RISK BENEFIT. The Salient Point Volume

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1 The Salient Point MCI (P) 156/01/2016 RISK BENEFIT Also in this issue: Trending business acronyms Accounting standard tailored for charities Thailand ups business incentives An independent member of Baker Tilly International

2 Risk management for better strategic planning Business is becoming more risky and regulators have upped the requirements in enterprise risk management. Governance & Risk partner, LIM Wei Wei, discusses how risk management can be used to improve strategic planning and scenario planning, making the company so much more effective in the present business environment. 2

3 LIM Wei Wei Partner, Governance & Risk Business is becoming more risky. The news has been filled with more stories of bizarre corporate foibles on an increasingly large scale. The result: Stakeholders and corporate regulators are piling on pressure and requirements for risk management and internal control. In Singapore, changes to the Singapore Exchange Listing Rules (1207 (10)) and Principle 11 of the revised Code of Corporate Governance 2012 now make boards responsible for risk governance. Among the many guidelines, the board has to comment on the adequacy and effectiveness of the enterprise risk management systems in the annual report. The board also needs to review the adequacy and effectiveness of the company s risk management and internal control systems at least once a year. Against the backdrop of this regulatory regime, many listed companies in Singapore have established frameworks for the periodic reporting and escalation of enterprise risks within their organisations. Since 2012, when the guidelines were first introduced, corporations have slowly but surely changed their attitude towards risk management. While it was another compliance requirement, a 2013 survey by the Singapore Institute of Directors identified enterprise risk management, or ERM, as the highest priority item on the agenda of most boards. Board members and C-level executives alike recognise that, in today s business environment, with its accelerating speed of change, organisations that fail to anticipate and respond to internal and external risks could find themselves becoming irrelevant and ending up losing their competitive edge vis à vis competitors. 3

4 In boardroom discussions, more are discussing how ERM processes can be better integrated with strategic planning in order to deliver more value for corporate decision making. Here are five steps that companies could take to extend their enterprise risk assessment exercise into the realm of strategic planning. 1. Map out the strategy and the corresponding business objectives The first steps of an enterprise risk assessment exercise often overlaps with the corporate strategic planning process. It begins with understanding the strategic and business objectives of the organisation. Many common strategy tools and models could be utilised in the process, including the performance of Political Economic Social Technological Environmental Legal (PESTEL) analysis; industry analysis such as Michael Porters Five Forces framework; as well as internal and external SWOT (strengths, weaknesses, opportunities and threats). After analysis of the internal and external environment, a road map can be developed with the corresponding business objectives and action plans aligned to the overall strategy mapped out. This step mainly involves the participation of middle to top management. 2. Identification and assessment of risks in relation to each business objective The next step is to identify the risks associated with each business objective. This is a meticulous process of going through every business objective, brainstorming and documenting the risks, then considering the execution plans for each business objective. Measures Strategic management and risk management are two key pillars in corporate governance. With a process in place such as the one outlined in this article management would be able to strike the right balance in the risk and reward equation through the implementation of a single framework, resulting in enhanced shareholder value adopted to manage the identified risks are then devised to ensure that adequate steps are taken to mitigate the risks identified. This requires not only the involvement of top management but also anyone who would be tasked with strategy execution. At this point, an estimate of the residual risks and their relative impact and likelihood should also be performed, so that these residual risks can be prioritised. 3. Explicit consideration of risk appetite The board and top management needs to engage in discussion on establishing the corporate threshold for risk tolerance. Risk appetite, as defined by COSO, is the amount of risk, on a broad level, an organisation is willing to accept in pursuit of value. Once determined, this risk appetite then needs to be communicated to the rest of the organisation. 4. Design and implementation of key performance metrics and key risks indicators Key performance indicators (KPI) are used by management as they pursue the objectives that have been set. Key risk indicators (KRI), on the other hand, are a measure of how risky an activity is. At this stage, both KPIs and KRIs are established concurrently. In this way, the performance of management can be measured against the benchmarks established, and risks can be measured, monitored and activities kept within the risk appetite quantum established during corporate strategic planning. 5. Institute a mechanism of continuous monitoring, evaluation and re-alignment Perhaps the most critical of all stages is the establishment of a framework of continuous monitoring, evaluation and re-alignment. This framework embraces all the metrics: the overall strategy, business objectives, risk appetite, KPIs and KRIs. This should be carried out quarterly or half yearly with all internal stakeholders, taking into account changes in internal and external environmental factors. It could also be useful to incorporate scenario analysis, planning and monitoring into the process to lend a more multidimensional consideration to risks and opportunities that could arise during the course of strategy execution. Strategic management and risk management are two key pillars in corporate governance. With a process in place such as the one outlined in this article management would be able to strike the right balance in the risk and reward equation through the implementation of a single framework, resulting in enhanced shareholder value.u 4

5 Scenario Planning for holistic ERM Singapore listed companies would all have enterprise risk management (ERM) frameworks in place by now, following the tightening of Singapore Exchange Listing Rules (1207 (10)) and Principle 11 of the revised Code of Corporate Governance Having set up and run ERM frameworks, these companies might now consider utilising scenario planning to move ERM up a notch so that executives can explore and anticipate a wider range of business possibilities. This would result in better preparedness for the future. Scenario planning has military roots but has been used for commercial purposes as early as the 1970s when Royal Dutch Shell adopted the tool, which greatly enhanced its business resilience during the oil crisis. The New York Broad of Trade presents another good case study of scenario planning; as a result of its planning exercise, it built a back-up trading floor outside the World Trade Centre. So while the fateful 9-11 attacks destroyed the twin towers, trading on the NYSE hardly skipped a beat. Scenario planning is a structured way for organisations to think about contingencies and their permutations that could impact the organisation. As with enterprise risk management, successful scenario planning requires the commitment and effort of top executives as they set out to develop a number of scenarios possible stories of how the future may unfold and its impact on operations. Scenario planning is typically carried out through workshops, with the involvement of executives from different divisions, and encompasses: Identifying a focal issue: e.g. a cyber security breach, acquisition execution, compliance failure, new product development, etc. Brainstorming a comprehensive list of factors that could affect the focal issue. Considering external forces macroeconomics, social media, technology that could have a bearing. Performing a critical assessment of the uncertainties and prioritising these uncertainties based on their relative impact. Developing 2 by 2 scenario matrices to map out possible extreme scenarios arising from the uncertainties selected and articulating pathways and implications for each scenario. Identifying indicators and taking steps to monitor these with regard to each scenarios. Generally, organisations that have not encountered crises in the past find it more difficult to envisage such events. This makes scenario planning all the more important as it forces management to look into plans and measures should the unthinkable happen. Besides this, scenario planning helps management to: Look beyond daily operational concerns to ponder business issues from a wider perspective. Create and provide an environment for executives to raise and discuss risks in business. Build a culture of brainstorming and thinking outside the box. Tap the imagination of executives in anticipating risks, as well as challenging their own assumptions on existing strategies. Embed a risk simulation process in ERM. Embed ERM and risk considerations in decisionmaking. Scenario planning exercises, when integrated with the ERM framework, can help companies respond better to risk events should they occur. After all, these events had already been anticipated with responses mapped out. It can make all the difference to the organisation s ability to survive in today s increasingly harsh business environment.u 5

6 Trending business acronyms LOH Eng Kiat Partner, Tax In a country where Singlish and the acronym are ubiquitous, endorsement of the latter appears more unanimous. We present terms that are currently trending (or that, at least, would likely trend) in the business circuit, which professionals and C-suite executives alike should acquaint themselves with. AML OEIC AEOI KYC BEPS UBO FATCA CRS AML or anti-money laundering has shot up in use, especially after BSI Bank was directed by the Monetary Authority of Singapore (MAS) to shut down in Singapore. MAS cited the bank s breaches of AML requirements as one of the causes. As an international financial centre and transport hub, Singapore will be at the forefront of global efforts to combat money laundering and terrorism financing. This high-profile case serves as a stark reminder that AML responsibilities are to be taken seriously. A (necessary) consequence of such responsibilities relates to the need for a more comprehensive set of KYC (Know Your Customer) procedures. These can include identifying the UBO (Ultimate Beneficial Owner) behind the underlying business transactions/structures, and have increased compliance obligations for many professional services providers. This overall trend is set to remain unabated in the foreseeable future. BEPS (Base Erosion and Profit Shifting) is another trending buzzacronym permeating the local business landscape, from its OECD origins. BEPS are essentially strategies that exploit gaps in tax rules to shift profits to locations where the taxes are low, resulting in little or no overall corporate tax being paid. In acknowledging that most BEPS strategies are legal, the OECD/G20 BEPS Project nevertheless points to the issue of fairness ; which underscores the extreme subjectivity involved, making it the bane of many tax practitioners. Notwithstanding this, the BEPS Project has progressed at an unrelenting pace. A comprehensive package of measures to address BEPS has been agreed upon and many countries have committed to it and are proceeding with implementation. For Singapore, one concern is that our substance-based tax incentives framework gets wrongly conflated with the harmful tax practices that certain BEPS measures are intended to address. This, in turn, can have undesirable outcomes like raising taxes worldwide and hindering global economic growth. FATCA (US Foreign Account Tax Compliance Act) and CRS (OECD s Common Reporting Standard). In sync with the theme of countering BEPS, both FATCA (relating to US taxpayers) and CRS (involving taxpayers in nearly 100 countries) were meant to promote cross border tax compliance by implementing an international standard for the automatic exchange of information or AEOI. The processes involving FATCA started slightly earlier, but Singapore banks and fiduciaries will be expected to have their hands full in dealing with CRS obligations since Singapore has committed to reporting on accounts in existence from 1 January OEIC (Open End Investment Companies). Already touted by some as a game changer, the OEIC framework is a new initiative targeted at the asset management industry, and could entice more funds to become locally domiciled (than to be offshore). More details are to be announced but already many industry players have expressed optimism that such a framework fairly common in other global investment fund centres should provide a flexible corporate alternative to existing Singaporedomiciled funds and help enhance Singapore s competitive situation.u 6

7 Accounting standard tailored for charities ASSURANCE FEATURES Susan FOONG Partner, Assurance In the area of financial reporting, charities were given an effortsaving leg up, in the form of the Charities Accounting Standard, or CAS, but very few have taken advantage of this. The CAS was issued with the intention of making it easier for smaller charities to comply with accounting standards whilst ensuring charities present information that is fit-for-purpose. Still, many charities in Singapore have chosen not to adopt CAS in their financial reporting, opting instead to adopt the Singapore Financial Reporting Standards (FRS). This could be due to lack of familiarity with the CAS and reluctance to invest in the cost and effort of changing to the new standard. CAS does require some changes e.g. the presentation of a Statement of Financial Activities (SOFA) which a charity s accounting records may not be able to support. It also requires additional disclosures, such as detailed disclosures of remuneration and other benefits paid to individual governing board members. Nonetheless, these are mostly one-time changes to systems and implementation. On an annual recurring basis, adoption of the CAS reporting framework will be simpler and yet provide better information to stakeholders. Some of these benefits are: CAS is a condensed volume, including only provisions in the FRS that are relevant to charities. As a result, governing board members and accounting personnel in charities would find CAS easier to understand and simpler to comply with. CAS would have fewer revisions and additions of new requirements as compared to the FRS which is continually revised and amended with new standards issued. CAS has guidance to meet the accounting needs of charities. e.g. It incorporates guidance on accounting for donations and accounting for separate funds. These provisions are helpful to assist charities to determine how such donations, as well as restricted and other funds, should be recorded and reported. CAS also incorporates guidance on loans made by charities to other parties. CAS requires disclosures of relevant information to enable stakeholders to understand the terms of these loan. To make it simpler for charities, loans do not need to be recorded at amortised cost using the effective interest method as required by FRS. CAS increases transparency and accountability in financial reporting by requiring the presentation of the SOFA. This provides a complete and summarised picture of a charity s incoming resources and how it applied its resources in all its various funds. There are provisions in CAS on disclosures and presentation of restricted funds which would provide greater transparency and accountability in the financial statements. Overall, the benefits of adopting the CAS outweigh the initial challenges at implementation. For charities that are eligible to adopt CAS and have not made the switch, we would advise governing boards to relook their concerns and weigh these against the benefits of improvements in the financial reporting process in the long term.u Full details of the Charities Accounting Standard can be obtained from Accounting Standards Council website at Or contact a Baker Tilly TFW professional at

8 ASEAN Resource Centre Thailand ups business incentives By Baker Tilly Thailand To promote Thailand as a business hub in Southeast Asia, the Thai government has upgraded its Regional Operating Headquarters (ROH) and International Procurement Office (IPO) schemes, replacing them with two new programmes. ROH has been superseded by the International Headquarters (IHQ) while IPO has been replaced with the International Trading Centre (ITC) programmes. The two new schemes come under the country s new Board of Investment (BOI) strategy, which aims to promote two-way investment inbound and outbound. It is Thailand s vision to become a global business hub. IHQ An IHQ is defined as a company incorporated under the law of Thailand, which provides management, technical, and support services or financial management services to its associated enterprises or branch offices either in Thailand or overseas. This also includes a Thai company doing international trade business with overseas customers. Tax incentives under the IHQ programme include: Corporate income tax exemption on qualifying services income and royalties from overseas associated enterprises and sales income from out-out transactions. [Ed note: An out-out transaction is sales income derived from international trade business to overseas based customers when goods are delivered outside Thailand.] Reduced corporate income tax rate of 10% on qualifying services income and royalties from associated enterprises in Thailand and sale income from in-out transactions. (Ed note: An in-out transaction is income derived from sale of raw materials or parts in Thailand to overseas associated enterprises.] Withholding income tax exemption on dividend and interest paid to overseas associates. Reduced and flat 15% personal income tax rate for expatriate employees of the IHQ. ITC An ITC is defined as a company incorporated under the law of Thailand, which engages in international trade business and provides services relating to international trade business to its overseas customers. Tax Incentives for ITC include: Corporate income tax exemption for sales income from out-out transactions and fees earned from providing services relevant to the international trade business to its overseas customers. Reduced corporate income tax rate of 10% on sales income from inout transactions. Withholding income tax exemption on dividend paid to foreign shareholders. Reduced and flat 15% personal income tax rate for expatriate employees of the ITC. ITC replaces the IPO scheme which had some conditions that were difficult to meet; such as a requirement to have a warehouse with a computerised inventory system, procurement, quality control and packaging activities; as well as conditions relating to procurement.u For more information on IHQ and ITC or for any other services in Thailand or Myanmar, contact Baker Tilly Thailand at or go to Download information on IHQ and ITC at IHQ _34592.pdf Editor Susan Foong Sub Editor Jeffrey Tsang Design Asher Communications Strategic Printer Pixel Tech Pte Ltd DISCLAIMER: All opinions, conclusions, or recommendations in this newsletter are reasonably held by Baker Tilly TFW at the time of compilation but are subject to change without notice to you. Whilst every effort has been made to ensure accuracy of the contents in this newsletter, information in this newsletter is not designed to address any particular circumstance, individual or entity. Users should not act upon it without seeking professional advice relevant to the particular situation. We will not accept liability for any loss or damage suffered by any person directly or indirectly through reliance upon the information contained in this newsletter. 8