No97DECEMBER LARNAKA NEW INTERNATIONAL AIRPORT

Transcription

1 No97DECEMBER The Journal of the Institute of Certified Public Accountants of Cyprus LARNAKA NEW INTERNATIONAL AIRPORT

2 CONTENT NÔ ÂÏ 1 December No. 97 ISSN Editor Ninos Hadjirousos, FCA Deputy Editor T. Anastasiades, B.Sc., M.A. (Econ.) Editorial & Institute Offices 11 µyron Avenue, CY-1096 Nicosia P.O.Box Nicosia - Cyprus Tel Telefax info@icpac.org.cy URL:http/ Accountancy Cyprus is published quarterly by the Institute of Certified Public Accountants of Cyprus and is sent free to all members of the Institute as well as to a large number of other persons, companies, and organizations. The Institute can accept no responsibility for the accuracy of contributed statements or articles appearing in this publication, and any views or opinions expressed are not necessarity endorsed by the Institute, its Council or by the Editors The Institute Council President: * Nicos Syrimis, FCA Vice President: * Kyriakos Iordanou, FCCA, MBA, ACIM, CIA Secretary: * Theodoros Parperis, BSc (Econ), ACA Treasurer: * Marios Skandalis, FCCA, FIFC, CFC, CFE * Denotes member not in practice Members Michael Antoniades, BA(Hons), ACA Panicos Charalambous, FCCA Christis Christoforou, BA(Econ.), FCA, MBIM Demetris Demetriou, FCCA Ninos Hadjirousos, FCA * Demetris Halios, BSc (Acc), CPA * Christodoulos Papas, BA (Hons), MBA, FCCA Panikos Tsiailis, FCCA Contents Institute News... 2 Professional Briefing Interview with the Minister of Communications and works, Mr. Nicos Nicolaides Is the EU economy on the road to gradual recovery? An investigation into the multigenerational workforce of the Cyprus accounting profession Warrior Negotiation tactics - Unconventional Weapons and Tactics to Get What You Want - Part The tready of Lisbon concluded on 19th October New VAT rules for Cross-border supplies of Services in the EU VAT: The European commission calls for a harmonised application of the VAT grouping rules The Excel Wizard The IFRIC issued guidance on distributions of non-cash assets to owners and on extinguishing financial liabilities with equity instruments IFRS 9 Financial Instruments The IMF in a more active role in the world economy Is the Central Bank Governor right, pessimistic (or both)? CIPA s Strategy for the Investor s Environment New non-regulated market of CSE The Fiscal Deficit and the Economy New Thinking on Dealing with Financial Crises Making sense of the Numbers: Analysts perspectives on current and future reporting in the insurance industry Should higher education be free? Restrictions and controls are imposed on the salaries and bonuses of bankers Banks are Rethinking Risk Based Internal Auditing Brazil, Russia, India, China: leading the recovery of the world economy The Importance of Economic Interdependence Trapped in Mortgages - Free at last (RA) Between recession and economic depression Measuring the success of the board

3 Institute News Institute News COUNCILã S ACTIVITIES During the fourth quarter of 2009 the Council of the Institute met three times and considered matters of interest to ICPAC and to the profession at large. Other activities included the following: On 1-2 October 2009, the President of the Council, Mr. Nicos Syrimis, and Mr. Ninos Hadjirousos, Member of the Council, attended the 10th anniversary of the Mediterranean Federation of Accountants in Bucharest. On 7 October 2009, the General Manager of ICPAC Mr. Theodoros Philippou, attended the Council meeting of the European Federation of Accountants (FEE) in Brussels. On 14 October 2009, Mr Christos Kyriakides, Senior Officer of the Institute, attended a meeting of the Committee for the Prevention of Corruption. On October 2009, the President of the Council and the General Manager attended the Presidents and CEO s meeting of the FEE Member-bodies in Lisbon. On 24 November 2009, Ms Lina Lemessiou, Senior Officer of the Institute attended the meeting of the FEE Audit Working Party in Brussels. On 16 December 2009, the General Manager attended the Council meeting of the FEE in Brussels. On the Occasion of the appointment of the new President Mr. Nicos Syrimis, courtesy visits took place to Mr Stavros Evagorou, spokesman of the Central Committee of AKEL, Mr. Nicholas Papadopoulos, President of the Economic and Budget Parliamentary Committee, Mr Averof Neophytou, Deputy President of DYSI, Spyros Kokkinos, Registrar of Companies, and Dr. Andreas Demetreou, Minister of Education and Culture. COMMITTEESã ACTIVITIES During the 4th quarter of 2009 ACCOUNTING STANDARDS COMMITTEE During the last quarter of 2009, the Accounting Standards Committee had three meetings during which the following actions were taken: 1. The Committee examined the Exposure Draft ED 2009/5 Fair Value and provided its comments. 2. The Committee concluded its examination of the Exposure Draft ED 2009/11 Improvements to IFRSs and of the relevant EFRAG draft comment letter. The Committee provided its comments to EFRAG. 3. The Committee is currently examining certain peripheral issues relating to (a) the IFRS for SME s in relation to the provisions of the Companies Law, Cap and (b) The European Commission Consultation Paper on IFRS for SMES s. Maria A. Papacosta Chairwoman ETHICS & INSTITUTIONS COMMITTEE During the forth quarter of 2009 the Ethics and Institutions Committee met twice. Added to this meeting were other informal meeting between various sub-committee members. The main activities of the Committee during this period were as follows: 1. The Committee is currently examining the 8th European Union Directive and issues that emanate from it that are Ethics related and will affect the members of ICPAC. 2. The Committee is currently examining a number of other issues in relation to the application of the IFAC Code of Ethics by the members of ICPAC including the preparation of Frequently Asked Questions on Ethical dilemmas faced by members. 3. The Committee is currently in the process of preparing standard questionnaires that can be used by members of the Institute to help them ensure that that they have obtained sufficient information about new clients in order to enable the relevant firms to decide whether to accept the entity as a new client. Furthermore, the same questionnaire will also help members on ethical related issues before accepting or declining new assignments. 4. The Committee is currently examining a discussion 2 ACCOUNTANCY CYPRUS VOLUME 97 DECEMBER 2009

4 Institute News paper issued by FEE in relation to the Integrity in Professional Ethics. On completion of this discussion our Committee will forward its comments to FEE. Polyvios Polyviou Chairman STOCK EXCHANGE AND CAPITAL MARKETS COMMITTEE During the fourth quarter of 2009, the Committee met three times. Added to these meetings, were other meetings between various sub-committees members. The main activities of the Committee during the period above were as follows: 1. Organised a seminar with the Cyprus Stock Exchange on a. The introduction of the new unregulated market b. The revised Corporate Governance Code c. The introduction of the Market-Maker 2. Reviewed and submitted comments for improvement to the Central Bank on the International Collective Investment Schemes (ICIS) Law of 1999 and related Directives, the non-ucits funds framework in Cyprus. 3. Met with the Chairman and representatives of the Cyprus Securities and Exchange Commission and discussed current developments in Cyprus and Europe, procedural issues of practical significance such as ways of better cooperation and communication with the Commission as well as the important issue of the Commission s resources including possible solutions. 4. Carried out maintenance and updated the Committee s material on the Institute s website. Additionally, the Chairman of the Committee participated in meetings of ICPAC representatives with representatives and officers of the Ministry of Finance, the Cyprus Securities and Exchange Commission and the Central Bank of Cyprus. Discussions covered all latest issues and developments on the mutual fund framework (UCITS and non-ucits). Demetris Taxitaris Chairman VAT COMMITTEE During the fourth quarter of 2009 the VAT Committee ( Committee) of the Institute of Certified Public Accountants of Cyprus ( ICPAC ) met only in November as the October meeting was cancelled to give the opportunity to all members to attend the presentation organized by the VAT office on the new VAT package coming into effect 1 January Nevertheless, the Committee s interaction with the VAT office and other Government bodies was both intense and constructive. Attending a regular meeting of the Finance Committee of the House of Representatives: The Chairman Harry Charalambous and Takis Kyriakides representing the VAT Committee together and Angelos Gregoriades representing the Tax committee of the Institute of Certified Public Accountants attended a regular meeting of the Finance Committee. The reason for the attendance was to discuss the VAT Commissioner s decision to demand the monthly submission of VAT returns by a selected number (77) of taxpayers which according to the Commissioner s available information pay over a certain amount of VAT. Before the Commissioner s decision the affected taxpayers were submitting quarterly returns. At the meeting present were representatives from the Association of Cyprus Banks, the Cyprus Chamber of Commerce and Industry, the Cyprus Employers and Industrialists Federation and representatives from other members of the business society of Cyprus which are affected by the Commissioner s decision. The Minister of Finance explained that the 77 companies were selected on the grounds that they collect considerable amounts of VAT funds from the final consumers and it is not fair to keep and take advantage of these funds for three months. The Minister further argued that the administration cost for shortening the submission period is estimated not to exceed the amount of m m3.000 per year per Company affected. Almost all of the attending representatives of the affected taxpayers plus a number of MPs presented their arguments which in their majority were against the decision. The main opposing arguments included the inappropriate selection of the companies, the timing of the decision, lack of consultation with the affected parties, the exposure to ACCOUNTANCY CYPRUS VOLUME 97 DECEMBER

5 Institute News additional administrative costs and the distortion in competition between businesses in the same industry that the selected Companies operate in. The general feeling at the end of the meeting was that both the Minister and the Commissioner were not prepared to reconsider their decision. 2. Meeting with the Federation of the Building Contractors Associations of Cyprus: A meeting was held with the representatives of the Federation, during which the concerns of the VAT Committee on various VAT problems affecting the construction industry were discussed. The purpose of this meeting was to brief the Federation on the results of the VAT committee s efforts regarding a number of issues affecting their industry including the provision of the VAT Act that creates a tax point 18 months following the supply of projects even though payment has not been received mainly in cases where state and local Government departments are involved. The attending members of the VAT committee informed the attending members of the Federation that the VAT committee is always available for any assistance the Federation will need in pursuing the resolution of these issues. 3. Meeting with the President of ICPAC, Mr. Nicos Syrimis: Mr. Syrimis welcomed the Vice President of the VAT Committee and discussed with him the possibility of assisting the committee in its attempts to expand the current duties of the Tax Council ( ÊÔÚÈ Îfi Ì Ô ÏÈÔ), to cover VAT disputes. During the meeting Mr. Syrimis was informed on actions undertaken up to that point by the Committee and its relevant proposals. His initial reaction was positive. VAT Office reacted positively to this possibility. Following the VAT Office s response, the Committee formally addressed the matter by sending letters to the VAT office itself and to the House of Representatives. Charis Charalambous Chairman PUBLIC RELATIONS COMMITTEE During the fourth quarter of 2009, the Public Relations Committee held four formal meetings and organised the following activities: On 16 September 2009, the Committee circulated a reminder to all members informing them about the blood donation group that has been registered under ICPAC. All members of ICPAC may donate blood anytime during the year at the Blood Donation premises in Engomi. The registration of the blood donation group is an integral part of ICPAC s social responsibility programme. On 5 November 2009, the Committee organised a presentation about the Institute and the profession at the premises of the English School, Nicosia. The presentation was attended by pupils of the school and their parents. The General Manager of the Institute made the presentation and answered a number of questions that the parents and pupils had for the Institute and the profession. The presentations to schools are part of Institute s strategy of informing the youth and their parents about the Institute and the profession. 4. Submission deadline for VIES: During a scheduled meeting with the VAT office, the VAT Committee discussed the possibility of extending the deadline for the submission of VIES Forms from the tenth day of the month following the month to which the VIES Form relates to the fifteenth day. The A photograph from the visit to the Paediatric Department of Limassol hospital. 4 ACCOUNTANCY CYPRUS VOLUME 97 DECEMBER 2009

6 Institute News On 11 November 2009, the Committee organised a Chinese dinner at Pagoda Mont Parnasse restaurant. The evening had a very high participation and was considered successful by the people attended since it gave them the opportunity to meet with other members of the Institute and friends and enjoy a large variety of Chinese food. On 28 November 2009, the Committee in co-ordination with the Education Committee attended a career event at the premises of Ayia Paraskevi, Bank of Cyprus. The event was attended by various professional associations in Cyprus where the associations had the chance to present their association and profession. The presentation by the Institute had a very high participation and the members of the Committees answered various questions. During the last two weeks of the year the Committee in coordination with the Limassol-Paphos co-ordination Committee organised visits to the paediatric departments of hospitals in both Nicosia and Limassol and offered presents to children for the Christmas period. The visits were an integral part of the Institute s social responsibility programme, which aims at providing comfort to the less fortunate. The children enjoyed the presents provided to them and were all thankful to the Institute. Panos Prodromides Chairman TAXATION COMMITTEE The Taxation Committee addressed the following issues during the last quarter of 2009: Anti avoidance tax evasion measures We have elaborately examined the anti avoidance tax evasion measures as announced by the Minister of Finance and have prepared a memo with our comments and suggestions which we have submitted to the Council for approval and circularization. Tax confirmation report We have examined and approved the draft tax confirmation report as prepared by our Institute that is intended to be introduced for tax returns of 2009 and onwards replacing item 2 in Part 8 (Auditor s Report) of the existing form I.R.4 & 4A 2008 of the Inland Revenue Department. The Institute intends to issue a technical circular on the matter together with a specimen working paper as to the audit tests that will be needed. Interest disallowed We are working on a list of cases where the current interpretation of the legislation regarding the disallowance of interest leads to unfair results for the purpose of submitting to the Inland Revenue Department. Financing arrangements between related parties We have continued our discussions with the Inland Revenue Department in an attempt to exploit the possibility of being able to provide a more certain environment on financing arrangements between related parties. Procedure to be followed with the Registrar of Companies when the beneficial owners of CY companies vanish We have circulated to our members the reply to our letter received from the Commissioner of the Registrar of Companies concerning the procedure to be followed by local directors that wish to resign their post when their non residents clients have vanished. Angelos M. Gregoriades Chairman INFORMATION TECHNOLOGY AND BUSINESS CONSULTING COMMITTEE The activities for each of our three main areas or responsibility were as follow: 1. Web-Site and ICPAC IT Architecture Administration The members of the Institutes Web Page subcommittee have continued working on the necessary requirements for the implementation of a Customer Relation Management Software (CRM) that is to be acquired by the Institute. In order to have a narrative and detail list of all current requirements, IT consultants were approach to quote their proposal in preparing the final requirements to be distributed to possible vendors. The members of the Institutes Web Page subcommittee have undergone a survey and have prepared a draft proposal for the Institute s Council regarding the ACCOUNTANCY CYPRUS VOLUME 97 DECEMBER

7 Institute News possibility to enhance the web page and allow members to advertise for career opportunities. We have also addressed in this memo the quotations by two colleague firms to prepare the final requirements for the implementation of the new CRM software, alongside with two current proposals for the CRM. In addition, based on the EU guideline 2006/123/ for the establishment of Unified Service Centre, we have met with our webpage providers to address the necessary changes that need to be applied in the webpage infrastructure so as to provide this facility. 2. Technical Development A seminar was presented with success in the field of ISA IT audit & controls implementation. The seminar was presented in Nicosia in co-operation with the Education Committee. An article was published in the latest Accountancy magazine of the series Excel Wizard. The members have also presented to the committee their proposal to publish early in 2010 our annual software survey. That will give the members the option to review the current software features. To complete the list of possible vendors the sub-committee have contacted CITEA and the Cyprus Information Technology Company and address to their members our intention to publish the survey. We had a lot of replies and we will soon proceed with the collection of vendors data. 3. Business Consulting The members of the Business Consulting sub-committee have contacted various an HR service providers to prepare for us various articles for publication in the Institute s magazine. Nicholas Shiakallis Chairman EU MATTERS COMMITTEE The EU Matters Committee of ICPAC has carried out the following actions in accordance with its terms of reference: Meeting of the representatives of The European Affairs Committee with representatives of the Planning Bureau of Cyprus. The participants discussed ways of cooperation between ICPAC and the Planning Bureau of Cyprus as well as the organisation of joint seminars during the beginning of Meeting of the representatives of The European Affairs Committee with representatives of the Office of the European Commission in Cyprus. The participants discussed ways of cooperation between ICPAC and the European Office. Continuous follow up on the developments in the EU affecting the accounting profession through research from various sources such as the EU website, the european business and accounting press etc Investigation of the possibility of accessing EU funds, through available EU programs, for the benefit of ICPAC and its members, with the assistance of an external counsel. The other committees of ICPAC have provided their views and proposals on this matter which have been evaluated. A letter was drafted to be sent to the board outlining the result of this exercise Preparation of articles for Accountancy on EU funding programs as well as on the economic forecast of the European Commission on the European and the Cyprus economy Continuous update of the website of ICPAC Stelios Anastasiou Chairman LIMASSOL-PAPHOS COORDINATION COMMITTEE During the period from 1 October 2009 to 31 December 2009 the Limassol-Paphos coordination committee has carried out the following activities: 1. On the 2nd and 3rd of November the committee coordinated the seminar IAS 1 Presentation of Financial Statements, IAS 36 Impairment of Assets and IAS 40 Investment Property. The seminar was held at Ajax Hotel in Limassol. 2. On the 25th of November the committee coordinated the seminar International tax and exchange of information. The seminar was held at Ajax Hotel in Limassol. 8 ACCOUNTANCY CYPRUS VOLUME 97 DECEMBER 2009

8 Institute News 3. On the 8th of December the committee coordinated the seminar IAS 21 The effects of changes in foreign exchange rates, IAS 19 Employee benefits and IAS 12 Income taxes. The seminar was held at Ajax Hotel in Limassol. 4. On the 10th of December the committee coordinated the seminar New VAT regulations. The seminar was held at Ajax Hotel in Limassol. 5. During the Christmas period members of the committee visited the pediatric wards of the Limassol and Paphos public hospitals and gave presents to the children on behalf of the ICPAC. Charalambos Efstratiou Chairman CORPORATE GOVERNANCE AND INTERNAL AUDIT COMMITTEE In October 2009 the Corporate Governance and Internal Audit Committee reviewed and approved the subcommittees action plans for The plans set objectives in the areas of corporate governance and internal audit, such as the development of a risk register for the core processes within a bank, continuous attention on the developments over regulatory guidance on governance, training needs for members that are more active in internal audit etc. A joint seminar was organised with another Committee on the revised Cyprus Stock Exchange s Code of Corporate Governance. The Committee is currently studying certain requirements of the Corporate Governance Code and Central Bank s Directive on Corporate Governance in an attempt to provide insight and guidance on the applicability of certain key requirements. Finally, the FEE discussion paper on the auditor s role regarding the assurance on Corporate Governance Statements has been presented to the Committee s members for exchange of views. Christos M Skapoullis Chairman PUBLIC SECTOR COMMITTEE The activities of the Public Sector Committee during the period October to December 2009 were as follows: 1. Seminar on the Challenges of Accrual Accounting in the Public Sector to be held on 23rd March 2010 The Committee is planning a seminar on the above subject in collaboration with the FEE Public Sector Committee. Among the speakers are expected to be the incoming Chairman of the International Public Sector Accounting Standards Board, the President of FEE, the Minister of Finance as well as a number of FEE Public Sector Committee members. The seminar programme can be found on pages of this issue. 2. Budget and Accounting Practice in the Public Sector Sub-committee The Committee is in the process of circulating a questionnaire (prepared in collaboration with a researcher) for the purposes of conducting a survey to ascertain the usefulness of financial information provided by the Public Sector to various user groups. The conclusions of this survey will be published in due course. 3. Public Governance Sub-committee The Committee is in the process of drafting a Public Governance Code with the contribution of a number of well respected professionals in the fields of accounting, management and law. When completed, the Code will be presented to the Ministry of Finance for discussion and adoption. 4. Other Actions Intensification of the cooperation with public sector committees of international accounting organisations (completion of questionnaires/surveys carried out by FEE/IPSASB, participation of the Committee s President in the FEE Public Sector Committee). Update of the record with the personal data of the ICPAC members who are employed in the public sector. Rea Georgiou Chairwoman AUDITING STANDARDS COMMITTEE During the fourth quarter of 2009, the Auditing Standards Committee held 2 meetings during which: ACCOUNTANCY CYPRUS VOLUME 97 DECEMBER

9 Institute News 1. The Committee discussed the possible alternatives in complying with the new requirements for signing of audit reports as per article 34(4) of The Law on Compulsory Audits of Annual and Consolidated Accounts by Statutory Auditors and Statutory Firms, Law No. 42(I)/2009 (the Auditors Law), which is expected to come into force soon. A technical circular was prepared which provides guidance on how and by whom the audit report should be signed. The technical circular will be issued to all members shortly. 2. The Committee considered the required changes to the terminology used in the audit reports (Greek and English versions) to comply with the requirements of IAS1 revised which is effective for accounting periods starting on or after 1 January A technical circular was prepared and will be issued to all members shortly. 3. The Committee began examining possible changes to the wording of the audit reports following the recent changes to the Companies Law, Cap.113 and the enactment of the Auditors Law referred to above. A technical circular containing the required revisions to the wording of the audit reports will be prepared for circulation to all members. A photograph from the seminar on the ISA 315 IT audit and controls implementation tools. EDUCATION COMMITTEE During the fourth quarter of 2009, the Committee held three meetings. The following seminars have been organized and presented during this period. 1. The CSE Emerging Companies Market, the Market maker institution and new developments on the corporate governance code 4. The Committee began examining the consultation paper released by the IAASB Auditing Complex Financial Instruments which seeks views on developing new fair value auditing guidance where it is most critical in today s environment, e.g. in situations of illiquid markets. 5. The Committee continued its monitoring of the EU s endorsement of new or revised IFRSs and IFRICs. Panos Papadopoulos Chairman The above seminar was held on 30 October 2009 in Nicosia and was co organised with the Stock Exchange and Capital Markets Committee and the Corporate Governance and Internal Audit Committee. It was presented by officials of the Cyprus Stock Exchange. The purpose of the seminar was to inform the participants on the introduction of the new unregulated market, the revised Corporate Governance Code and the introduction of the Market-Maker. The seminar was attended by 62 participants. 2. IAS 1 Presentation of Financial Statements, IAS 36 Impairment of Assets and IAS 40 Investment Property 10 ACCOUNTANCY CYPRUS VOLUME 97 DECEMBER 2009

10 Institute News Harry Xenophontos, Senior Consultant Enterprise Risk Services, Deloitte, Nicola Rouso, Manager Systems and Process Assurance, PwC and Hari Photiou Senior Consultant Enterprise Risk Services, Deloitte. The seminar was attended by 94 participants. 4. International Tax and Exchange of Information A photograph from the seminar on the different aspects of International tax and the Exchange of information issue. The seminar was co organised with the Taxation Committee and was held in Nicosia on 18 November 2009, attended by 128 participants and in Limassol on 25 November which attended by 102 participants. The purpose of the seminar was to inform the participants about the different aspects of International tax and the exchange of information issue. The seminar was presented by Mr Pieris Markou, Partner, Head of Tax Services Deloitte and Mrs Athina Stephanou, Senior Principal Tax Assessor, Department of Inland Revenue. The seminar was held on 14 September 2009 in Nicosia and it was repeated in Limassol on 2 and 3 November The seminar was presented by Mr. Costas Seraphim, Head of PwC Academy and Mr Sakis Fasouliotis, Director of F & A Grand Auditing & Consulting Ltd. The purpose of the seminar was to inform members in public practice of the revisions to International Accounting Standard IAS 1 and the requirements of IAS 36 and IAS 40. The seminar in Limassol was attended by 194 participants. 3. Information system risks and how they affect the financial statements The seminar was held in Nicosia on 12 November September 2009 and was co organised with Information Technology and Business Consulting Committee. The purpose of the seminar was to inform the participants on the ISA 315 IT audit and controls implementation tools. The seminar was presented by A photograph from the seminar regarding the new VAT rules. 12 ACCOUNTANCY CYPRUS VOLUME 97 DECEMBER 2009

11 Institute News Action Plan of the Education Committee, with the view of continuing to provide the members of ICPAC with relevant seminars for the purposes of Continuous Professional Education (CPE) and to keep them abreast with recent changes in national and international laws and regulations as well as changes in the profession. Maria Pastellopoulou Chairwoman INTERNATIONAL BUSINESS, SHIPPING AND FOREIGN INVESTMENTS COMMITTEE 1. Meetings of the committee The seminar on IAS 21 ``The effect of changes in Foreign Exchange ratesãã, IAS 19 ``Employee Benefits and IAS 12 Income Taxesãã 5. New Vat rules effective from 1 January 2010 The above seminar was presented in Nicosia on 3 December and 9 December, attended by 233 participants and repeated in Limassol on 10 December, attended by 128 participants. The purpose of the seminar was to inform members on the new Vat rules which will be effective from 1 January The seminar was presented by Christos Papamarkides, Partner Indirect Tax Department, Deloitte. 6. IAS 21 The effect of changes in Foreign Exchange rates, IAS 19 Employee Benefits and IAS 12 Income Taxes The seminar was held on 7 December 2009 in Nicosia, attended by 65 participants and it was repeated in Limassol on 8 December 2009, attended by 50 participants. The seminar was presented by Mr. Costas Seraphim, Head of PwC Academy and Mr Sakis Fasouliotis, Director of F & A Grand Auditing & Consulting Ltd. The purpose of the seminar was to inform members in public practice of the requirements of IAS 21, IAS 19 and IAS 12. During the last quarter the committee held meetings with the following in order to discuss issues of mutual interest: a. Cyprus Investment Promotion Agency (CIPA) b. Association of Cyprus Commercial Banks The general conclusion is that the meetings with the above organizations as well as the meeting with the Shipping Council and the Bar Association proved to be very positive. These meeting are helping in the coordination of our activities on subjects of mutual interest. 2. Registrar of Companies The Committee is coordinating its activities with the Cyprus Investment Promotion Agency (CIPA) to ensure the computerization of the procedures of the Registrar of Companies is completed as quickly as possible. Following the meeting held with the Registrar, we have been assured that despite some small delays, the first modules of this project will be operational in the first six months of the coming year. The committee will continue monitoring the process on a monthly basis. 3. Responsibilities of Company s Secretary and VAT Authorities Several seminars are planned for the first quarter of 2010 in Nicosia, Larnaca and Limassol, in accordance with the The Committee discussed the responsibilities of the company s secretary under the current VAT legislation. In ACCOUNTANCY CYPRUS VOLUME 97 DECEMBER

12 Institute News cooperation with CIPA this issue has been taken up with the responsible government departments to establish ways to relieve the secretary from the strict obligations provided in the legislation. 4. World Bank Report During the current year, Cyprus participated for the first time on a study/evaluation carried out by the World Bank. This report covers 183 countries. Cyprus was ranked at the 40th position among these 183 countries. An ad-hoc committee has been set up to discuss the report and to propose ways to improve the efficiency of the various government departments and consequently to improve the ranking of Cyprus. Marios A. Klitou Chairman NEW MEMBERS During the period October - December 2009 the following persons have been accepted as new members of the Institute: 2874 Antonis Skouris ACCA 2875 Michalis Mitas ACCA 2876 Michael Alexandrou ACCA 2877 Emilianos Demetriou ACCA 2878 Stelios Efstathiou ACCA 2879 Antonia Hajdisophocleous ACCA 2880 Despina Loizou ACCA 2881 George Kasapis ACCA 2882 Theodoros Louka ACCA 2883 Elisavet Papaioannou ACCA 2884 Stelios Demetriou ACCA 2885 Kyriakos Koursaros ACCA 2886 Dmitry Kucheryuk FCCA 2887 Andreas Ioannou ACA 2888 Marianna Chrysospathi ACA 2889 Alexia Michael ACA 2890 Soteris Tsiartas AIA 2891 John Thomas Horton ACA 2892 Kleanthis Christodoulides ACA 2893 Georgios Syrimis ACA 2894 Spyros Yiasemides ACA 2895 Stephanos Symeonides ACCA 2896 Marilena Lefa ACCA 2897 Marina Gueorguieva Tzoneva ACCA 2898 Marios Panayides ACCA 2899 Margarita Christoforou ACCA 2900 Alexis Avakian ACCA 2901 Anna Efstathiou ACCA 2902 Nicholas Sozou ACCA 2903 Spyridoula Olga Mylona ACCA 2904 Georgios Karatzias ACCA 2905 Elina Christodoulou ACCA 2906 Linos Iacovou ACCA 2907 Evripides Theodoulou FCCA 2908 Xenophon Savva ACA 2909 Iordanis Argyropoulos ACA 2910 Theophylactos Phylactou ACA 2911 Yiouli Frangoude ACA 2912 Christos Charalambides ACA 2913 Maria Lambrou ACA 2914 Antonis Assos Article 155(1)(b) 2915 Yuliya Staravoitava ACCA 2916 Andreas Antoniou ACA 2917 Charalambos Kassapis ACA 2918 Loizos Theophilou ACA 2919 Evangelia Tsiakkouri ACA 2920 Constantinos Georgiou ACA 2921 Theognosia Sofroniou ACCA 2922 Christakis Iacovides IIPA 2923 Theofanis Skapoullis CIMA 2924 Maria Anastasiadou ACCA 2925 Athos Louca ACCA 2926 Panayiotis Ierides ACCA 2927 Marinos Tsikkouris CPA-USA Asked to be removed 418 Andreas Drousiotis ACCA 1176 Christina Constantinou ACCA 1700 Charalambos Katsaras ACCA 1858 Kokos Theodorides FCCA 2223 Marios Kyriakou ACA 2381 George Pitsillides ACCA 2385 Eleni Constantinou ACCA 2691 Denis Ivanov ACCA Removed 371 Eleni Iacovidou ACA 666 Petros Papaioannou ACCA 1231 Menelaos Aristodemou ACCA 1419 Elena Tsielepi ACCA 1614 Anna Andreou ACA 1750 Leon Elias Harris FCA 1841 Constantinos Yiannoulakis CA South African 2064 Charalambos Stavrou ACA 2095 George Sarris ACCA 2321 Sophia Christodoulou ACCA 2507 Loizos Kastrappis CPA Australia 2684 Pantelis Panteli ACCA Correction (we placed him, wrongly, as a member that he passed away) 2158 Nicolaos Teggeris ACA 14 ACCOUNTANCY CYPRUS VOLUME 97 DECEMBER 2009

13 Professional Briefing Professional Briefing NEW COMMISSIONER FOR INTERNAL AUDIT APPOINTED On 13 October 2009 the Council of Ministers appointed Mr. Andreas M. Lambrianou as the new Commissioner for Internal Audit. Mr. Andreas M. Lambrianou was born at Galata in 1952 and had his graduate and prost-graduate studies in the U.K. He graduated from the Queen Mary College of the University of London in 1978 by being awarded the degree of B.Sc (Eng) with distinction and in 1979 received his post-graduate degree, M.Sc. (LON) with specialization in engineering. productivity, the provision of high quality services with minimization of costs, as well as safeguarding the revenue of the State. At a public meeting on 6 November 2009 in the presence of the Minister of Finance Mr. Charilaos Stavrakis, Mr. Lambrianou stated inter alia: My Vision is that this Service may be turned into one of the basic pillars in the modernization and reform of the Public Service in the competitive environment of the European Union and the globalized economy. I definitely believe that the Internal Audit Service, in order to respond successfully to its objectives, requires independence, and integrity so that it provides the basis for reliability and impartiality to the highest possible professional level, confidentiality in order that it respects the importance of any information it receives without their dissemination and finally the ability which is required for the knowledge, experience and qualifications for the implementation of its tasks. BASIC REFORMS FOR REDUCING BUREAUCRACY In 1980 he started working in London and in May 1981 was appointed to the Department of Electromechanical Services and subsequently to the Department of Control of the Ministry of Communications and Works. On 15 November 2007 Mr. Lambrianou was promoted to Director of the Department of Control Upto 13 October 2009 when the Council of Ministers decided to appoint him as the new Commissioner of Internal Audit of the Republic of Cyprus. The Internal Audit Service conducts audits in the Public Service of the Republic of Cyprus which include the Public Educational Service, the Police, the Army and the National Guard. In achieving its objectives, the Service takes into consideration the well meant public interest, just administration, the need to achieve efficiency, the husbanding of resources and effectiveness in the use of resources of the public sector, the increase of The Ministry of Finance and KPMG, within the context of the project which is pursued with the objective of improving the Regulatory Regime to the benefit of businesses, on Monday 14 December 2009, held a Press Conference in Nicosia to present the project which will help in achieving the national objective of reducing the administrative burden by 20% until 2012, which is a commitment of our country to the European Union. Speakers at the Conference were the Minister of Finance, Mr.Charilaos Stavrakis, and Mr. Andreas K. Christophides, Managing Director of KPMG Limited. The target of the project is the modernization and simplification of the procedures which the businesses follow for the purpose of complying with the legislation of the Republic of Cyprus. This momentous project, which will cost half a million euros, will affect all the sectors of the civil service. The successful completion of the project and the adoption of the measures which will be recommended will constitute a significant aid to the businesses and to the economy at large, since they will free capital for use in productive sectors. ACCOUNTANCY CYPRUS VOLUME 97 DECEMBER

14 Professional Briefing The Minister of Finance, Mr. Charilaos Stavrakis, stated that the improvement of the Regulatory Regime is an initiative of the European Commission within the context of the Lisbon Strategy which promotes the decrease of bureaucracy and the administrative burden, the simplification of legislation and of the complex procedures and has as its objective a better governance. << As a Ministry of Finance we believe that the improvement of the Regulatory Regime constitutes the beginning for promoting further structural changes which must be pursued for the upgrading and improvement of the Civil Service of the country and as result for a better and more prompt service to the citizen and to the businesses. We all know that small and medium sized enterprises constitute the backbone of the economy and that it is they which are adversely affected from the complex and time-consuming procedures. In a period of world economic crisis, initiatives to this effect are imperative>>, Mr. Stavrakis stated. Mr. Christophides, inter alia, stated that as a business with more than 60 years presence in Cyprus, KPMG is well aware of the problem of bureaucracy <<We really feel honoured for being selected to promote this important project which is expected to bring tremendous benefits to businesses. As KPMG we provide high standard consultative services and we will do everything possible to respond fully to the expectations of the Government of Cyprus>>. Mr. Christophides stated. Mr. Christophides also stated that the successful completion of the project presupposes the cooperation with many Government departments, since the volume of work to be undertaken is quite large. Consequently, the need for harmonious cooperation of all the agents which will contribute for the completion of this project is absolutely necessary. ICPAC QUALITY CHECKED ICPAC Quality Checked is a quality assurance scheme introduced by ICPAC as from 1 July 2006 to promote best practice and to help improve standards across the profession in Cyprus. The aim of the scheme is to help ICPAC member firms enhance the quality and efficiency of services they provide to their clients, improve profitability, and protect the reputations of firms and the profession in Cyprus in general. The scheme promotes the adoption of practical quality control procedures that are generally considered to be best practice by the accountancy profession worldwide. Through this scheme, in order to encourage firms to apply suitable quality control procedures, ICPAC recognises firms that apply best practice procedures by issuing an ICPAC Quality Checked certificate and mark. This is awarded to firms that demonstrate at a quality assurance review visit that they adhere to principles and standards by applying suitable quality control to all areas of their business. Firms can display the certificate in their offices and include the mark on letterheads and in promotional literature to demonstrate to clients and others that they apply best practice procedures. The scheme is available to all ICPAC member firms and the quality assurance reviews of non-audit services are carried out alongside the routine statutory audit monitoring visits undertaken by ACCA on behalf of ICPAC. Under the scheme, ICPAC member firms can qualify for the ICPAC Quality Checked certificate and mark if they are able to demonstrate that they follow best practice standards, in addition to having a satisfactory outcome on audit monitoring and on compliance with ICPAC s rules and regulations. From 1 July 2006, the date of commencement of the ICPAC Quality Checked scheme, ACCA has carried out quality assurance reviews on behalf of ICPAC to 67 ICPAC member firms. Following these reviews, as at the time of this publication going to press, the following firm has been awarded the ICPAC Quality Checked certificate and mark: Horwath DSP LTD It is noted that 261 ICPAC member firms have not yet been subject to quality assurance reviews by ACCA on behalf of ICPAC. ACCOUNTING & AUDITING NEWS IASB AMENDS THE ACCOUNTING FOR RIGHTS ISSUES The International Accounting Standards Board (IASB) 18 ACCOUNTANCY CYPRUS VOLUME 97 DECEMBER 2009

15 Professional Briefing issued today an amendment to IAS 32 Financial Instruments: Presentation. The amendment addresses the accounting for rights issues (rights, options or warrants) that are denominated in a currency other than the functional currency of the issuer. Previously such rights issues were accounted for as derivative liabilities. However, the amendment issued today requires that, provided certain conditions are met, such rights issues are classified as equity regardless of the currency in which the exercise price is denominated. The global financial crisis has led to an increase in the number of such rights issues as entities seek to raise additional capital. The IASB has moved swiftly to address this issue. Entities are required to apply the amendment for annual periods beginning on or after 1 February 2010, but earlier application is permitted. Classification of Rights Issues (Amendment to IAS 32) is available for eifrs subscribers. Printed copies (ISBN ) will be available shortly, at 10 plus shipping. IASB SIMPLIFIES REQUIREMENTS FOR DISCLOSURE OF RELATED PARTY TRANSACTIONS The International Accounting Standards Board (IASB) issued today a revised version of IAS 24 Related Party Disclosures that simplifies the disclosure requirements for government-related entities and clarifies the definition of a related party. The revised standard is effective for annual periods beginning on or after 1 January 2011, with earlier application permitted. IAS 24 requires entities to disclose in their financial statements information about transactions with related parties. In broad terms, two parties are related to each other if one party controls, or significantly influences, the other party. The IASB has revised IAS 24 in response to concerns that the previous disclosure requirements and the definition of a related party were too complex and difficult to apply in practice, especially in environments where government control is pervasive. The revised standard addresses these concerns by: SUMMARY OF IASC FOUNDATION TRUSTEES MEETING - OCTOBER 2009 Providing a partial exemption for governmentrelated entities. The Trustees of the International Accounting Standards Committee (IASC) Foundation, the oversight body of the International Accounting Standards Board (IASB), today published the conclusions of their meeting in New York, USA on 7 and 8 October Response to G20 conclusions At their meeting in Pittsburgh in September, leaders of the G20 countries called on international accounting bodies to re-double their efforts to achieve a single set of high quality, global accounting standards within the context of their independent standard-setting process, and complete their convergence project by June In response, the Trustees at their meeting reaffirmed their commitment to this objective within the independent standard-setting process. In doing so, they continued to support the priority that the IASB has given to the projects described in its Memorandums of Understanding (MoU) with the US Financial Accounting Standards Board and the Accounting Standards Board of Japan. Those two Memorandums outline steps to complete convergence of IFRSs and US GAAP and Japanese GAAP respectively by 2011, consistent with the G20 request. Until now, if a government controlled, or significantly influenced, an entity, the entity was required to disclose information about all transactions with other entities controlled, or significantly influenced by the same government. The revised standard still requires disclosures that are important to users of financial statements but eliminates requirements to disclose information that is costly to gather and of less value to users. It achieves this balance by requiring disclosure about these transactions only if they are individually or collectively significant. Providing a revised definition of a related party. The IASB has simplified the definition and removed inconsistencies. BUSINESS SUPPORTS REFORMS FOR FINANCIAL STABILITY AND SUSTAINABLE GROWTH At their first ever joint press conference today, BUSINESSEUROPE and the leading European associations in the area of banking, pension funds, private equity and venture capital, securities exchanges and professional accountants presented a joint report, drawing lessons from the financial crisis and proposing key principles for financial market reforms: ACCOUNTANCY CYPRUS VOLUME 97 DECEMBER

16 Professional Briefing Maintain financial market integration as a core objective and avoid segmentation of financial services along national borders Better coordinate macro- and micro-prudential supervision and develop criteria for early cross-border intervention Elaborate an international resolution regime for large cross-border financial firms Uphold better regulation principles to ensure that regulation is proportionate and does not undermine innovation, market integration and competitiveness Avoid unilateral approaches and protectionism and eliminate harmful differences between regulatory regimes and regulatory arbitrage Develop counter-cyclical prudential rules without stifling access to finance also other interested parties may benefit from having an additional, educational resource to assist them in understanding and analysing the new impairment proposals. IFAC SUPPORTS G-20 INITIATIVES; CALLS FOR CORPORATE GOVERNANCE REFORMS AND EARLY ADOPTION OF GLOBAL STANDARDS (New York/September 29, 2009) - The International Federation of Accountants (IFAC) supports the goals expressed by G-20 Leaders at the Pittsburgh Summit last week to advance a framework for strong, sustainable, and balanced growth, which includes reform of executive compensation packages, the adoption of a single set of high-quality global accounting standards, and increased resources for the World Bank and international development banks. IFAC recommends that these goals remain priorities and that G-20 Leaders act on them at a national level. The organisations trust that these recommendations will be taken into account in the ongoing European reforms and G-20 process. FEE AND EFRAG HIGHLIGHTING THE DEBATE ON IMPAIRMENT OF FINANCIAL ASSETS - THE EXPECTED LOSS MODEL Brussels, 9 December FEE (Fédération des Experts comptables Européens - Federation of European Accountants) and EFRAG publish today a paper informing the debate on the IASB s proposals for the impairment of financial assets. Impairment of Financial Assets - The Expected Loss Model has been prepared jointly by FEE and EFRAG as part of their pro-active work to provide European stakeholders with a perspective on the proposals of the International Accounting Standards Board (IASB) for the impairment of financial assets. It is intended to promote discussion and debate on these proposals. The paper describes the proposals but does not represent the views of either FEE or EFRAG. Further to the recent financial crisis, aspects of financial reporting have been put under the spotlight and calls for change have been raised. The financial reporting of losses on financial assets held at amortised cost is one such principal area and the IASB has reacted by proposing a new impairment model. Given the complexity involved in accounting for the impairment of financial assets, both FEE and EFRAG felt that both European constituents and Two issues at the top of IFAC s agenda, which were reflected in its submission to the G-20 finance ministers in July, are the need for governments to address corporate governance issues and to move ahead on implementing common global standards not only for accounting, but also for auditing and for auditor independence. IFAC shares the G-20 s view that systems of remuneration should provide incentives consistent with long-term growth and corporate performance, emphasizes Robert Bunting, IFAC President, adding, The time has come to act on that view. IFAC FORUM IN BEIJING ADDRESSES NEEDS AND SOLUTIONS FOR SMALL AND MEDIUM PRACTICES AND THEIR SME CLIENTS (Beijing, PRC/October 30, 2009) - Over 200 delegates from more than 40 countries gathered in Beijing for the fourth annual IFAC SMP Forum ( smp/index.php#resources) of the International Federation of Accountants (IFAC) Small and Medium Practices (SMP) Committee making it the largest gathering in the event s history. Co-hosted by the Chinese Institute of Certified Public Accountants (CICPA) and the Confederation of Asian and Pacific Accountants (CAPA), the conference covered topics ranging from how to accomplish sustainable growth during economic turbulence to ensuring that international standards are relevant to SMEs/SMPs, and included presentations from the World Bank and the Asian Development Bank. 20 ACCOUNTANCY CYPRUS VOLUME 97 DECEMBER 2009

17 Professional Briefing IFAC PRESSES FOR ACTION TO ADOPT AND IMPLEMENT GLOBAL FINANCIAL STANDARDS (Washington, D.C./November 19, 2009) - The International Federation of Accountants (IFAC) 32nd annual Council meeting in Washington, D.C., this week emphasized the urgency of achieving global adoption and implementation of financial standards, especially for accounting and auditing. (New York/October 5, 2009) - To promote awareness and understanding of the newly clarified1 International Standards on Auditing (ISAs), the International Auditing and Assurance Standards Board (IAASB) released today a series of ISA Modules focusing on some of the new and more significantly revised ISAs. Developed by IAASB staff, each of these modules combines short video presentations and accompanying slides that explain the key principles of, and major changes in, individual ISAs, including the implications for audits of small- and medium-sized entities (SMEs). This new resource includes modules that provide an introduction to, and an overview of, the clarified ISAs, including ISA 200, Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with International Standards on Auditing, and audit documentation and SME audit considerations. Additional modules cover ISAs that address related parties, auditing accounting estimates, including fair value estimates, communication with those charged with governance, and communicating deficiencies in internal control. FORUM OF FIRMS FOCUSES ON ENHANCING INTERNAL QUALITY ASSURANCE PROCESSES (New York/October 8, 2009) - Over 40 senior audit professionals from 23 international networks of accounting firms met yesterday to share their experiences, industry insights, and current practices in establishing and strengthening global internal inspection processes, at a workshop organized by the Forum of Firms (Forum). The Forum assembled a group of experts to discuss new developments, including innovations in inspection organization, methodology and staffing, practical implementation issues, and processes for internal reporting. Every member of the Forum must follow international professional standards on quality control at the firm level and for each transnational audit engagement: International Standard on Quality Control 1 (ISQC 1) and International Standard on Auditing 220 (ISA 220) as issued by the International Auditing and Assurance Standards Board. These standards require firms to establish a system of quality control to provide them with reasonable assurance that the firm and its personnel comply with professional standards and regulatory and legal requirements, and that reports issued by the firm or engagement partners are appropriate in the circumstances. Additionally, Forum members must conduct regular globally coordinated internal inspection reviews to monitor adherence to these standards across their networks. IAASB SEEKS VIEWS ON AUDITING COMPLEX FINANCIAL INSTRUMENTS (New York/October 16, 2009) - The International Auditing and Assurance Standards Board (IAASB) has released a Consultation Paper seeking views on developing new fair value auditing guidance where it is most critical in today s environment. Entitled Auditing Complex Financial Instruments, the paper recognizes the strong demand from auditors and preparers for further guidance on auditing complex financial instruments, e.g., in situations of illiquid markets, which currently pose the greatest challenges for them. The Consultation Paper incorporates recent work by the UK Auditing Practices Board (APB) on the same topic, and asks specific questions about how that guidance might be adapted or supplemented for application in the international context. James Gunn, IAASB Technical Director, explains, The APB has made significant progress in developing national guidance on this important topic and, just as importantly, leveraging it will enable us to put relevant guidance in the hands of auditors as quickly as possible. IPSASB Issues Consultation Paper on Reporting on the Long-Term Sustainability of Public Finances (New York/November 24, 2009) - There is a growing understanding that future generations of taxpayers will have to deal with the fiscal consequences of current government policies. Concerns about the ability of governments to meet future service delivery and financial commitments for health, pensions, debt-servicing, and other obligations have long existed, but have increased in the current economic environment. Uncertainty over the long-term financial consequences of government interventions, including the bailouts and stimulus packages that have characterized the global financial crisis, has added another dimension to concerns over the long-term sustainability of public finances in many countries. ACCOUNTANCY CYPRUS VOLUME 97 DECEMBER

18 Professional Briefing By Tassos Anastasiades, Deputy Editor Note related to accounting - Auditing and relevant issues SEC SEEKS COMMON GOAL FOR ACCOUNTS The United States remained committed to creating a single global accounting standard for public companies, Mary Schapiro, chairman of the Securities and Exchange Commission stated She told the technical committee of the International Organisation of Securities Commissions in Basel, Switzerland, that regulations would announce a plan in the autumn for moving toward that goal. We must not lose sight of the fact that the purpose of accounting standards is to provide a clear and accurate picture of a company s financial condition for investors... I remain committed to the goal of a global set of highquality accounting standards, Ms Schapiro said. SEC CHIEF SEEKS NEW SECURITIES LAWS Securities laws are outdated and legislation is needed to regulate new investment products that were at the heat of the financial crisis, Mary Shapiro, chairman of the US Securities and Exchange Commission, stated. For the first time, Ms Schapiro called for new laws targeted at gaps in the regulation of securities backed by assets such as mortgages and credit cards. Not all problems with [asset-backed securities] can be addressed under our current rule-making authority, she said at a securities industry conference in New York. I believe legislative action is also necessary to deal with some of the issues that have been highlighted by the credit crisis. Ms Schapiro said the statutes governing the offer and sale of securities were written decades before asset-backed securities (ABS) were even dreamed of and that current amendments to improve disclosure did not go far enough to tackle the unique problems posed by ABS. BANKS FACE BIG RISE IN CAPITAL HOLDINGS Tough new rules that require banks to do more to protect themselves against trading losses will force them to increase their total capital holdings by an average of 11.5 per cent, according to an impact study by the Basel committee on banking supervision. The rules, adopted in July by the committeeãs 27 member nations, force banks to set aside capital against the possibility of credit defaults or downgrades and to test their trading-book risk in deeply stressed-book risk in deeply stressed markets. All major banks must adhere to the new requirements by the end of 2010, including those in the US, which has not subscribed to some of Baselãs rules in the past. E&Y ADMITS ROLE IN AKAI CASE Ernst & Young has agreed to make an undisclosed substantial payment to the liquidators of Akai Holdings, Hong Kongãs biggest corporate failure, after admitting that certain audit documents produced as court evidence were not reliable. Speaking in Hong Kong s High Court Leslie Kosmin, barrister for liquidators Borrelli Walsh, called the settlement a very favourable outcome for the creditors of Akai Holdings and another milestone in the winding up of the company. E&Y had been Akai s auditor prior to the Hong Kong consumer electronic company s collapse. The liquidators began pursuing the accounting firm for a $1bn negligence claim in SWISS POISED TO MEET INTERNATIONAL TAXATION STANDARDS Since March, when Bern decided to accept transparency standards established by the Organisation for Economic Co-operation and Development, Switzerland has embarked on a diplomatic race to renegotiate its treaties in record time. The Swiss governmentãs change of tack involved dropping an arcane, but crucial, distinction between tax fraud and tax evasion. In its traditional double taxation agreements, Bern had offered to help foreign tax authorities track down tax fraud - a criminal offence in Switzerland - but withheld assistance in cases of tax evasion, which is a civil offence under Swiss law. The Swiss government was forced to adjust after rising international pressure for greater transparency from the G20. PWC FEES RISE TO í154m IN LEHMAN WIND- UP The winding-up of Lehman Brothers in Europe, one part of the largest-ever global bank-ruptcy, is heading into record territory for accountancy and legal fees in the region, as 24 ACCOUNTANCY CYPRUS VOLUME 97 DECEMBER 2009

19 Professional Briefing well as the size of the claims made against the overseas parent company. The joint administrators, in a report to creditors, revealed that they are readying a new claim of $90bn (m60,2bn) against the US parent of the failed bank, bringing the claims by its European arm against different Lehman entities globally to $208bn. In the report, PwC revealed that in its first year working on the case it charged 154m (m168m) in fees for work on the companyãs winding up. The report notes that there has been a general downward trend in the average hourly charge-out rates for PwC partners and staff. AXA CHIEF ATTACKS ACCOUNTING RULES SWITCH Europe should not have handed over control of accounting rules to the London-based International Accounting Standards Board, according to the chief executive of Axa, Franceãs largest insurer. Among the more controversial points is the current requirement for many assets to be marked at ``fair valueãã or market prices. As markets tumbled during the crisis the rules forced banks to write down hundreds of billions in assets, producing losses and undermining their capital cushions. Axa, along with French banks such as BNP Paribas, has long been a vocal critic of fair value. The companies argue that the rules ignore the fact that banks with large retail operations and insurers hold assets to back long-term liability, and that many assets are infrequently traded, leading to big moves in their prices. SWISS SET FOR FLOOD OF UBS APPEALS Switzerland is braced for a flood of legal challenges over its agreement to hand confidential bank account information on nearly 4,500 UBS private clients to US tax officials - and plans to hire judges to cope with the onslaught. The Swiss government s admission yesterday that hundreds of UBS account holders suspected of evading US taxes were likely to challenge the agreement was unwelcome news for UBS, which has sought to draw a line under the dispute. Up to five judges are to be appointed to deal with appeals lodged by UBS s private clients. The appointments will be limited to two years and are meant to speed complaints through the Swiss courts. Bern agreed to hand over the identities of 4,450 wealthy UBS clients to settle the case with the US. But account holders were given a right to appeal. The government said it was likely that as many as 500 claims would be submitted by the end of the year. MADOFF LOSSES AMOUNT TO $21.2BN The trustee in charge of recovering assets from Bernard Madoff s fraudulent investment operations has said $21.2bn had been lost through his Ponzi scheme, an amount far higher than was thought as recently as June. Irving Picard, the court appointed trustee, who initially estimated that $13bn was missing, said after examining accounts dating back to 1983 the losses were deeper and could continue to grow as more claims were made. Mr Madoff is serving a 150-year jail term. SEC LOOKS TO GET TO THE BOTTOM OF DARK POOLS Equity prices from the New York Stock Exchange and Nasdag flash across television screens, computers and mobile phones constantly. But there is a flourishing and hidden side to the business of buying and selling shares that most investors are not aware of. The Securities and Exchange Commission is expected to expand on recent proposals governing this hidden side, so-called dark pools, which has grown in recent years. Last week the regulator started a 90-day consultation for suggestions on further proposals to reform the operations of dark pools. LEADING ECONOMIES BLAMED FOR FISCAL SECRECY Leading economic centres including the US, UK and Singapore are among the countries most to blame for promoting international financial secrecy, according to a new index comparing the harm allegedly done by tax havens and rich nations. The league table issued by the tax Justice Network, a respected campaign group, led by the US state of Delaware and includes Luxembourg, Switzerland and Hong Kong in its top 10. The research is an unusual attempt to measure whether powerful countries are as culpable over illicit fund flows as the offshore centres they have attacked since the financial crisis. BRUSSELS WARNS ON ACCOUNTS RULES Brussels has warned that it will be months before it decides whether to support a radical overhaul of accounting rules on how banks and other financial institutions value their assets. Charlie McCreevy, the outgoing internal markets commissioner, has stepped into the debate that has rattled the European financial industry. The European Commission decided to delay the introduction of controversial accounting rules just as they were made available for use in most of the rest of the world outside the US. The standards need to have a complete overview of all aspects, Mr McCreevy said in a letter to Gerrit Zalm, head of the independent foundation which oversees the International Accounting Standards Board, the international rulesetter.the Commission s decision not to ACCOUNTANCY CYPRUS VOLUME 97 DECEMBER

20 Professional Briefing deploy the rules this year reflects the changed financial outlook and market improvements, Mr McCreevy added. EU DELAYS ADOPTION OF ACCOUNTING RULE CHANGES Brussels has delayed the introduction in the European Union of a radical overhaul of accounting rules for banks and insurers which has recently come into force across most of the rest of the world outside the.the move follows a deep split between European financial institutions over the new rules on the way they value assets in their accounts. Analysts say some French, German and Italian banks with large investment banking activities would be hit disproportionately by the changes, forcing them to book losses on large holdings of derivatives. But the decision by the European Commission to delay the changes within Europe has angered other banks in the region who fear they will be put at a disadvantage to international peers. The International Accounting Standards Board earlier published its overhaul of rules on fair value accounting, where assets are marked to market prices. Supporters say this makes accounts more transparent, but critics believe it exacerbated the financial crisis by forcing banks to take losses on assets when markets fell. DELAY HIGHLIGHTS DIVISIONS What happened? Brussels said on November 12 that it would delay the introduction in the European Union of an overhaul of accounting rules relevant to banks and insurers. The overhaul, published by the International Accounting Standards Board, is the first part of a standard called IFRS 9 Financial Instruments. It is designed to take effect no later than Why did Brussels decide to delay? The first part of the standard focused on controversial fair value, or mark-to-market accounting, valuing assets at market prices. Institutions from Germany, France and Italy thought the overhaul gave too much emphasis to fair value, which some banks and policymakers say exacerbated the financial crisis, and not enough emphasis to amortised cost that smoothes out market volatility. Those in favour of the standard, which include UK banks and accountants, say valuing assets at market prices improves transparency by reflecting the current economic reality, however harsh that reality may be. What is the impact of the decision? European banks and insurers will not be required to use the standard for their 2009 accounts while companies in more than 80 countries outside of the European Union may do so. HSBC says this puts European companies at a competitive disadvantage. What happens now? The Commission says it will wait until the remaining two phases of the IASB s project are complete before deciding to adopt the standard. It also wants to investigate whether the new rules will require European banks and insurers to report more of their assets at fair value. EX-OPTIMAL HEAD IS CHARGED OVER MADOFF The former head of Optimal, the Geneva-based hedge fund investment arm of Spanish bank Santander, has been charged with criminal mismanagement of client funds that were placed with fraudulent US broker Bernard Madoff.Manuel Echeverr_a was charged as part of a probe by Geneva investigating magistrate Marc Tappolet, according to legal sources and a court document. He is one of the most senior wealth managers known to be facing criminal charges connected with the Madoff scandal. MADOFF AUDITOR PLEADS GUILTY TO FRAUD David Friehling, Bernard Madoff s auditor, has pleaded guilty to securities fraud and filing false audit reports in his role in the multibillion dollar Ponzi scheme. Mr Friehling pleaded guilty to nine separate charges and faces up to 114 years in prison. He is co-operating with prosecutors in the hope of receiving less prison time and is likely to be sentenced by mid-february. UBS FINED AFTER BANKERS USED CLIENT CASH FOR SPECULATIVE TRADES UBS has been hit with the third-biggest fine levied by the UK financial watchdog after senior employees were discovered using money taken from customer accounts to speculate in foreign currencies and commodities. An internal investigation launched by the Swiss Bank after an employee blew the whistle on the practice found a desk head and three other employees in the international wealth management business had been placing up to 50 unauthorised trades a day in 2006 and ACCOUNTANCY CYPRUS VOLUME 97 DECEMBER 2009

21 Professional Briefing FORMER UBS CLIENT JAILED FOR TAX FRAUD A US court yesterday handed down the first prison sentence to a former US client of UBS in a ruling that will unsettle the Swiss banking group s other US former offshore customers. Robert Moran, a wealthy US yacht broker, was given a two-month sentence for tax fraud by a court in Florida. The sentence was relatively lenient to reflect the cooperation of UK-born Mr Moran with the US authorities but it marked the first custodial term in deepening investigations into US clients of the bank. Mr Moran, aged 58, is the third former UBS client tried after the US authorities earlier this year gained the names of 255 of UBS s US offshore customers as part of a $780m ( m525m, 470m) settlement of criminal charges against the bank.the US justice department and Internal Revenue Service should receive details about a further 4,450 clients, under another settlement agreed last August to resolve a separate, but linked, civil action. FEE - ICPAC SEMINAR JOINT FEE AND ICPAC PUBLIC SECTOR SEMINAR MARCH 2010 CHALLENGES OF ACCRUAL ACCOUNTING IN THE PUBLIC SECTOR Tuesday 23 March 2010, 8:00-17:00 Hilton Cyprus, Nicosia, Cyprus Speakers include: Nicos Syrimis, President of ICPAC (Institute of Certified Public Accountants of Cyprus) Charilaos Stavrakis, Minister of Finance Hans van Damme, President of FEE (Federation of European Accountants) Andreas Bergmann, Incoming Chair of IPSASB (International Public Sector Accounting Standards Board - IPSASB) Lazaros Lazarou, Accountant General of the Republic of Cyprus Chrystalla Georghadji, Auditor General of the Republic of Cyprus The seminar will discuss the latest developments in relation to IPSAS including the IPSASB strategy. Not only the accounting aspects will be considered but also the auditing aspects. There will be workshops on the practical experiences in accounting and auditing practices from over 10 different European countries. SEMINAR PROGRAMME 8:00-8:30 REGISTRATION AND COFFEE 8:30-9:00 INTRODUCTION Nicos Syrimis, President of ICPAC Caroline Mawhood, Chair of FEE Public Sector Committee (PSC) Rea Georgiou, Chair of ICPAC Public Sector Committee (PSC) 9:00-9:20 KEYNOTE SPEECHES Charilaos Stavrakis, Minister of Finance Hans van Damme, President of FEE 9:20-10:10 INTERNATIONAL PUBLIC SECTOR ACCOUNTING STANDARDS BOARD STRATEGY Andreas Bergmann, Incoming Chair of IPSASB 10:10-10:40 PRESENTATION OF PUBLIC SECTOR-SPECIFIC IPSASs Thomas Müller-Marques Berger, Member of IPSASB and FEE/PSC 10:40-11:10 COFFEE BREAK 11:10-11:30 AUDITING: SIMILARITIES AND DIFFERENCES BETWEEN PUBLIC AND PRIVATE SECTOR Daniel Faura, Member of FEE/PSC 11:30-11:50 CYPRUS PUBLIC SECTOR DEVELOPMENTS IN ACCOUNTING PRACTICE Lazaros Lazarou, Accountant General of the Republic of Cyprus 11:50-12:10 CYPRUS PUBLIC SECTOR DEVELOPMENTS IN AUDITING PRACTICE Chrystalla Georghadji, Auditor General of the Republic of Cyprus 12:10-12:30 QUESTIONS 12:30-14:00 LUNCH 14:00-14:30 THE BENEFITS IN IMPLEMENTING ACCRUAL ACCOUNTING John Stanford, Deputy Technical Director of IPSASB 14:30-16:15 PRACTICAL EXPERIENCES IN ACCOUNTING AND AUDITING PRACTICES IN: (two parallel sessions) ACCOUNTANCY CYPRUS VOLUME 97 DECEMBER

22 Professional Briefing SESSION 1 Chair of Workshop: Antigoni Modestou, Member of ICPAC/PSC Speakers: Austria: Peter Wundsam, Member of FEE/PSC Belgium: Johan De Cooman, Member of FEE/PSC Denmark: Erik Hammer, Member of FEE/PSC France: Philippe Adhémar, Member of FEE/PSC Germany: Viola Eulner, Member of FEE/PSC SESSION 2 Chair of Workshop: Andreas Antoniades, Vice-Chair of ICPAC/PSC Speakers: Netherlands: Martin Dees, Member of FEE/PSC Norway: Harald Brands_s, Member of FEE/PSC Spain: Daniel Faura, Member of FEE/PSC UK: Caroline Mawhood, Chair of FEE/PSC Sweden: Pär Falkman, Member of FEE/PSC Romania: Adriana Tiron Tudor, Member of FEE/PSC QUESTIONS - DISCUSSION 16:15-16:30 COFFEE BREAK 16:30-16:50 REPORT BACK ON CONCLUSION OF WORKSHOPS 16:50-17:00 CONCLUSIONS AND CONFERENCE CLOSE Issues to be discussed during workshops: Brief description of each country s public sector accounting and auditing practices. Justification (advantages and disadvantages) of the adoption of the above practices, in areas such as in managerial decisions, transparency etc. Major challenges in accounting/auditing reporting on: Consolidation issues, Pension costs/ employee benefits, Non exchange revenues, others. Practical problems faced in implementing accrual accounting and how can they be overcome. Is the use of external assistance from the private sector necessary? * Involvement of auditors (external and internal, SAIs and private auditors) in promoting accrual accounting implementation. 30 ACCOUNTANCY CYPRUS VOLUME 97 DECEMBER 2009

23 Interview Interview with the Minister of Communications and works, Mr Nicos Nicolaides Interview to Ninos Hadjirousos, Editor and Tassos Anastasiades, Deputy Editor Accountancy Cyprus Journal In an interview we had with the Minister of Communications and works, Mr Nicos Nicolaides, for all the multifarious activities and functions of his Ministry, inter alia, we have been informed, that the contribution of Merchant Shipping to the economy of Cyprus is significant since it contributes approximately 2% of the GDP. `Our Nicos Nicolaides objective for the future is to consolidate and further develop our role in world shipping and to provide the right conditions for a sustainable growth of the shipping industry Mr. Nicolaides stated. With regard to the importance of ports to the Cyprus economy Mr. Nicolaides stated that Cyprus, being an island, the dependence of the Cyprus economy on maritime transport is almost absolute. In order to achieve its goal to establish Cypriot ports as the most modern, productive, competitive and safe in South-Eastern Mediterranean, the Cyprus Ports Authority has introduced a port development programme which includes a number of significant projects which are almost complete. Responding to our question about the two new airports in Larnaka and Pafos, Mr. Nicolaides informed us that the total costs of construction were expected to be m520 million and m110 million respectively and that the financing was undertaken by Hermes Airports Ltd under a 25 year BOT (Build - Operate - Transfer) Concession Agreement. Larnaka and Pafos Airports have been designed to handle 7.5 million and 2-8 million passengers per annum respectively. The interview with Mr Nicolaides follows:- 1. What was the cost of construction of the two airports in Larnaka and Pafos and how was this financed? The cost of the construction of Larnaka and Pafos Airports were expected to be m520 million and m110 million respectively. The finance of the above cost was undertaken by Hermes Airports Ltd under a 25 year B.O.T. (Build-Operate- Transfer) Concession Agreement signed with the Republic of Cyprus on 12 May What is the capacity of the two airports? Larnaka and Pafos Airports have been designed to handle 7.5 million and 2.8 million passengers per year respectively. The new facilities are capable to serve 3220 passengers per hour at Larnaka and 1820 passengers per hour at Pafos Airports. 3. What will the earnings of the Government from the operation of the two airports be and how will they impact the Cyprus Economy? The earnings of the Government from the operation of the two Airports depend mostly on the traffic at the airports which has also been affected by the Economic Crisis. The Government of Cyprus has an income from the operation of the Airports but it must be noted that there are also expenses for the services that the Government of Cyprus provide at the Airports. Such services include among other the Air-control, the Security, Health services, Customs, Post offices etc. ACCOUNTANCY CYPRUS VOLUME 97 DECEMBER

24 Interview 4. Travel agents and chartered airlines operating in Cyprus are complaining about the high fees charged. What are your comments? Regarding this issue I would like to emphasize that the Government of Cyprus has taken many measures to support the Tourism Industry in Cyprus. Among these measures are the reduction of the landing fee by 25% at the airports, which in effect amounts to a reduction of m4 for every passenger that the airlines bring to Cyprus. I should also note that taking the above measures into account and the data given to us by Hermes Airports Ltd., the airlines pay today for Airport charges about 11% more than what they used to pay back on May 2006 when the Concession Agreement between the Republic of Cyprus and Hermes Airports commenced. I am sure that they recognise that the facilities enjoyed now are much better than before. Turnaround charges constitute 4-5% of the total airline cost. These charges include the fees paid to the airport operator and to the ground handlers for the services rendered. The concession agreement between the Government of Cyprus and the airport operator stipulates the fees and charges the airport operator is allowed to levy to the users. The agreement furthermore sets implementation dates for any increase on these fees, which are allowed to be adjusted according to inflation every two years. With the commissioning of the new terminal building at Larnaka most of the existing fees and charges are retained e.g landing fees, passenger fee. However, there is an increase in the security charge (from 0,43 to m1,24) and the introduction of a fee for the use of jetties (m300 for a period of one hour including the provision of electricity and air conditioning). These fees are published. Charges levied by ground handlers to airlines are agreed between the two parties and factors such as volume of traffic to be served are taken into consideration when setting prices. Due to the economic crisis and in an effort to stimulate the tourist industry the Government decided to forgo part of the concession fee paid by Hermes for a period of one year (April May 2010). This amounts to 16 million Euro which includes 25% reduction in landing fees and 4m reduction in the passenger fee. The cost per passenger for a flight of 160 passengers (Airbus A320) for an average turnaround of 65 minutes, amounted to m15,65 before the operation of the new airport and m16,77 after the operation of the new airport, which constitutes an increase of 7,15%. 5. How many Ships are registered under the Cyprus flag? At the end of 2008 the Cypriot merchant fleet ranked tenth in the world with 1,016 ocean-going vessels of a gross tonnage of The Cypriot merchant fleet ranks third in the European Union with a percentage of around 12% of the total fleet of the 27 EU member states. 6. What is the contribution of the Cyprus Shipping to the Cyprus economy? The contribution of merchant shipping to the economy of Cyprus is significant. The Cyprus Government is well aware that through shipping, Cyprus has distinguished itself by achieving remarkable international ranking and recognition far beyond its size and boundaries. Cyprus is not just a ship registry but it is the base for international operations by a large number of companies with shipping and shipping related activities. Shipping contributes approximately 2% of the Gross Domestic Product of Cyprus. Local employment in shipping activities amounts to 3500 persons, the majority of whom are Cypriots. 7. What are the safety standards of the ships under the Cyprus flag? The policy adopted by the Department of Merchant Shipping to improve the safety and quality standards of the Cyprus fleet proved to be very successful. The performance of the Cyprus Department of Merchant Shipping, evaluated on the basis of the detention rates of Cyprus flag ships by foreign port state control authorities, has considerably improved over the last years and Cyprus is now permanently on the White list of both the Paris and the Tokyo MOU, on Port State Control. Another success for Cyprus is the removal of the Cyprus flag from the List of Targeted Flag States of the U.S. Coast Guard. Our policy measures regarding maritime safety and security, amongst others, are the following: - Stricter registration rules focusing mainly on the safety standards of the ships to be registered and due attention to the qualifications of the crews of the vessels; - Effective control of the fleet through unscheduled inspections of Cyprus vessels by surveyors and inspectors. Due account of the provisions of the International Safety Management (ISM) and International Ship and Port Facility Security (ISPS) codes is taken, in the course of these inspections; 32 ACCOUNTANCY CYPRUS VOLUME 97 DECEMBER 2009

25 Interview Maritime transports are one from the most important ways of transport, while 80% of international trade is transported through sea connections. In our region, the Eastern Mediterranean, because of the geopolitical situation, maritime transports are the sole alternative solution and that is why they should be performed without obstacles. - Quality control and audit of the recognised classification societies; - The set up of a worldwide network of inspectors and surveyors of Cyprus flag vessels for adequate coverage of inspections globally. 8. What are the prospects of the Cyprus Shipping Industry? During the last eighteen months the Cyprus register recorded a slight increase, in terms of gross tonnage and the number of vessels registered. This positive development encouraged the Department of Merchant Shipping to direct its endeavours to further expansion of the Cyprus Register, ensuring at the same time that the high quality and safety standards of the Cyprus flag vessels are maintained. Our objective for the future is to consolidate and further develop our role in world shipping and to provide the right conditions for a sustainable growth of the shipping industry, particularly, the maritime cluster which has established itself in Limassol. The Ministry of Communications and Works through its Department of Merchant Shipping looks into the future with confidence. The competitive position of Cyprus continues to be at a quite high level and we maintain an active role in all international maritime fora and the EU. With systematic work, the shipping industry of Cyprus will expand and develop further. 9. What is the importance of the Cyprus ports to the Cyprus economy and what, if any, problems are being faced? Specifically for island countries such as Cyprus, the importance of ports and their development is more intense. Being an island the dependence of the Cyprus economy on maritime transports is almost absolute. The maritime transports and the ports of Cyprus, play an important role in the growth of the country s economy, which depends to a large extent in the provision of services. The domestic agricultural and industrial production are relatively small, and as a result comparatively increased volume of imports of all goods, are imported through our ports. Moreover, the geographic position of the island and the inexistence of land borders and alternative ways of goods transport, such as railways, rivers, etc, impose the distribution of goods via sea. The importance of ports in island countries, as are the Cypriot ports, in combination with the decreased domestic production of export goods, is extended in the service of transit trade, contributing thus a very important role in the international distribution chain and in the maritime transports of the wider region. Therefore, the opportunities for expansion in our region and specifically for our ports are concentrated to establish Cypriot ports as the most modern, productive, competitive and safe in the South-Eastern Mediterranean, to serve Transhipment Trade. In order to achieve this goal, the Cyprus Ports Authority has introduced a port development programme which includes a number of significant projects with most of them being at their final stages. However, a serious problem towards our efforts to enhance our port product and to attract transhipment trade in our ports are the restrictive measures, which were introduced by Turkey in 1987 for Cyprus flag vessels calling at Turkish ports, which were extended in 1997 to all ships, irrespective of flag, which had a connection with Cyprus. These restrictions enforced by the Government of Turkey are selective and discriminatory and affect shipping ACCOUNTANCY CYPRUS VOLUME 97 DECEMBER

26 Interview engaged in international trade. They distort the application of values and principles of fair competition and free trade of the maritime sector and violate all commercial shipping principles such as the freedom of navigation, freedom of transit, freedom of access to ports and harbours, as well as equality of treatment. Since their introduction, these measures have adversely affected the development of Cyprus ports, reduced trade and hindered the growth of the Cyprus Ships Register and the local ship-management sector. Since 2004, these measures have started to directly affect the wider interest of the European Union as well. Moreover, it is understandable that the worldwide economic recession that all countries economies are now facing, have affected negatively Cyprus economy and consequently the Cyprus ports. Having said this, I would like to ensure you that we constantly monitor the international economic developments as well as the local economic indicators and we have introduced or we will introduce, when necessary, those measures in order to protect Cyprus trade which as you know, around 80% of it, is executed through Cyprus ports. 10. Coming now to the postal services would you please tell us if, how and when will the postal services be liberalized? According to the 3rd Postal Directive (8/2008/EC), the postal services in the European Union should be liberalised by at the latest. Cyprus, along with 10 other member states were granted the right to postpone for two years the implementation of the said directive. At the moment, there is a reserved area in the Cyprus postal market in favour of Cyprus Post, who is the designated Universal Service provider. The reserved area is valid for items of correspondence up to 50gr. These weight limits do not apply if the price is equal to, or more than, two and a half times the public tariff for an item of correspondence in the first weight step of the fastest category. On , the reserved area will be abolished and all entry restrictions into the postal market in Cyprus will be lifted. It should be noted however, that any interested new entrant should first apply for a special licence to the Office of the Commissioner of Telecommunications and Postal Regulation. 11. Cyprus has a very bad record with regard to road accidents with high death rates. What measures are being pursued to face this serious problem? In the European context, the position of Cyprus as regards road safety is not envious. In 2008, Cyprus ranked 18th out of the 27 EU member states, with 103 fatalities per million population. The corresponding EU average index was 79 and for the leading member state, the Netherlands, it was only 41. It should be noted, that progress has been achieved in Cyprus, as ten years ago in 1999, the fatality/ population index for Cyprus was 165. Moreover the number of fatalities in 2008 was the lowest in 30 years and the number of injuries the lowest in 44 years. A Strategic Road Safety Plan for the period is being implemented with a target for a 50% reduction in the number of road victims by year Progress has been achieved, but not at the rate pursued, as in 2008 the reduction in fatalities was only 20,4% instead of 33,7% which was the target for that year. The number of injuries however dropped by 45,1% which was significantly higher than the reduction targeted. The measures implemented within the framework of the Strategic Plan to combat the road safety problem in Cyprus aim at improving, Road infrastructure safety Vehicle safety The efficiency of emergency care services and The quality of driving and road user behaviour in general. Furthermore, particular focus is given to the vulnerable groups of young drivers and foreigners. An action plan for the reduction of accident involving young drivers will be designed in 2010 in cooperation of the University of Cyprus. An action plan has also been prepared, for the reduction of accidents involving foreigners and will be implemented in In addition, a cooperation between Cyprus and Spain in the field of road safety has been established and valuable knowledge is being drawn from he Spanish successful experiences. Finally a new Strategic Road Safety Plan for the period will be drafted in 2010, based on the new European Road Safety Action Programme You have participated in the first global ministerial road safety conference in Moscow. What were the results of this conference? More than 1000 delegates from 150 countries participated in the 1st Global Ministerial Road Safety Conference in 34 ACCOUNTANCY CYPRUS VOLUME 97 DECEMBER 2009

27 Interview Moscow and numerous presentations were made by Ministers, heads of international organisations and other stakeholders, on all areas of concern for road safety. Panel discussions followed the presentations and invaluable knowledge and views were exchanged. The conference adopted the Moscow Declaration by which the Ministers and all other heads of delegations, invite the United Nations General Assembly to declare the decade as the Decade for Action for Road Safety with a goal to stabilize and then reduce the forecast level of global road deaths by What are the main measures pursued to ameliorate the serious problem of traffic congestion? The traffic congestion problem is complex and is a result of a combination of factors such as the lack of a modern public transport system, the dependence on the private car, the town structure and urban environment, the radial road system and the incomplete primary road infrastructure as described in the Local Plans of all cities. The Ministry of Communications & Works considers the completion of the urban road network, according to the Local Plans, necessary for creating safe and efficient traffic conditions for all modes of transport as well as pedestrians. In parallel, the Ministry is promoting the upgrading and modernization of public transport in Cyprus in order to offer motorists an alternative option to the private car. In order to alleviate traffic congestion, emphasis is given to the upgrading of public transport in Cyprus. On 2 December 2009 a significant step to this direction was made with the signing of 6 service concession contracts for public transport with bus. With these contracts, one for each of the five districts and one for inter-city transports, the Republic of Cyprus assigns to economic operators the exclusive right to provide services within the designated area, under strict rules regarding the fares, the bus lines, the frequency of routes, the type and quality of the buses used, the level of service provided etc. It is the first time in Cyprus that such contracts have been signed, fully in compliance with the European practice. The old system of subsidizing the losses of more than two hundred companies and individuals that were providing bus transport services in predetermined bus lines was proved to be inadequate and inefficient. This system is now substituted with a modern one that exploits the large-scale economies, and that is based on a motive oriented scheme. There is still lot of things that have to be done. The next critical milestone is the implementation of the new contracts that is planned for next June. We are exercising our best endeavours to succeed in providing an attractive service that could persuade people to change attitude and extensively use public transport. This upgrading of public transport is also part of the Cyprus Strategic Plan for Local Transport for which aims, among others, for the following: a. Balanced use of all modes of transport b. To offer a competitive alternative mode of transport to the private vehicle c. Alleviate traffic congestion d. Improve the urban environment e. Reduce traffic accidents f. Better use of the road network In order to implement the Strategic Plan, the Ministry promotes the implementation of a Master Plan so that public transport island-wide is improved and funds are secured from the Structural Fund. Through the Strategic Plan, traffic studies will be gradually carried out for all towns beginning with the study for Nicosia. In order to alleviate congestion and reduce traffic accidents, the Ministry is also promoting the use of Intelligent Transport Systems (ITS). ITS is the application of advanced technologies by means of computers, sensors, control, communications and electronic devices. The use of ITS in transportation are proven to save lives, time, money, energy and the environment. By providing accurate and real time information to motorists through ITS and efficient traffic management systems, the Ministry aims to provide better and safer traffic conditions on the road network. An ITS study has been completed in early 2009 and part of its implementation phase includes the installation of Variable Message Signs (VMS) and Closed Circuit TV systems in order to monitor and manage traffic during the construction and after the completion of the grade-separated junction near the New GSP Stadium at the entrance of Nicosia. Finally, in addition to the upgrading of public transport, some additional measures are under way in all cities with the construction or upgrading of major arteries or roads such as Archangelos Avenue in Nicosia, the Link between the Limassol Bypass and the Limassol Port as well as the upgrading of the Nicosia-Limassol Motorway to six lanes and the construction of a grade separated junction near the New GSP Stadium at the entrance of Nicosia. It is important to note that in an effort to promote the use of public transport, the upgrading of Archangelou Avenue in Nicosia includes a dedicated lane that will be used only by buses heading towards the city centre. ACCOUNTANCY CYPRUS VOLUME 97 DECEMBER

28 Is the EU economy on the road to gradual recovery? The economic forecast The EU economy By Varnavas Nicolaou Senior Manager Tax Services - VAT PricewaterhouseCoopers Limited Member of the European Union Affairs Committee The Directorate-General for Economic and Financial Affairs of the European Commission issued in November 2009 its European Economic Forecast for the period , per which it foresees that the EU economy will emerge from recession in the second half of A more gradual recovery is foreseen in following the improvements in the external environment, financial conditions, as well as the significant fiscal and monetary measures. The EU economy has experienced the deepest, longest and most broad-based recession in its history but has now reached a turning point. Recent months have seen a marked improvement in the economic situation and financial conditions, largely due to the above mentioned actions that have been taken. Several financial indicators are now back at pre-crisis levels, while confidence is advancing. The outlook for global growth and trade has also strengthened, economies. especially in emerging-market GDP GROWTH REGAINS GROUND On the basis of the above developments, together with a favourable inventory adjustment, GDP growth in the EU and euro area is set to turn positive again in the second half of The Commission forecasts that the EU and euro area GDP will grow by 0.75% in 2010 and by 1.50% in This outlook rests on a number of factors which tend to push the economy in different directions in the short and the medium term. First, the immediate pick-up is mainly due to unprecedented fiscal and monetary policy actions, and several financial indicators getting back to pre-crisis levels, with business climate and consumer confidence indicators constantly rising. Global trade and growth have also strengthened and start to contribute to growth in the EU. Further out, a certain easing in growth could follow on the rebound as a number of factors could dampen economic activity. Such factors include the projected further deterioration in labour markets (the unemployment rate is projected to reach 10.25% in the EU), the need for substantial financial deleveraging across sectors, low capacity utilisation, subdued profitability gains and moderated credit growth that all contribute to domestic demand, gathering strength only very gradually. INFLATION REMAINS SUBDUED Inflation in the EU and euro area is expected to rebound somewhat from its current, very low level, but to remain subdued over the forecast horizon. HICP (harmonised index of consumer prices) inflation is projected to average slightly over 1% in 2010 and around 1.50% in 2011 in both areas. While rising commodity prices are likely to put upward pressure on inflation, substantial slack in the economy and weak wage growth should have a dampening effect. Differences between countries will be less pronounced than they were prior to the crisis, and inflation expectations are well anchored. LABOUR MARKETS STILL UNDER PRESSURE While the EU labour market has been more resilient to the recession than expected (largely on account of short-term policy measures and past reforms in some Member States), an increase in labour shedding is expected in the coming quarters. A contraction in employment of around 2.25% is foreseen in 2009, with a further decline of about 1.25% expected in A gradual stabilisation in employment is likely towards the end of 2010 and into 2011 as the recovery takes hold. However, the new analytical part of the forecast points to the risks of a jobless recovery depending on the flexibility of the market and the policies in place. PUBLIC FINANCES ARE SET TO IMPROVE Public finances have also been hit hard. The government deficit is projected to triple this year in the EU (reaching close to 7% of GDP, up from 2.25% in 2008) and to rise further in 2010 to around 7.50%. This deterioration follows in part from the discretionary measures taken to support the economy, but also reflects a stronger than usual fall in revenue in response to the downturn. A slight easing in the 38 ACCOUNTANCY CYPRUS VOLUME 97 DECEMBER 2009

29 The EU economy deficit, to just below 7% of GDP in the EU and 6.50% in the euro area, is expected in 2011 as activity picks up and temporary measures come to an end. The debt ratio, however, is set to remain on an increasing path. This is to be expected following such a deep crisis, but high initial debt levels especially in some countries make it more difficult to sustain. Consequently the debt evolution becomes a source of concern for long-term sustainability in several EU countries, especially so as they are faced with combined sustained large deficits, lower potential output and in view of the unfavourable demographic developments ahead. UNCERTAINTY REMAINS HIGH BUT THE RISKS ARE BALANCED The outlook for the EU economy as it emerges from recession is highly uncertain, and subject to non-negligible but broadly balanced risks. The recovery could surprise on the upside if policy measures are more effective than anticipated in restoring the soundness of the financial sector and boosting confidence, or if there is a more pronounced pick-up in global demand. On the other hand, the impact of weak labour-market conditions and constraints on investment could prove stronger than expected. Moreover, if the banking sector does not repair its balance sheet, it may not be able to provide sufficient support to the recovery. Risks to the inflation outlook are also broadly balanced. THE FORECAST OF THE CYPRUS ECONOMY Declining activity and policy response The slowdown of economic activity in Cyprus started in the third quarter of 2008 and gained momentum in the first half of Economic growth was compromised as a result of the adverse external economic environment, the high household indebtedness together with tight lending conditions, the restructuring corporate balance sheets and the overall deteriorating confidence. Cyprus GDP contracted in the second quarter of This trend is expected to continue until the end of the year and, for the first time in 30 years, Cyprus is set to record a negative growth rate (-0.25%). The downturn is expected to take a heavy toll on public finances: deficits exceeding 3% of GDP are projected over the forecast period, reflecting both lower tax elasticities and higher expenditure. As a result, the long-term sustainability prospects for public finances are deteriorating. The labour market is also expected to suffer. As a response to the crisis, the Cypriot government acted in a timely manner, adopting some fiscal stimulus and structural measures amounting to 1.50% of GDP. The stimulus package was essentially addressed to construction (1.25% of GDP) and tourism (0.25% of GDP). Regarding the financial sector, Cypriot banks have not been exposed to toxic assets, mainly thanks to strict supervision by the Central Bank of Cyprus. However, in order to underpin confidence in the banking system, the government raised the deposits guarantee and issued treasury bills to provide liquidity to the banking system. SUBDUED GROWTH WEIGHS ON THE CYPRUS LABOUR MARKET The forecast envisages a slow economic recovery in 2010 and 2011, with Cyprus lagging behind the EU average in both years. GDP is projected to stall in 2010, reflecting mainly sluggish world demand and depressed private consumption and investment. Specifically, private consumption growth is likely to be subdued over the forecast period despite nominal wage growth above inflation and a falling debt-servicing burden consistent with declining interest rates. This is due to a high household debt burden, tight financial conditions and downbeat consumer sentiment in an uncertain environment. Given the economic outlook in Cyprus main trading partners, foreign demand for dwellings by non-residents should remain weak. Domestic demand for housing and activity in real estate is also expected to stay subdued, on the back of high indebtedness and high growth of prices in recent years. Although infrastructure projects should support investment somewhat, it is unlikely that they would be sufficient to fully offset the impact of the contraction in housing on total investment. As regards the external sector, imports should shrink in 2010 and recover only in 2011 due to the slowdown in final demand. Exports of both goods and services, particularly tourism, are set to recover somewhat in view of an improving economic outlook in Cyprus main trading partners. All in all, the contribution of net exports to GDP growth should be positive in both 2010 and The subdued economic outlook should weigh particularly on labour-intensive sectors in 2010, especially construction and tourism. Accordingly, employment is projected to decline while unemployment should rise to historically high levels, reaching 6.50% in Overall, the balance of risks for Cyprus appears to be neutral. A reduction in interest rate spreads and in banking lending rates could underpin private consumption and soften the adjustment of the housing sector. On the negative side, a sharper-than-expected fall of external demand would certainly weigh on economic activity. At ACCOUNTANCY CYPRUS VOLUME 97 DECEMBER

30 The EU economy the same time, a tightening of credit conditions coupled with high indebtedness of private agents could lead to a sharper fall in investment and consumption. Furthermore, in a context of weak growth the external constraint becomes more severe and it could eventually lead to either higher cost of debt-financing or higher savings, in each case affecting adversely economic activity. RESTORING THE BALANCE AND ACHIEVING A SUSTAINED RECOVERY Within the economic forecast, the challenge for the Cypriot economy is to return to a sustained convergence path. Due to the strong deceleration of activity in 2009 there was a significant, albeit partial, correction of the external deficit. However, as a percentage of GDP, it is set to remain at two-digit levels. In the medium term, the deficit should continue to improve but at a much more moderate rate, reflecting lower GDP growth. In particular, the current account deficit should still reach 7.25% of GDP by As a result, the external imbalance is likely to weigh on economic growth over the medium-term. Consequently, the growing public sector would need to be financed by either foreign debt or domestic private savings. The external imbalance to a certain extent reflects a deterioration of competitiveness, partly due to a weak response of wages in both the public and private sectors to the current recession. In particular, nominal compensation per employee is estimated to increase by about 1.75% in 2009, which exceeds productivity growth. In line with slowing activity, productivity growth is expected to slump. This, coupled with a minor acceleration in wages, is set to keep unit labour costs rising modestly, yet higher than the euro area. Although the inflation rate is estimated to be very low in 2009, a rapid return to the trend rate of 2.50% is envisaged over the forecast horizon. This should be driven by developments in oil prices, on which Cyprus is highly dependent, and a powerful base effect. Core inflation should remain above the euro area average, mainly reflecting pressures in product markets, especially services. DETERIORATION IN CYPRIOT PUBLIC FINANCES While the Cypriot budget balance was in surplus during the last two years, it is expected to have turned into a deficit of about 3.50% in 2009 compared to a 0.90% surplus in 2008, due to both lower than anticipated revenue and to higher than planned expenditure. The declining of revenue reflects the downturn of economic activity, particularly in the construction and real estate sector coupled with the fading out of the asset boom. Social contributions are the only revenue item to post positive growth, benefiting from the rise of contribution rates as part of the pension reform adopted this year. Oneoff revenues associated with the penalty imposed by the Competition Authority on oil companies, corporate tax obligations and the shortening of payment period for VAT account for almost 0.75% of GDP. One-off expenditure cuts associated with budgeted appropriations for ministries account for an additional 0.50% of GDP. For 2010, the Draft Budget Law targets a deficit of 4.50% of GDP, on the basis of an estimated deficit outcome for 2009 of 2.90% of GDP. The 2010 Draft Budget does not incorporate any additional measures to the previous year, thus foreseeing a continuation of the 2009 policies. Even though a series of supplementary measures are mentioned in the Draft Budget, they are not accounted in the budget target. These measures, which could restrain the budgetary deficit in 2010 below 3%, are namely aimed at fighting tax evasion, at a real property amnesty (one-off), freezing public sector employment for the next 18 months and improving the state s cash management. The Commission projects a deficit of 5.75% of Cyprus GDP for 2010, a somewhat gloomier macroeconomic scenario and a more prudent assessment of measures on the revenue side. The deficit should increase further to almost 6% of GDP in This projected fiscal deterioration is driven by rising expenditure, which is only partly offset by moderately increasing revenues. With weak GDP growth and an increasing deficit, the debt-to- GDP ratio will raise and exceed 60% of GDP by 2011, thus weakening the long-term sustainability of the public finances. CLOSING COMMENTS To quote the words of Joaquin Almunia, Commissioner for Economic and Monetary Affairs, the EU economy is gradually coming out of recession and this owes much to the ambitious measures taken by governments, central banks and the EU that have not only prevented a systemic meltdown but have kick-started the recovery. However, the road ahead is a challenging one. To maintain momentum and support the sustainability of the recovery, it is essential that Member States fully implement all announced measures and complete the repair of the banking sector. They must also begin to look more towards the mediumterm, and consider how best to address the adverse effects that the crisis has had on labour markets, public finances and potential growth. Only by addressing these challenges with determination will our economy emerge stronger after the crisis. 40 ACCOUNTANCY CYPRUS VOLUME 97 DECEMBER 2009

31 Multigenerational survey of the accounting profession n investigation into the multigenerational workforce of the Cyprus accounting profession By Maria Krambia-Kapardis* & Zopiatis A** Demographic experts have been studying for the past 80 years the generational cohort theory. Most of the studies in this field have been carried out in the United States but limited work is found in the field of accountants and their work views based on their generational cohort. Maria Krambia-Kapardis Each generational cohort has been shaped by historical, political, social and economic factors. Cypriots have had their share of political unrest, economic downturn and at the same time they have had their social and traditional values change due to tourism, foreign workers, Cypriots living and working overseas and immigration. Thus, accountants living in Cyprus and having experienced: civil unrest, invasion, stock exchange crush, financial turmoil and political insecurity have shaped their way of behaving at work more than their counterparts in other parts of the world. Thus it is worth studying accountants belonging to the generational cohorts X and Y so as to identify their work values and beliefs. Furthermore, if a generational gap is identified the profession ought to find ways to bridge it. Generational cohorts are separated by years of birth and the individuals belonging to each generation have different expectations and work values. It is important to carry out such generational studies because the diverse mix of perspectives and perso-nalities can create frictions in the workplace due to different work values, work styles, priorities and viewpoints. INTERNATIONAL STUDIES ON THE TWO GENERATIONS HAVE FOUND THE FOLLOWING CHARACTERISTICS. Generation X is year olds. They are so concerned with seniority and work to live as opposed to live to work. They are excellent in developing goals and strategic planning and enjoy having influential friends. They value gaining skills and respond best to instant gratification. They focus on working effectively and efficiently and use a team of people to support their own Zopiatis A personal individual efforts. Some researchers have argued that this is the Generation known for accomplishing tasks quickly and sometimes they may even bend the rules to achieve their goals. Generation Y is year olds. They are used to being on a team, work hard to reach their monetary goals and are trying to maintain work/life balance. They were raised in a child-centric atmosphere, have a great deal of selfconfidence and adaptability, because they are close to internet they are conditioned to getting information quickly and easily. They are looking for flexibility, growth, opportunity and frequent constructive communication. They are exposed to diverse lifestyles and cultures in school at early age. They tend to respect different races, ethnic groups and sexual orientations and are comfortable with diversity. They want job flexibility, telecommunications, and ability to work part time or leave the workforce temporarily when having children. CYPRIOT STUDY The primary objective of the study was to identify whether a generational gap exists among accountants working in accounting firms and belonging to Generations X and Y. The research team decided to concentrate only on the two prevailing generations currently working in the accounting practices. Table 1, below, exhibits the demographic profile of the respondents according to the variables of gender, age ACCOUNTANCY CYPRUS VOLUME 97 DECEMBER

32 Multigenerational survey of the accounting profession TABLE 1: DEMOGRAPHIC PROFILE OF THE RESPONDENTS (N=159) Frequency Valid Percentage Gender Male Female Age (Generation Y) (Generation X) Level of Employment Qualified Accountant Affiliate / Graduate Accountant / Trainee and level of employment in the industry. Respondents were asked to indicate their perception towards the two generations in the workplace with the utilization of a 20-item bipolar scale. All twenty variables included in the survey describe specific occupationalspecific issues indicative of the accounting profession. Findings, presented in Figure 1, suggest significant differences in 17 out of the 20 variables measured (Significant Difference p<.05). Overall, it seems that the respondents share a much different perception towards the two prevailing generations currently work-ing in the accounting industry. than earners who prefer micro-management more compared to Generation X. Finally, Generation Y are perceived as easy learners who prefer flexible work schedules and enjoy developing off-work relationships with their co-workers. It is important to note that significant differences between Generation Y and X members were revealed in seventeen out of the twenty variables under investigation. The variables where no differences were found were: individualist vs. team player, local vs. global thinker and preference towards single tasking vs. preference towards multi tasking. Respondents perceive that Generation Y members question authority more compared to their Generation X colleagues, are more difficult to motivate, are more skeptical to recognition, more loyal to themselves (instead to the organization) and they seek work-life balance more. In addition, findings suggest that Generations Y members are perceived as more technologically confident, value monetary rewards more, embrace change more, and are less hard working compared with their Generation X colleagues. The respondents perceive Generation Y members as less reliable, less career seekers, of constant need for supervision and guidance, more respect seekers INDUSTRY IMPLICATIONS Findings suggest that a generational gap exists in the perception of accountants belonging to the two generations under investigation on numerous occupational related issues. The success of any organization, private or public, lays on the knowledge, skills and abilities of their members occupying all levels of the organization s hierarchy. Each generation that enters the workforce brings with it, its own unique perspectives and values about work and the work environment; thus posing unique human resource management challenges. Findings are expected to enrich 44 ACCOUNTANCY CYPRUS VOLUME 97 DECEMBER 2009

33 Multigenerational survey of the accounting profession the human resource literature and assist in creating new and innovative practices in managing today s multigenerational accounting workforce. The study s implications are of interest to local accounting firms who strive to achieve inter-generational comfort, thus avoiding conflict, an impediment to the effectiveness of even the most sophisticated organizations, while at the same time meeting their pre-established operational objectives. Industry stakeholders may utilize the revealed findings in re-visiting their human resource practices (i.e. recruitment, internal training, coaching) especially in regards to the new generation of accountants; Generation Y. A generation that according to the findings and the existing literature is very different from the earlier generations, thus posing atypical challenges to today s accounting firms. By identifying work-related generational similarities and differences accounting firms could gain a better understanding of a) how to effectively manage today s multigenerational workforce, and b) how to design and implement cost-efficient human resource programs able to meet the specific needs of their multi-generational workforce. ACKNOWLEDGEMENT The research team acknowledges the valuable assistance of the Institute of Certified Public Accountants of Cyprus for endorsing the study and all the accountants who took part in the survey. * Associate Professor in Accounting, Cyprus University of Technology ** Lecturer, Cyprus University of Technology ACCOUNTANCY CYPRUS VOLUME 97 DECEMBER

34 Negotiation tactics Warrior Negotiation tactics - Unconventional Weapons and Tactics to Get What You Want - Part 2 By Demetris Stylianides, DipLC, CTM, CL, FAIA, FCCA, CPA, Certified Trainer of NLP In this second part on negotiation tactics, we will examine some unconventional tactics used in negotiations and how you can deal with them. In negotiations, there are a number of things that people may do in order to intimidate you, or to make them seem more powerful than you are. While understanding and working with the power balance is vitally important to negotiation success, some people interpret this to mean bullying the other person into submission! It is important to know of these tactics so that you can defend against them. In addition, in one-off negotiations you may wish to use one or more of these tactics. They can be very effective, particularly with inexperienced negotiators. If you do decide to use some of the tactics that follow then please ensure you have considered the possible consequences taking into account the ethics and moral code of our highly esteemed association. There are a number of tactics that make use of someone other than the person you are negotiating with to force or encourage you to agree to some form of concession. These are: GOOD COP/BAD COP Anyone who has watched enough police shows on television will have seen the interrogation tactic where one cop is nasty and one cop is nice. One cop shouts and threatens the suspect while the other befriends him and is nice to him. Although this tactic is widely known it can still be a very effective way to manipulate someone s behaviour. The best way to defend yourself from this tactic is to firstly understand it, secondly to become aware that despite knowing about it you may still be manipulated by it, and thirdly, you may wish to even say (perhaps in a humorous sort of way) Hey, what is this? Good cop, bad cop? This will help to diffuse the tension involved and make the other party aware that you have realized their game. MY BOSS IS A BASTARD! The implication is that you will get a better deal if you agree to what they are asking for. If their boss gets involved then it is going to get even worse. In addition the implication is that they are trying to help you and that you ought to be grateful for their assistance! The counter to this is to firstly, inform the other person that you too have a real bastard of a boss (if you don t have a boss then you may wish to use another person - a business partner perhaps) and secondly, to be fully prepared to negotiate with the boss. I NEED TO GET THIS APPROVED BY MY BOSS You are required to kindly let them have your full proposal so that they can take it to their boss. This reduces your ability to trade concessions and secure a robust deal. This tactic makes the concessions rather one sided in the other party s favour! The counter is to insist upon negotiating with the boss directly. If they cannot confirm the value that they will give in return for any concession that you may be prepared to make then you cannot proceed with the negotiation. THE TIME FACTOR You will recall that time can be a factor that affects the power balance in negotiations. The person with the most time generally has the power balance tipped in their favour. If you desperately need to have a deal concluded to hit 46 ACCOUNTANCY CYPRUS VOLUME 97 DECEMBER 2009

35 Negotiation tactics your yearend sales targets, then you are far more likely to make generous concessions than if you had another nine months to hit your sales targets. In addition, the less time you have to think and plan and prepare the weaker you will be in the negotiation. For this reason, watch out for people who insist that they need to know immediately, or by the following day. They are using the time factor to try to force you into making the concessions they need. THE SALAMI SLICER When you buy salami from the supermarket the meat is sliced in very thin slices. In a negotiation the other party may attempt to salami you by securing a series of what seem to be minor concessions on your part. It is only when the salami slice concessions are viewed in total that you realize just how much you have given away! You can counter the salami by using the If you...then I principle with every attempt at taking a slice. THE NIBBLE The nibble tactic is used when the negotiation appears to have been concluded. You have shaken hands and you think it s all over. You relax and sit back in you chair. In what appears to be an afterthought, perhaps even as you are walking out of the meeting, the other party casually states, That includes the free warranty, right? Caught off guard many people will end up agreeing to a minor concession. The counter to the nibble is to politely refuse and to state that you thought the negotiation has concluded and that if the other party wants the free warranty (or whatever) that you will need to revisit the agreement CHERRY PICKING This is a tactic where the other party chooses the elements of your proposal that they do like, and rejects the elements that they don t like. They are cherry picking just the elements that they want. For the deal to work for you, you may need all of the elements included in your proposal. Make sure your positioning is clear - nothing is agreed until everything is agreed. I M YOUR FRIEND It is not unknown for someone to encourage you to make a concession by using emotional blackmail. They will use their friendship with you to leverage a concession that you would not usually make. Even when I do business with friends - business is business! I wouldn t expect any friend of mine to give me a deal that was not beneficial to them also. I draw a distinction between my friends and being friendly with people that I do business with. THE FALSE CONCESSION This tactic works by getting you to make a concession because you cannot meet a demand from the other party. However, the demand is a work of fiction and its sole purpose is for it to be used to get a concession from the other party. For example, if someone knows that it takes you a week to prepare the financial statements of a company then they may demand next day preparation and delivery. To compensate for your lack of ability to deliver tomorrow you might be tempted to concede on the fee of the service concerned. The other party knows that you can t possibly deliver tomorrow and indeed don t expect or need you to do so. They are only demanding the next day delivery to force a concession from you. Part of negotiating correctly is the powerful use of language as a weapon during the negotiating stages. You will have more practice on this on one of my 5-day Accelerated Intensive NLP Practitioner workshops and the next on is held on March True power is in the mind and if you have planned and prepared correctly you will be less affected by attempts such as the ones described in this article. Do not make the mistake of thinking that these techniques aren t effective. Sometimes they can be very effective. The best way to protect yourself from them is to understand them and then recognize them. This will diminish or even neutralize their effect upon you. ACCOUNTANCY CYPRUS VOLUME 97 DECEMBER

36 The treaty of Lisbon concluded on 19th October 2007 The treaty of Lisbon By Andreas Iosif Manager Tax Services PricewaterhouseCoopers Limited Any new European Union (thereinafter referred to as EU ) Treaty to get into force must be ratified by all EU Member States (thereinafter referred to as MS ) pursuant to their own constitutional requirements. Twenty-three out of twenty-seven EU MS had ratified the Treaty of Lisbon (thereinafter referred to as ToL ) which has been concluded since October 2007 leaving Ireland, Germany, Poland and Czech Republic to do so. future property claims by ethnic Germans expelled from Czechoslovakia after Therefore, ToL - Treaty on the Functioning of the European Union (thereinafter referred to as TFEU ) concluded back in October 2007 by the 27 EU MS governments is as from 1 December 2009 in force. Following the ratification Ireland s legal requirements: 1 Each MS will keep a Commissioner 2 Nothing in the Treaty of Lisbon makes any changes of any kind, for any MS, to the extent or operation of the Union s competence in relation to taxation Regarding Ireland, in accordance with its own domestic constitutional rules, a referendum should be called for its nationals to vote for or against the ToL. In the second referendum of 2nd of October 2009, Irish people with turnout of 58%, voted for the ratification of ToL (67.1%). According to commentators a yes vote was basically expected but not at so high. Following the ratification of ToL by Ireland, Poland followed with the ratification of it. Germans referred before the German constitutional court in Karlsruhe to confirm whether the new EU treaty (now named as Treaty on the Functioning of the European Union ) was compatible with the German constitution, which the court affirmed and therefore provide the green light to German government to ratify it. The focus subsequently was shifted to Czech Republic, which has also ratified ToL following EU leaders acceptance of the condition Czech Republic has requested. Czech Republic wished to opt-out from the Charter of Fundamental Rights, which is incorporated into the new treaty, to ensure that Czech ratification does not lead to as well as Czech opt-out from the Charter of Fundamental Rights are annexed to the TFEU and will be formally annexed as a Protocol (integral treaty part with full legal status) to a next EU accession treaty with Croatia or Iceland. Irelands legal guarantee (number 2 above) maintains each MS competence in the field of direct tax. Therefore, each MS continues to be free to have a tax system which believes that is suitable for its own funding and public interest. Having said that, it is settled EU case law that even though MS have such competence, MS must exercise their competence in the field of direct tax consistency with the TFEU. Further, as from 1 December 2009 the free movement of Capital (article 63 as per the new numbering of the TFEU and old Article 56 of the European Community Treaty) which under certain circumstances applies to third countries, incorporates the below. In the absences of measures pursuant to Article 64(3) (old 57(3)), the Commission or, in the absence of a Commission decision within three months from the request of the MS concerned, the Council, may adopt a decision 50 ACCOUNTANCY CYPRUS VOLUME 97 DECEMBER 2009

37 The treaty of Lisbon Following the ratification of ToL by Ireland, Poland followed with the ratification of it. Germans referred before the German constitutional court in Karlsruhe to confirm whether the new EU treaty (now named as Treaty on the Functioning of the European Union ) was compatible with the German constitution, which the court affirmed and therefore provide the green light to German government to ratify it. stating that restrictive tax measures adopted by a MS concerning one or more third countries are to be considered compatible with the Treaties insofar as they are justified by one of the objectives of the Union and compatible with the proper functioning of the internal market. The Council shall act unanimously on application by a MS. At this stage, the question remains what the above provisions will mean in practice and what effects will have for the TFEU. Further, no new direct tax legislation proposals expected in meantime, although political agreement expected on amended EU Savings Directive, and maybe also on EC proposal for Directive on administrative cooperation at next ECOFIN Councils or at the European Council summit. Estonia Siim Kallas Transport Finland Olli Rehn Economic and monetary affairs France Michel Barnier Internal market and services Germany Gfinther Oettinger Energy Greece Maria Damanaki Maritime affairs and fisheries Hungary L szlû Andor Employment, social affairs and inclusion Ireland M ire Geoghegan-Quinn Research and innovation Italy Antonio Tajani Industry and entreprenuership Latvia Andris Piebalgs Development Lithuania Algirdas _emeta Taxation and customs union, audit and anti-fraud Luxembourg Viviane Reding Justice, fundamental rights and citizenship Malta John Dalli Health and consumer policy The Netherlands Neelie Kroes Digital agenda Poland Janusz Lewandowski Budget and financial programming Romania Dacian Ciolos Agriculture Slovakia Maros Sefcovic Inter-institutional relations and administration Slovenia Janez Potocnik Environment Spain JoaquÓn Almunia Competition Sweden Cecilia MalmstrÊm Home affairs UK Catherine Ashton High representative for foreign and security policy Each of the Commissioners will be quizzed during formal hearings at the European Parliament expected to start on January The Parliament will either endorse or reject the full College of Commissioners in a plenary vote expected on January If endorsed by Parliament, the Barroso II Commission is expected to start its work immediately, and that the new Commissioners will set out their policy priorities for the next 5 years in February or March Finally, EC President Barroso has recently announced his preferred new team of Commissioners: Austria Johannes Hahn Regional policy Belgium Karel De Gucht Trade Bulgaria Rumiana Zheleva International co-operation, humanitarian aid and crisis response Cyprus Androulla Vassiliou Education, culture, multilingualism and youth Czech Republic _tefan Ffile Enlargement and European neighbourhood policy Denmark Connie Hedegaard Climate action Czech Republic wished to opt-out from the Charter of Fundamental Rights, which is incorporated into the new treaty, to ensure that Czech ratification does not lead to future property claims by ethnic Germans expelled from Czechoslovakia after ACCOUNTANCY CYPRUS VOLUME 97 DECEMBER

38 New VAT rules in the EU New VAT rules for Cross-border supplies of Services in the EU INTRODUCTION all management charges, unless directly related to land. From 1 January 2010, major new rules will be introduced across the EU, affecting all business that trade internationally in services, whether as a supplier or purchaser, and whether externally or on an intragroup basis. Cross-border VAT charges will be minimised but when VAT is still charged, there will be faster, more efficient refund procedures - the Eighth Directive VAT refund procedure is being streamlined and electronic filing is introduced. Fewer situations where a company must register for VAT in more than one EU Member State. By Chrystalla Michael, For some, there could be a Senior Manager, indirect Tax substantial economic impact, Services, Ernst & Young especially businesses and other organizations that cannot recover VAT on their purchases, notably banks, insurance companies and the public sector. For many, a key challenge will be to adapt their processes and existing systems to comply with the new rules, the most significant issue being the introduction of new statistical reporting requirements for services traded within the EU. Business that currently claim VAT incurred in other EU Member States will also face major procedural changes. In considering the overall impact of the changes, it is essential to recognize that although each EU Member State will be subject to the same EU legislation, individual approaches and interpretations may vary. KEY VAT CHANGES FROM 1 JANUARY 2010 VAT on almost all B2B (business-to-business) services will be chargeable in the Member State of the customer, and not in the country/member State of the supplier. The customer will then account for the VAT due under the reverse charge procedure. Many more services will be subject to the reverse charge, including Exempt and partly exempt businesses, such as banks and insurance companies, currently receiving VAT-free services from abroad may face extra VAT costs on, for example, management charges, outsourced services and global contracts. New establishment rules could affect the charging of VAT between businesses with branches in different Member States. New time of supply rules governing when a reverse charge liability is accounted for and when a transaction is to be included on an EC Sales Lists. Businesses will be required to file EC Sales Lists (VIES forms) for services. NEW RULES REGARDING THE PLACE OF SUPPLY OF SERVICES GENERAL RULE The general rule with respect to the supply of services to a taxable person shall be the place where the taxable person (i.e. the recipient) has established its business and not the place where the supplier is established. The place of supply of services to a non-taxable person shall be the place where the supplier is established. 52 ACCOUNTANCY CYPRUS VOLUME 97 DECEMBER 2009

39 New VAT rules in the EU SPECIFIC RULES Specific rules shall be applied to the following services: Services connected to immovable property - The place of supply shall be where the immovable property is located. The deadline for filling an application for VAT refund is newly set at 30 September of the following calendar year. The claimants will no longer be required to present the original copies of documents. The VAT authorities will be required to process claims within a stipulated time period. If exceeded, they will have to pay interest to the claimants on overdue refunds. Passenger transport - The place of supply shall be where the transport takes place. Cultural, artistic, sporting, scientific, educational and similar services - The place of supply shall be where those activities are physically performed. Restaurant and catering services - The place of supply shall be where the services are physically carried out. Restaurant and catering services for consumption on board ships, aircraft or trains during the section of a transport operation effected within the Community - The place of supply shall be at the point of departure of the passenger transportation. NEW REPORTING REQUIREMENTS As of 1 January 2010, businesses will be required to file EC Sales Lists (VIES forms) for services, similar to those already required for goods. Only taxable (not exempt) services subject to the reverse charge and supplied to a VAT-registered customer in another Member State will need to be reported. Businesses will not be required to report services supplied to customers in the same Member State or to customers outside the EU. Hence, In order to enable the timing completion of the return information systems will need to identify: the type of service supplied (whether or not reverse charge service, taxable or exempt service, etc), Short-term hiring of means of transport - The place of supply shall be the place where the means of transport is actually put at the disposal of the customer. the status of the customer (i.e. VAT taxable person or not), In addition, specific rules shall be applied to services supplied to non-taxable persons. the location of the customer (i.e. in another Member State or outside the EU). Refund of VAT to taxable persons not established in the Member State of refund but in another Member State The existing procedure for the refund of VAT paid by a taxable person in another Member State for business expenses incurred in that other Member State, will be replaced by a new electronic procedure as of 1 January In Cyprus, the VIES forms for services will be filed on a monthly basis and they will be filed by the tenth day of the month following the month to which the VIES form relates. In addition, as of 1 January 2010 the VIES form for intracommunity supplies of goods will also be filed monthly. These forms are currently filed quarterly. The purpose of the new electronic procedure is the equal treatment of the businesses within the EU and the faster refund of the VAT to the claimants. As of 1 January 2010, when a taxable person who is established in one Member State (Member State of Establishment) pays VAT in another Member State of the EU (Member State of Refund), will be allowed to submit an electronic application for the refund of VAT in the Member State of Establishment. ACTIONS SHOULD BE TAKEN BY BUSINESSES All business engaged in supplying or receiving services cross-border should urgently consider the impact of the changes, and be ready to make appropriate changes to their processes and systems. Businesses that are adversely impacted should review their existing arrangements and consider the options for negating the adverse effects. Other businesses may find that the changes present opportunities for VAT savings. ACCOUNTANCY CYPRUS VOLUME 97 DECEMBER

40 Value added tax in the EU VAT: The European commission calls for a harmonised application of the VAT grouping rules By Therapon Mafkas, Director in Baker Tilly Klitou, Member of the VAT Committee of the ICPAC The EU VAT legislation gives Member States the option, for the purpose of administrative simplification, to regard as one single taxable person those who, while legally independent, are closely bound to one another by financial, economic and organisational links. The European Commission had recently adopted a Communication setting out its position on VAT grouping schemes and sets out the Commission s view on how the provisions of Article 11 of the VAT Directive should be translated into practical arrangements whilst respecting the basic principles of the Community VAT system and ensuring that the effects of using the option scheme remain restricted to the Member State applying it. The Communication includes guidelines which aim at ensuring a correct, coherent and uniform application of the VAT grouping option. INTRODUCTION Article 11 of Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax ( the VAT Directive ) provides the Member States with an option to introduce VAT grouping schemes into their national legislation. A Member State may regard two or more persons established in that Member State who, while legally independent, are closely bound to one another by financial, economic and organisational links, as a single taxable person for VAT purposes. Where the VAT grouping option provided for in Article 11 is taken up by a Member State, this is to be considered as a particular national deviation from the normal Community VAT rules. ANALYSIS OF THE VAT GROUP PROVISION Article 11 of the VAT Directive has to be interpreted in the light of the aforementioned original objectives. THE MAIN PURPOSE OF THE VAT GROUPING OPTION The essential effect of implementing the VAT grouping option provided for in Article 11 is to allow taxable persons who are bound to one another by financial, economic and organisational links no longer to be treated as separate taxable persons for the purposes of VAT, but as one single taxable person. In other words, a number of closely bound taxable persons are merged into a new single taxable person for VAT purposes. WHO CAN FORM A VAT GROUP? Under Article 11, Member States may regard as a single taxable person any persons established in the territory. The notion of persons The Commission is of the opinion that the reference to persons in Article 11 applies only to those who fulfil the criteria for being a taxable person for VAT purposes. It follows logically that the persons regarded as a single taxable person must also be taxable persons in their own right, since the meaning of the grouping concept is to group together persons who are all engaged in activities falling within the scope of the VAT Directive. In this connection, the adjective single implies that, without the group, there would be several taxable persons: the status of a taxable person is therefore implicitly present in the case of all the group members. It is also clear from the settled case-law of the Court that the basic terms in the VAT Directive such as taxable person and economic activities are objective in nature, without regard to the purpose or results of the transactions concerned. 56 ACCOUNTANCY CYPRUS VOLUME 97 DECEMBER 2009

41 Value added tax in the EU Interpretation of this notion: The very wording of Article 11 restricts the territorial scope of a VAT grouping scheme implemented by a Member State to persons established in the territory of that specific Member State. It is therefore crucial to know who can be regarded as established within the meaning of this provision. There is no existing guidance as to the meaning of that notion. The Explanatory Memorandum to the proposal for a Sixth VAT Directive does not provide any explanation in respect of the restriction of the territorial application to the Member State The condition of financial, economic and organisational links The Commission is of the opinion that this condition is to be interpreted as meaning that all three links have to be met during the entire time a VAT group exists. The financial link: Defined by reference to a percentage of participation in the capital or in voting rights (over 50%), or defined by reference to a franchise contract. This guarantees that one company has the actual control of another. The economic link: Defined by reference to the existence of at least one of the following situations of economic cooperation. The principal activity of the group members is of the same nature, or the activities of the group members are complementary or interdependent, or one member of the group carries out activities which are wholly or substantially to the benefit of the other members. The organisational link: Defined by reference to the existence of a shared, or at least partially shared, management structure. The rights and obligations of a VAT group On whom do the obligations fall? Since a VAT group is considered to be a single taxable person, it follows that the group is subject to the same rights and obligations as any other taxable person and that all the provisions of the VAT Directive, as well as the rulings by the European Court of Justice, apply to it. Thus, the obligations fall on the VAT group as such, not its members. Therefore, when creating a national VAT grouping scheme, it is essential to design the scheme within the Community legal framework set out for ordinary taxable persons. The single VAT number of the VAT group is to be used, for example, when issuing invoices for supplies of goods or services deemed to have been carried out by the VAT group. The right of deduction of a VAT group Rules on the right of deduction applicable to the VAT group The treatment of the VAT group as a single taxable person for VAT purposes has the effect that the right to deduct input VAT is determined on the basis of the transactions of the group as such with third parties. In this context, the rules concerning adjustment to the right of deduction will need to be properly applied, e.g. when a taxable person enters or leaves the group, or if the activities of a group member change in such a way that the right of deduction of the group needs to be changed. The impact of a VAT group on the right of deduction One of the most important consequences of forming a VAT group is the disappearance, from a VAT perspective, of the transactions between the members of the group. In a VAT group consisting only of taxable persons with the right to full deduction, the effect on the tax revenue is neutral for the Member State in whose territory the VAT group operates. CONCLUSIONS The Commission invites the Council and the European Parliament to take note of its position on VAT grouping schemes as set out in the Communication with a view to contribute to a more uniform application of Article 11 of the VAT Directive, thereby avoiding negative impacts on the internal market and contradictions with the basic principles of the Communities VAT system. The above guidance is already included in the Article 32 of the National VAT Laws of Cyprus and we are not expecting any major amendments in the National VAT legislation. ACCOUNTANCY CYPRUS VOLUME 97 DECEMBER

42 The Excel Wizard The Excel Wizard By Stratos Panayides, BA(Econ), ACA Training Consultant at AKTINA 58 ACCOUNTANCY CYPRUS VOLUME 97 DECEMBER 2009

43 The Excel Wizard ACCOUNTANCY CYPRUS VOLUME 97 DECEMBER

44 Distributions of non-cash assets to owners The IFRIC issued guidance on distributions of non-cash assets to owners and on extinguishing financial liabilities with equity instruments IFRIC 17 PROVIDES GUIDANCE ON DISTRIBUTIONS OF NON-CASH ASSETS TO OWNERS Transactions with shareholders has always been a grey area under IFRS and raised many application questions. Diversity in By George Kazamias practice developed as a Director result. The International Assurance-Financial Services and Member Financial Reporting Interpretations Committee of the Accounting Consulting Services team (IFRIC) responded to PricewaterhouseCoopers requests for guidance by Limited issuing IFRIC 17, Distributions of non-cash assets to owners, in November The scope of IFRIC 17 is narrow and carefully defined. IFRIC 17 only deals with transactions that are nonreciprocal transfers, that is distributions, and more specifically distributions of non-cash assets or distributions that give a choice of a non-cash asset or a cash alternative. IFRIC 17 is also limited to distributions where all owners are treated equally and only applies to distributions that result in a change in control over assets distributed. IFRIC 17 clarifies that a dividend payable should be recognised when the dividend is appropriately authorised and is no longer at the discretion of the entity. This date will differ by jurisdiction. For example, if the jurisdiction requires shareholders approval, the liability is not recognised until such approval is granted. Where shareholders approval is not required, the dividend payable is normally recognised when declared. The dividend payable is recorded at the fair value of the net assets to be distributed. Where a choice of settlement is given, management considers fair values of both alternatives and their respective probabilities. Where the net assets distributed constitute a business, the liability is measured at the fair value of the business rather than the sum of individual fair values of the net assets constituting the business (ie, they include goodwill, identifiable intangible assets and contingent liabilities). The distribution liability is remeasured at fair value at each reporting date, with measurement adjustments taken to equity. The IFRIC recognised that fair value of some distributions (for example, ownership interest in a non-traded entity) may not be readily available but did not provide any exemptions from the measurement principle. Management is expected to be able to measure the value of any distribution. In addition, dividend income is measured at fair value under IAS 18; thus the interpretation does not impose a more onerous requirement on the entity making the distribution as compared to the recipient of the distribution. IFRIC 17 requires an entity making the distribution to recognise the difference between the carrying amount of the dividend payable and the carrying amount of the net assets distributed in profit or loss. IFRIC 17 applies for annual periods starting on or after 1 July 2009 (ie, 2010 for calendar-year-end entities). Earlier Transactions with share-holders has always been a grey area under IFRS and raised many application questions. 62 ACCOUNTANCY CYPRUS VOLUME 97 DECEMBER 2009

45 Distributions of non-cash assets to owners application is permitted. The IFRIC recognised potential difficulties around fair value measurement of the liability and therefore required prospective application of the interpretation. IFRIC 19 CLARIFIES THE ACCOUNTING FOR the fair value of the financial liability extinguished. The difference between the carrying amount of the financial liability extinguished and the initial measurement amount of the equity instruments issued is included in the entity s profit or loss for the period. IFRIC 17 requires an entity making the distribution to recognise the difference between the carrying amount of the dividend payable and the carrying amount of the net assets distributed in profit or loss. DEBT FOR EQUITY SWAPS IFRIC issued on 26 November 2009 an interpretation that provides guidance on how to account for the extinguishment of a financial liability by the issue of equity instruments. These transactions are often referred to as debt for equity swaps. IFRIC 19 clarifies the accounting when an entity renegotiates the terms of its debt with the result that the liability is extinguished by the debtor issuing its own equity instruments to the creditor. Before IFRIC 19, some recognised the equity instrument at the carrying amount of the financial liability and did not recognise any gain or loss in the income statement. Others recognised the equity instruments at the fair value of equity instruments issued and recognised any difference between that amount and the carrying amount of the financial liability in the income statement. As a result, there was diversity in practice in the accounting for such transactions and the issue became more pervasive in light of the current economic environment. IFRIC 19 clarifies that: Hence, entities will no longer be permitted to reclassify the carrying value of the existing financial liability into equity (with no gain or loss being recognized in profit or loss). All entities that enter into debt for equity swap transactions (in full or partial settlement of a financial liability) are affected by IFRIC 19. IFRIC 19 does not impact the debtor s accounting. It also does not change the guidance for convertible bonds where extinguishing the liability by issuing equity shares is in accordance with its original terms. IFRIC 19 also does not apply to transactions with shareholders or to most transactions between entities under common control. IFRIC 19 shall be applied for annual periods beginning on or after 1 July 2010 which for calendar year-end companies means their 2011 financial statements; earlier application is permitted. The interpretation should be IFRIC 17 clarifies that a dividend payable should be recognised when the dividend is appropriately authorised and is no longer at the discretion of the entity. applied retrospectively from the beginning of the earliest comparative period presented as application to earlier periods would result only in a reclassification of amounts within equity. The entity s equity instruments issued to a creditor are part of the consideration paid to extinguish the financial liability. The equity instruments issued are measured at their fair value. If their fair value cannot be reliably measured, the equity instruments should be measured to reflect This article provides some general guidance on the application of standards, and it does not intend to create a subset of additional rules. Entities should consider the full text of standards, consult with their auditors and apply professional judgement to their specific accounting questions. ACCOUNTANCY CYPRUS VOLUME 97 DECEMBER

46 IFRS 9 Financial Instruments IFRS 9 Financial Instruments PART 1 By Yiannis Leonidou Deloitte THE HEADLINES New classification and measurement requirements for financial assets. New criteria for amortised cost measurement. New measurement category - fair value through other comprehensive income. Impairment assessment only for amortised cost assets. No more available-for-sale assets. No more held-to-maturity assets and tainting rules. No more embedded derivatives in financial assets. No more unquoted equity investments measured at cost less impairment. BACKGROUND On 12 November 2009, the International Accounting Standards Board (IASB) issued IFRS 9 Financial Instruments. This Standard introduces new requirements for the classification and measurement of financial assets and is effective from 1 January 2013 with early adoption permitted. The exposure draft for this Standard included both financial assets and financial liabilities within its scope, however, due to concerns raised with the proposals for financial liabilities the scope was restricted to only financial assets. New requirements for classification and measurement of financial liabilities, derecognition of financial instruments, impairment and hedge accounting are expected to be added to IFRS 9 in 2010 as illustrated in the timetable. As a result, IFRS 9 will eventually be a complete replacement for IAS 39 Financial Recognition and Measurement. An early adopter of IFRS 9 continues to apply IAS 39 for other accounting requirements for financial instruments within its scope that are not covered by IFRS 9 (e.g. classification and measurement of financial liabilities, recognition and derecognition of financial assets and financial liabilities, impairment of financial assets, hedge accounting, etc.). SUMMARY OF PROPOSALS All recognised financial assets that are currently in the scope of IAS 39 will be measured at either amortised cost or fair value. A debt instrument (e.g. loan receivable) that (1) is held within a business model whose objective is to collect the contractual cash flows and (2) has contractual cash flows that are solely payments of principal and interest on the principal amount outstanding generally must be measured at amortised cost. All other debt instruments must be measured at fair value through profit or loss (FVTPL). A fair value option is available (provided that certain specified conditions are met) as an alternative to amortised cost measurement. All equity investments within the scope of IFRS 9 are to be measured on the statement of financial position at fair value with the default recognition of gains and losses in profit or loss. Only if the equity investment is not held for trading can an irrevocable election be made at initial recognition to measure it at fair value through other comprehensive income (FVTOCI) with only dividend income recognised in profit or loss. DEBT INSTRUMENTS A debt instrument will be measured at amortised cost or FVTPL. The available-for-sale and held-to-maturity classifications (including the associated tainting rules) that are currently in IAS 39 are eliminated under IFRS 9. A debt instrument generally must be measured at amortised cost if both the business model test and the contractual cash flow characteristics test are satisfied. Business model test: The objective of the entity s business 64 ACCOUNTANCY CYPRUS VOLUME 97 DECEMBER 2009

47 IFRS 9 Financial Instruments model is to hold the financial asset to collect the contractual cash flows (rather than have the business model objective to sell the instrument prior to its contractual maturity to realise its fair value changes). Contractual cash flow characteristics test:the contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding. Despite the fair value requirement for all equity investments, IFRS 9 contains guidance on when cost may be the best estimate of fair value and also when it might not be representative of fair value. the current IAS 39 fair value option for an accounting mismatch). If a debt instrument measured at amortised cost is derecognised prior to maturity, IAS 1 Presentation of Financial Statements is amended to require the gain/loss on disposal to be separately presented in the statement of comprehensive income, and IFRS 7 Financial Instruments: Disclosures is amended to require an analysis of that gain/loss and the reasons for the sale. Where a debt instrument does not meet the criteria for amortised cost measurement it must be measured at FVTPL. All derivatives within the scope of IFRS 9 are required to be measured at fair value. This includes derivatives that are settled by the delivery of unquoted equity instruments, however, in limited circumstances cost may be an appropriate estimate of fair value. A debt instrument that meets both of the above criteria can still be designated as FVTPL on initial recognition if the fair value designation would eliminate or significantly reduce an accounting mismatch that would exist had the instrument been measured at amortised cost (equivalent to BUSINESS MODEL TEST IFRS 9 introduces a business model test that requires an entity to assess whether its business objective for a debt instrument is to collect the contractual cash flows of the instrument as opposed to realising its fair value change from sale prior to its contractual maturity. This is determined at a higher level than the individual financial instrument level (e.g. portfolio or business unit level).this is not based on management s intent for individual instruments. ACCOUNTANCY CYPRUS VOLUME 97 DECEMBER

48 IFRS 9 Financial Instruments The Standard acknowledges that an entity may have different business units that are managed differently. For example, an entity may have a retail banking business where the objective is to collect the contractual cash flows of loan assets and an investment banking business where the objective is to realise fair value changes through the sale of loan assets prior to their maturity. In this case, assuming that the financial instruments give rise to cash flows that are payments of principal and interest (see cash flow characteristic test below), in the retail banking business they may qualify for amortised cost measurement even if similar financial instruments in the investment banking business do not. Instruments that would meet the existing held for trading definition in IAS 39 would be measured at FVTPL as they are not held to collect the contractual cash flows of the instrument. Although the objective of an entity s business model may be to hold financial assets in order to collect contractual cash flows, the entity need not hold all of those assets until maturity. Thus an entity s business model can be to hold financial assets to collect contractual cash flows even when sales of financial assets occur. For example, an entity s assessment that it holds investments to collect their contractual cash flows is still valid even if they would sell the investments to fund capital expenditure. However, if more than an infrequent number of sales are made out of a portfolio, the entity needs to assess whether and how such sales are consistent with an objective of collecting contractual cash flows. The original proposals in the exposure draft would have prevented an asset acquired at a discount reflecting incurred credit losses ( distressed debt ) from being measured at amortised cost because it did not pass the business model test. The Standard takes a different approach, potentially allowing distressed debt to pass the business model test if the business model for the holder is to collect the contractual cash flows on the debt. CONTRACTUAL CASH FLOW CHARACTERISTICS TEST The requirement in IFRS 9 to assess the contractual cash flow characteristics of a financial asset has been adapted from a similar approach applied in the IFRS for Small and Medium-sized Entities recently issued by the IASB. The concept is that only instruments with contractual cash flows of principal and interest on principal (hereafter referred to as principal and interest ) may qualify for amortised cost measurement. The Standard describes interest as consideration for the time value of money and the credit risk associated with the principal outstanding during a particular period of time. Therefore, an investment in a convertible loan note would not qualify 68 ACCOUNTANCY CYPRUS VOLUME 97 DECEMBER 2009

49 IFRS 9 Financial Instruments because of the inclusion of the conversion option which is not deemed to represent payments of principal and interest. This criterion will permit amortised cost measurement when the cash flows on a loan are entirely fixed (e.g. a fixed interest rate loan or zero coupon bond), or where interest is floating (e.g. a GBP loan where interest is contractually linked to GBP LIBOR), or combination of fixed and floating (e.g. where interest is LIBOR plus a fixed spread). Other examples provided in the Standard of instruments that satisfy this criterion include: a variable rate instrument with a stated maturity date that permits the borrower to choose to pay three month LIBOR for a three-month term or one-month LIBOR for a one-month term; a fixed term variable market interest rate bond where the variable interest rate is capped; and a fixed term bond where the payments of principal and interest are linked to an unleveraged inflation index of the currency in which the instrument is issued. Examples of instruments that do not satisfy this criterion include: a bond that is convertible into equity instruments of the issuer; and a loan that pays an inverse floating interest rate (e.g. 8% minus LIBOR). IFRS 9 contains application guidance and further examples illustrating the application of this criterion. EMBEDDED DERIVATIVES IFRS 9 does not retain IAS 39 s concept of an embedded derivative for hybrid contracts if the host contract is a financial asset within the scope of IFRS 9. Consequently, embedded derivatives that would have been separately accounted for at FVTPL under IAS 39 because they were not closely related to the financial asset host will no longer be separated. Instead, the contractual cash flows of the financial asset are assessed in their entirety and the asset as a whole is measured at FVTPL if any of its cash flows do not represent payments of principal and interest as described by the Standard. As IFRS 9 only applies to financial assets in the scope of IAS 39, the requirement to assess contractual arrangements for non-closely related embedded derivatives still applies to all hybrid contracts with a financial liability host and non-financial host contracts that are outside the scope of IAS 39. NON-RECOURSE LENDING When debt instruments are non-recourse, i.e. the lender s claim is limited to specific assets of the borrower, it will be necessary to consider whether the loan only represents contractual cash flows that are payments of principal and interest. The Standard requires an entity to look through to the underlying assets or cash flows to make this determination. If the terms of the loan give rise to any other cash flows or limit the cash flows in a manner inconsistent with payments representing principal and interest the loan cannot be measured at amortised cost. For example, an entity that is developing an investment property may issue a fixed rate bond whose terms state that the principal and interest on the bond are repayable solely from the sale proceeds of the development property and without recourse to the issuing entity. Such a bond would fail the contractual cash flow characteristics test because the underlying asset to which the bond is contractually linked does not have cash flow characteristics of principal and interest. This publication contains general information only and is not intended to be comprehensive nor to provide specific accounting, business, financial, investment, legal, tax or other professional advice or services. This publication is not a substitute for such professional advice or services, and it should not be acted on or relied upon or used as a basis for any decision or action that may affect you or your business. Before making any decision or taking any action that may affect you or your business, you should consult a qualified professional advisor. Whilst every effort has been made to ensure the accuracy of the information contained in this publication, this cannot be guaranteed, and the author of this article will not have any liability to any person. ACCOUNTANCY CYPRUS VOLUME 97 DECEMBER

50 The IMF in a more active role in the world economy The IMF in a new active role At the 1946 Conference, held at Bretton Woods, New Hampshire, in the United States of America, 44 government representatives, decided to set-up the International Monetary Fund (IMF). The objective of the set-up of this Institution was to stabilize international exchange rates and facilitate By Philippos Aristidou economic development. Advisor, Financial Risk Management, KPMG Ltd The IMF finances countries facing financial and economic difficulties, by making use of the deposits of its 186 member countries. Prior to granting the financing the IMF imposed strict conditions, with which each country in need was ought to comply, to ensure that the IMF prevented a financial crisis rather than funding financial recklessness. These conditions became known as the Washington Consensus and were distinguished by a series of reforms which promoted fiscal austerity, fixed exchange rate regimes and utilized monetary practices similar to those implemented in the evolving world. In the absence of safety nets, these reforms failed to address the issues underpinning the poor economic conditions in developing countries, many of which found themselves in worse economic conditions post to being financed by the IMF. The policies engaged by the IMF received a great deal of criticism, the most notable of all received by the Nobel Laureate, Joseph Stiglitz in his book Globalization and its Discontents. Many developing countries did not wish to take advantage of the credit facilities of the IMF and therefore, attempted to maintain low exchange rates in order to increase their exports and have surpluses in their balance of payments, while at the same time they were borrowing from the International Capital Markets. As recently as two years ago the IMF was reduced to irrelevance. The big rich countries were not appreciating it while the poor countries did not accept its advice since it limited domestic economic activity and led to unemployment. At the same time it was easy for them to take loans from the international capital markets. In order to ensure that they would not have to be facilitated by the IMF, many emerging countries, especially in the Asia region, built up enormous foreign exchange reserves creating global capital imbalances, considered by many as the root cause of the recent financial crisis. Today, the IMF is considered to be a flexible institution that aided more than 12 countries to face the current international financial crisis. It has already granted loans and credit facilities of more than $160 billion, in comparison to $1 billion in At the same time, its potency to offer loans and credit facilities has been tripled to $750 billion. With new contributions from member countries, IMF s capital has increased, while simultaneously it has been granted an important role in facing international imbalances that continue to threaten the world economy. The IMF has considerably remitted the terms that it imposes for lending to countries in need, something that constitutes a great difference in regards to the previous philosophy followed by the IMF. Mr. Dominique Strauss-Kahn, the Managing Director of the IMF and former Minister of Finance of France, played an essential role in these developments. With the Keynesian Theory in mind, Mr. Strauss-Kahn encouraged the fiscal policy to the countries facing economic difficulties. The enhanced role of the IMF in the global scene, was the result of Mr. Strauss-Kahn orchestrating the global fiscal stimulus, for driving the world economy out 70 ACCOUNTANCY CYPRUS VOLUME 97 DECEMBER 2009

51 The IMF in a new active role of the recession as well as the efforts made by IMF to coordinate a global fiscal exit strategy to avoid the undesired effects of inflation upon the recovery of the economy. Mr. Strauss-Kahn took advantage of the crisis to encourage the mission that both he and the IMF wanted to pursue: setting up the Fund by means of lending facilities to emerging economies - which proved to have had good economic management - under generous terms in order to make them attractive. At the same time the leaders of G20 decided to increase the voting rights of the emerging economies in the IMF by 5%. Brazil, Russia, India and China however, the so-called BRIC group, claimed that this increase should be 7%. Mr. Strauss-Kahn has encouraged reforms that allow the IMF to grant large sums of money at a rapid pace, without onerous terms, while it has convinced a plethora of countries, including China, India and Brazil, to contribute In order to ensure that they would not have to be facilitated by the IMF, many emerging countries, especially in the Asia region, built up enormous foreign exchange reserves creating global capital imbalances, considered by many as the root cause of the recent financial crisis. to the financial situation of the IMF. Mr. Strauss-Kahn has managed to turn the IMF into a leading financial institution. At the G20 summit meeting in Pittsburgh, Pennsylvania, USA, the leaders, committed to a coordinated international economic management and called upon the IMF to undertake the analysis of the means the special national and regional policies could be coordinated. Recently, the IMF was commissioned to supervise the progress regarding the application of the balanced international growth, which was agreed at the G20 summit meeting in Pittsburgh. Thus now, the IMF has been rendered as the international coordinator, aiming at a viable and balanced world economic growth. In addition, the IMF s Ministers of Finance, who in October assembled in Istanbul for its annual meeting, advised the IMF to prepare guidelines in order to ensure an organized and The policies engaged by the IMF received a great deal of criticism, the most notable of all received by the Nobel Laureate, Joseph Stiglitz in his book Globalization and its Discontents. coordinated exit strategy from the fiscal and monetary stimulus. However, the exit strategy will not be activated until a viable economic growth is ascertained. It may also be noted that China proposes the extension of the role of the Special Drawing Rights (SDRs), introduced by the IMF in 1969, based on the Bretton Woods system. Furthermore, China proposes, inter alia, that the basket of currencies that will constitute the base of SDRs, is extended in order that the currencies of all large emerging economies are additionally included. The membercountries will entrust part of their exchange reserves in the SDRs to the IMF so that it manages them collectively and gradually the SDRs will replace the existing international reserve currencies. Also, at the G20 summit meeting in London, back in April 2009, it was agreed that the IMF created an additional sum of $250 billion in the SDRs. This amount certainly leads to the creation of new international money which underprivileged countries may exchange their currency into Dollars, Euros or any other currency in order to utilize it for import purposes. It remains to be seen whether the recent policies adopted by the IMF will be proved to be successful. The change in IMFs governance has shifted some power to emerging countries, making Europe and the USA unwilling to further concessions. Many have started to fear that once the global economy recovers, the role of the IMF will be minimized once again, since it will lack legitimacy and the legal force for promoting its policies, by punishing countries that cause global capital imbalances. Note: The views and opinions expressed herein are those of the author and do not necessarily represent the views and opinions of KPMG International or KPMG member firms. ACCOUNTANCY CYPRUS VOLUME 97 DECEMBER

52 The Cyprus economy Is the Central Bank Governor right, pessimistic (or both)? By Dr Ioannis M. Violaris Associate Professor of Economics Frederick University We are witnessing, for some time now, a situation during which on one hand the Central Bank s Governor is expressing, in pure Economic language, the facts about the Cyprus economy and on the other hand the Government officials, especially the Finance Minister, are trying to interpret the economic situation in a more earfriendly mode. Yet, if one reads carefully the Governor s views he will realize that they are based on facts that cannot be easily disputed, as they are based on the true economic measurements of the economy and his projections, for the next few years, are based on econometric scenaria that are plausible. The Governor, of any Central Bank for that matter, should have no political aspirations or interests. His role should be dictated by the needs of the economy and not by the need for re-election. After all the Governors are not elected, they are appointed. Therefore our Central Bank s Governor, rightly, exercises his role and rings a bell (or even more than one) whenever, after carefully studying the economic situation, is convinced that several economic parameters are heading towards the wrong direction. And this is exactly what he does during his term in office. At times, like these ones, during which the economy is in a depression, what he says sounds pessimistic and negative and definitely is not what the Government would have liked the people to hear. Yet he (the Governor) has not been appointed at his position to tell us what we would have liked to hear, but on the contrary what we would not. In this way he presents the true picture of the economy to all, especially to the Government, so as to take measures that will reverse the situation and place the economy on the right path of sustainable development. Our economy, unfortunately, even without this present crisis, has been, through several periods of its short, 50 years, economic history, heading towards the wrong direction. For instance the public sector, plus the public sector at large, are simply too expensive to sustain and at the same time not productive enough. With or without the crisis, this problem needs to be addressed. Moreover, our economy has been based on a handful of sectors all of which are too sensitive to economic crises (e.g. tourism, construction). The Governor is right when he says that structural changes need to take place. This is something that has always been recognized as a must, yet very few measures have been taken towards materializing it, and not just by this Government. The previous Governments have simply been luckier, as during their terms several external events led to more positive results for our economy. (Such as the Lebanese civil war, that suddenly gave preference to our ports and facilities, or the Gulf war, for that matter). It is obvious that, whether we like it or not, the Governor of the Central Bank is right. Perhaps at the same time he is too pessimistic, but that is not a purely economic characteristic! And, pessimistic or not, as David Landes writes in his masterpiece, The Wealth and Poverty of Nations, W.W.Norton & Company Inc, 1998, is not the real issue. The real one is to confront realities and plan long-term ways to face them. This is what we all expect from the Government and we additionally would have liked to see the fiscal policy coordinated with the monetary one, in other words the Governor coordinated with the Finance Minister, and consequently with the Government. If that happens, the people will be happier too, as the measures that will be taken will, in the long run, benefit them too. 74 ACCOUNTANCY CYPRUS VOLUME 97 DECEMBER 2009

53 Cyprus Investment Promotion Agency CIPA s Strategy for the Investor s Environment By Lefteris S. Eleftheriou Investor Relationship Officer at CIPA ( As part of its strategy to support existing investors, the Cyprus Investment Promotion Agency (CIPA) arranged to meet, during 2009, with more than 100 foreign investors who domiciled their companies to Cyprus. The purpose of the meetings was threefold: First, to make CIPA s presence known to foreign investors. Second, to identify from the prime source the pros and cons of the investor s environment. And third, to prioritize the issues raised, by the investors, in order to provide solutions and support, where it s possible, always within the framework of the Agency s jurisdiction. From the first meetings, it became obvious that foreign investors confronted positively the establishment of CIPA. This is attributed to the Agency s apparent orientation to support foreign investment in Cyprus-which consequently translated as support to the Cyprus economy. CIPA s policy towards foreign investment actually, is fully harmonized with the needs of the modern economy. After all, foreign direct investment offers thousands of jobs to Cypriots, as well as million of Euros to state funds every year. As it came out from the meetings, two-thirds of the companies-members of the Cyprus International Business Association (CIBA) employed something close to 2000 Cypriots, while an additional number of 1400 employees, from EU member states or third countries, are employed in the same companies. These employees however, pay taxes to the Republic of Cyprus as the relevant law foresees. Another striking feature of the presence of foreign companies in Cyprus is the fact that 31, out of the 36, foreign companies full members of the Cyprus Shipping Chamber (some are members of CIBA) employ more than 1600 Cypriot nationals. CIPA s meetings revealed that foreign companies offer generously management opportunities to Cypriot professionals. This is confirmed by the fact that the majority of senior managerial positions are staffed by Cypriots. In fact, Cypriot professionals occupied, in a number of cases, the General Manager position of huge multi-national corporations. In addition to that, it is a common phenomenon for Cypriots to hold corporate-shares to that extent, that their decisions affect the strategic development of the company. Foreign investors have indicated to CIPA that the major reasons for choosing Cyprus to be the base of their company are: the favorable tax regime of the island (10%). The high percentage of university graduates, in comparison with compatible destinations. And the fact that Cyprus is the bridge between Europe, Middle East and Africa. Apart from that, the enviable lifestyle of the Island plays a significant role to investors decision. Besides the indicated positive points however, foreign investors expressed some complaints about their general experience of doing business in Cyprus. The complaints have to do mainly with the bureaucracy at the Immigration Department especially on matters such as visa issuing and family reunification. Complaints have also been expressed for the frequent delays of VAT returns. Apart from the Public Sector though, many foreign investors complained strongly about the overcharging of Cypriot banks for basic services such as money transferring. Throughout its contacts with foreign investors, CIPA has collected useful information concerning the investment environment of Cyprus. Based on these findings, the Agency has planned a number of actions as an effort to find solutions where is needed. The ultimate goal of course is to upgrade the Island s economy. ACCOUNTANCY CYPRUS VOLUME 97 DECEMBER

54 Energing companies market New non-regulated market of CSE By Socrates Paschalis Senior Manager Advisory Services and Member of Capital Market Group PricewaterhouseCoopers Limited On the 30th September 2009, the Cyprus Stock Exchange ( CSE ) launched a new market, called the Emerging Companies Market ( ÂÔ Ó appleù ÛÛfiÌÂÓˆÓ Ù ÈÚÂÈÒÓ ÁÔÚ ) ( ECM ). The ECM will be nonregulated and the CSE has complete control over the determination of the listing requirements and the obligations of the issuer and its directors. The Cyprus Securities and Exchange Commission ( CySEC ) will only be the supervisor in relation to the publication of the IPO prospectus, if one is required, according to the Law for Public Offers. As it will be shown below, the ECM has considerably less stringent listing requirements and continuous obligations than that of the existing regulated markets of the CSE. The ECM is addressed to non-listed companies that need funding and easy entrance to a secondary market. It is also addressed to already listed companies which are not able or unwilling to pay the high costs of being listed in a regulated market. In addition it provides new opportunities to investors seeking for a new type of investment, taking into account the high risk of the market. ADVANTAGES OF THE ECM FOR COMPANIES AND INVESTORS The ECM of the CSE will offer companies an alternative method of securing financing at competitive cost. It will also offer the opportunity to suitable candidates to enhance their recognition and reputation, by becoming a listed entity. In addition, listing on the ECM can act as a stepping stone and preparation for a company to transform itself from a private company to be listed on a regulated market of the CSE, with the gradual increase of its dispersion and volume of trading of their shares. It is important to note that, like the other CSE markets, any profit realised on the sale of shares of a company listed in the ECM is not subject to any Capital Gains Tax, even if the company owns property. For companies already listed in regulated markets that do not wish or cannot incur the cost of complying with more strict obligations in the regulated markets, listing in the ECM constitutes a suitable alternative. A key benefit for investors is that the ECM will create opportunities for new investment in companies with a high growth potential but also with high risk. LISTINGS REQUIREMENTS SPECIFIC TO THE ECM The issuer must have published audited accounts, has normal operations and related activities for at least the two years preceding application. Newly established companies can be admitted to the ECM, provided that the Council of the CSE is satisfied that investors are provided with adequate information to enable them to assess properly the value of the titles. The issuer should have a Nominated Advisor ( Ì Ô - ÏÔ ÈÛ ÁˆÁ ), during the listing process and for as long as it is listed The issuer should be a public company, in accordance with the Cyprus Companies Law No minimum market capitalisation. No minimum shareholders equity (net assets) No minimum dispersion (No minimum numbers of shares to be in public hands). It is noted here that the CSE has unofficially set some benchmarks for the minimum number of new investors so it is preferable to consult the CSE on this matter on a case-by-case basis. GENERAL LISTING REQUIREMENTS In addition to the specific requirements mentioned above, there are some additional listing requirements that are already applicable to the other regulated markets of the CSE and they also need to be adhered to: The issuer was incorporated by law and operates as a public company according to the legislation of the country of its registration Has the authority to issue the specific equities which he 76 ACCOUNTANCY CYPRUS VOLUME 97 DECEMBER 2009

55 Energing companies market wishes to list according to the laws of the country of its registered office. The titles are freely transferable. The titles are fully paid. WAYS OF ACHIEVING A LISTING ON THE ECM A company can achieve a listing on the ECM in two ways. The first is by public offer. This will be applicable if the offering is higher than m2.5 million and is addressed to more than 100 potential investors. In such a case, a Prospectus and an approval from the CySEC will be required according to the relevant Law for Public Offers, in addition to the Admission document that will need to be approved by the CSE, The second option is by private placement, which will nit require a Prospectus or approval from the CySEC. In such a case, only an Admission Document will be required that will need to be approved by the CSE. Private placement will only be appropriate if the offer is only addressed to institutional investors or to fewer than 100 potential investors or funds raised are less than m2.5 million. Please note that companies can use a combination of the two methods described above. CONTENTS OF THE ADMISSION DOCUMENT Historic analysis and analytical background of the issuer. Adequate business plan, referring to the long-term and short-term business plans of the issuer. Information on the Directors and largest shareholders. Information on the issue. Business risks. Audited financial statements for the 2 years immediately preceding the application, if applicable. Use of the funds raised from the issue. ON-GOING OBLIGATIONS OF ISSUERS As mentioned above, the on-going obligations of a company listed on the ECM are less stringent, compared to the regulated CSE markets. The key on-going obligations are: Annual audited accounts must be signed and published within four months of the year end. Half-yearly reports (unaudited) must be published within two months of the period end. Announcement of any changes in the co-operation between the issuer and the Nominated Advisor, accompanied with the reasons. In order to ensure the early notification to investors, companies have the obligation to announce to the CSE immediately and if possible at least one hour before trading begins any decision relating to the following matters: Decision to pay or not to pay a dividend, the distribution of profits or the payment of interest concerning listed securities. Approval of financial results and accounts and how these will be published. In the case of bonds, any decision taken for a new issue and especially any matters associated with indemnities or collateral. Any decision taken concerning changes in the capital structure of the company. Any significant changes in the operations of the issuer. Any changes in the positions of Chairman, Member of the Board of Directors, Senior Management, the Auditors or any other executive. Publication and submission to the CSE of the dispersion of shares in the listed entity on the last working day of the calendar year. TRANSFER OF ISSUER FROM A REGULATED MARKET OF THE CSE TO THE ECM An issuer cannot automatically be de-listed from a regulated market of the CSE and be transferred to the ECM. For this to be achieved, there has to be a takeover bid for the existing minority shareholders of the company listed in the regulated market in accordance with the Takeover rules. If the bid is successful and dispersion falls below the minimum levels, the Company is then de-listed from the regulated market and applies for listing to the unregulated ECM of the CSE. NOMINATED ADVISOR The Nominated Advisor will assist the company throughout the listing process and will ensure that the issuer is suitable for admission. Furthermore, subsequent to the listing, the Nominated Advisor will advise the company on its on-going obligations that flow from the rules and regulations of the ECM. The role of the Nominated Advisor can be performed by investment banks, investment firms, audit firms or solicitors firms. Investment banks and investment firms can in addition to being Nominated Advisors offer underwriting and market-making services. However, audit and solicitors firms cannot offer these services. ACCOUNTANCY CYPRUS VOLUME 97 DECEMBER

56 Public Finances The Fiscal Deficit and the Economy According to the recent statistical data, the fiscal deficit of Cyprus in 2009 will amount to 3.5% of GDP while in 2010 it will rise to 5.7%. The deficit of 5.7% of GDP for 2007 is compared favourably with the average of the of 16 countries of the Eurozone which will be 6.9%. In America the fiscal By Tassos Anastasiades, deficit for 2009 is expected Deputy Editor to reach 11.2% of GDP while in Greece it will exceed 12%. As a consequence if not in 2009 in 2010 Cyprus will submit to the excessive deficit procedure of the Commission in Brussels. This development, however, will be helpful because there will also be supervision by the Commission. According to the theory of Lord Keynes, the greatest economist of the 20th century, when there is recession there must be fiscal deficit by decreasing taxes and increasing expenditure, something which leads to the increase in demand, thus reducing unemployment and increasing production. The fiscal deficit during the duration of economic recession is a result of decreased tax revenue because there is reduced economic activity and increase of public expenditure. The public expenditure is increased certainly because of the increase of unemployment benefits for supporting the unemployed but also due to the execution of more public-works projects in order to give a stimulus to the economic activity. As a consequence it is natural that, during a period economic recession, there will be an increase in fiscal deficit. increase of employment can be enhanced by the acceleration of the execution of public-works projects and the award of increased targeted social benefits. This will lead to the maintenance of consumption demand which constitutes about 70% of aggregate demand in compassion with only 35% in China. In order to maintain the consumption demand at this high level we should stop writing articles and making statements which undermine the confidence of the consumers, specifically persons that have no risk of losing their work, as are the Government and semi-government employees, bank and local authorities employees, as well as the seft-employed who in their majority, the economic crisis has not significantly influenced their work. For the increase of external demand we should promote measures for the increase of tourist arrivals and foreign investements. Certainly measures must be taken for the increase of tax revenue as is the town-planning amnesty and the reduction of tax evasion while at the same time taxation on the unutilised land, of some area, in the urban areas should be imposed. But in the middle of an economic crisis you do not hit companies by forcing them to pay the VAT monthly instead of quarterly. At the same time the Government and semi-government employees should not receive any salary increases during 2010 and The public-works projects which are to be executed is not necessary to be financed from public funds, which increase the fiscal deficit, but from the private sector with the method of BOT, a method which has been successfully used for the erection of the two airports. At the same time for the increase of public revenue and the reduction of fiscal deficit the Government could partly privatize public assets and services. In consequence it is unthinkable to speak for the taking of measures for the reduction of fiscal deficit because our primary objective should not be, at the present moment, the reduction of fiscal deficit but the increase of production and employment and the reduction of unemployment. The But the concern for the fiscal deficit and the public debt and the taking of premature measures it may worsen the situation not only of the economy but also of the public finances. According to the Mr, Joaquim Almunia, commissioner for the economic and monetary policy of 80 ACCOUNTANCY CYPRUS VOLUME 97 DECEMBER 2009

57 Public Finances the EU, it is too early for the withdrawal of fiscal measures for the support of the EU. In parallel, however this is the time to open discussions for the exit strategy from the measures and to explain clearly our intentions, Mr Almunia stated. But while we should continue the fiscal stimulus in 2010 we must also be ready to start the withdrawal of the measures in 2011, as Mr. Almunia believes. Also as it was stressed by the International Monetary Fund even if the situation has been improved internationally dangers remain which could undermine the recovery with the taking of measures of exit strategy from the extraordinary monetary and fiscal measures that have been taken. The taking of measures for the reduction of fiscal deficit will actually lead to the increase of fiscal deficit because it will influence negatively the economic activity end consequently the tax revenues. At a University in Washington the students were given a model of the American Economy and were asked to take measures to reduce the fiscal deficit. Thus the students increased the taxes and decreased expenditure. As result the economic recession was worsened and the fiscal deficit increased. As Mr. Paul Krugman, who has been awarded the of Nobel prize for economies, if a country takes now measures for the reduction of fiscal deficit it will be an exceptionally erroneous action. Financial crises New Thinking on Dealing with Financial Crises Poor Alan Greenspan. Only a short time ago the former head of the American Federal Reserve was hailed as the guru of national economic management. Today, many blame him for the financial crisis that hit the American Economy and the world. What has changed? By Jim Leontiades Cyprus International Institute The global financial crisis of Management has brought with it a fundamental re-examination of many precepts which until recently were part of the accepted economic wisdom. The doctrine of efficient markets and the risk models based on this concept are no longer accepted as valid by many economists. Not even Adam Smith s invisible hand has escaped criticism. Though often guiding markets in the right direction, some experts now say that it may also point the economy toward the sort of bust we are now experiencing. The most basic change of all has to do with the focus on credit and particularly the overextension of credit as playing the key role in financial crises. Not that credit was held blameless during previous such downturns. Today however, there is a growing conviction that its role is more crucial than previously thought. Economic thinking was quite different only a short time ago when Alan Greenspan was the darling of both government and Wall Street. To keep the economy growing ACCOUNTANCY CYPRUS VOLUME 97 DECEMBER

58 Financial crises while maintaining high levels of employment was generally considered to be the main task of a central bank. Through the aggressive reduction of interest rates, Greenspan encouraged consumer to continue borrowing and consuming, This ensured that the American economy continued growing, until it crashed. TOO MUCH CREDIT Today there is a growing perception that this thinking was misguided. Credit is both the lifeblood of an expansion as well as the root of its downfall. A new book by George Cooper puts it succinctly: Credit creation is the foundation of the wealth generation process.. it is also the cause of financial instability.* An excess of credit and borrowing was certainly detectable in many of the countries which experienced the worst aspects to the financial crash. Spain, Ireland, USA, UK, Iceland, to name a few. Excessive credit expansion was evident in the dot com boom of 2000, the crash of the Japanese economy, the recession associated with the American Savings and Loan Associations and of course, the famous 1929 crash. If too much credit and borrowing is to blame, it follows that encouraging excessive credit and borrowing plays a key role in bringing about such crises. A NEW ROLE FOR CENTRAL BANKS Following this line of thought a perception on the role of government and the central bank has emerged which is quite different from that pursued in the days of Alan Greenspan Financial management requires limiting credit expansion... (G.Cooper) How much credit is too much? Another aspect of the new thinking is the focus on asset prices rather than consumer prices. Rapidly rising share and house prices are key indicators, signalling excessive credit expansion. This means that while credit fuelled prices in such assets are moving up and fortunes are being made, the central bank should step in, limit credit creation and dampen the expansion. This could be done through an increase of interest rates, just the opposite of what happened during the Greenspan years. The objective is not to bring about a financial crash but to avoid one through a timely slowing of credit. For all practical purposes this policy amounts to asking central banks to preemptively prick asset bubbles. (G.Cooper) Or, in the words of the former Chairman of the American central bank, William McChesney Martin: The job of the Federal Reserve is to take away the punchbowl just when the party gets going. The political and practical difficulties here are obvious. Unlike the more traditional approach (keeping the party going) the focus on limiting credit expansion will clearly face much popular and political opposition. Which government is prepared to curtail rising share prices and employment? Our own politicians in Cyprus, are not know for an aversion to parties and punch bowls. Would they be willing to raise interest rates to bring about a planned economic slowdown? It will be interesting to see what practical steps central banks may decide to take in support of this latest thinking. Using the interest rate and other tools to protect economic growth and employment against a downturn as long as possible is should not be the main objective of the central bank. Since too much credit creation is at the root of the sort of the boom and busts the capitalist economies have been experiencing, it is up to governments and particularly central banks to monitor credit creation and to curtail it when it reaches danger levels. * George Cooper, The Origin of Financial Crises, Harriman House, Ltd., 2008) 82 ACCOUNTANCY CYPRUS VOLUME 97 DECEMBER 2009

59 Financial Reporting in the Insurance Industry Making sense of the Numbers: Analysts perspectives on current and future reporting in the insurance industry By Androulla S Pittas Partner - Assurance Services Leader - Insurance Industry Services PricewaterhouseCoopers Limited FOREWORD A financial reporting framework that enables the investment community to make informed judgements is critical to insurer s ability to attract capital and ensure their share prices reflect the true level of value being created within their businesses. However, the 2007 survey of insurance analysts, carried out by PricewaterhouseCoopers, revealed strong dissatisfaction with the adequacy (level of quality, clarity and granularity) of financial reporting within the insurance industry. In turn, some of the proposals for change being discussed at the time were seen by many analysts as creating what one described as a bigger, blacker box. With the financial crisis having intensified the competition for capital and heightened the critical glare of market scrutiny, PricewaterhouseCoopers felt that it would be useful to find out whether investment professionals believe that the adequacy gap between their expectations and current practice has widened or narrowed since As the International Accounting Standards Board (IASB) and Financial Accounting Standards Board (FASB) reach a decisive stage in their planned overhaul of insurance contract reporting, it was also felt that this would be an opportune moment to ask analysts how the eventual framework could best meet their needs. Several important messages came through loud and clear from the more than 40 interviews that were carried out as part of this survey. Many of the participants believe that a lack of transparency is increasingly leading to the undervaluation of a number of the world s leading insurance companies. To overcome these deficiencies, they would like the IASB and FASB to come up with a new and improved reporting framework as quickly as possible, encouraging the standard setters to put pragmatism before theoretical precision. The desire for a swift solution was especially strong among life insurance analysts using IFRS. Perhaps more of a surprise was the degree to which a consensus is emerging among the analysts interviewed on the fundamentals that they believe should form the bedrock of the new reporting framework. This consensus is rooted in a desire for reporting to reflect the economic reality of an insurer s business model. Moreover, it has been interesting to note the areas where the analysts view of reporting coincides with - and differs from - that of the IASB and FASB. We recognise the scale of the challenge facing the standard setters as they try to find a single solution that meets the needs of disparate stakeholder groups in different territories. The feedback from analysts is, however, clear. The current situation is harming the industry and so the Boards efforts must come to a conclusion, and quickly. It is inevitable that some analysts - and, indeed, insurers - will be disappointed by the Boards proposals. It is therefore essential that all sides engage in the debate and play an active part in achieving a workable compromise. THE SURVEY In the autumn of 2009, PricewaterhouseCoopers conducted in depth interviews, with more than 40 insurance analysts from the US, Europe, Asia and Australia to gain their perspectives on the current state and future direction of financial reporting. The survey follows on from a similar study carried out in The survey respondents were chosen to provide coverage across all the major financial centres and include a broad mix of life/non-life, buy-side/sell-side, and equity/fixed income analysts. The interviews were conducted face-toface, allowing interviewers to explore the rationale for any given reply. In this report, the areas where there was significant variance between the findings for particular types of analysts - generally life or non-life were noted as well as the distinctions between the perceptions of US analysts and those in the rest of the world. ACCOUNTANCY CYPRUS VOLUME 97 DECEMBER

60 Financial Reporting in the Insurance Industry SURVEY RESULTS Key findings on the current state of insurance reporting IFRS and US GAAP financial statements ( GAAP reporting ): - Overall, the gap between participants expectations and current practice was still considerable in the current survey. - Cash flow data was perceived as potentially more useful than in a reflection of the current market environment. Supplementary non-gaap reporting: - Potentially highly useful, but currently largely inadequate. - While many held Market Consistent Embedded Value (MCEV) to be theoretically more appealing than its predecessors, there was frustration with its implementation. management services, to be accounted for separately (unbundled). It would be useful to distinguish between risk and investment business. It s currently difficult to see exactly where the profits come from, said a participant. - Very few respondents would wish to see profit from an insurance contract recognised at its inception. More than three-quarters of participants were opposed to recording a profit at the inception of the contract. Support for the concept of a day one gain was marginally stronger in parts of the world that are more familiar with embedded value. To the extent that they re writing profitable contracts, I would like to see it, said a participant. - Most participants would like to see an explicit risk margin, primarily because more information is better than less. However, very few have experience of how the concept might work in practice. KEY FINDINGS ON THE FUTURE DIRECTION OF THE ACCOUNTING FOR INSURANCE CONTRACTS As the IASB and FASB reach a decisive stage in the planned overhaul of insurance contract reporting, the survey findings offer the standard setters some clear messages: A majority of participants would like insurers to report a risk margin, with some arguing that it might provide greater insight into the information that they believe some companies use when pricing their products. However, as insurers do not typically report risk margins at present, few participants had first-hand knowledge of how such margins would work. This doesn t mean anything to me, said a participant. - Reporting should reflect the fundamental economic realities and underlying business model of insurance companies. - Underpinning these responses was strong support for the concept of matching (e.g. matching the recognition of acquisition costs and profit). Most participants felt that acquisition costs should be deferred. Your day one acquisition costs do not represent the economics on day one, said a participant. However, many would like more control and consistency in how costs are deferred. Deferred acquisition costs are too variable and too open to manipulation at present, said a participant. - Most participants felt that insurance is distinctive enough to deserve its own reporting model. Those against the inclusion of a risk margin felt that it would be too subjective. You will get a snowball of assumptions, said a participant. Another participant said that this was a further sign that insurance contract accounting is becoming too complicated. KEY FINDINGS ON THE FUTURE DIRECTIONS OF THE MEASUREMENT AND CLASSIFICATION OF FINANCIAL INSTRUMENTS Most participants would support the continued use of multiple valuation bases. The quality of the associated disclosures of both cost and fair values was critical to many participants, as this would enable them to make their own adjustments. TIMING OF IMPLEMENTATION Nearly 90% of participants felt that insurance should have its own accounting model (this view was unanimous in the US). Of those supporting a distinct model, 56% would favour a separate approach for life and non-life business. Nearly 70% would like aspects of a particular contract that have different risk and earnings profiles, such as savings and investment Most participants favoured adopting the fundamental changes being proposed on financial instruments and insurance liabilities at the same time to avoid accounting mismatches. A copy of the full survey can be found on our website 86 ACCOUNTANCY CYPRUS VOLUME 97 DECEMBER 2009

61 The financing of higher education Should higher education be free? The intention of the government of Cyprus to expand the number of positions for students at state universities is likely to increase spending on higher education as well. Higher education in Cyprus is free at the undergraduate level while at the graduate level, students pay a small amount for tuition and fees, which is much lower than the actual By Marios Mavrides cost of their education. The Associate Professor of government is investing in Economics human capital with the European University Cyprus expectation that the investment will bring social and economic benefits. Funding higher education is already a heavy burden, on public finances. The government spends hundreds of millions of euros every year on higher education, over m250 millions euro annually for financing the budgets of state universities and colleges and another m100 millions euro for student subsidies for Cypriot students in Cyprus and abroad. The government pays also for the capital expenditures of the state schools which are increasing every year. Higher education costs money and it will cost more every year. Taxpayers will be asked to pay more in order for the government to provide free higher education. The question that arises is whether higher education should be financed by the taxpayers or by students themselves. Should we ask students to pay part of their tuition? To answer the above question we should examine who really benefits from higher education in Cyprus. Education entails substantial external or social benefits, that is, benefits accruing to parties other than the individual acquiring the education, lower unemployment, lower welfare payments, less poverty, better society, less crime. As a result of the above, society will enjoy paying less taxes for social welfare programs, crime prevention and law enforcement. Educated parents can create a better environment for children, and educated people may benefit society through discoveries and new inventions. Also, educated people are more likely to participate in the political process and make better decisions, for the benefit of society. Education entails also significant private benefits to the individuals. Studies show that wages are higher for graduates than for non graduates throughout their working life. Also, graduates have more opportunities during their lifetime than non graduates. The private return on investing in education is relatively high, depending on the state of the economy as well as the demand and supply for graduates. In underdeveloped economies, where there is a shortage of graduates, private return on investment on education is high, while in advanced economies, where there is a surplus of graduates, private return on education is lower. Since higher education yields both social and private benefits, it is only fair for the parties who benefit from education to pay for it. Individuals should pay part of their education, and society should pay the rest. Adopting a hybrid financing system in higher education has a number of benefits. First of all it is fair! Individuals and society share the cost of higher education since they both benefit from it. Second, a hybrid financing policy results in a better allocation of resources. Free higher generates overconsumption and waste of resources, because free education creates oversupply of graduates, lower wages and graduate unemployment. That is one of the reasons Europe is suffering from high long term unemployment. Fourth, the supply of individuals in technical occupations will increase, solving a major problem in Cyprus, that is the shortage in technicians. When individuals have to pay for part of their education, less will participate and more of them will be available for technical occupations. Fifth, the hybrid financing system generates competition among higher education institutions and a better communication between higher education and businesses. Universities will have incentives to provide better education and employment opportunities to graduates. That way they will attract better students, and be able to charge higher tuition and fees. Businesses will be able to distinguish among universities and recruit graduates from the best schools, leading to a better allocation of resources. It is no secret that graduates top universities graduates can get a job right after graduation with very high salaries. Sixth, there will be less pressure on public finances as the government would not pay for all the cost of higher education in Cyprus. A more sustainable financing would be generated, that would maintain the quality of higher education. There is no question that higher education is a tool for economic development. Higher education could be the solution to many social and economic problems. However, if it is not managed correctly by the state, it may cause additional economic and social problems. Introducing the price mechanism in higher education is the best solution to provide better quality education that would maximize private and social benefit ACCOUNTANCY CYPRUS VOLUME 97 DECEMBER

62 Bonuses and salaries of bankers Restrictions and controls are imposed on the salaries and bonuses of bankers The investment banks one year after they have been rescued by the governments have started again to pay high bonuses and high salaries. For example the investment Bank Goldman Sachs is intending to award its staff as bonuses the record amount of $20 billion for But even banks that incur losses for their shareholders such as By Christos Vasiliou Citigroup and Bank of Board Member, Head of America continue paying Financial RISK Management, high bonuses. All these KPMG Ltd banks from profitable Goldman Sachs to loss making banks are subsidised by tax-payers. This money was of course given in order to help the banks to increase their capital so as to provide more credit to the economy. This behaviour of the banks is possible to lead to pressure from the tax- payers so that the bonuses are taxed at a higher rate and at the same time place pay limits on salaries. In the press release of the leaders of G20 that assembled last September in Pittsburgh in America, it is stated that one of the main reasons for the international economic crisis was the excessive salaries and bonuses in the financial sector that induced the taking of excessive risks. Thus the leaders of G20 proposed the restriction of bonuses as percentage of the total net income and call for 40 to 60% of bonuses be deferred for several years so that they can be clawed back in case the long-term investments are proved loss-making. It seems, however, that France, Switzerland and Holland have adopted systems of payment that in certain respects are stricter than the proposals of the leaders of G20. This because it is believed that the collapse of certain banks was the result of decision-making that contained high risk. At the same time Denmark has imposed pay limits in banks. In Spain and as result of public outcry legislation is being prepared according to which the remuneration of each executive director of a public company should be publicized. Also the Spanish banks in Spain will be controlled by the Central Bank in order to ensure that the policies for the remuneration of directors conform with effective and correct policies of risk management. In France as well as in many other countries there is an outcry for the payment of generous bonuses by banks receiving state aid. The president of France Mr. Nicolas Sarkozy, however, has stated that he is concerned more about the remuneration of traders who work in big banks which are related to the taking of excessive risks, something that leads to disaster, rather than for the bonuses of the executive directors of banks. Thus Mr. Sarkozy supported the restriction of bonuses to traders but ruled out the fixing of pay limits for executive directors in the companies that received state aid. He also stated that it is not right that traders are remunerated for decision-making that includes excessive risk. France was the first big economy to impose restrictions for future bonuses of the bankers, traders and directors in an effort to avoid excessive risk taking in the financial markets. With these restrictions of the bonuses the staff of French investment banks will be paid according to the long-term profitability of their company. Mr. Georges Pauget, chief executive director of Credit Agricole, believes that other countries will follow suit because the French code is based on proposals that have been submitted by the Institute for International Finance, the Body that represents the private international banks. As Mr. Michel Camdessus former Managing Director of the IMF, who was appointed last September by president Sarkozy for monitoring the bonuses at state-aided banks, stated that it is the public outcry that prompted the leaders of G20 to give emphasis for the remuneration and bonuses of bankers. Moreover, the president of the European Central Bank, My. Jean- Claude Trichet, stated that awarding big bonuses risks contributing to a future financial crisis. The minister of enterprises of Britain Lord Mandelson has warned the banks for the high bonuses that they pay to the staff and stressed that the bonuses which are considered ``exorbitantãã finally will lead to public outcry from the tax-payers. In Britain Lord Myners, Minister of the City of London, has referred to the unacceptably high bonuses and salaries of the bankers while at the same time 88 ACCOUNTANCY CYPRUS VOLUME 97 DECEMBER 2009

63 Bonuses and salaries of bankers it accuses the big customers of investment banks that they do not object to the high fees and other charges imposed by investment banks. It appears that the crisis has not affected the way that the bankers are remunerated. In Britain a Committee appointed by the government proposes that large banks that operate in Britain should be forced to reveal the number of employees who are paid more than í1 million while a proposal has been submitted in order that the 50% of the bonuses are postponed for 3-5 years. Also the role of the non-executive directors is strengthened by giving them more responsibilities. At the same time a new Council, the Council on Financial Stability, will monitor the dangers to the system. This Council will be chaired by the Minister of Finance and will also include representatives of the Treasury, the Bank of England and the Financial Services Authority. In the mean-time the UK Government decided to levy oneoff 50% tax on bonuses above m25,000 for Bankers in the City of London, however reacted negatively to the imposition of the tax saying this move may lead to an exodus of financial services companies from London. Large banks are also concerned that the UK tax may also apply to staff who work frequently in the country but do not reside, thus adding to the fiscal burden of groups with international activities. The French Government was intending to introduce such a tax also but president Sarkozy had feared that it could adversely affect Paris as a financial Centre. But the fact that London introduced it changed the picture and thus France now intends to introduce such a tax on bonuses for 2009 above m27,000. Also Mr. George Papandreou, Prime Minister of Greece, announced a 90% tax on bonuses in the private sector with a ban on bonuses for executives at public sector corporations. Germany, however, is not intending to introduce such a tax. Note: The views and opinions expressed herein are those of the author and do not necessarily represent the views and opinions of KPMG International or KPMG member Banks Internal audit + system Banks are Rethinking Risk Based Internal Auditing Internal audit work saw a shift in focus over the recent years from system based internal auditing to process based internal auditing and currently to Risk Based Internal Auditing (RBIA). Risk based internal auditing has the following two objectives to accomplish: By Anastasios Fikardos Group Internal Audit Department, Hellenic Bank process Provide an independent assurance on management s risk management Form an opinion on the extent to which sound controls have been implemented and maintained to mitigate those significant risks which management has agreed to treat. Historically, the internal audit system in banks has been concentrating on transaction testing, testing of accuracy ACCOUNTANCY CYPRUS VOLUME 97 DECEMBER

64 Banks Internal audit + system and reliability of accounting records and financial reports, integrity, reliability and timeliness of control reports, and adherence to legal and regulatory requirements. The implementation of risk-based internal audit would mean that greater emphasis is placed on the internal auditor s role in mitigating risks. Risk based internal auditing would not only offer suggestions for mitigating current risks but also anticipate areas of potential risks and play an important role in protecting the bank from various risks. Adopt a risk assessment methodology for formulating risk based audit plan; Develop a risk profile and draw up a risk matrix taking inherent business risk and effectiveness of the control system for monitoring the risk; The shift towards more risk sensitive auditing becomes apparent in the recent IIA (Institute of Internal Auditors) survey which reflected responses from 1,665 internal auditors in 57 countries on how internal auditors viewed what has happened during the recent global economic crisis, where the following major areas of concern emerged: Internal auditors views are split on whether risk management could have played a mitigating role in the financial crisis, but a majority felt there were more things internal audit activities could have done to soften its impact. Prepare the annual audit plan, covering all risks and their prioritisation based on the level and direction of each risk; Set up communication channels between the audit staff and the management, such as Risk Based Internal Audit Organizations are redirecting their internal audit resources to cover recession-related risks. More than a third of internal audit activities have not addressed risks related to funding. It is important to note that while the Risk Management Committee/ Department focuses on identification, monitoring and measurement of risks using risk management models, risk based internal auditing utilizes a risk assessment framework solely for the purpose of formulating the risk based audit plan by viewing/ comparing the inherent business risk of the organisation s activities and the effectiveness of the internal control systems. The following diagram sets out a range of stages of risk management maturity and the internal audit approach that might be adopted at each stage 1 : Banks may take the following steps to introduce RBIA: Develop a well defined policy for risk based internal audit; 92 ACCOUNTANCY CYPRUS VOLUME 97 DECEMBER 2009

65 Banks Internal audit + system Report; Volume of business and complexity of activities Identify appropriate personnel to undertake risk based audit and provide them with relevant training, and Address transitional/ change management issues Substantial performance variations from the budget RBIA is all about providing an opinion on whether risks are being properly managed. So the work we have to do is: The risk assessment process should, inter alia, include the following: Identification of inherent business risks in various activities undertaken by the bank. Evaluation of the effectiveness of the control systems for monitoring the inherent risks of the business activities (Control risk). (1) Confirm the organisation s risk register (a database of scored and sorted risks) suitable to use as a basis for planning. Management should agree to its content and scoring. (2) Decide those risks we are to provide an opinion to management and when. Group them into audits so as to compile the risk and audit universe. Compile an audit plan, probably annual, for approval by the audit committee. Drawing up a risk-matrix for taking into account both the factors - inherent business risks and control risks and also the trend of risk in terms of increasing, decreasing or stable. (3) Carry out the individual audits that will provide the opinions. Deliver a periodic (at least annual) report to the audit committee, and update the risk and audit universe as necessary. The extent of transaction testing will have to be determined based on the risk assessment. Illustratively, the bank should undertake 100 per cent transaction testing if an area falls in cell C Extremely High Risk of the risk matrix. The bank may also consider 100 per cent transaction testing if an area falls in cell B Very High Risk or F Very High Risk, and the risks are showing an increasing trend. Banks should form a Task Force of senior executives with a plan in hand for switching over to risk-based internal audit, handling change management issues while reporting to the BOD periodically. RBIA does not eliminate system and/or process based auditing. It is an approach that will bring more assurance and focus on the risk management framework and the critical issues that concern the organization. The risk assessment methodology should consider the following parameters: Previous internal audit reports and compliance Proposed changes in business lines or change in focus Significant change in management / key personnel Reference Books: 1. Risk based Internal audit-an Introduction By David Griffiths Results of latest regulatory examination report Reports of external auditors Industry trends and other environmental factors Time lapsed since last audit 2. Risk Based Internal Auditing (Position Paper) The Institute of Internal Auditors, UK and Ireland, August Risk based Internal audit By Gourav Vallabh Sharma 4. Guidance note on risk-based internal audit Reserve Bank of India ACCOUNTANCY CYPRUS VOLUME 97 DECEMBER

66 The BRIC Group and the world economy Brazil, Russia, India, China: leading the recovery of the world economy By Marina Theodotou, BA (Honors), MA Economist and Six Sigma Black Belt Jim O Neill a Global Economist at Goldman Sachs first coined the acronym back in the beginning of the decade, to highlight the emerging markets of Brazil, Russia, India and China. While all four countries have vast differences in culture, language and history, they share at least one commonality: they are the economic powerhouses that will propel us out of the global economic crisis and into a new decade. Combined, they account for 40% of the world s population, 25% of the global GDP, they are cash rich and have made sizable investments abroad. A SNAPSHOT TODAY BRAZIL Brazil has recovered brilliantly in the last decade and has well developed agricultural, mining, manufacturing and service sectors. Through its outward investment strategy, Brazilian multinationals are seeking lower cost tax jurisdictions and place investments in services, logistics, consumer goods and R&D. Some of the key opportunities for improvement for Brazil, include decreasing the debt burden, managing inflationary pressures and increasing the number of double tax treaties they have with key tax jurisdictions. RUSSIAN FEDERATION Russia is quite familiar to the Cypriot accounting professionals and has had ten years of straight growth averaging 7% annually since Recently, Russia created two sovereign wealth funds: a reserve fund to cover budgetary expenditures in case of a fall in the price of oil, and a national welfare fund, to finance pensions and infrastructure development. The key opportunities for improvement include decreasing corruption, accelerating judicial reform, stabilizing exchange rates and addressing the ageing population issue. INDIA With a rapidly growing middle class, increased consumption in real estate, consumer goods, vehicles and cellular subscriptions among everything else, India, is no longer only producing cheap electronics, textiles and outsourcing, but is now gaining strength in shipbuilding, chemicals, steel and telecoms. Key opportunities for reform include further privatization of government owned industries, lowering tariff spikes in key sectors and speeding up reforms, especially to integrate the undereducated and poorer populations. CHINA This powerhouse is outpacing all the others, or as a finfacts.com article headline notes, in 2010, The Dragon is expected to outpace the Jaguar, the Tiger and the Bear. In 2008, China s GDP grew at real growth rate of 9%. The same year, the Chinese invested about 149 USD billion abroad and received 758 USD billion in investment from abroad. The Chinese outward FDI strategy is focusing on strengthening the National Champions state owned enterprises in sectors of strategic growth for the economy. While the Chinese economy is on fire, there are several opportunities for improvement including strengthening the social safety net, dealing with an ageing population, sustaining adequate job growth, reducing corruption and containing environmental damage. LOOKING AHEAD All four countries are expected to contribute 50% of the global GDP by This is not news though. OECD studies show that back in 1800, Brazil, Russia, India and China were again the main contributors to 50% of the global GDP. By 2050, the combined nominal GDP of the BRICs will be two and half times more than the combined GDP of the G3 (US, Japan and Germany). DOUBLE TAX TREATY WITH BRAZIL: AN OPPORTUNITY FOR CYPRUS? While Cyprus has leveraged extremely well the double tax treaty with Russia and to a certain extent those with China and India, it does not appear to have a treaty with Brazil. In August 2009, based on an article published by Luis Alfonso Lima and Octavio e Barros in conjunction with the Vale Columbia Center on Sustainable International Investment at Columbia University, focusing on Brazil s direct investment abroad and the challenges it faces, the article highlights that Brazilian multinationals are concerned by the lack of double taxation treaties with key jurisdictions. Brazil signed only 12 double tax treaties in the past 10 years. Could this be an opportunity Cyprus ought to focus on, if not already? Sources: GoldmanSachs, finfacts.com, Columbia University, DoingBusiness Report, CIAFactbook, International Economy. 94 ACCOUNTANCY CYPRUS VOLUME 97 DECEMBER 2009

67 Economic Interdependence in Cyprus The Importance of Economic Interdependence By Costas Apostolides, Dr. Erdal Guryay, Dr. Ahmet Ozigit Costas Apostolides Erdal Guryay Ahmet Ozigit On 30th October 2009 the Cyprus Chamber of Commerce and Industry and the Turkish Cypriot Chamber of Commerce held a ceremony to announce the undertaking of two studies for the Economic Interdependence Project by the Peace Economics Consortium. The programme is funded by UNDP ACT and USAID. The project is based on the fundamental overriding concept upon which the European Union was built, that is the development through economic trading and cooperation of mutual interest in peace and reconciliation among the peoples of Europe. An idea which Robert Schuman first put into practice with the first European treaty: the establishment of the European Coal and Steel Community in Since then, this principle has formed the basis for the development of the European Economic Community and subsequently the European Union. The overall objective of the Economic Interdependence Project is to carry out two studies which will assess the current economic interdependence between the Greek Cypriot and Turkish Cypriot communities and will put forward recommendations for re-enforced economic convergence in Report A, as well as develop a framework for a joint economic development strategy after a Cyprus settlement in Report B. Even though the word interdependence has a negative tune to it, it defines the existing relationship between many nations of the world actively seeking any type of economic relation. The forces of globalization and advances in communication technologies have enabled increased mobility of people, machines, goods and services. In this new era, every economy, to some degree, is dependent on others in many areas. In the light of this definition, the basic aim of this Project is to promote economic interdependence between the GC and TC communities, enabling the two business communities to enhance their economic and financial relations. To achieve this, the project will build on the existing knowledge gained from other schemes, and undertake a range of new research work In Report A, a snapshot of the current situation regarding interdependence between the two communities is required, as well as recommendations for the future based on two scenario: a Cyprus settlement or a delayed solution. It is expected that different sets of recommendations will be produced from each of the two scenaria. The conclusions of Report A will, however, form the main focus for the terms of reference of Report B. The aim of Report B is to develop a framework for a joint economic development strategy, building on the recommendations of Report A. Such a strategy is aimed at facilitating development, socio-economic growth and ACCOUNTANCY CYPRUS VOLUME 97 DECEMBER

68 Economic Interdependence in Cyprus competitiveness in a unified manner, consideration the EU context. taking into The preliminary data available from the interim stage of Study A on economic interdependence, attempt to assess the situation at a macroeconomic level, subject to Business to Business surveys which are being processed, and surveys at the greenline crossing points which are currently under way. There are, however, some preliminary findings available which are of interest. Table 1 shows the development of the economy of the Greek Cypriot Community (GCC) from 2002 to The interesting points that arise are as follows: In 2008 the economic crisis had not turned yet into recession on an annual basis, and unemployment was still below the 2004 level. Population grew rapidly from 2001 to 2007 as migration increased sharply, both legal and illegal. Migration slowed down in 2008, and the population growth rate came down to normal. Employment, grew rapidly from 2003 to 2008, with about a hundred thousand foreign workers, almost equally divided between citizens of EU countries and Asian workers. Unemployment in 2008 was still below the ratio to total employment existing in Imports continued to grow throughout the period. Exports declined in 2002, 2003, 2006 and 2007, but virtually recovered in The most striking feature of the economy, however, was the great increase in the balance of payments deficit in its current account, from 3.4% of GDP in 2005 to 7% in 2006, 11.7% in 2007 and 17.7% in This demonstrated a major weakness of the economy, and essentially arose owing to high levels of expenditure. Nevertheless, the most interesting part of the macro figures is the sudden apparent decline in exchange reserves in 2008 from m4.4 billion to just m717 million. But no one should be alarmed, because the membership of the euro zone means that the Cyprus currency, that is the Euro, is now a world reserve currency, and consequently the money holdings of the country are all in fact exchange reserves. Unlike the USA, however, euro zone member states have to be careful and stay within the Stability Pack and European Central Bank rules and regulations. Macroeconomic data for the Turkish Cypriot community (TCC) is shown in Table 2, and there the surprise feature is that the exchange reserves are at _1.5 billion, and statistically higher than in the GCC. This has no meaning, however, other than to show that the TCC economy has accumulated more reserve currency deposits than expected. It does, however, show that when Cyprus joined the euro zone, the monetary aspects of a solution to the Cyprus problem have become easier to deal with. There are two notable changes in TCC statistical definitions that make an instant impression: In 2004 the European definition of unemployment was adopted and since 2006 it has been very much higher at over 10%, in sharp contrast to the earlier statistical approach. In 2006 the population was adjusted to comply with the Census, and increased sharply by almost 17%. Gainfully employed also increased in The most worrying aspect of the TCC economy, however, is the decline into recession in 2008, but also the signs of recession in key sectors from the fourth quarter of This combined with high rates of inflation by European standards of over 10% on average, and a relatively stable Turkish Lira, and appears to explain to some extent the comparative loss of competitiveness in the TCC economy. One other feature of the Turkish Cypriot economy is the fact that its GNP has been consistently higher than its GDP over the years, a common characteristic shared by many developing economies. This is indicative of the degree to which workers remittances and transfer payments play a role in the economic arena. In the GCC economy the opposite takes place, GNP is lower than GDP. The reason for this appears to be repatriation of profits by international companies in Cyprus (former off-shore companies) which may be nominal rather than real but meets EU national statistical regulations, but also remittances of foreign workers. In Table 3 the two sets of data are combined for 2007, and also compared. On this basis the population of the island was already over a million people, the activity rate was 43%, and overall unemployment 5.4% of gainfully employed. GDP of Cyprus was over m17 billion, and per 98 ACCOUNTANCY CYPRUS VOLUME 97 DECEMBER 2009

69 Economic Interdependence in Cyprus capita it was m16,622 a person. On the basis of these figures, the TCC community and those living north of the greenline comprised about 25% of the population, and the TCC per capital income was almost 59% of that of GCC GNP. TCC GDP was, however, only 14% of that of the island, which is at almost half the proportion to population. Table 4 compares the economic structures, and here there are serious statistical problems. Data is not provided in the TCC statistics separately for education, health and social services. Much of this is under public services, but it is not clear where the private sector clinics, schools and tertiary education institutions are to be found. It should be noted that tertiary level education in the TCC is a very important economic sector, which appears to account for over 10% of economic activity. Based on the work of the consortium members Fehiman Eminer and Ahmet Ozyigit, it has been estimated that expenditures of foreign students ran about 450 million dollars in 2007, which was roughly about 11% of the GNP of the same year. Irrespective of such problems it is noteworthy that in the TCC community services (22+%), electricity and gas, transport and communications, quarrying and agriculture, all have a proportion to GDP actually higher than that of the GCC. While the manufacturing, hotel and restaurant and financial sectors are proportionally much smaller. Preliminary estimates show that GCC expenditures and incomes of Turkish Cypriot workers south of the greenline are equal to about 7% of the TCC GDP, and that at m150 mln a year are more significant than TCC trade with the world at large. While TCC expenditure south of the greenline was over m40 mln a year in In conclusion, greenline trade and economic transactions are becoming significant, and constitute a basis for the expansion of business confidence. The Economic Interdependence Project aims to research, understand and enhance economic cooperation in the interests of peace and a common path of development. ACCOUNTANCY CYPRUS VOLUME 97 DECEMBER

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71 Economic Interdependence in Cyprus * Costas Apostolides, EMS Economic Management Ltd Dr. Erdal Guryay, Near East University Dr. Ahmet Ozigit, Near East University 102 ACCOUNTANCY CYPRUS VOLUME 97 DECEMBER 2009

72 Mortgages moving more easily to a new financier Trapped in Mortgages - Free at last (RA) By Antonis Loizou F.R.I.C.S. Antonis Loizou & Associates Ltd. - property Valuers & Property Consultant A new law that has just been approved by the House of Representatives, gives a very good boost to the free economy and provides a great help both to Mortgagors as well as to Mortgagees. As the system exists at the moment, the finance houses can charge through their fluctuating rate/top up margin just about anything. On average, the charge for housing loans are on overall 1.80% - 2.5% above the base rate, reaching a total of around 61/2%- 71/2%, but in the event of delayed repayments, the charge can reach as high as +11%. Up to now, it was very difficult for a mortgagee to move from one mortgagor to another, because of the high mortgage costs. If for example an individual takes out a mortgage of say m he would have to pay - - Study fees to Bank m2.500 Mortgage fees to Government [1%] m5.000 Valuation fees m400 Solicitor/stamps m300 Total +- m8.200 In order for the mortgagee to move to another Bank/finance house, he has to repeat the same expense, so, more often than not, borrowers stay with their existing banks, notwithstanding the fact that they could have got a better interest rate/lower charges from others. At the same time new products which are constantly coming into the market by Financiers offering competitive rates/charges, normally fail to attract clients, since the clients, when considering the cost of moving from one bank to another, find that the cost and hassle is too much. The new law states that if a property is mortgaged for an X amount and the borrower wishes to cancel this and move to another Bank, the mortgage fees will be By Antonis Loizou F.R.I.C.S. - Antonis Loizou & Associates Ltd. - property Valuers & Property Consultant200 only [instead of 1% of the loan amount] if it is for the same amount. If more, he will have to pay the 1% mortgage fee on the excess amount - if less, the m200 again. We will add that the other costs still remain and in the above example the cost of moving instead of being m8.200 will be reduced to m In this example if the borrower wishes to borrow m from another Bank, he has to pay all the other expenses, plus 1% on the difference [i.e m X 1%] = m2,000 in addition [total m m2.000 = m5.200]. This is a considerable saving bearing in mind the larger borrowers in particular. With the new law, competition between the financiers will improve and hopefully other costs will be reduced also, since the clients will have the freedom of moving from one financier to another. Similarly, financiers, who target good clients, have now a case to aim for a better finance deals. In the past, some Banks usually offered to cover the moving cost of clients by paying themselves the cost, but again, the banks being what they are, this initial saving was later charged on the client by one way or another. All these are well and good and help mainly the traders/households and not so much the developers. Developers who erect a property subject to a mortgage and in particular those developers who have sold units to various buyers and who have deposited their contracts with the Lands Office and even obtain a loan from an X Bank, the developer will not be in a position to use this new measure, since he has to refinance the whole project and including all the buyers of the project (some of which might not accept). As a result of this the developers remain enclaved in the present system. Bearing in mind that the majority of loans refer to housing loans/developers, the net affect on the real estate market will be very limited. Of course the biggest looser in this case is the state s income, since the Government will loose the 1% mortgage fees and this is particularly bad during these difficult times of reducing state income. On the other hand, however, the borrowers will incur a lower cost and logically speaking, this saving should be reflected at the consumers end/economy at large at the end. We are always taken by surprise by the capitalistic measures that this new Government of ours so called communist/socialist is taking. The shopping of foreign investors [see Qatar visit by the President] the renegotiation of the double tax agreement and the lifting of Cyprus from the black list of Russia and Italy, the permanent resident permits for cash [permanent residences = m in house purchase] business for passports and other such progressive measures, we must say, surprise us. ACCOUNTANCY CYPRUS VOLUME 97 DECEMBER

73 Between recession and economic depression Facing economic recessions By Frixos Kyprianou, FCCA, Manager MK Kyprianou Ltd Around the 1930 s an economic theory was developed by Lord John Keynes that was considered new and different at the time. The basis of the theory was that governments should intervene in the natural cycle of the economy in order to smooth out the fluctuations. At regular intervals, all the economies that follow the free market principles experience slowing growth and in some cases enter into recession. The main characteristics of a recession are the slowdown in economic activity and increasing unemployment. Based on the theory of Lord Keynes when the economy appears to be entering into a recession governments should intervene actively by increasing their spending. But when the economy does well governments are to withdraw liquidity from the system, for example by increasing taxes. The above theory was partly followed by almost all western economies over the past 50 years. The problem however was that the people that were responsible to apply the theory applied only the first part that was suggesting increased government spending in difficult times. The second component that dictated the withdrawal of liquidity and the improvement of government finances in good times, the various governments were unwilling to follow. To make matters worse the increased government spending during the difficult economic times was mostly done through borrowing. As a result government borrowing has reached unsustainable levels. Today that we are going through some recessionary times, the above scenario is repeated. This time however public spending is much more exaggerated and with much larger amounts of debt. The whole rationale of the various governments is that the additional liquidity that will bombard the system will be able to shake the economy in a positive manner and get things moving again. In my opinion the whole plan has more chances to fail than to succeed. I believe that the world economy is on the verge of leaving the recession and dip further down to economic depression. The rising unemployment alone is capable to put the global economy into a vicious circle from which it will be very difficult to recover. In addition to the rising unemployment there is one more reason for me to believe that the worst is coming and this is the rampant inflation that prevailed in the last 30 to 40 years. Inflation that was the result of wrong economic policies pursued by the various countries. In addition to the unacceptable use of borrowing made by the governments themselves, in an effort to maintain constant growth rates a second mistake was also made. They promoted over borrowing at the citizens level through cheap money. In practice the result of excessive borrowing at both the state and personal level has fed inflation and has made people poorer. In theory the measurements made on the inflationary pressures show that were and remain low. Reality however is quite different and anyone can feel it in his pocket. Inflation has almost killed the purchasing power of the people in all areas from clothing to feeding and housing. My personal view is that through borrowing we have reached a financial point of excessive leveraging. I do believe that after such point a correction is unavoidable. Regarding our economy here in Cyprus we need to be extremely careful. If the global economy finally enters into economic depression is highly essential for the banks to be able to weather it successfully, otherwise the disaster will be much greater. I believe that at least in the next two years the goal of the Cypriot banks should be to strengthen drastically their liquidity and also to follow a clearly conservative lending policy. Finally, and although it may seem extreme from my part, I would like to propose to the political leaders to pay immediate attention to the defence forces of the island. History has shown that big economic storms can also ignite military conflicts. We must be vigilant and prepared for what it may or hopefully will not happen. 106 ACCOUNTANCY CYPRUS VOLUME 97 DECEMBER 2009

74 Measuring on board s performance Measuring the success of the board How do you measure your board s performance? Sir Andrew Likierman describes the 10 key qualities every board needs for success, and explains how to measure them How would you rate your own board of executive and nonexecutive directors? High, because the organisation is doing well? Low, because you can t fathom how such a bunch (other than you) could have been appointed? At 6 out of 10, because it s a complicated judgement? None of the above bears close examination. So, in common with many bodies who find it difficult to measure performance, boards may be tempted to fall back on the measurable. But numbers - whether showing activity (number of meetings) or even outcomes (company profitability) - can t possibly capture the essence of how a board functions. This is why it s false, indeed dangerous, for board members to assume that the organisation s success reflects the success of the board. Today s success may well originate from decisions taken years ago by a previous board, or from other factors that have little to do with the current board s efforts. For the same reason, currently unsuccessful companies can have successful boards - in that they are keeping those companies going while competitors are going bust, and laying down the basis for future success. Nor is the performance of individual members the same as performance of the board as a whole. There may be excellent individuals in a dysfunctional team. Conversely, a great team could be far more than the sum of its parts, with the chairman playing a key role in making it happen. This article sets out how to measure board success. Really discussing how fully your board demonstrates the 10 abilities set out in the box (see Box 1) will provide the basis for an assessment, rather than just adding up numbers or ticking boxes. The list of abilities relates to UK listed companies, but the principles are just as applicable to unlisted companies seeking long-term shareholder value. Most also apply (though in different institutional contexts) to non-uk companies and to public sector organisations. THE FORMAL REQUIREMENTS The combined code, which gives corporate governance requirements for listed companies, is clear: Every company should be headed by an effective board, which is collectively responsible for the success of the company. And paragraph A6 of the code specifies that the board should undertake a formal and rigorous annual evaluation of its own performance and that of its committees and individual directors. ACCOUNTANCY CYPRUS VOLUME 97 DECEMBER