PwC newsletter Stay connected In the first issue our experts provide information on the latest business developments

Transcription

1 PwC newsletter Stay connected In the first issue our experts provide information on the latest business developments Issue 1 - July 2012

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3 Contents Foreword 3 Tax News EU Yacht Registration Cyprus the preferred location 4 Cyprus tax developments 7 Cyprus as IP holding and financing location Accounting news IASB/FASB leasing redeliberations February IASB publishes annual improvements to six standards for 2013 year ends 11 IASB/FASB leasing redeliberations May IASB publishes exposure draft on improvements project cycle 14 PwC Cyprus Winning with the EPO 16 Real estate advisory services 18 Corporate responsibility reporting 21 PwC events and activities 23 PwC global Talent crisis threatening business growth and economic prosperity say CEOs 28 Investor appetite for acquiring non-core loan assets from European banks is on 30 the rise PwC survey The economics of sport: PwC study seeks to benchmark Olympic medals tally 32 Digital banking to be the norm by The end of the digital beginning: challenge for media companies now lies in 36 how to implement their digital strategies Executives don t value their pay plans PwC and LSE study 39 Recent publications 41 PwC profile 42 PwC offices in Cyprus 44 PwC newsletter - July

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5 Foreword Welcome to the first edition of the PwC newsletter which aims at sharing useful information and keeping you connected with recent developments relevant to the accounting profession as well as current industry and business updates. This publication replaces our Accounting & Reporting newsletter published by PwC for the past 8 years. In the first issue of the PwC newsletter, our experts cover a variety of subjects concerning taxation, accounting, IFRS, a number of business topics of general interest and corporate social responsibility activities. Topics analysed include the recent tax developments in Cyprus as well as articles of technical nature, covering IFRS news issued by the International Accounting Standards Board and the Financial Accounting Standards Board. The newsletter also provides an overview of our events, activities and CSR initiatives undertaken during the past six months as well as a detailed analysis of our real estate advisory services. With the long anticipated Olympic Games taking place this summer, our newsletter features an article on the new PwC study which seeks to benchmark Olympic medals tally. Other articles cover subjects on human resources, digital banking and social media. We hope that you enjoy reading our newsletter and would welcome any feedback that you might have. Our experts are always at your disposal for any further information or clarifications you may need. Liakos M Theodorou Partner Head of Assurance & Advisory PwC newsletter - July

6 EU Yacht Registration Cyprus the preferred location The new guidelines issued by the Cypriot VAT authorities make Cyprus one of the most attractive jurisdictions for yacht registration in the EU. On the basis of the new guidelines issued by the Cypriot VAT authorities the effective VAT rate for yacht registration in the EU can be reduced to as low as 3.4% through the use of the Yacht Leasing Scheme. 4 PwC Cyprus

7 What is a Yacht Leasing Agreement? A Yacht Leasing Agreement is an agreement whereby the lessor (the owner of the yacht) contracts the use of the yacht to the lessee (the person who leases the yacht) in return for a consideration. At the end of the lease period, the lessee may opt to purchase the yacht at a fraction of the original price. Such final purchase is strictly an option which may be exercised by the lessee, at the end of the lease period, for a separate consideration. What is the VAT treatment of the Yacht Leasing Agreement? For VAT purposes, the leasing of the yacht is considered as a supply of services with the right of deduction of input VAT by the lessor. This supply of services by the lessor is taxable at the basic VAT rate of 17% but only to the extent that the leased yacht is used within the territorial waters of the European Union (EU). A specific condition which applies is that the lessor must be a company registered in Cyprus. The lessee may be an individual or legal person, irrespective of residence / place of incorporation. How is the use of the yacht within EU territorial waters calculated? Taking into consideration the inherent difficulty of trailing the movements of each yacht in order to determine the time that the yacht is used within the territorial waters of the EU and the time it is used outside the EU, the Yacht Leasing Guidelines provide that Cyprus VAT will only be applied on a percentage of the lease consideration. The applicable percentages have been determined by the VAT Service and depend on the length and type of the yacht (motor or sailing yachts) and indicate the presumed length of use of the yacht in EU waters. There is therefore, no need to maintain for VAT purposes, any detailed record or log books of the movements of the yacht. Applicable VAT rates The tables below indicate the applicable presumed percentage of use of the yacht in EU waters and the effective VAT rate: Table A: Motor Boats Length of yacht Percentage of use within Effective VAT rate EU waters Length over 24 meters 20% 3,4% Length between 14,01 and 30% 5,1% 24 meters Length between 8,01 and 50% 8,5% 14 meters Length up to 8 meters 60% 10.2% Boats allowed to sail only within protected waters 100% 17% Table B: Sailing Boats Length of yacht Percentage of use within Effective VAT rate EU waters Length over 24 meters 20% 3,4% Length between 20,1 and 30% 5,1% 24 meters Length between 10,1 and 50% 8,5% 20 meters Length up to 10 meters 60% 10.2% Boats allowed to sail only within protected waters 100% 17% PwC newsletter - July

8 Certificate confirming VAT payment In the case where the lessee exercises the option to buy the yacht at the end of the lease period, the VAT authorities will issue a certificate to the lessee confirming full payment of the total VAT liability, provided that all the VAT liability has been paid. Conditions The VAT treatment prescribed in the Yacht Leasing Guidelines will apply if all the following conditions are met: A lease agreement is concluded between a Cyprus company and an individual or legal person (irrespective of residence / place of incorporation). The yacht arrives in Cyprus within 1 month from the date of inception of the lease agreement. Any extension of the above mentioned time limit may only be given by the VAT Commissioner. Such extension shall not exceed under any circumstances the time at which the option to purchase the yacht is exercised. An initial payment amounting to at least 40% of the value of the yacht must be paid by the lessee to the lessor at the inception of the lease agreement. The lease payments are payable on a monthly basis, and the lease period must under no circumstances exceed the period of 48 months. The lessee may purchase the yacht at the end of the lease period, for a final consideration of not less than 5% of the value of the yacht. The lessor is expected to make a total profit from the leasing agreement of at least 10% on the initial value of the yacht. The prior approval of the VAT Commissioner needs to be obtained for the application of the Yacht Leasing Guidelines in each case. Such approval will cover the acceptability of the initial value of the yacht and the applicable percentage of use within EU waters on the basis of which VAT will be applied. The application to the VAT Commissioner must be accompanied by documentation supporting the purchase price/ value of the yacht and a copy of the lease agreement concluded between the two parties. The VAT Commissioner may reject any application or ask the lessee for further information regarding the use of the yacht. Income Tax Treatment The total profit from the leasing agreement which amounts to 10% on the initial value of the yacht, will be subject to Income Tax at the rate of 10%. Way forward: How PwC can help you Our teams are ready to discuss the above developments with you and offer support for the implementation of the scheme. Your contacts for Indirect Tax matters in PwC Cyprus: Costas L Mavrocordatos, Head of Tax & Legal Services costas.mavrocordatos@cy.pwc.com Chrysilios Pelekanos, In charge of Indirect Tax Services chrysilios.pelekanos@cy.pwc.com Ioanna Stylianidou, Director - Indirect Tax Services ioanna.stylianidou@cy.pwc.com Martha Lambrou, Director - Indirect Tax Services martha.lambrou@cy.pwc.com 6 PwC Cyprus

9 Cyprus tax developments Cyprus as IP holding and financing location Andreas Iosif Manager Direct Tax Preamble Cyprus House of Representatives has recently approved a number of important legislative proposals relating, among others, to amendments to Cyprus tax provisions relevant to Intellectual Property (hereinafter referred to as IP ) and interest expense tax deductibility. These provisions are expected to pave the way for Cyprus to enhance its position as an IP holding and financing location. Cyprus income tax provisions for IP Pursuant to the new provisions associated with intangibles, the legislation should cover the following: Patents or rights thereof; Trademarks or rights thereof; Tradenames or rights thereof; Intellectual property rights; So, what is the real benefit for Cyprus IP companies? The new provisions provide generous exemptions from tax of income related to IP. More specifically: 80% of any income generated from IP owned by Cypriot resident companies (net of any direct expenses) will be exempt from income tax. 80% of profit generated from the disposal of IP owned by Cypriot resident companies (net of any direct expenses) will be exempt from income tax. any expenditure of a capital nature for the acquisition or development of IP will be claimed as a deduction in the tax year in which it was incurred and the immediate four following years on a straight-line basis. PwC newsletter - July

10 Deductibility of interest expense By virtue of general income tax legislation provisions associated with interest expense deductibility, interest expense attributable or which is deemed to be attributable to the cost of purchasing of any asset not used in the business will not be deductible for Cyprus income tax purposes. Conclusive remarks Investors are now offered new opportunities which can be utilized and aligned with their business strategies to achieve tax optimization regarding IP and financing operations and thus higher yields from their investments. The above provision applies for seven years from the date of purchase of the relevant asset. Cyprus tax authorities practice is to consider investment in shares as nonbusiness asset for the purpose of the application of the above mentioned provisions. Therefore, any interest expense attributable to the cost of investment in shares will be restricted. So, what s new? The new amendments to the income tax legislation relax the above practice under certain circumstances. In particular, interest expense incurred by a Cyprus tax resident company for the direct or indirect acquisition of 100% of the share capital of a subsidiary company will be treated as deductible for income tax purposes provided that the subsidiary company does not own any assets that are not used in the business. Loans receivable are deemed to constitute assets that are used in the business. In the case where the subsidiary company owns assets that are not used in the business, then the interest expense incurred by the Cyprus tax resident parent company which corresponds to such assets will be treated as non-tax deductible. These provisions for interest expense deductibility will apply for the acquisition of shares effected from 1 January 2012 onwards. Shares acquired before 1 January 2012 which previously attracted restriction of interest expense for seven years will remain under the 7-year rule after 1 January 2012, as explained above. 8 PwC Cyprus

11 IASB/FASB leasing redeliberations February 2012 If you would like further information, please contact: Tasos N Nolas, Partner Assurance Services tasos.nolas@cy.pwc.com Anna G Loizou, Partner Assurance Services anna.loizou@cy.pwc.com T: F: What is the issue? The boards met in February to discuss: Lessee accounting subsequent measurement; and Lessor accounting proposed scope exemption for investment properties. There was some discussion of lessor accounting and a growing concern about the scope exemption for all investment properties, but most of the meeting dealt with subsequent measurement of the lessee s right-of-use asset. The boards agree on many aspects of lessee accounting, but there is disagreement on how the right-ofuse asset should be amortised. IASB chairman Hans Hoogervorst said that the boards might not be able to agree on this issue and that this outcome would not be desirable, a view shared by the FASB. The staff will undertake further consultation with users and preparers to better understand the operationality of each of the boards preferred approaches in an attempt to see if a single converged view can be reached. The plan is to discuss the results of this consultation in the April meeting. This latest twist has inevitably introduced a further delay to the project, and a revised exposure draft will not be issued before Q Lessee accounting subsequent measurement The February discussion focused on the continued objections from constituents to the 2010 exposure draft s proposed front-loaded lessee expense recognition pattern. There was general agreement among board members that something should be done to address this. They confirmed their previous decision that the lease liability, being a financial liability, should be measured at amortised cost using an effective interest rate method, so attention was directed towards measurement of the right-ofuse asset. The boards could not however agree on which solution to propose. IASB s preferred view The IASB unanimously supported an underlying asset approach. This approach is based on the presumption that lease payments typically cover three components: (a) a payment for the part of the asset the lessee consumes during the lease term; (b) a finance charge on the part of the asset consumed because the lease payments are made over time; and (c) a return on the residual value of the asset that is, the part of the asset the lessee does not consume, because the residual asset cannot be used by the lessor during the lease period. PwC newsletter - July

12 The right-of-use asset is amortised with reference to each of these elements, and the amortisation profile varies based on the extent to which the value of the underlying asset changes over the lease term that is, how much of the asset the lessee consumes. If management expects the value of the underlying asset to be the same or greater at the end of the lease compared to the start of the lease (for example, in the case of some property leases), there might be no consumption of the underlying asset by the lessee. As a result, the amortisation expense represents only the lessor s return on the residual asset. When combined with the interest expense on the lease liability, the total expense is recognised straight-line over the lease term. Conversely, if the value of the underlying asset is expected to be nil at the end of the lease that is, the lessee consumes all of it the total expense profile will be similar to that proposed by the boards in the 2010 exposure draft. As the consumption percentage increases from zero, the total expense profile moves from straight-line to front-loading. The expense profile will also be affected where a lease contains rent-free periods, pre-paid lease balances, stepped rent and other similar features. The main advantage of the underlying asset approach is that it can be applied to all leases, with no need to distinguish between operating and finance leases, which was one of the boards original objectives for this project. However, there is a concern that this approach is overly complex and cannot be applied in practice. This view will be tested during the consultation over the coming weeks. FASB preferred view The FASB s preferred view is to propose two different amortisation approaches based on lease type. Finance leases will retain the expense profile of the 2010 exposure draft; operating leases will either apply the underlying asset approach favoured by the IASB for all leases or, if this proves impracticable, an interest-based amortisation approach. An interest-based amortisation approach views right-of-use assets as a unique class of asset. The point of distinction is that when considering the lease contract as a whole, essentially there is no financing effect because the lessee is paying for, and consuming the benefits from, the right-of-use asset in the same period. A lessee would subsequently measure the right-of-use asset at amortised cost at the present value of the remaining economic benefits, discounted using the discount rate used to initially measure the lease liability. For typical leases in which lease payments are made evenly over the lease term, this approach would result in a straight-line total expense profile. However, similar to the underlying asset approach favoured by the IASB, the expense profile will not be straight-lined where a lease contains rent-free periods, pre-paid lease balances, stepped rent and other similar features. The FASB s preferred view will require criteria for distinguishing between finance and operating leases. The majority of FASB members at the meeting agreed this should be based upon the tentative decision made in 2011 to use IAS 17 s risk and rewards indicators as a starting point. 10 PwC Cyprus

13 IASB publishes annual improvements to six standards for 2013 year ends 21 May 2012 The table below identifies the more significant changes to the standards arising from the 2009 to 2011 annual improvements project and the implications for management. Standard Amendment Practical implications Effective date Amendment to IFRS 1, First time adoption of IFRS The amendment clarifies that an entity may apply IFRS 1 more than once under certain circumstances. An entity that previously applied IFRS but then stopped is permitted but not required to apply IFRS 1 when it recommences applying IFRS. The IFRS 1 provisions are designed to ease the process of transition to IFRS. For an entity that was previously an IFRS preparer, applying IFRS 1 as if no IFRS financial statements had ever been prepared may be more burdensome than simply resuming the preparation of IFRS financial statements. The amendment permits a choice of whether to apply IFRS 1. To avoid abuse, the amendment requires management to disclose why it stopped preparing IFRS financial statements and why it has resumed. An entity that previously applied IFRS but then stopped is permitted but not required to apply IFRS 1 when it recommences applying IFRS. Amendment to IFRS 1, First time adoption of IFRS The amendment clarifies that an entity can choose to adopt IAS 23, Borrowing costs, either from its date of transition or from an earlier date. From whichever date the entity choose, to adopt IAS 23: Borrowing costs under previous GAAP are not restated; and IAS 23 applies to borrowing costs on qualifying assets that were under construction at the date of transition, irrespective of whether borrowing costs were capitalised under previous GAAP. Applies retrospectively for annual periods beginning on or after 1 January Early adoption is permitted. PwC newsletter - July

14 Amendment to IAS 1, Presentation of financial statements The amendment clarifies the disclosure requirements for comparative information when an entity provides a third balance sheet either: as required by IAS 8, Accounting policies, changes in accounting estimates and errors ; or voluntarily. When an entity produces an additional balance sheet as required by IAS 8, the balance sheet should be as at the date of the beginning of the preceding period that is, the opening position. No notes are required to support this balance sheet. When management provides additional comparative information voluntarily for example, statement of profit and loss, balance sheet it should present the supporting notes to these additional statements. Applies retrospectively for annual periods beginning on or after 1 January Early adoption is permitted. Amendment to IFRS 1 as a result of the above amendment to IAS 1 The consequential amendment clarifies that a first-time adopter should provide the supporting notes for all statements presented. A first-time adopter should provide supporting notes for its transition balance sheet. Applies retrospectively for annual periods beginning on or after 1 January Early adoption is permitted. Amendment to IAS 16, Property, plant and equipment The amendment clarifies that spare parts and servicing equipment are classified as property, plant and equipment rather than inventory when they meet the definition of property, plant and equipment. The previous wording of IAS 16 indicated that servicing equipment should be classified as inventory, even if it was used for more than one period. Following the amendment, this equipment used for more than one period is classified as property, plant and equipment. Prior to the amendment, IAS 32 was ambiguous as to whether the tax effects of distributions and the tax effects of equity transactions should be accounted for in the income statement or in equity. The amendment clarifies that the treatment is in accordance with IAS 12. So, income tax related to distributions is recognised in the income statement, and income tax related to the costs of equity transactions is recognised in equity. Applies retrospectively for annual periods beginning on or after 1 January Early adoption is permitted. Amendment to IAS 32, Financial instruments: Presentation The amendment clarifies the treatment of income tax relating to distributions and transaction costs. Applies retrospectively for annual periods beginning on or after 1 January Early adoption is permitted. Amendment to IAS 34, Interim financial reporting The amendment clarifies the disclosure requirements for segment assets and liabilities in interim financial statements. The amendment brings IAS 34 into line with the requirements of IFRS 8, Operating segments. A measure of total assets and.liabilities is required for an operating segment in interim financial statements if such information is regularly provided to the CODM and there has been a material change in those measures since the last annual financial statements. Applies retrospectively for annual periods beginning on or after 1 January Early adoption is permitted. 12 PwC Cyprus

15 IASB/FASB leasing redeliberations May 2012 What is the issue? Since the February meeting, the staff have been consulting with users, preparers and auditors to hear their views on how a lessee should subsequently measure a right-of-use asset arising under a lease. The boards met this week to discuss the results of this exercise. The key points were as follows: There was almost unanimous support among users for recognising all leases on-balance sheet, regardless of the expense recognition pattern, in support of the project s primary objective. Most participants did not support either the underlying asset or the interest-based amortisation approach described in our February Straightaway. Although some saw conceptual merit in these approaches, most agreed they were too complex and costly. There were mixed views about which other approach was preferred. Some participants preferred the simplicity of applying one model to all leases (whether this be the approach proposed in the 2010 exposure draft, with its resultant expense front-loading, or a straight-line total expense similar to today s operating lease expense recognition); others preferred different types of leases to be approached differently. After debating the feedback, the boards have instructed the staff to explore three different approaches for discussion at next month s meeting: 1. The approach proposed in the 2010 exposure draft to all leases, possibly with some exceptions. 2. Straight-line total expense recognition for all leases. 3. A combination of the above two approaches. Board members made a number of suggestions as to when each approach should be applied. These ranged from using the existing indicators in IAS 17 (that is, retaining the distinction between operating and finance leases while recognising assets and liabilities in respect of both on-balance sheet); using a new set of indicators based on a mirror image of IAS 17 (that is, specifically identifying operating leases, with all other leases being finance leases); and differentiating leases based on the nature of the underlying asset (that is, treating equipment and real estate differently). The boards aim to make tentative decisions about which approach they prefer and consider the implications for lessor accounting at the June meeting. If this is achieved, any remaining outstanding issues will be discussed in July, with the hope of publishing a new exposure draft by the end of Q PwC newsletter - July

16 IASB publishes exposure draft on improvements project cycle What is the issue? The IASB has published an exposure draft for the cycle of the annual improvements project, with amendments that would affect 10 standards. The proposed amendments affect IFRS 2, IFRS 3, IFRS 8, IFRS 13, IAS 1, IAS 7, IAS 12 IAS 16, IAS 24 and IAS 36. They are expected to apply for annual periods beginning on or after 1 January 2014 except for the amendment to IFRS 3, which applies to business combinations on or after 1 January The Board is asking for comments on the transition provisions and the effective date of each proposed amendment, for the first time. The deadline for comments is 5 September The following is a summary of the proposed amendments. IFRS 2, Share-based payment The amendment clarifies the definition of vesting conditions as either a performance condition or a service condition and separately defines those terms. A performance condition requires a specified period of service and specified performance targets to be met while the services are being performed. A service condition requires a specified period of service to be completed but does not include a performance target. IFRS 3, Business combinations The amendment clarifies that contingent consideration that meets the definition of a financial instrument is classified either as equity or a financial liability in accordance with IAS 32. The reference to other IFRSs is removed. The amendment further clarifies that contingent consideration that is classified as a financial liability is subsequently measured at fair value, with changes in fair value being presented in profit or loss or in other comprehensive income, depending on the requirements of IFRS 9. The amendment includes consequential amendments to IFRS 9. IFRS 8, Operating segments There are two amendments to IFRS 8: Entities are required to disclose the factors used to identify the reportable segments when operating segments have been aggregated. The Board has clarified that the reconciliation of a segment s assets to the entity s assets is only required when details of segment assets are reported to the chief operating decision-maker. 14 PwC Cyprus

17 IFRS 13, Fair value measurement The amendment to the Basis for Conclusions to IFRS 13 clarifies that the Board did not intend the changes made to IFRS 9 and IAS 39 by IFRS 13 to remove the ability of entities to measure short-term receivables and payables without discounting when the effect of discounting is not material. IAS 1, Presentation of financial statements The amendment clarifies that a liability is classified as non-current if the entity expects, and has the discretion, to refinance or roll over an obligation for at least 12 months after the reporting period under an existing loan facility with the same lender on the same or similar terms. IAS 7, Statement of cash flows The amendment clarifies that the classification of capitalised interest follows the classification of the asset to which the interest payments were capitalised. IAS 12, Income taxes The amendment clarifies how an entity recognises deferred tax assets for unrealised losses. If tax law restricts the use of tax losses to income of a certain type, the entity assesses whether it expects sufficient taxable income of that type to recognise a deferred tax asset. Taxable profit against which an entity assesses a deferred tax asset for recognition is the amount before reversal of any deductible temporary differences. A tax-planning opportunity is an action that creates or increases taxable profit. Examples are included in the ED to illustrate these clarifications. IAS 16, Property, plant and equipment, and IAS 38, Intangible assets The amendment clarifies how the accumulated depreciation should be calculated at the date of valuation when the revaluation model is applied. IAS 24, Related party disclosures The amendment extends the definition of related party to include entities that provide management services to the reporting entity. Disclosure is required of amounts charged as an expense for management services provided by such entities. IAS 36, Impairment of assets The amendment clarifies that the disclosures required when there has been a material impairment loss or reversal in the period are the same whether the recoverable amount has been estimated using value in use or fair value less costs of disposal. Am I affected? The proposed amendments are seemingly minor changes. However, if you are affected, the impact could be significant. What do I need to do? Please read the proposed amendments in their entirety to determine the impact to you and consider commenting on the proposed amendments. PwC newsletter - July

18 Winning with the EPO Our cross territory EPO team has just received the prestigious award of: ACE of Clubs you shared and collaborated! What does this mean? Read on to find out! The competition All the 2012 ACE Awards winners The annual Advisory Client Engagement (ACE) Awards is a client centric competition designed to recognise exemplary team performance, to foster increased sharing of wins and success stories and to promote our cross border networks. The ACE Awards are presented to entries from territory teams which best demonstrate clear application of the PwC Experience behaviours. The 4 categories are: ACE of hearts - You invested in the relationship with your client ACE of spades - You put yourself in your client's shoes ACE of diamonds - You focused on client value ACE of clubs - You shared and collaborated EPO building - The Hague 16 PwC Cyprus

19 EPO building - The Hague The 2012 competition started with the nomination of teams by Advisory territory leaders in January. Between February and March, the nominees had 5 weeks to produce their submissions, including a description of the client, the team, the context and background of the engagement and the work they did. Teams were also asked to describe and present how they prepared for the client engagement, including the process of winning the work, how they engaged with the client, delivered the work and enhanced value for the client and PwC. The submissions were reviewed by seven jury members and the final choice was made by a panel of four judges. The criteria used to judge submissions were based on how well teams demonstrated the service behaviours contained in the PwC Experience guidelines as well as the quality of the submission. 37 teams were nominated from 17 territories and there were 4 winners, one for each PwC behaviour! The Client The European Patent Office (EPO) is an intergovernmental organisation which registers patents across Europe and plays a leading role in developing an effective global patent system. As the patent office for Europe, it aims to support innovation, competitiveness and economic growth across Europe in line with the quality and standards delivered under the European Patent Convention. The EPO employs around employees who are based at several offices across Europe, including The Hague, headquarters in Munich and offices in Berlin and Vienna. It consists of qualified, technical experts such as scientists and engineers who use their expertise to evaluate inventions and ideas being registered for patents. Our history with the EPO PwC Cyprus has been working with the EPO on various projects including executive coaching and workshop facilitation since The Netherlands office won a contract to deliver Management and Leadership training to the EPO in The Northern Ireland and Cyprus Capability and Training teams were sub-contracted to support this work. The 3 territories started to position themselves as a collaborative partnership to prepare to bid for the renewal of this contract 18 months in advance of the tender. Our ACE Award submission was all about our journey in winning this new piece of work as a cross territory team: A number of account planning meetings took place during that time in the Netherlands and Cyprus which resulted in the formation of a clear strategy and actions to be implemented in preparation of the upcoming bid. Once the tender was out the team met in Cyprus to agree on the main messages of our proposal and start producing the proposal document. Our key messages were: Continuity, Taking it to the Next Level & Impact. A Velocity Coach came on board to play the role of the client and challenge the team as to the relevancy and value of our offering. Our bid was short- listed and we were invited to present our proposal together with 8 other bids. Members of the team flew to Munich a day ahead to rehearse the pitch with the support of our Velocity Coach. Our bid was successful even though we were the most expensive proposition. The Project The scope of this contract is to design and deliver a management development program for the Aspiring Managers and the First Time Managers of the EPO. As a team we need to design 23 separate courses (41 training days) and provide up to 230 training days per annum for the next 5 years, mostly in Munich and The Hague and occasionally in Vienna and Berlin. Our aim is to support the participants through a journey of self reflection and skill building to become more effective managers in the EPO environment. We have developed a Virtual Learning Environment (VLE) to complement the learning journey. We have put together a strong trainer pool with experienced trainers who know the EPO well from Northern Ireland and Cyprus. At the moment we are working very closely with the client to finalise the design of the material. Some courses have been delivered already and we are evaluating participants and trainers feedback in order to fine tune the content. The project manager who is based in Belfast is working very closely with the design lead who is based in Nicosia for the smooth implementation of the project and the delivery of a seamless team to the client. For more information on the EPO project, or if you would like to find out more about how PwC can support you in enhancing your management capacity through training and coaching contact Hara Granath, Senior Manager, Advisory Services, PwC Cyprus on hara.granath@cy.pwc.com, or PwC newsletter - July

20 Real estate advisory services One stop solution The real estate industry is a key driver of economic activity. The Cyprus property market currently faces an unprecedented range of challenges which renders the business environment more complex and calls for a need for independent real estate knowledge experts. PwC Cyprus has proactively responded to these changes by creating comprehensive solutions for such needs. How can PwC help you? Our experts offer our clients the value they are looking for, value that is based on the knowledge drawn from our extensive international presence and on experience shaped from the local environment and needs. Our experienced real estate focused team provides tailored-made solutions of high quality for specific needs to clients who develop, invest, own, lease, dispose or acquire all types of property. Our clients draw comfort from working with PwC, the leading organisation of its kind in the world, and from the integrity, reliability and security that it brings with it. Our strong international network combined with our local expertise, enable us to support our clients needs in all their countries of operation. We provide an integrated one-stop shop solution offering, handling all issues relating to real estate projects, including investment support, transaction advisory, valuations, legal, tax structuring, IFRS s and complicated accounting treatment of real assets and leases. 18 PwC Cyprus

21 Real estate lifecycle Pre-Development Development Managing Operations Exit Services Investment support services M&A Advisory and assistance in raising finance Valuations Relocation advisory services Reorganisation / Restructurings Distressed Assets / Business Recovery IFRS s and complicated accounting treatment VAT and Tax advisory Legal services Investment support services Feasibility analysis / Investment appraisals Financial Modelling Sensitivity Analysis Preparation and objective assessment of business plans Market analysis Site analysis SWOT Analysis Economic evaluation of projects Competitor study and analysis M&A advisory and assistance in raising finance Objective assessment of Business Plan, review of critical assumptions Assessment of the financial returns for potential investors Identification of investors, using our global network Assistance in the preparation of road shows / investor presentations through the preparation of teasers and information memorandum Assistance during the negotiation process Purchaser or vendor due diligence Design of financing schemes Valuations Market Value analysis in the context of transactions, due diligence processes, audits of annual financial statements and credit checks Support in real estate valuations within the context of IFRS PwC newsletter - July

22 Relocation advisory services Pathfinder services: Relates to foreign based businesses aiming to setup offices in Cyprus for the first time: Assistance in finding suitable office space that serves the tailored needs of the client Citizenship services: Relates to affluent individuals who wish to obtain Cyprus Citizenship. Support in finding suitable residential properties which meet the criteria of affluent interested individuals Permanent Residence services: Relates to individuals who wish to obtain Immigration Permit which will give the right to reside permanently in Cyprus. Guidance in finding suitable residential properties Corporate restructuring / reorganizations for separating real estate from other business Identification and assessment of options available for the separation of real estate from other business activities Identification of structure that will enhance value and provide maximum flexibility for possible mergers & acquisitions Evaluation of the tax and other implications of the proposed restructuring plan Distressed assets/ Business recovery Advise on optimal approach to banks / lenders and other stakeholders Advise on the preparation of plan dealing with distressed assets Debt Advisory IFRS and complicated accounting treatment Support and guidance in relation to the accounting treatment of specific transactions both under the existing standards and also under the standards issued not yet effective (enabling better planning and preparation for the standards that will be applied at a later stage). Transactions can relate to investment properties, asset management and funds, recognition of revenue for real estate inventories, lease classification etc. Review of financial statements to ensure compliance with IFRS as adopted by the European union Tax and VAT advisory Tax efficient structures in relation to the entry of prospective investors in real estate groups. Tax efficient structures for obtaining financing for real estate operations. Assistance in the reorganisation (merger, de-merger etc) of real estate groups for achieving an efficient tax base or a more transparent structure for potential investors. Assistance in complying with the provisions of the Capital Gains Tax (CGT), Immovable Property Tax (IPT) and Income Tax (IT) Laws. Assistance /Advise in dealing with VAT issues. Any other tax compliance work. Legal services Legal support for acquisition of real estate Advising in respect of the status of the real estate Reviewing and amending standard (developer s) Contracts of Sale or drafting Contracts of Sale Applying for any necessary permits Filing of Contracts with the District Land Registry Appearing before the District Land Registry to complete transfer and registration of real estate in the name of the client Legal support for disposal of real estate Drafting of Sale/Lease Agreements Appearing before the District Land Registry to complete transfer and registration of real estate in the name of the client For more information please contact us Deals and Corporate Finance Constantinos Constantinou, Partner constantinos.constantinou@cy.pwc.com Constantinos Savvides, Assistant Manager constantinos.savvides@cy.pwc.com Global Compliance Services George Foradaris, Partner george.foradaris@cy.pwc.com Assurance Services Tasos N Nolas, Partner tasos.nolas@cy.pwc.com Direct Tax Panicos Kaouris, Partner panicos.kaouris@cy.pwc.com Indirect Tax Services Chrysilios Pelekanos, Partner chrysilios.pelekanos@cy.pwc.com Legal Practice Spyros A Evangelou, Partner S.A. Evangelou & Co LLC spyros.evangelou@cy.pwclegal.com 20 PwC Cyprus

23 Corporate responsibility reporting Volunteering Environment Since the very beginning, we, in PwC Cyprus aspire to be a great corporate citizen by playing a leading role in the community. The CSR activity in our organisation is all about abiding with our Code of Conduct and our main values in our relationships with all our stakeholders. Employees, stakeholders, customers, suppliers and the society are the recipients of a series of activities and behaviors that are integrated into our organisation s program which has 5 pillars: Professional services More specifically during the past fiscal year the CSR Committee organized the following activities: We sponsored the 4th CSR conference which was organised by IMH and took place on Friday, 1 July 2011 at Hilton Park hotel. The conference aimed at promoting CSR as an important element of strategic planning in organisations. Our director, George Ioannou attended the seminar and presented the PwC case study of How we moved from theory to action. We supported the Association for the welfare of people with mental handicap. We launched a facebook campaign during December so as to help raise money for them. The campaign was a great success and we donated euros to the association which was founded in July 1990 by the parents and friends of people with mental handicap. Giving Corporate community leadership PwC newsletter - July

24 With the slogan Blood Donation Day: A Day of Life, PwC Cyprus organised on Monday, 28 November 2011 the annual blood donation day for the support of the Nicosia General Hospital blood bank at the Nicosia, Larnaca and Paphos offices of the organisation. The blood donation in Limassol was held on 9 January It worth mentioning that for the second consecutive year, the blood donation was organised the same day as the annual Unicef Christmas bazaar, celebrating in this way the values of giving and volunteerism that characterise the organisation. We continued for 4th consecutive year the sponsoring of our Olympic Sailing athlete Andreas Cariolou. This has been a very good year for Andreas who has won the 6th place in the European Sailing Championship in Bulgaria and currently he is getting prepared for the 2012 Olympic Games in London. We continued this year our support to the Road Safety Unit of the Ministry of Communications and Works that has initiated a campaign promoting the safe use of the highway 3rd lane. We distributed to our staff the leaflet that was circulated by the Ministry which stresses compliance with the Traffic Laws and applying defensive driving practices. During Christmas time, our colleagues in Limassol decided to set up a team of volunteers in order to raise money to buy presents for the children at the Limassol General Hospital. Net proceeds from the fund raising amounted to 355 which were donated to Make a wish foundation. In addition our colleagues offered presents to the children of Limassol Hospital. On the occasion of the Worldwide Safer Internet day (this year it was celebrated on 7 February) we organized a successful event for the children of our staff that had the opportunity to participate in a really interesting discussion so as to know how to safely navigate in the internet. The younger children had the opportunity to draw a painting for Andreas Cariolou, who attended the event, wishing him all the best of luck in the summer Olympic games. On the International Women's day, on 8 of March, we offered charity pins from Europa Donna Cyprus, to all women in the firm. This activity was realized as a token of appreciation and respect towards our female colleagues. Europa Donna Cyprus, is part of a European Breast Cancer Coalition and an independent non-profit organisation, which works towards raising awareness for breast cancer and mobilising the support of European women for improved breast cancer education, appropriate screening, optimal treatment and increased funding for research. PwC Cyprus supports the local community through sponsorships and donations and promotes the idea of Volunteering contributing this way actively to the common wealth. In this context our people often provide pro bono services where is needed, and in many case they devote their personal time to support NGO s. After all this is the idea of being corporate responsible. 22 PwC Cyprus

25 PwC events and activities Economic Crimes in Businesses, 7 March 2012 The book Economic Crimes in Businesses: Detection, investigation, prevention by Christos Tsolakis, Partner at PwC Cyprus and Dr Maria Krambia-Kapardis, Associate Professor in the Cyprus University of Technology was presented during an event held in Limassol. The book examines economic crime emphasising on detection suggesting the necessary policies and procedures for the prevention of business fraud. Limassol Marathon GSO, 18 March 2012 The Limassol Marathon GSO, accredited by the international federations of AIMS and IAAF, was organised for the 6th consecutive year at the Limassol Molos area. more than runners. PwC Cyprus took part in the 5Km PwC corporate race, with more than 100 members of the organisation together with family members and clients. PwC Cyprus sponsored the 5Km corporate race which gathered participation of 50 companies with PwC newsletter - July

26 Women in the Boardroom, 14 March 2012 The women in PwC committee organised an event with title Women in the Boardroom. The event aimed at recording and understanding the perceptions of Cypriots as regards to the professional development of women in businesses. The event was attended by high profile women from all the sectors of business and economic activity and was addressed by Mrs Androulla Kaminara, Former Head of the European Commission Representation in Cyprus. Mrs Jacey Graham, Director of Brook Graham Ltd, who was the main speaker at the event, analysed the global and European context for women s careers, the typical barriers women face in male gendered organisations as well as the measures taken by organisations to overcome this issue. New Russian transfer pricing rules and other recent tax developments, 20 March 2012 During this seminar which focused on new Russian transfer pricing rules, Cyprus and Russia experts analysed the important developments of the new transfer pricing rules, which became effective from 1 January 2012 and bring significant changes to the Russian tax system. The seminar was attended by representatives from companies engaged in business operations with Russia. Russian and Cypriot opportunities in an ever evolving tax environment, 18 May 2012 PwC Cyprus organised with great success a seminar entitled Russian and Cypriot opportunities in an ever evolving tax environment, which was sponsored by the Bank of Cyprus. The seminar which took place in Moscow, focused on the recent trends in the Russian tax legislation and how these impact investments structured through Cypriot companies. Costas Mavrocordatos, Head of Tax & Legal Services at PwC Cyprus and David John, Tax and Legal Practice Leader at PwC Russia addressed the seminar which attracted more than 250 people from the Russian business world. Representing the Cypriot authorities, Mr George Poufos, Director of the Inland Revenue Department analysed the tax authorities perspective and Mrs Demetra Kalogirou, Chairman of CySec delivered a presentation on the Cyprus Securities and Exchange Commission developments. 24 PwC Cyprus

27 PwC Cyprus and Abacus Ltd participated at the conference organised by the Cyprus US Chamber of Commerce in New York, 4 May 2012 PwC Cyprus and Abacus participated for the first time at a conference organised in New York by the Cyprus-US Chamber of Commerce, which focused on the geopolitical and economic developments in Cyprus and on how US multinational companies (MNCs) can benefit from these. In charge of Direct Tax Services, Constantinos Leontiou, Director on the PwC Cyprus tax desk in New York, Constantinos Chiotis, Senior Manager at Abacus Ltd and Mrs Anastasia Xenias, Senior International Trade Specialist at the US Department of Commerce. The conference included a panel discussion with the participation of Terry Gerhart, Vice President of Noble Energy (responsible for Noble s activities in the Eastern Mediterranean), Nicos Chimarides, Partner at PwC Cyprus, 2012 STEP Cyprus International Conference, 10&11 May 2012 PwC Cyprus sponsored the conference with title Cyprus: A trusted stepping stone to doing business in Europe and the rest of the world which was jointly organised by the Society of Trust and Estate Practitioners and the Cyprus branch of STEP. Costas Mavrocordatos, Head of Tax & Legal Services, addressed the conference while Panikos Tsiailis, Partner, Direct Tax delivered a presentation on Cyprus holding companies and provided an indepth explanation of their uses, benefits and competitive advantages. PwC newsletter - July

28 WISTA Med Conference Cyprus 2012, 23 June 2012 The Women s International Shipping & Trading Association (WISTA) organised the 4th WISTA Med Conference in Limassol. The conference which was sponsored by PwC covered topics such as ship registration and related legal affairs, Cyprus from the shipowners point of view, Cyprus shipping forecast as well as oil & gas developments in the Eastern Mediterranean. During the conference, Evgenios Evgeniou, CEO at PwC Cyprus delivered a presentation with the subject Cyprus as an Optimal Business Base. Real Estate Investments in the EU - Opportunities for Diversification, 5&6 June 2012 The Real Estate Investments in the EU conference was organised at the PwC Russia offices in St Petersburg and Moscow. During this event leading partners from PwC s real estate practices in major European countries presented the opportunities and highlighted key issues in the tax and legal regulation. George Foradaris, Partner at PwC Cyprus, provided a snap shot of the Cyprus Real Estate Market which covered the locations, sectors, trends as well as the major tax and legal issues and together with Constantinos Constantinou, Partner at PwC Cyprus, participated in the closing panel discussion. 26 PwC Cyprus

29 Panel discussion organised by the Bank of Cyprus, 21 June 2012 A panel discussion with title Two Nobel Prize Winners and a European Central Banker discuss the International economy was organised by The Bank of Cyprus and PwC and focused on the international economy, potential for growth as well as on the future challenges and opportunities. This event was organised on the occasion of PwC s sponsorship towards the annual meeting of the Society for Economic Dynamics, an academic conference that attracted more than 200 professors and was held from 22 to 24 June Speakers at the event included Prof. Christoforos Pissarides, Nobel Prize in Economics in 2010, Prof. Edward Prescott, Nobel Prize in Economics in 2004 and Dr. Frank Smets, Director General of the Directorate General Research of the European Central Bank. Working Better Together Cyprus - Russia - Ukraine The Working Better Together workshop was organised on Friday, 25 May 2012 at the Grand Resort Hotel, in Limassol. The aim of this event was to further enhance the relationship among the Russian, Ukrainian and Cypriot tax and legal teams, to understand the issues and challenges faced when dealing with common clients and to identify the ways to further promote our business. The workshop was supported by the Bank of Cyprus, representatives of which attended the first session of the event to present the Cypriot Banking System and the relevant regulatory environment as well as the Bank of Cyprus Group. Subjects covered during the presentations and workshops included tax and legal developments in the EU, Cyprus, Russia and Ukraine and business development efforts. Employment Practices Competitiveness Development Learning from the German experience, 30 May 2012 The Cyprus Chamber of Commerce and Industry together with the German Friedrich-Ebert-Stiftung Foundation (FES) organised a conference with the title Employment Practices - Competitiveness Development. Learning from the German experience, which was sponsored by PwC Cyprus. The German employment model was the focus of discussion during the conference which included an opening speech by Evgenios Evgeniou, CEO of PwC Cyprus and a presentation by Dr Nicole Elert, Partner at PwC Germany, who analysed the issue from an employer s perspective. PwC newsletter - July

30 Talent crisis threatening business growth and economic prosperity say CEOs One in four CEOs say lack of the right talent has stopped them pursuing market opportunities One in three CEOs are concerned that skills shortages have impacted innovation An inability to recruit and keep the right people, and a skills mismatch are hitting companies bottom lines, according to a global PwC survey of CEOs. A quarter of CEOs said they were unable to pursue a market opportunity or have had to cancel or delay a strategic initiative because of talent challenges. One in three said they were concerned that skills shortages will impact their company s ability to innovate effectively. PwC asked nearly 1300 CEOs in 60 countries about their priorities and how they re preparing for the future. Talent emerged as one of the biggest issues facing the boardroom. Philippos Soseilos, Performance Improvement Consulting Services partner at PwC Cyprus said: CEOs are facing a talent crunch, and it s an issue keeping them awake at night. An inability to find and keep the right people is biting CEOs say the lack of talent is stifling expansion and innovation. It s a unique challenge - companies are struggling to find and keep the right talent when there are more educated people than ever before and a worldwide talent pool is available to them. CEOs across all industries said it has become more difficult to find the skills they need - even industries that have retrenched. 43% of those polled say it is now more difficult to hire workers in their industry. 28 PwC Cyprus

31 They re also looking at the gap that exists to replace the baby boomer generation over the next ten years and how best to prepare the next generation for that transition. Only 30% of CEOs are very confident that they will have access to the talent they need over the next three years. 78% of CEOs say they ll make a change to their talent strategies. Philippos Soseilos said: To face up to this crisis CEOs are turning outside their sector for talent and they re also going deeper into their own organisations to pinpoint their future leaders and invest in their development now. This early investment can pay off in future loyalty among these future leaders, and the obvious benefits of recruiting internally and growing their own rather than struggling to replace from outside. CEOs that are facing the future and trying to get their talent pipeline right are bringing HR closer to the fold and changing their talent strategies; 79% of CEOs say that the chief HR officer or equivalent is one of their direct reports. HR needs to ensure that it s responding to this talent rethink by getting the longterm pipeline right and making sure CEOs get the right metrics. There s a big opportunity for HR in management information - only a minority of CEOs are getting HR management information for the measures they say are important. CEOs want to know about their talent investments beyond productivity and labour costs. Employee engagement, team performance and isolating skills gaps are difficult measurements to make, but they are critical to see where investments and innovation are working. PwC newsletter - July

32 Investor appetite for acquiring non-core loan assets from European banks is on the rise PwC survey Investors have accumulated nearly 60 billion to invest in non-core European loan assets Portfolios with a face value of 50 billion expected to change hands this year Less than one in five think debt will be more difficult to raise Investors expect the sale of European loan portfolios to peak in 2013, as banks begin to plan their refinancing of the liquidity injections received from the European Central Bank (ECB), according to a new survey from PwC. The majority of investors think the deleveraging process, now underway at European banks, will take at least five years, while the number who believe it will take more than ten years - a view shared by PwC - has doubled since the previous survey was carried out a year ago. Investor appetite to acquire non-core loan assets from European banks continues to grow. PwC surveyed more than 50 major investors active in the European loan portfolio market, ranging from investment banks and hedge funds to private equity groups, to understand the perspectives of those looking to acquire non-core loan portfolios from financial institutions. As well as a rise in the volume of identified non-core loans, the survey results indicate a significant increase in investor appetite. Every respondent plans to make an investment in Richard Thompson, PwC s European Portfolio Advisory Group Chairman, said: In the past year the banking sector has been much more open to deleveraging strategies. We estimate there are 2.5 trillion of non-core loan portfolios in the European banking sector, representing 6% of European banking assets. 30 PwC Cyprus

33 The run-off or sale of these loan assets will continue for many years and will make up a major proportion of future M&A activity. Based on our discussions with the major banks around Europe, we expect portfolios with a face value of 50 billion to trade this year and 500 billion to trade in the next five to ten years. An interesting development has been the new categories of investor entering the market, such as insurance companies, pension funds and sovereign wealth funds. These new investors demand more stable returns from longer maturity assets and so are more suited to performing portfolio investments. Leverage continues to be an important factor in enabling transactions to be completed by increasing prices and liquidity in the market. Over 60% of survey respondents said they plan to use funding for their investments in Despite the uncertainty in the European financial system, investors remain confident that funding will be available for transactions in 2012 and beyond. Only 18% of respondents thought it would be more difficult to raise debt this year compared to Richard Thompson, PwC s European Portfolio Advisory Group Chairman, commented: Leverage will play an important role in increasing prices and liquidity in the European loan portfolio market and investors remain optimistic about accessing further funding for transactions this year. However, whether this funding will be available remains to be seen. The survey results show that while the UK, Germany and Spain continue to dominate the market for loan portfolio sales, investor interest in Ireland and Portugal is also on the rise, driven by the active steps taken by regulators in those countries to restructure their banking system. Investors are showing the most interest in commercial real estate (CRE) portfolios. This assets class is expected to see the highest level of investment activity in % of investors plan to make a non-performing CRE portfolio investment in 2012, up from 41% last year. The market for unsecured retail portfolios, such as credit card debt, also remains active, where sellers provisioning levels are higher and specialist servicing capabilities exist. For more information you may contact Stelios C Constantinou, partner in charge of the banking industry, stelios.constantinou@cy.pwc.com. PwC newsletter - July

34 The economics of sport: PwC study seeks to benchmark Olympic medals tally British team set to benefit from home town effect Economic size matters in medal tally but David can still beat Goliath US and China to renew their top-of-the-table tussle in 2012 Home advantage could once again play a part in how the Olympic medals are shared in August; but the superpowers of the US, China and Russia are again set to battle it out at the top of the Olympic Games medals table in London in August, according to a new analysis by economists at PwC. This is the fourth time that PwC has published an analysis of how medal performance at the Olympic Games can be linked to such factors as past Olympic performance, economics and state support for sport. This paper updates these estimates to allow for actual results in Beijing PwC Cyprus

35 The following economic and political factors were found to be statistically significant in explaining the number of medals won by each country at previous Olympic Games before allowing for past performance (which subsumes some of these factors as explained in the paper): Population Average income levels (measured by GDP per capita at PPP exchange rates) Whether the country was previously part of the former Soviet/communist bloc (including Cuba and China) that tended to give significant state support to Olympic sports; and Whether the country was the host nation. In general, the number of medals won increases with the population and economic wealth of the country, but less than proportionately, says the report s author, PwC s UK Chief Economist, John Hawksworth. David can sometimes beat Goliath in the Olympic arena, although superpowers like the US, China and Russia continue to dominate the top of the medals table. In the extract below, our model estimates the top 10 medal-winning countries in London compared to Beijing Country Model estimate of medal total in London 2012 Medal total in Beijing US China Russia Great Britain Australia Germany France Japan = Italy = South Korea Some of the more interesting conclusions to be drawn from the PwC model are: Now it is no longer the host country, China may find it more difficult to stay ahead of the US (as it did in Beijing on gold medals, although not total medals won). The PwC model suggests that the British team could win around 54 medals this time around, beating an already exceptionally good performance of 47 medals in Beijing due to home advantage, which has proved significant in all other recent Olympics except Atlanta in Russia is projected by the model to continue to perform strongly relative to the size of its economy in third place (68 medals), but it does continue to drift down the table relative to the heights of its performance in the old USSR era. The model still suggests that India is a significant underperformer relative to its population and GDP, with a model target of around 5-6 medals for London after allowing for past performance. The most plausible explanation is that, with the exception of hockey, Indian Difference sport tends to focus on events that are not included in the Olympics, notably cricket. The model estimates suggest that larger Western European countries such as Germany, France, Italy, Spain and the Netherlands might be expected to broadly match their Beijing 2008 performances though they will no doubt hope to do better. Countries where the model targets for London are below those for Beijing include Australia (still in gentle decline from the heights of Sydney in 2000) and some former Soviet bloc countries where the legacy advantages of strong state support from the pre-1991 era may be gradually fading, such as Ukraine and Belarus. As well as Great Britain, countries that the model suggests have the potential to do better than in Beijing include: Japan, Brazil (in the run-up to being the host country in 2016), Romania and Turkey. PwC newsletter - July

36 Digital banking to be the norm by 2015 Digital banking is set to overtake branch networks as the main way customers interact with their bank by This is according to a new PwC report The new digital tipping point, which suggests that banks are missing a vital new source of revenue growth as they have been too slow to respond to the digital innovations that have radically changed business models and redefined customer experience. This is despite strong demand for digital banking products from consumers and the fact they are willing to pay for these. PwC conducted research with over 3,000 banking customers across nine developed and emerging markets and found that most consumers are willing to pay up to 10 a month for digital banking services if they believe they offer convenience and value. The research reveals that there is customer demand for innovative digital offerings such as social media notifications, an electronic wallet for loyalty cards and financial tools provided by banks and that these are the products consumers are most willing to pay for. In the UK, almost two thirds (65%) of respondents said they are willing to pay just over 4 a month for their bank to store loyalty card information and convert accumulated points into cash. This amounts to an annual fee income for banks of approximately 50 per customer. Stephen Whitehouse, retail and commercial banking partner at PwC, said: Banks have generally been slow to embrace the digital innovation customers now expect from other industries, such as retail or travel. This needs to improve if banks are to hold on to their existing customers and attract the next generation, as the quality of a bank s digital offering will become an increasingly important factor for consumers. Despite customers appetite for new and innovative digital banking offerings, and the fact they are willing to pay for these, the majority of banks still only provide basic mobile and internet banking services. Banks are clearly missing a trick if they don t start to invest in their digital offerings and only see digital as a way to reduce costs. The lack of investment is perhaps even more surprising considering banks are struggling to grow revenues at a time of increased regulation and a difficult economic environment. Digital products are a significant opportunity for banks to grow revenues and serve their customers in a way that they want. 34 PwC Cyprus

37 The research reveals that more and more consumers are using online and mobile channels to access financial products. 69% of those surveyed said they currently use the internet to purchase financial products. While a lower number of respondents (33%) currently use mobile to purchase financial products, mobile banking is expected to follow a similar usage curve to internet banking, with China, India and the United Arab Emirates currently leading its adoption. 1 In terms of customer profile, it is not surprising that Generation Y 2 leads the way, with 67% of respondents saying they currently use or are considering using mobile channels for banking. Matt Hobbs, retail and commercial banking partner at PwC, said: To grow revenues and combat high customer inertia, banks need to focus on attracting the next generation of customers which will be largely made up of Generation Y and the unbanked population. For these customers, a bank s digital services will be more central to their decision-making process than branch location or even brand. 1 56% of respondents in India, 48% of respondents in China and 42% of respondents in the United Arab Emirates said they currently use mobiles to purchase financial products. 2 Generation Y refers to people born in the 1980s and 1990s. Generation Y are now choosing their main banking provider and represent an important source of future value for banks. Banks need to take their digital products to the next level if they want to secure these customers as they expect a rich digital experience that is both mobile and social and integrates their banking needs with their digital lives. If banks are too slow off the mark, they risk being overtaken by new entrants or nontraditional financial services providers, who already place digital at the heart of their offerings. Despite new technology opening up banking to a number of new players, there is little evidence to suggest that they will be successful in taking over the entire customer relationship from banks. The survey reveals that the majority of respondents (61%) still trust their banks over other providers to provide their current account. However, the report suggests that new entrants, such as mobile payment providers, will continue to act as a catalyst for change in the retail banking space. Banks may also need to partner with technology, mobile and other non-traditional banking providers in order to deliver the digital experience customers now expect. Matt Hobbs, retail and commercial banking partner at PwC, said: The growth of digital has removed key barriers to market entry, including the need for large branch networks, customer inertia and brand trust. Because of this, banks need to consider strategic acquisitions or partnerships with digital innovators to secure their long-term position and market share. Incumbents in developing markets, where there is a larger share of unbanked consumers, will experience the greatest threat from new players if they do not improve their digital offerings. Stephen Whitehouse, retail and commercial banking partner at PwC, said: The banks that provide a differentiated digital experience, with advice and relationship management elements tailored to the individual customer, will secure deeper engagement and more profitable relationships with their customers. PwC newsletter - July

38 The end of the digital beginning: challenge for media companies now lies in how to implement their digital strategies Digital migration is increasingly playing out differently across the various segments and geographies of the entertainment and media industry says PwC s Global Entertainment and Media Outlook Despite ongoing economic uncertainty, the past year has seen global sales of tablets and smart devices reach record levels once again, underlining the growing revenue opportunities from digital delivery of entertainment and media (E&M) content and advertising to increasingly connected, and particularly mobile, consumers. According to PwC s annual Global Entertainment and Media Outlook , digital opportunities are now well understood by media companies, advertising agencies and advertisers themselves: the industry is approaching the end of the digital beginning as rising comfort levels with digital mean that it is becoming business-as-usual. Although the fog experienced in the past few years around strategic options is lifting, there is more to be done: today s challenge is in the implementation of those digital strategies. 36 PwC Cyprus

39 A world of difference PwC believes that though the focus may still be on digital migration, challenges for E&M companies differ according to diverging market pictures across segments and geographies. Tipping points and contrasting market development rates highlighted by this year s Outlook data and analysis show: Global entertainment and media spending on digital advertising and consumer formats increased by 17.6 percent in 2011 compared with only a 0.6 percent rise in nondigital spending. Digital s share of total spend will grow from 28 percent in 2011 to 37.5 percent in 2016, and digital spending will account for 67 percent of total E&M spending growth to Digital maturity varies widely at a segment level. For example, global spending on digital recorded music formats will overtake physical distribution in 2015, reaching 55 percent of total revenues in And global spending on online and wireless video games will overtake console and PC games revenues in By contrast, the digital component of consumer magazines will account for only 10.4 percent of spending by 2016, up from 3.1 percent in Global spending on music rose 1.3 percent in 2011, the first gain in many years, thanks to growth in the concert and music festival market and a slower decline in recorded music. Rises in digital music spending mean that overall, global spending on recorded music will finally begin to increase in Mobile internet access subscriber numbers, a key driver of digital spending, will more than double during the next five years to 2.9 billion by 2016, of which almost 1 billion will be in China. In India, mobile internet subscribers will increase from a low base at a compound annual rate of 50.8 percent to 2016, making it the fastest growth market for mobile internet in the world. By 2016, global mobile internet advertising revenues of $24.5 billion will grow at 36.5 percent compounded annually, to almost match the size of the classified internet advertising market. However, paid search at $78.1 billion and banner/display at $46.6 billion will retain the lion s share of the market in China s mobile internet advertising market will grow at a compound rate of 68.4 percent to reach $6.2 billion in 2016, making it the second largest market in the world behind the United States at $9.4 billion. The newspaper publishing segment illustrates diverging trends across mature and growth economies. There will be ongoing declines in some territories such as the United States (declining 1.4 percent compounded annually to 2016, and expected to be worth 43.8 percent less in 2016 than 2007), but strong growth in countries where the digital infrastructure is less mature, such as Argentina (11.9 percent growth compounded annually to 2016), Indonesia (11.2 percent), and India (9.6 percent). France passed the United Kingdom and Germany in 2011 to become the second largest TV subscriptions market in the world behind the United States, driven by a 76 percent rise in IPTV households. In the TV advertising segment, spending in Russia surged by 20.2 percent in 2011; by 2016, Russia will overtake the UK, Germany, Italy, and France to become the largest TV advertising market in EMEA (Europe, Middle East and Africa). In the worldwide filmed entertainment market, over-thetop/streaming services will grow at a 21.0 percent CAGR to $11 billion in 2016, and will overtake spending through TV subscription providers in Entertainment and media companies reshape and retool for life in the digital new normal According to the Outlook, the challenge now for E&M companies in a world where digital is established as business as usual and in those markets where the infrastructure is suitably developed to support digital distribution and consumption is to focus on planning out and executing their digital strategies. Uncertainty in past years triggered by digital migration is giving way to a sharper focus on identifying, choosing and executing the business models, organisational structures and skill sets to harness new consumer behaviours and deliver rising future value. A finger on the consumer s pulse E&M companies need more than ever to understand consumer behaviours and motivations in order to engage with and immerse consumers in their connected, multi-screen environment. Data analytics tools are required to mine the mass of customer data, however the development of such tools may be triggering consumer fears over risks to their privacy. PwC believes that avoiding this will require a shift of industry mindset from customer ownership, towards facilitating a position where the customer is in control. Companies will find that giving consumers more control over how their personal data is used may deliver higher benefits back to consumers, encouraging them to volunteer even more information, as well as providing better value for advertisers and higher rewards for media owners. Businesses need to aim for a win-win model in which the medium, the advertiser and the consumer all collaborate and benefit. Ultimately, the only person who owns the customer and the customer s data is the customer him or herself. PwC newsletter - July

40 New roles emerge across the E&M value chain E&M companies need to identify the role or roles they will occupy as new structures emerge across the digital value chain, and work collaboratively with other providers with complementary capabilities. According to the Outlook, these roles could include: -- acting as the online destination or physical auditorium that hosts the customer experience (the venue ) -- aggregating and filtering consumers content requirements (the community curator ) -- providing exclusive content (the content monopoliser ) -- being the device developer -- acting as the consumer s trusted content companion across devices (the digital services champion ) -- being the third-party specialist supporting experimentation, innovation and execution (the ideas generator ) For creative and media agencies, the rise of unpaid or earned media reflects an innovative new fusion of advertising, content and analytics, and presents an opportunity for sweeping change in their roles and business models. Advancing socialization is feeding into the widelyaccepted concept among agencies and advertisers of bought, owned and earned advertising. A fourth category is emerging -- managed advertising, (the orchestrated use of social media, such as engagement via bloggers). Everything that agencies do for their clients now has an embedded digital component and agencies are directing clients attention toward output measures such as earned/ unpaid media reach, and purchasing intentions. The benefits of reorganising around digital To date, many E&M businesses have developed digital as an adjacent operating group, with separate infrastructure, solutions and staff. But in the new normal, PwC believes that companies need to move away from this siloed approach, instead embedding and integrating their digital operations into the main enterprise, and driving improvements in three key areas: profitability, by reducing operational costs through common platforms and integrated business processes; scalability, gaining greater agility to grow and flex the business; and innovation, through integration, automation and talent. To realise these benefits, companies will have to tackle challenges around rights, royalties and piracy areas where many E&M companies are often burdened by rigid, complex, bespoke legacy systems There are additional issues in leading and marshalling the talent and culture of innovation, needed to make digital implementation a reality, particularly in meeting the distinctive employment needs and expectations of the Millennial generation. The end of the digital beginning arrives In the face of sweeping change and uncertainty, the E&M industry has spent the past few years seeking effective business and operating models for the new world, through a cycle of constant experimentation, ongoing innovation and targeted analysis of the results. This will continue. But with digital now at the core of business-as- usual, PwC believes that experimentation and execution are no longer sequential but will proceed in parallel, enabling E&M companies to press ahead into the new normal with confidence. There are therefore opportunities for agencies to act as digital marketing and brand consultants, guiding their clients with insights into opportunities around the aggregation of data, socialization and content particularly as the historical distinction between traditional and digital disappears. 38 PwC Cyprus

41 Executives don t value their pay plans PwC and LSE study Many aspects of current incentive plans don t motivate the executives they are aimed at Increased complexity and deferral puts upward pressure on pay levels Most executives are risk averse and would prefer lower, less volatile pay over a complicated, potentially higher reward Perceived fairness of pay relative to peers is more important to executives than what they are paid in absolute terms PwC newsletter - July

42 Incentives have become so complex and volatile that they no longer motivate the executives they are aimed at. This is according to new PwC research in conjunction with the London School of Economics and Political Science, which found that many features of current pay packages mean that the value executives place on them is materially lower than the cost to companies of providing them. In many cases executives would be happier being paid a smaller salary in a less complex and less volatile form. The Psychology of Incentives study of over 1,100 participants reveals that executives are risk-averse, don t like complexity and discount deferred pay. According to the research, deferred bonuses hold little incentive, with the majority of executives valuing a 100 of bonus in a typical deferral plan at only half its value ( 50). This discount is massively in excess of economic discount rates and the perceived value drops to as low as 33 for younger employees (those under the age of 39). Discounts also vary significantly in different regions of the world, showing that one-size fits all pay packages may be ineffective. Tom Gosling, head of PwC s reward practice said: These findings place a major question mark over the effectiveness of deferred bonuses, which have been championed by shareholders, regulators and corporate governance bodies as a powerful way of influencing behaviour while at the same time encouraging prudent risk-taking. It is difficult to see how a form of pay that has such low perceived value can have a significant influence on behaviour. A very real consequence is that as deferral increases, we would expect there to be pressure to increase pay levels. Complex and uncertain incentives are also revealed as a massive turn-off for most people. The research reveals that two thirds more respondents (51% versus 27%) favoured a cash plan based on profit targets that they understand over a more ambiguous share plan based on their share price relative to other companies. The more complicated the reward, the more likely participants were to choose the smaller but more certain reward. Tom Gosling, head of PwC s reward practice, said: UK executive pay is based on the motivational theory that loading executives up with large amounts of incentive pay with complex performance conditions means that they ll perform better for shareholders. Unfortunately this isn t supported by our study, which shows that complex pay plans are a motivation killer. The more complex the pay, the lower the value in executives eyes. We re paying company managers as though they are risk-seeking entrepreneurs. Our research shows that corporate executives are generally risk averse, and don t value long-term incentive plans and deferred bonuses. We need to simplify pay significantly. We ve tried to put too much of the package into complex incentives that executives don t value, and this is leading to volatility of pay-outs and unintended consequences. If we had simpler, less volatile pay plans then most executives would be happy to be paid less. The research also highlights that executives are very concerned about the perceived fairness of pay. For the majority (51%) of respondents, getting paid more than their peers was more important than getting paid more in absolute terms (27%). In many countries there is a drive for greater disclosure of pay on the basis that this will lead companies to exercise restraint. But PwC s research suggests the opposite, that disclosure will simply provide more opportunities for cross-comparisons and consequent pay ratcheting. Tom Gosling, head of PwC s reward practice, said: Executives are really focussed on the fairness of pay outcomes. Complex and volatile plans lead to windfalls that executives don t thank companies for, and periods of unfair underpayment that are highly demotivating. This creates a lose-lose situation for executives and shareholders. Simpler, more stable plans, with a greater role for remuneration committee discretion, are likely to be more effective at motivating executives and will also cost companies less. 40 PwC Cyprus

43 Recent publications PwC Global Communications Review Telecoms in Africa: innovating and inspiring Delivering results through talent The HR challenge in a volatile world Executing a successful listing Markets for Oil & Gas Investing in transportation Doing more with less Issues and solutions for the retail and consumer goods industries Making executive pay work The psychology of incentives Making sense of a complex world Broadcast television: Acquired programming rights Millennials at work Reshaping the workplace in financial services On the road again? Global Mining 2011 Deals Review & 2012 Outlook March Responsible investment: creating value from environmental, social and governance issues Uncovering covered bonds PwC Cyprus For acquiring a copy of publications prepared by PwC Cyprus, contact the receptions of any office in Cyprus. Acrobat (PDF) files of our publications can be found on our website Leaflets Private Funds in Cyprus Cyprus International Trusts Real estate advisory services Small and Medium Enterprises Tax and Legal Services in Cyprus Cyprus Investment Firms Cyprus the preferred location PwC newsletter - July

44 PwC profile We are striving to offer our clients the value they are looking for, value that is based on the knowledge that our teams draw from experts in 158 countries and based on experience adapted to local needs. PwC Cyprus focuses on two main areas: Assurance & Advisory Services and Tax & Legal Services. We work closely with our clients. We ask questions. We listen. We learn what they want to do, where they want to go. From all our international knowledge we share with them the piece that is more suitable for them and thus we support them on how to achieve their goals. In the operation of the world s capital markets we play an important role and as business advisors we help our clients solve complex business problems. We aim to improve their ability to manage risk and improve performance. At the same time we take pride in our quality services which help to improve transparency, trust and consistency of business processes. Our position is strengthened with our almost professionals and our offices throughout Cyprus. 42 PwC Cyprus

45 Assurance & Advisory Services Our Financial Assurance services comprise of statutory and regulatory audit services, which include evaluation of information systems, advisory services for capital market transactions, accounting and regulatory issues for all types of businesses through specialist industry divisions: Financial Services (FS), Consumer and Industrial Products and Services (CIPS) and Technology, Information, Communications, Entertainment and Media (TICE). Our Risk Assurance Consulting (RAC) offers expertise on internal audit services, internal controls optimisation, corporate governance and reporting, as well as assurance and advisory services related to security and controls of information technology systems including Enterprise Resource Planning (ERP) systems (e.g. SAP, Oracle, Navision), Project Implementation Assurance (PIA), Computer Assisted Audit Techniques (CAATs), Spreadsheet Integrity and IT Risk Diagnostic and Benchmarking. A particular focus of the team is in supporting the financial services industry on matters related to regulatory compliance, licensing and risk management. Our Performance Improvement Consulting (PIC) is offering specialist advisory services on strategy and operational effectiveness, process improvement, cost reduction, people and change and sustainability issues. Our Deals & Corporate Finance (DCF) provides consulting on M&A s, valuations, feasibility studies, transactions support and crisis Management. Tax and Legal Services Our PwC network s tax and legal services include Global Compliance Services, Direct and Indirect Tax Services, Services to Small and Medium Enterprises and Legal Services. Global Compliance Services Comprising the whole spectrum of company administration and corporate statutory compliance services, bookkeeping, accounting and payroll services as well as specialised services such as private client services, advice on establishment and administration of local and international business companies, collective investment schemes, UCITS, investment firms and trusts. Direct tax services Corporate: Advisory Services for tax planning, international tax structuring, mergers and buyouts and other business issues, tax returns administration, agreement with Tax Authorities and obtaining tax rulings. Personal: Tax planning, completion submission and agreement of tax returns, tax services to expatriates, pensioners and other non-cypriot individuals. Indirect Tax Services VAT: Advisory services for VAT, VAT recovery and VAT minimisation and tax compliance (administration of VAT returns, communication with VAT authorities, agreement of disputed assessments, etc). Services to Small and Medium Enterprises (SME) The Services to Small and Medium Enterprises are addressed to individuals, small and medium - sized enterprises with local activity and cover the whole spectrum of accounting, tax, VAT, family business and financial structuring and statutory compliance services. Legal Services The legal firm, full member of the PwC international network, offers legal services that cover the whole spectrum of corporate and business law, including advising and representing clients in M&A transactions, re-organizations, European Union law and Competition law, setting up and regulating private companies, setting up joint ventures and other forms of businesses and carrying out legal due diligence. PwC newsletter - July