement

Innovate

Foreffectivecollection,be:

Politebutfirm:neverguiltyofrudeness.Thecustomerremainsthefocusofourbusiness;
Goodcommunicator:findeffectivewaysofgettingthemessageover;
Outgoing,butnotovertalkative:establishabriskrapportbutdolistentocustomersneeds;
Persuasive:trytosucceedatthefirstattempt;
Persistent:donotbedistracted,donotgiveuponobstacles;
Targetoriented:findefficientwaystocollectthetotalsrequired;
Keentobeatdeadlines:prioritise,arrangetimeeffectively;
Goodlistener&problemsolver:helpcustomerstogaintheirloyalty;
Confident:Customersrespectsupplierswithaprofessionalapproach;
Authoritative:rarelyhavetorefertoothersfordecisions;
Welltrained:knowledgeableinotherkey areas.

Visits

Payregularvisitstomajorcustomers maintainloyalty

Phone
Calls

BepreparedPlanyourcallcarefully
BepersistentDontbedeflected
BepromptRingwhenyouintendto
BeurgentMakethecustomerfeelhemustpaytoday
BecourteousBuildgoodwillandenhancecompanysimage
BetactfulAcknowledgecomments
Bebusinesslikebefriendlybutfirm
BecooperativeShowyouwanttohelp
BerepetitiveKeepmentioningtheamountrequired

Collection
Letters

Addressittoanamedindividual
Signitpersonally
Showthesendersjobtitleasonewithauthority
Showtelephone&email
Makesureitisaccurate
Keepitsimpleandeasytoread
Keepittoonepage
Theamountclaimedshouldbeprominent
Showhowthedebtismadeup
Keepthesalespersoninformedofthecollectionletter

WehavealllearntalessonfromtheInternationalCreditCrunch:CashisKing
MaltaAssociationofCreditManagement
86/2,TriqtaMellu
MostaMST3785.Malta

Phone:(356)21423638or(356)21423639
Email:info@macm.org.mtWeb:www.macm.org.mt

DevelopedandDesignedby

JosefBusuttil
DirectorGeneral

53

Winter 2011

LIFESTYLE

Spotlight on

PierreCordina
By: Catherine Mallia Bonavia

Accountant by day deejay by night

For many people the marriage of these two careers is
something beyond their imagination. For him they are
the perfect combination as the stress and pressure gained
during the working week, is used positively by partying
hard with hundreds or thousands of clubbers in the
weekend.
Pierre Cordina is a name that definitely rings a bell. With
a smile on his face he recounts that whenever he makes
a phone call to a department or institution, the receiving
person asks him Inti tar-radio?
Pierre also known as Id-Deejay, is an accountant by
profession and a Member of the Malta Institute of
Accountants. He is married to the well-known, charming
presenter, Mireille Bonello, and lives in a quiet alley in
Zebbug.
Pierre describes himself as a very positive, dedicated,
control freak who tries hard to make the most of each
and every moment God grants him to live. When working
either full-time in the accountancy field or part-time
deejaying, he is very loud and extrovert, but normally he
is quite a shy guy.
With a nostalgic look on his face, Pierre recounts him
graduated in B. Accountancy Hons in the year 2001. He
decided to pursue a career in accounting in furtherance of
his teenage dream of wanting to become rich and being
able to manage his own finances And the wish is still
there. I always dream of one day having a company of my
own which could either be in the importation/exportation
industry or in the retail industry and/or even in the tourism
industry.
He started his working career as an accountant at Portomaso
with Tumas Group. Eventually he moved to Go plc
whereby he held a number of positions including Financial

54

Controller in one of their subsidiaries. For the past three

and a half years he has been working as a Financial
Controller at Master Group where he is responsible for a
team of seven members whom I am always grooming to
be the best department at the Master Group.
Many might think that accountancy and deejaying do not
go well together. Personally I see them both on the same
level since it is with the same attitude and dedication that I
work hard on the two.
With a smile that never leaves his face, Pierre moved on
to the start off his deejaying career, My love for music
started early at the age of three, when a small electric piano
was given to me as a Christmas present. Thinking I could
compose the best pieces of music, I invited all the family to
a weekly performance after Sunday lunch. Later along the
years in family and friends parties, my place was assigned
to a corner behind a table with two CD players and a mixer
it just felt great playing the best hits.composed by
others! At the age of 16, he started his radio career on
Deejays Community Radio Station, followed by 3 years
at 89.7 Bay, 3 years at Radio 101, 1 year at A3 FM and 6
years at X FM. He was a line-up DJ of Vibe FM from the
start and he confesses that At Vibe, I have found the right
mix of music that I always liked to deejay with. At the
moment he has a weekly Saturday afternoon show on Vibe
FM, The No. 1 Source for Dance and Rnb, and he also
does a couple of fill-ins during the week when necessary.
The other part of the deejaying career is clubbing. He has
deejayed in most of the clubs and pubs in Malta, Gozo and
Comino! For the past 10 years or so, I have been resident
deejay with G7 promoters who organise amongst many
other events the famous Gianpula Fridays in Summer.
Basically thanks to G7, I feel that Gianpula is my second
home and consider myself to be part of the furniture and
fittings by now!

LIFESTYLE
Modestly enough, I am proud to say that I played before
many international dance acts and deejays including
Ian Van Dahl, Ida Corr, Molella, Alex Gaudino, Uniting
Nations, Sash, Gigi Dagostino, Inna, Kenno Project and
many more. I can list many events I featured in but the
biggest would be The Isle of MTV whereby I deejayed
four times already and also last year I deejayed and
presented Akon in concert. My biggest thrill up till now
was deejaying in front of a crowd of more than 50,000
people with Enrique Iglesias waiting to come on stage after
my set at the Isle of MTV of two years ago.
Following his best memorable experience, it was natural
to ask about his worst one. The biggest scare of his life
took place last year whereby as soon as he arrived late in
Gozo for a big party, he noticed that he forgot his laptop,
soundcard, headphones and CDs in Malta. Thanks to his
friend Anthony from Gozo, nobody noticed this in the
party and everybody had a wild time.
When asked whether he prefers radio shows or gigs, in
turn he said, I can only answer by asking can one actually
prefer his father or his mother? I just love them both!
His dream in his deejaying career is of having a concert
somewhere big like the National Stadium at Ta Qali and
getting everybody to party both in the ground and on the
stands. Actually I already deejayed once there before an
International match but my dream is having a concert of
my own.
What keeps him going in the deejaying field? The passion
he has for all kinds of music, the fact that working in the
nights makes more contacts than during the day and some
are even more long lasting, but the most important factor
is being able to make people happyby helping them to

Winter 2011

party in style.
The feeling of getting people moving and later on
partying is just great. It gives me a vibe. Also the feedback
I get both from e-mails, Facebook and verbal comments is
so heart warming and I dread the day I will have to stop
doing it. No wonder that Life without deejaying is so
boring indeed!.
Both careers are very time consuming and time for hobbies
is definitely a no no! For the past 5 years, he wanted to
start photography and bought the SLR camera and lens but
up till now it is still brand new and unused. He does try to
find some time to read positive philosophy books. After
a hectic day at work, there is nothing better than staying
at home, listening to slow and soul music, coupled with a
glass of red wine.
Juggling both careers and family life is very hard. I have
a very patient wife but after all I love family and I would
be nowhere without it. So when I overdo it with work, I
do my best to make up for it in a million and one ways
Pierre leads an interesting life and jokes about the fact that
as a young boy, he aspired to become either a priest or the
President of Malta. Seems that at the moment I am quite
far from both options but in life you never know.
His concluding remarks take us back to this interviews
introduction. Accountancy and deejaying go well
together. He sees them both on the same level since it is
with the same attitude and dedication that he works hard
on the two.
His advice to readers is whatever you want to do in life
just find the right attitude and your success is guaranteed.

TECHNICAL

Winter 2011

Accounting

SOLUTIONS
By: Fabio Axisa and David Leone Ganado

Accounting for group reorganisations

Background
Subsidiary S2 within the Group G of companies is acquired by S1, a
fellow group company. S1 and S2 are both wholly owned subsidiaries
within Group G, and the ultimate ownership of, beneficial interest
in, and control of Group G are identical both before, and after, the
restructuring.

years results, even though the business combination may have

occurred part of the way through the year, supporting the argument
that the results reflect the period over which the controlling party had
common control.
o Incorporate the acquired entitys results only from the date on which
the business combination occurred. Consequently, the consolidated
financial statements do not reflect the results of the acquired entity
for any period before the transaction occurred.

Identifying related party relationships

Background
Investor I, a corporate entity, controls its subsidiary S and has
significant influence over its associate A.
S1 acquires S2

Q: Should S1 apply the IFRS 3 model of acquisition accounting?

A: IFRS 3 excludes business combinations involving entities under

common control from its scope. It is evident from the background

information that S1 and S2 are entities under common control. However
the definition of entities subject to common control is not limited to
control by another entity; subject to certain conditions, control can also
rest with an individual, a common group of individuals, or a common
mix of individuals and companies. The scope exclusion is therefore
not dependent on the combining entities being included as part of the
same consolidated financial statements.
Notwithstanding the scope exclusion, management may refer to IFRS
3 in determining an accounting policy for such common control
transactions, and decide to adopt the acquisition method as their
policy, in which case the requirements of IFRS 3 are applied in full.
Alternatively, management could use predecessor accounting, which
is in line with other GAAPs such as US GAAP and UK GAAP. The
principles of predecessor accounting are:
The acquirer incorporates predecessor carrying values (i.e. the
carrying values related to S2), rather than restating assets and
liabilities to their fair values.
The assets and liabilities acquired are measured at their carrying
amounts from the consolidated financial statements of the highest
entity that has common control where such consolidated financial
statements are prepared. They will also include any goodwill
recorded at the consolidated level in respect of the acquired entity
which, through the transaction, is in substance a transfer of the
goodwill from the controlling entity to the acquiring entity. When
the controlling party does not prepare consolidated financial
statements because it is not a parent company, the financial
statement amounts of the acquired entity are used.
No new goodwill arises in predecessor accounting because the
combining entities are looked at from the perspective of a transfer
made by the controlling party. Any difference between the
consideration given and the aggregate book value of the assets and
liabilities (as of the date of the transaction) of the acquired entity
are included in equity within retained earnings or within a separate
reserve.
The consolidated financial statements of S1 can either:
o Incorporate the acquired entitys results as if both entities (acquirer
and acquiree) had always been combined (or from the date of
common control if later). Consequently, the consolidated financial
statements (including comparative amounts) reflect both entities full

58

Q: In the financial statements of S and A, which are the related parties?

A: An investor which controls, jointly controls, or has significant

influence over an investee company is a related party to that company.

Investor I is therefore a related party to both S and A.

When however considering whether S and A are related to each other,

it is pertinent to note that the currently-effective IAS 24 definition of
related parties contains an inconsistency which means that in view of
this definition:
in the financial statements of S, A is not a related party to S, whereas
in the financial statements of A, S is a related party to A
This is because from As point of view, related parties include not
only investor I, which has significant influence over A, but also any
company forming part of the group of companies of which investor
I is a member. This line of thought is however not replicated to S,
whereby, for A to be a related party to S, S itself must according to the
definition have, directly or indirectly through its own subsidiaries (if
any), significant influence over A.
This inconsistency, together with other inconsistencies in the current
definition of related parties, is addressed through IAS 24 (Revised),
which becomes effective for financial periods beginning on, or after, 1
January 2011. Under the revised definition, two entities are related to
each other if a third party, corporate or individual, has control (or joint
control) over the first entity, and significant influence over the other.
Having been endorsed by the EU, IAS 24 (Revised) is also available
for early adoption by companies reporting in accordance with IFRSs
as adopted by the EU.

About the authors

This edition of Accounting Solutions was compiled by Fabio Axisa and
David Leone Ganado, Partner and Senior Manager respectively in the
PwC Malta Accounting Consulting Services team.

TECHNICAL

IASB issues narrow amendments to IFRS 1

IFRS, IAS,
ISA
UPDATE

The International Accounting Standards Board (IASB) issued two narrow

amendments to IFRS 1 First-time Adoption of International Financial
Reporting Standards (IFRSs). The first amendment replaces references to a
fixed transition date of 1 January 2004 with the date of transition to IFRSs,
thus eliminating the need for companies adopting IFRSs for the first time to
restate derecognition transactions that occurred before the date of transition
to IFRSs. The second amendment provides guidance on how an entity
should resume presenting financial statements in accordance with IFRSs
after a period when the entity was unable to comply with IFRSs because its
functional currency was subject to severe hyperinflation. The amendments
are effective from 1 July 2011, with earlier application permitted.

IASB issues amendments to IAS 12 Income Taxes

The IASB issued amendments to IAS 12 Income Taxes. IAS 12 requires an entity
to measure the deferred tax relating to an asset depending on whether the entity
expects to recover the carrying amount of the asset through use or sale. It can be
difficult and subjective to assess whether recovery will be through use or through
sale when the asset is measured using the fair value model in IAS 40 Investment
Property. The amendment provides a practical solution to the problem by
introducing a presumption that recovery of the carrying amount will normally be
through sale. As a result of the amendments, SIC-21 Income TaxesRecovery of
Revalued Non-Depreciable Assets would no longer apply to investment properties
carried at fair value. The amendments also incorporate into IAS 12 the remaining
guidance previously contained in SIC-21, which is accordingly withdrawn.

IASB proposes improvements to hedge accounting

The IASB published for public comment an exposure draft on the accounting
for hedging activities. The model being proposed in the exposure draft is
principle-based, and will more closely align hedge accounting with risk
management activities undertaken by companies when hedging their
financial and non-financial risk exposures. The proposals also include
enhanced presentation and new disclosure requirements. The exposure draft
forms part of the IASBs project to replace IAS 39 Financial Instruments:
Recognition and Measurement, and when its proposals are confirmed they
will be incorporated into IFRS 9 Financial Instruments.
The exposure draft Hedge Accounting is open for comment until 9 March
2011. In addition to the general hedge accounting proposals in the exposure
draft, the IASB is continuing to discuss portfolio macro hedge accounting.

IASB publishes IFRS Practice Statement on

Management Commentary
The IASB published an IFRS Practice Statement Management Commentary,
a broad, non-binding framework for the presentation of narrative reporting
to accompany financial statements prepared in accordance with IFRSs. The
Practice Statement permits entities to adapt the information provided to
particular circumstances of their business, including the legal and economic
circumstances of individual jurisdictions. This flexible approach will generate
more meaningful disclosure about the most important resources, risks and
relationships that can affect an entitys value, and how they are managed.
The Practice Statement is not an IFRS. Consequently, an entity need not
comply with the Practice Statement to comply with IFRSs.

60

Winter 2011

IASB issues additions to IFRS 9 for financial liability

accounting

The IASB issued requirements on the accounting for financial liabilities.

These requirements will be added to IFRS 9 Financial Instruments and
complete the classification and measurement phase of the IASBs project to
replace IAS 39 Financial Instruments: Recognition and Measurement. The
new requirements maintain the existing amortised cost measurement for most
liabilities, limiting change to that required to address the own credit problem.
With the new requirements, an entity choosing to measure a liability at fair
value will present the portion of the change in its fair value due to changes in
the entitys own credit risk in the other comprehensive income (OCI) section
of the income statement, rather than within P&L.
IFRS 9 applies to financial statements for annual periods beginning on or
after 1 January 2013. The second and third phases of IFRS 9 are concerned
with accounting for the impairment of financial assets and hedge accounting
(see above). The IASB is aiming to complete those phases by 30 June 2011 and
therefore replace IAS 39 in its entirety.

IAASB addresses assurance (other than audit) on

financial statements; exposes enhanced Review
Engagement standard
The International Auditing and Assurance Standards Board (IAASB) released
for public exposure proposed International Standard on Review Engagements
(ISRE) 2400, Engagements to Review Historical Financial Statements. This
revised standard and proposed ISRS 4410 (see below) mark important steps in the
IAASBS work to create robust standards for services that can be used by entities
that are either not required or do not elect to be audited.
A review of financial statements in accordance with the proposed ISRE consists
primarily of making inquiries of management and others within the entity involved
in financial and accounting matters, applying analytical procedures, and evaluating
the sufficiency and appropriateness of evidence obtained. The practitioner reports
on whether anything has come to the practitioners attention that causes him/her
to believe that the financial statements, taken as a whole, are not prepared in all
material respects in accordance with the applicable financial reporting framework.
The procedures performed in a review are substantially less than those performed
in an audit, and the practitioner does not express an audit opinion.

IAASB addresses Compilation Engagements;

exposes enhanced standard
The IAASB released for public exposure proposed International Standard on
Related Services (ISRS) 4410, Compilation Engagements. Through a compilation
engagement, practitioners can provide significant benefit by applying their
expertise in accounting and financial reporting. This expertise is applied to assist
the management of an entity in preparing and presenting historical financial
information for use by the entitys internal or external stakeholders.
Regulations affecting financial reporting by small- and medium-sized entities
(SMEs) continue to evolve, highlighting the critical need for standards that
support quality services to meet the needs of those entities and their stakeholders,
said Prof. Arnold Schilder, IAASB Chairman. Through the proposed ISRS
4410, as well as additional planned standards, the IAASB aims to address the

growing international need for standards that support a range of services

other than audit.

57

Winter 2011

STUDENTS

ACCA STUDENTS NOTICE BOARD

Practical experience requirement (PER)

In order to become an ACCA-qualified accountant you will need to complete

the practical experience requirement (PER) as well as passing your exams
and the professional ethics module.
It is a key component of the ACCA Qualification and will help you to:
apply in practice the knowledge and techniques gained through your
studies towards the ACCA exams
observe and be involved in real-life work situations that help you to
develop the skills, attitudes, and behaviours that you will need to possess as
a qualified accountant
develop your judgement, encouraging you to reflect on the quality of
your work and how you may improve your work performance in the future.
Employers expect ACCA members to show high levels of knowledge and
ability in the workplace, and to behave ethically.
The PER provides a framework for ACCA trainees to gain this knowledge
and ability. It does this by setting you a range of performance objectives to
achieve and ensuring you gain enough experience in one or more relevant
roles, demonstrating that you have the abilities and maturity required to
become a member - making you a more valuable employee.
What do I have to do?
To begin achieving your PER, you need to be working in an accounting or
finance-related role. You may feel that the opportunities to achieve your PER
in your current role are limited, but you should consider the options available
to you before you decide to seek alternative employment.
If you are a full-time student or are not working in a relevant role, you may
want to start thinking about what steps you will need to take in the future to
gain the practical experience you need in order to become a member.
There are four components to your PER:
completing three-years employment in an accounting or finance-related
role(s)
achieving the nine Essentials and any four Options performance
objectives to the satisfaction of your workplace mentor
recording and reporting your PER progress through the trainee
development matrix (TDM)
making a PER return each year.
You can gain your practical experience before, during or after completion
of the exams. There is no time limit to gaining practical experience and
applying for ACCA membership. However, the performance objectives
are closely linked to the exam syllabus and it is recommended that you coordinate your study and practical experience achievement.
You should aim to get your employers support to help you gain the PER and
you will also need to work closely with your workplace mentor.

BSC Degree

papers as required to successfully complete all nine Fundamentals level papers

complete the ACCA Professional Ethics module
o to submit your Research and Analysis Project in the May submission period
this must be completed by 15 April of the same year
o to submit your Research and Analysis Project in the November submission
period this must be completed by 15 October of the same year
complete and pass the Oxford Brookes University Research and Analysis
Project
The degree must be completed within 10 years of your initial registration onto
ACCAs professional qualification otherwise your eligibility will be withdrawn.
If you are unsure on your eligibility for the BSc (Hons) in Applied Accounting
degree, then you should firstly refer to myACCA which will tell you whether or
not you have opted in to the degree scheme and whether or not you are eligible.
If you are not eligible for the degree programme, then it will be for one of the
following reasons:
You enrolled with ACCA before the BSc (Hons) in Applied Accounting
degree was introduced
You ticked the box on your ACCA registration form stating you did not wish
to join the Oxford Brookes University degree programme
You do not hold a suitable English language qualification
You enrolled with ACCA over 10 years ago
If you wish to enquire about your eligibility to complete the BSc degree, please
contact ACCA Connect (students@accaglobal.com). Please include your ACCA
student registration number in any correspondence.

TIME LIMITS
You have 10 years from the date you registered to complete the ACCA exams.
If you registered before 31 December 2006 and were transferred to the existing
syllabus in August 2007, you will have been given a further ten years to complete
the ACCA exams, i.e. you will have until June 2017 to complete.
However, this does not apply to the completion of the BSc Honours Degree in
Applied Accounting awarded by Oxford Brookes University (OBU). You will
need to complete the degree within ten years of your initial registration date
with ACCA.

Important dates
MARCH
Requests for an administrative review should be received within 15
working days from the release of results.
15 March Requests for special exam centres must be received by this date
for the June exam session (refer to the Exams section to find out about
special exam centres).

ACCA and Oxford Brookes University have worked together to develop

a BSc in Applied Accounting, which is available exclusively to ACCA
students who wish to obtain a degree while studying towards the ACCA
Qualification.

30 March Requests for special circumstances/assistance during June exams

must be received by this date.

There are numerous benefits to completing the degree. Not least because
a degree and a professional accounting qualification are a powerful
combination of qualifications to have, putting you in demand with employers
and increasing your career prospects.

Appeals against the results of an administrative review should be received

by the first week of April.

Eligibility
To be awarded the BSc (Hons) in Applied Accounting you must:
be registered with Oxford Brookes University i.e. opted-in to the BSc
degree scheme before passing any of the three ACCA Fundamentals papers,
F7, F8 and F9
pass the three ACCA Fundamentals papers F7, F8 and F9 and pass other

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APRIL

15 April Your Examination Entry Form for the June exams must be
received by ACCAs exams department.
Applications to change variant papers must be received by this date or
changed on myACCA.
Examination Entry Acknowledgements will start to be posted.