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The Cyprus Economy - Σύνδεσμος Εγκεκριμένων Λογιστών Κύπρου
No92SEPTEMBER2008 www.icpac.org.cy GOVERNMENTS BAIL OUT FINANCIAL INSTITUTIONS The Journal of the Institute of Certified Public Accountants of Cyprus ¶EPIEXOMENA NÔ. 92 6-10-2008 09.23 ™ÂÏ›‰· 1 September 2008 - No. 92 ISSN 1450-2380 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 24935 1355 Nicosia - Cyprus Tel. 22870030 Telefax 22766360 E-mail: [email protected] URL:http/www.icpac.org.cy 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: Vice President: Secretary: Treasurer: Panikos Tsiailis, FCCA Panicos Charalambous, FCCA Theodoros Parperis, BSc (Econ), ACA * Kyriakos Iordanou, FCCA, MBA, ACIM, CIA * Denotes member not in practice Members Michael Antoniades, BA(Hons), ACA Christis Christoforou, BA(Econ.), FCA, MBIM Demetris Demetriou, FCCA Ninos Hadjirousos, FCA * Demetris Halios, BSc (Acc), CPA * Christodoulos Papas, BA (Hons), MBA, FCCA * Marios Skandalis, FCCA, FIFC, CFC, CFE Nicos Syrimis, FCA Contents Institute News ............................................................................................................................................................ 2 Professional Briefing .................................................. ............................................................................................... 8 ™˘Ó¤ÓÙ¢ÍË Ì ÙÔÓ ¶ÚÔ¤‰ÚÔ ÙÔ˘ ™E§K Î. ¶·Ó›ÎÔ N TÛÈ·˚Ï‹......................................... ......................................... 15 Are Cyprus group loss relief provisions compatible with European Community Law?................................................ 20 The Cyprus Economy................ ................................................................................................................................. 25 The second downturn in share prices......................................................................................................................... 33 Main EU funding programmes for business................................................................................................................ 34 Chartered Accountants Benevolent Association......................................................................................................... 41 IFRIC 15 Agreements for the Construction of Real Estate......................................................................................... 43 Eurozone: Between Recession and Slowdown .......................................................................................................... 48 Improvements to International Financial Reporting Standards 2008-Part 2 ............................................................... 51 Investment Banks would be facing more strict regulations ......................................................................................... 55 Opportunities at Protaras + Paphos ........................................................................................................................... 56 Amendments to International Accounting standard 40 Investment Property..................................................................... 57 The Management of the National Economy ............................................................................................................... 61 The Excel Wizard................ ....................................................................................................................................... 62 Excellence in presentations! Advance presentation skills - part 1 .............................................................................. 66 No Applications for Greek and Turkish Cypriot Joint Ventures................................................................................... 71 Economic Bulletin ....................................................................................................................................................... 73 The new thinking on key performance indicators........................................................................................................ 75 Institute News Institute News COUNCIL’S ACTIVITIES During the 3rd Quarter of 2008 During the third quarter of 2008 the Council of the Institute met four times and considered matters of interest to the ICPAC and to the profession at large. Other activities included the following: On 7 July 2008 Ms Lina Lemesiou, Senior Officer of the ICPAC, attended the meeting of IFRS for SMEs enterprises at the Offices of the European Federation of Accountants in Brussels. On 8 July 2008 Mr Christos Kyriakides, Senior Officer of the ICPAC attended a meeting at the Planning Bureau regarding the third progress report about the Lisbon Strategy. Of 8 July 2008 the President of the Council, the Vice President, the General Manager as well as Messrs Nicos Syrimis and Demetris Demetriou, members of the Council, met with officials of the Chartered Accountants Benevolent Association who were on a visit to Cyprus. On 10 July 2008 the President of the Institute, Mr. Panikos Tsialis, the Vice President Mr Panicos ICPAC COMMITTEES On 26 August 2008 the Council decided on the appointment of the members of Committees as follows: European Union Affairs Committee Anastasiou Stelios - Chairman Avraam Michalis Antoniades Panikos Chrsitofi Niki Christofidou Maria Georgoullas Constantinos Hadjikkou Andri Kaffa Maria 2 Charalmbous and the General Manager Mr. Theodoros Philippou had a meeting with the Minister of Finance, Mr. Charilaos Stavrakis, regarding matters relating to double taxation agreements and improvements of the taxation system so as to render our system more competitive. On 31 July 2008 the President, Council Members and Institute officials met with the Director of the Department Inland Revenue, Mr George Poufos, and discussed matters of mutual interest. On 26 August 2008 the Council of ICPAC met and appointed the 16 committees of ICPAC. The chairmen and members of these committees are presented below. On 3 - 5 September 2008 Ms Lina Lemesiou, Senior Officer of the Institute, attended in Copenhagen: a) The FEE SMP / SME Congress, and b) The FEE Development and Coordination Meeting. On 25 September 2008 Mr Ninos Hadjirousos, member of the Council, attended a council meeting of the Mediterranean Federation of Accountants in Rome. Louka Michael Neophytou George Nicolaou Varnavas Pieri Marina Polyviou Savvas Tavelis Christos Trimintis Aristides International Business, Investments Committee Shipping and Foreign Klitou A Marios - Chairman Apostolou Apostolos Afxentiou Costas Christoforou Costas ACCOUNTANCY CYPRUS ñ VOLUME 92 ñ SEPTEMBER 2008 Institute News Chrysanthou Athos Ioannides Lefkios Kasapis Antonis Kourris George Mavrokordatos Costas Michael Christos Odysseos Christos Paraskeva Marios Phidia Phidias Treppides Kikis Yiakoumi Petros Epaminondou Neoklis Theodoulou Nikos Thoma Lenas Kamberis Alexis-Theodoros Koufari Natali Pantzaris Stavros Papadopoulos Stephanos Papanicolaou Katerina Papaprodromou Demetris Paschalis Socratis Shiakallis Demetris Public Relations Committee VAT Committee Prodromitis Panos - Chairman Antoniou Maria Fokides Marios Georgiou Constantina Hadjizacharias Philippos Thrasyvoulou Panayiotis Kastelianou Monica Katsikides Christakis Kirkos Christos Kleriotis Iordanis Loizou Aggelos Polyviou Savvas Prodromitis Stelios Solomonide Angela Yiakoumi Georgiou Aggela Charalambous Charalambos - Chairman Christodoulou Christos Demetriades Ioannis Economou Christakis Halios Michalis Ioannou Christakis Karavis George Kyriakidou Teloni Florentia Mafkas Therapon Papamarkides Christakis Pelekanos Chrysilios Rossidou Soteroulla Stavrinides Nicolas Tsielepis Alexis Philippou Philippos Education Committee Auditing Standards Committee Pastellopoulou Maria - Chairman Avraam Andreas Agapiou Protopapa Chryso Christodoulou Mary Demosthenous Maro Kolokotronis Michael Kouvarou Polyxeni Kyrou Panayiota Constantinou Costas Markides Eleftherios Michael Olga Michael Polina Nakouzi Petros Papadopoulos Michalis Socratous Socratis Papadopoulos Panos - Chairman Christodoulou Themis Georgiou George Kailos Alkis Karaolis Kyriakos Louloupis Christodoulos Meraklis Christos Nicolaou Maria Onisiforou Gavriel Philippou Andreas Photiades Simos Poyiadji Souzana Pouros Georgios Soteriou Yiannis Tsisios Christos Stock Exchange Committee Accounting Standards Committee Taxitaris Demetris - Chairman Antoniou Katerina Constantinides Michalis Demetriades Marios Papacosta Maria - Chairwoman Agathaggelou Marios Ioannou Yiannos Kasioulis Marios ACCOUNTANCY CYPRUS ñ VOLUME 92 ñ SEPTEMBER 2008 3 Institute News Kazamias Giorgios Lambrou Paschali Maria Logides Antonis Menelaou Rebecca Nicolaides Giorgos Petsas Gregoris Protopapa Theocharous Koulla Psalti Irene Schizas Constantinos Stavrouki Theocharous Evdokia Theodosiou Apostolena Gregoriou Michalis Hadjilambrou Nicos Ioannou Yiannis Kassianos Lefteris Kittos Georgios Lambrianides Michalis Marinou Demetrakis Nicolaides Marios Skapoularos Giorgos Stavrinou Stavrinos Spanoudes Nicos Vagianou Panayiota Corporate Governance and Internal Audit Committee Limassol - Paphos Coordinating Committee Christos Skapoulis - Chairman Antoniou Ioanna Argyrou Andreas Christoforou Anna Demetriou Theodoros Genagritis Marios Kasapis Iosif Nicolaides Alexis Papamichael Panikos Pavlou Nicolas Pegasiou Chrysis Shipilli Athina Xenides Marios Zarka Marilena Zenieris Antonis Efstratiou Charalambos - Chairman Athanasiou Steliou Andreas Christodoulou Christos Christodoulou Ifigenia Demetriou Eleni Gerasimou Stavrou Thoula Kasses Elias Neophytou Neophytos Nicolaidou Ioannou Panayiotou Neoklis Kyriacos Papaperikleous Demetris Papapetrou Panayiotis Pozatou Tasoula Saparilla Myria Sazeides Demetris Information Technology and Business Consulting Committee Financial Services Committee Shiakallis Nicolas - Chairman Costea Ersi Demetriou Melina Hadjipantela Michalis Ioannou Nicos London Nicos Lazarou Marios Leonidou Yiannis Panaou Christos Panayides Stratos Panayiotou Michalis Ppasias Marios Rousos Nicolas Theodotou Petros Vrahimis Marios Anastasiou Marios - Chairman Agathocleous Alexis Akkelides Christos Arsalides Petros Ellina Demetra Hadjichristodoulou Christos Hadjiioannou Popi Iordanou Yiannis Kenne Chrystalla Kosma Marios Livadiotou Eliza Marinou Marinos Peleties Panayiotis Philippidou Anna Skaliotis Loukis Larnaca - Famagusta Coordinating Committee Ethics & Institutions Committee Michael Tasos - Chairman Charalambous Pambos Costa Christodoulos Polyviou Polyvios - Chairman Asimenou Chrystalla Aspris Andreas 4 ACCOUNTANCY CYPRUS ñ VOLUME 92 ñ SEPTEMBER 2008 Institute News Constantinou Christophoros Constantinou Maroula Efstathiou Efstathios Ieronymides Leonidas Kapardi Maria Karlettides Andys Panayidou Stella Savvides Sergios Seraphim Costas Shiammoutis Antonis Stavrou Angelos Philippou Eleftherios Taxation Committee Markou Pieris - Chairman Charalambides Nicos Chimarides Nicos Fantarou Anna Gregoriades Aggelos Gregoriou Andreas Kaouris Panikos Karaolis Andreas Kapsalis Constantinos Liassides Petros Mallis Pavlos Markides George Neophytou Neophytos Pifanis Andreas Taliotis Antonis Public Sector Committee Georgiou Rea - Chairwoman Agastiniotis Costas Antoniades Andreas Charalambous Chloe Hadjiliasis Evanthis Ioannides Stelios Kaimakliotou Stella Markitsi Maria Michael Panayiotis Modestou Antigone Papaiacovou Iacovos Photiou Eleni Savva Kyriakos Siepilli Phiniki Tsaggaris Michalis ACCOUNTANCY CYPRUS ñ VOLUME 92 ñ SEPTEMBER 2008 NEW MEMBERS OF THE INSTITUTE During the period July - September 2008 the following persons have been accepted as new members of the Institute: 2629 2630 2631 2632 2633 2634 2635 2636 2637 2638 2639 2640 2641 2642 2643 2644 2645 2646 2647 2648 2649 2650 2651 2652 2653 2654 2655 2656 2657 2658 2659 2660 2661 2662 2663 2664 2665 2666 2667 2668 2669 2670 2671 2672 2673 2674 2675 2676 George Matsoukaro Aggelo Theodorou Evangelo Evangelou Photi Timotheou Marina Nicolaou Philio Chrysochou Kyriako Vlacho Chari Neoptolemou Antia Paralimnitou Costas Neophytou Xenio Tzioni Xenia Stavrou Maria Papastavrou Athanasios Stamoulis Avgousta Papadopoulou Michalis Papadouris Katerina Georgiou Natali Georgiou Nicholas Pavlou Theodoros Demetriou Antonis Zenieris Adamos Savvides Demetra Gypsiotou Irena Theodoulou Klea Lamnisou Neoclis Neophytou Christina Christou Mario Kalleno Andreas Theodorou Alexis Demetriou Demetra Papanicolaou Stavroulla Symeonidou Ioulia Papalouka Antonis Ierides Elena Panayiotou Yiannakis Kakkou Charis Eliades Panayiotis Vasiliades Andreas Lytras Nicolas Rousos Maria Michael Andreas Liasides Georgina Hanna Stelios Pittakas Charis Savvides Marios Roussis Stephani Kyriakidou Savvas Machairas FCCA ACCA ACCA ACCA ACCA ACCA ACA ACA ACA ACA ACA FCCA ACCA ACCA ACCA ACCA ACCA ACA ACA ACA ACA ACA ACCA ACCA ACCA ACCA ACCA ACCA Article 155(1)(b) ACCA ACCA ACCA ACCA ACCA ACA ACA ACA ACA ACA ACA ACA ACA ACA ACA ACA ACA ACA ACCA 7 Professional Briefing IFAC’S IPSASB PROPOSES MODIFICATIONS TO BORROWING COST ACCOUNTING (New York /September 3, 2008) - The International Public Sector Accounting Standards Board (IPSASB), an independent standard-setting board within the International Federation of Accountants (IFAC), is seeking comments on its proposed changes to IPSAS 5, Borrowing Costs, set forth in exposure draft (ED) 35, Borrowing Costs (Revised 200X). “Public sector entities borrow for a variety of reasons, most of which are unrelated to asset acquisition,” said Mike Hathorn, Chair of the IPSASB. “The IPSASB concluded that requiring public sector entities to capitalize borrowing costs as part of the cost of qualifying assets would not satisfy the qualitative characteristics of general purpose financial reporting, particularly related to the reliability of information reported. The immediate expensing of these borrowing costs instead will enhance the accountability of public sector entities.” Most notably, ED 35 proposes amendments to reflect that in many circumstances the capitalization of borrowing costs as part of the cost of an asset is not appropriate for public sector entities. This view, a departure from both IPSAS 5 and the International Accounting Standards Board’s International Accounting Standard 23, Borrowing Costs, is an evolution from public sector consideration of the issue. The ED proposes that entities recognize borrowing-related expenses, such as interest or loan origination fees, during the period in which they are incurred. The ED also proposes, however, that where entities borrow funds specifically to acquire, construct or produce a qualifying asset, the entity has the option to capitalize those costs as part of the cost of that asset. ED 35 may be viewed and downloaded, free-of-charge, by going to http://www.ifac.org/EDs. The IPSASB values the public’s opinion and welcomes comments on its decision to require entities to expense borrowing costs, except in the circumstances outlined. STATUTORY AUDIT: COMMISSION DECISION CUTS RED TAPE FOR AUDIT FIRMS FROM THIRD COUNTRIES The European Commission adopted today a decision granting a transitional period for the registration requirements for audit firms from 30 non-EU countries1. The decision clarifies how the competent authorities in Member States should deal with third country audit firms under the Statutory Audit Directive2. In the context of its work on monitoring the implementation of the Statutory Audit Directive, the Commission published a scoreboard 8 on where the 27 Member States stand with their implementation of the Statutory Audit Directive, which had to be transposed into national law on June 29, 2008. Internal Market and Services Commissioner Charlie McCreevy said: “The implementation and enforcement Statutory Audit Directive is particularly important at a time when financial markets face a difficult period and need to rely on robust audits of financial statements. I feel encouraged that the public oversight bodies in Europe are working together so that third country audit firms have a clear idea what it is expected from them when they audit companies listed on European capital markets. “”. The Commission has adopted a Decision concerning a transitional period for audit activities of certain non-EU auditors and audit entities. The decision ensures the proper implementation of Article 46 of the Statutory Audit Directive, which allows Member States to modify or not to apply the registration requirements for third country auditors set out in Article 45 of the Directive only if such auditors fulfil certain conditions. The Decision allows 30 third country audit firms to continue their audit activities regarding third country companies listed on European markets by granting the audit firms concerned a transitional period in respect to registration requirements until 1 July 2010. However, transition will only be granted if third country audit firms comply with the minimum information requirements necessary for investors in Europe. Audit firms from third countries that do not fall under the transitional regime will be subject to full registration and oversight by the competent EU Member State. On the practical application of the regime for all third countries, the audit regulators in the European Group of Auditors’ Oversight Bodies worked out arrangements for a common approach on common application forms for the registration of third country auditors and audit firms. In another document, the Commission offers a first overview on the extent of implementation of the Statutory Audit Directive in all 27 Member States. The Commission drew up a scoreboard based on the information provided by Member States. The scoreboard shows that twelve Member States completed the entire implementation of the Directive to date. Most of the other Member States have transposed major parts of the Directive but are still missing some important provisions. This scoreboard will be regularly updated in order to inform the European Parliament and the markets on where Member States stand on the implementation. 1 The countries concerned are Argentina, Australia, the Bahamas, the Bermudas, Brazil, Canada, the Cayman Islands, Chile, China, Croatia, Guernsey, Jersey, the ACCOUNTANCY CYPRUS ñ VOLUME 92 ñ SEPTEMBER 2008 Professional Briefing Isle of Man, Hong Kong, India, Indonesia, Israel, Japan, Kazakhstan, Malaysia, Mauritius, Mexico, Morocco, New Zealand, Pakistan, Russia, Singapore, South Africa, South Korea, Switzerland, Taiwan, Thailand, Turkey, Ukraine, the United Arab Emirates and the United States of America. 2 Directive 2006/43/EC. For the complete text please visit: http://europa.eu.int/eurlex/lex/JOHtml.do?uri=OJ:L:2006:157:SOM:EN:HTML IFRIC ISSUES GUIDANCE ON HEDGES OF A NET INVESTMENT IN A FOREIGN OPERATION The International Financial Reporting Interpretations Committee (IFRIC) has issued an Interpretation, IFRIC 16 Hedges of a Net Investment in a Foreign Operation. The IFRIC was asked for guidance on accounting for the hedge of a net investment in a foreign operation in an entity’s consolidated financial statements. Practice has diverged as a result of differing views on which risks are eligible for hedge accounting according to International Financial Reporting Standards (IFRSs). Constituents asked for clarification of three main issues. First, whether risk arises from the foreign currency exposure to the functional currencies of the foreign operation and the parent entity, or from the foreign currency exposure to the functional currency of the foreign operation and the presentation currency of the parent entity’s consolidated financial statements. Secondly, which entity within a group can hold a hedging instrument in a hedge of a net investment in a foreign operation and in particular whether the parent entity holding the net investment in a foreign operation must also hold the hedging instrument. Thirdly, how an entity should determine the amounts to be reclassified from equity to profit or loss for both the hedging instrument and the hedged item when the entity disposes of the investment. IFRIC 16 clarifies these issues, stating that: ñ the presentation currency does not create an exposure to which an entity may apply hedge accounting. Consequently, a parent entity may designate as a hedged risk only the foreign exchange differences arising from a difference between its own functional currency and that of its foreign operation. ñ the hedging instrument(s) may be held by any entity or entities within the group. ñ while IAS 39 Financial Instruments: Recognition and Measurement must be applied to determine the amount that needs to be reclassified to profit or loss from the foreign currency translation reserve in respect of the hedging instrument, IAS 21 The Effects of Changes in ACCOUNTANCY CYPRUS ñ VOLUME 92 ñ SEPTEMBER 2008 Foreign Exchange Rates must be applied in respect of the hedged item. IFRIC 16 applies to an entity that hedges the foreign currency risk arising from its net investments in foreign operations and wishes to qualify for hedge accounting in accordance with IAS 39. It does not apply to other types of hedge accounting. The main expected change in practice is to eliminate the possibility of an entity applying hedge accounting for a hedge of the foreign exchange differences between the functional currency of a foreign operation and the presentation currency of the parent’s consolidated financial statements. The IFRIC recognises the difficulty that entities would face in preparing adequate documentation from the inception of the hedge relationship and therefore requires prospective application of the guidance. The Interpretation is effective for annual periods beginning on or after 1 October 2008. Introducing IFRIC 16, Robert Garnett, IFRIC Chairman and IASB member, said: IAS 39 and IAS 21 provide limited guidance on the application of their requirements for hedges of net investments in foreign operations. With this Interpretation the IFRIC has provided practical guidance to help entities apply those standards consistently. IFRIC 16 Hedges of a Net Investment in a Foreign Operation is available for eIFRS subscribers from today. IASB RESPONSE TO THE CREDIT CRISIS In April 2008 the Financial Stability Forum published a report to the G7 group of Finance Ministers and Central Bank Governors making recommendations for Enhancing Market and Institutional Resilience. The report was the result of collaboration by the main international bodies and national authorities in key financial centres, including the IASB. It set out 67 recommendations, which were endorsed by the G7 on 11 April. Of the recommendations, three relate to enhancements to financial reporting. Those recommendations form the core of the IASB’s response to the credit crisis. RECOMMENDATIONS 1. Off balance sheet: The IASB should improve the accounting and disclosure standards for off balance sheet 9 Professional Briefing vehicles on an accelerated basis and work with other standard-setters toward international convergence. Response: The IASB already had two projects under way directly related to off balance sheet vehicles. The Consolidation project identifies when an entity should be brought on to another entity’s balance sheet, whilst the Derecognition project examines when assets should be removed from the balance sheet. Both of these projects are described by the Memorandum of Understanding which sets out a roadmap for convergence between IFRSs and US GAAP. The IASB has prioritised both projects in order to accelerate their completion. It is expected that an exposure draft of the Consolidation standard will be published for public comment during the second half of 2008, whilst staff will be presenting an update on the Derecognition project during the IASB’s meeting in October. 2. Fair value in illiquid markets: The IASB should enhance its guidance on valuing financial instruments when markets are no longer active. To this end, it will set up an expert advisory panel in 2008. Response: During its meeting in May 2008 and as part of its Fair Value Measurement project the IASB announced plans to form an expert advisory panel to identify valuation and disclosure issues encountered in practice in the current market environment. The outcome of the meetings will assist the IASB in deciding whether additional guidance might be necessary. The panel met for the first time on 13 June. Three more panel meetings are to take place in July. The objective of the first two meetings, with a subset of panel members, is to discuss the measurement issues raised in the 13 June meeting. The full panel will discuss these issues at its next meeting on 31 July. The staff will summarise the discussions on the IASB Website. A similar process is planned for the disclosure issues raised. Although the panel meetings are held in private, a summary of the discussions will be presented to the IASB in a public meeting. A summary of the issues addressed in the first panel meeting is available on the Fair Value Measurement project page. You can also listen to the recording of the IASB’s meeting in June when the staff presented the summary. 3. Disclosure: The IASB will strengthen its standards to achieve better disclosures about valuations, methodologies and the uncertainty associated with valuations. 10 Response: The IASB will review IFRS 7 Financial Instruments: Disclosures as part of its Consolidation project to assess the standard’s effectiveness in ensuring that entities disclose information that reflects their exposure to risk and any potential losses arising from financial instruments with the off balance sheet entities with which they are involved. Steps taken to date by staff include consultation with preparers and users of IFRS compliant financial statements, an analysis of good disclosure practice observed in financial reports and a review of good practice suggestions made by regulatory bodies. IFAC’S INTERNATIONAL ETHICS STANDARDS BOARD ISSUES PROPOSALS TO CLARIFY CODE OF ETHICS FOR ACCOUNTANTS (New York City/July 15, 2008) - To further promote and facilitate accountants’ adherence to high ethical and independence standards, the International Ethics Standards Board for Accountants (IESBA), an independent standardsetting board within the International Federation of Accountants (IFAC), has proposed changes to the IFAC Code of Ethics for Professional Accountants. The changes, outlined in an exposure draft with the same title, focus on enhancing the clarity of the Code. The proposed changes make clear the specific requirements that are contained in the Code and refine the application of the Code’s conceptual framework. IFRIC ISSUES CLARIFICATION ON AGREEMENTS FOR THE CONSTRUCTION OF REAL ESTATE 3 JULY 2008 The International Financial Reporting Interpretations Committee (IFRIC)_ issued today an Interpretation, IFRIC 15 Agreements for the Construction of Real Estate. The Interpretation will standardise accounting practice across jurisdictions for the recognition of revenue among real estate developers for sales of units, such as apartments or houses, ‘off plan’, ie before construction is complete. The Interpretation provides guidance on how to determine whether an agreement for the construction of real estate is within the scope of IAS 11 Construction Contracts or IAS 18 Revenue and when revenue from the construction should be recognised. The main expected change in practice is a shift for some entities from recognising revenue using the percentage of completion method (ie as construction progresses, by reference to the stage of completion of the development) to recognising revenue at a single time (ie at completion upon or after delivery). ACCOUNTANCY CYPRUS ñ VOLUME 92 ñ SEPTEMBER 2008 Professional Briefing Agreements that will be affected will be mainly thosecurrently accounted for in accordance with IAS 11 that do not meet the definition of a construction contract as interpreted by the IFRIC and do not transfer to the buyer control and the significant risks and rewards of ownership of the work in progress in its current state as construction progresses. construction of real estate directly or through subcontractors. The interpretation is effective for annual periods beginning on or after 1 January 2009 and is to be applied retrospectively. The IFRIC released draft Interpretation D21 Real Estate Sales for public comment in July 2007 and received 51 comment letters in response. In its redeliberations, the IFRIC responded to the concerns expressed by respondents by improving the articulation between IAS 11 and IAS 18 and by providing additional guidance on how to account for revenue in IAS 18. In addition, in its ratification process, the IASB specifically considered whether the IFRIC’s interpretation was in line with the principles underpinning IAS 18 and agreed with the IFRIC’s consensus. The real estate industry is an important sector across countries and, especially in times of volatile markets, transparency and comparability of the accounting are important. However, at present there is widespread divergence in practice when accounting for the recognition of revenue for ‘off plan’ contracts. IFRIC 15 clarifies how the existing principles in IAS 11 and IAS 18 apply for the revenue recognition in the real estate sector and by doing so will ensure consistent accounting. In some cases this means that companies will have to change their accounting. IFRIC 15 applies to the accounting for revenue and associated expenses by entities that undertake the IFRIC 15 Agreements for the Construction of Real Estate is available for eIFRS subscribers from today. ACCOUNTANCY CYPRUS ñ VOLUME 92 ñ SEPTEMBER 2008 Introducing IFRIC 15, Robert Garnett, IFRIC Chairman and IASB member, said: 11 Professional Briefing Note Related to Accounting - Auditing and Relevant Issues By Tassos Anastasiades, Deputy Editor AUDITORS RENEW CALLS FRO LIMIT TO US LIABILITY Us auditors have renewed calls to introduce legal limits to the liability they face and have warned that the risk they currently bear is the “single greatest threat” to the industry’s survival. Leading firms and an industry body, the Centre for Audit Quality, have made the calls in a series of letters to the US Treasury’s Advisory Committee on the Auditing Profession. The committee, which is headed by Arthur Levitt, former chairman of the Securities and Exchange Commission, and Donald Nicolaisen, a former chief accountant at the SEC, was set up last year to look into measures that could help sustain the industry. Audits of the biggest companies are concentrated among PwC, Ernst & Young, KPMG and Deloitte. Regulators are concerned that another collapse like that of Arthur Andersen after the Enron scandal could leave the capital markets in chaos as companies scrambled to find a new auditor among the three survivors. Unlimited liability has traditionally applied to auditors, meaning they can be held responsible for the entire cost of a company’s collapse. This had been considered a means of forcing auditors to be careful with their work, but the industry has warned that the soaring market capitalization of its clients has made the firms’ liability risk uninsurable. SEC LAYS OUT ROADMAP FOR SHIFT TO GLOBAL ACCOUNTING STANDARDS Us companies are set to switch to international accounting rules in a move that will, for the first time, see all the world’s most important listed groups reporting according to the same set of standards. The US Securities and Exchange Commission has proposed a “roadmap” to manage the migration of US companies from its rules to the international ones. The plans are open to comment for 60 days. More than 100 countries use, or are adopting, International Financial Reporting Standards, including all ACCOUNTANCY CYPRUS ñ VOLUME 92 ñ SEPTEMBER 2008 27 European Union members as well as China, Japan, Canada and India. US GAAP, the accounting lingua franca until the sudden rise of IFRS, is the last significant standard to be switched. Under the SEC’s plans, US groups are likely to adopt IFRS in 2014 providing certain conditions are met, a decision that will be taken in 2011. Some companies may be allowed to adopt IFRS sooner. Christopher Cox, SEC chairman, said more groups were reporting under IFRS than US GAAP and the number would rise as other large economies made to the switch. He said US GAAP would be marginalized if the US did nothing, making it harder for international investors to consider US companies. The SEC last year signalled its support for IFRS when it dropped the requirement for foreign groups that use IFRS to produce a reconciliation of their numbers with US GAAP. HOW TO ARRIVE AT FAIR VALUE DURING A CRISIS Mark-to-market accounting has been blamed for being the catalyst, or even the cause, of the recent financial crisis. According to this argument, the extension of mark-tomarket - the valuation of assets at putative market prices to all credit portfolios in trading books made earnings look worse than they were and forced banks to seek dilutive capital injections. Mark-to-market, this argument goes, should be renounced in favour of valuing portfolios at their historical cost. We do not endorse this view in any way and we firmly believe that measuring a bank’s trading portfolio at “fair value” is the only possible means of guaranteeing transparency and discipline. Although we are firm believers in the fair value principle, we are strongly opposed to the way it is applied during a crisis. In these circumstances, market value is no longer fair value, in large part because of the much-reduced volume of transactions. Arbitrageurs - including banks’ 13 Professional Briefing own trading desks and hedge funds - withdraw from the trades that normally deal with the temporary differences that naturally arise between the market price of an instrument and its intrinsic value. Market prices are hence squeezed by a “crisis discount” as investors also avoid all credit assets, regardless of intrinsic quality. By incorporating this “reverse convenience yield” into valuation, accounting takes on a pro-cyclical dimension exaggerating the peaks and troughs of the business cycle which runs contrary to its objective of reliability, neutrality and unbiased presentation of asset values and performance. Banks artificially mark down earnings, putting pressure on capital and forcing them either to raise new capital or to sell off assets. We believe that earnings should be effected only by valuation inputs attributable to the rise in the probability of default, the fall in recovery rate (the proportion of an asset’s value that can be recovered in the event of a default) or the increased default correlation between borrowers (where several borrowers default at the same time). The temporary “crisis discount” should be disclosed but should not affect earnings. revealing widespread evasion. Finance ministers from the Group of Eight nations, who have met in Osaka, called for stronger action against evasion. They said: “In view of the recent developments, we urge all countries that have not yet fully implemented the OECD [Organization for Economic Co-operation and Development] standards of transparency and effective exchange of information in tax matters to do so without further delay”. The US is ratcheting up its anti-evasion efforts after a federal judge was asked to issue a summons requiring Swiss bank UBS to turn over information about US taxpayers who may be using Swiss bank accounts to evade federal income taxes. Three out of seven of the largest industrialized countries have signed information exchange agreements with six offshore centres as part of a long-running OECD drive against secrecy. Tax authorities worldwide are cooperating more frequently against evasion, while several countries have launched tax “amnesties” to persuade evaders to come forward. Under our proposal, as soon as the accounting regulator in the country concerned considers the “crisis discount” abnormally high, banks would be required to discontinue mark-to-market measurements of credit assets in their trading books that no longer represented fair value. NOTE: The above is by Jean Francoil Lepetit, Chairman of France’s Accounting Board, Etienne Boris, partner at PwC, and Didier Marteaur Professor at the European School of Management. The OECD blacklist of uncooperative tax havens has diminished in recent years from its original 35 named jurisdictions to just Liechtenstein, Monaco and Andorra. But concerns have been raised, particularly by France and Germany, over countries such as Panama that have failed to implement pledged reforms. These countries have refused to reform their secrecy laws until similar reforms have been undertaken by OECD countries , particularly Belgium, Austria, Switzerland and Luxembourg. GERMANY REACHES TAX DATA DEAL WITH OFFSHORE CENTRE UK watchdog unveils rights issues curbs on short - sellers The UK’s financial watchdog has moved decisively to shore up companies’ ability to conduct rights issues, clamping down on speculators who have recently taken aim at specifics stocks. Germany has signed its first tax information exchange agreement with an offshore centre, in a sign of the continuing crackdown on secrecy in the wake of the Liechtenstein tax evasion scandal. Its agreement with Jersey, which has already agreed to exchange information with the Netherlands and the US, is a sign that some offshore centres are keen to shed the “tax haven” tag and promote themselves as well-regulated financial centres. Pressure to reform tax havens has mounted after a former Liechtenstein bank employee sold information to Germany 14 The Financial Services Authority introduced tough new rules requiring disclosure for anyone “short-selling” a significant amount of stock in a company conducting a rights issue. Short-sellers aim to profit from selling shares they have borrowed by buying them back more cheaply at a later date. ACCOUNTANCY CYPRUS ñ VOLUME 92 ñ SEPTEMBER 2008 To XÚËÌ·ÙÔÔÈÎÔÓÔÌÈÎfi ∫¤ÓÙÚÔ Ù˘ ∫‡ÚÔ˘ H ·Ó·‚¿ıÌÈÛË Ù˘ K‡ÚÔ˘ ˆ˜ ¢ÈÂıÓ¤˜ XÚËÌ·ÙÔÔÈÎÔÓÔÌÈÎfi ∫¤ÓÙÚÔ ™˘Ó¤ÓÙ¢ÍË Ì ÙÔÓ Î. ¶·Ó›ÎÔ ¡. ∆ÛÈ·˚Ï‹, ¶Úfi‰ÚÔ ÙÔ˘ ™˘Ó‰¤ÛÌÔ˘ ∂ÁÎÂÎÚÈÌ¤ÓˆÓ §ÔÁÈÛÙÒÓ ∫‡ÚÔ˘ TÔ˘ T¿ÛÔ˘ AÓ·ÛÙ·ÛÈ¿‰Ë °È· Ó· ·Ó·Ù˘¯ı› ¯ÚËÌ·ÙÔÔÈÎÔÓÔÌÈο Ë ∫‡ÚÔ˜ ¯ÚÂÈ¿˙ÔÓÙ·È ¤ÚÁ· Î·È fi¯È ÏfiÁÈ· √ ™‡Ó‰ÂÛÌÔ˜ ∂ÁÎÂÎÚÈÌ¤ÓˆÓ §ÔÁÈÛÙÒÓ ∫‡ÚÔ˘ (™∂§∫), ÙÔ ·ÚÌfi‰ÈÔ ÂÔÙÈÎfi ÛÒÌ· ÙÔ˘ ÏÔÁÈÛÙÈÎÔ‡ ·ÁÁ¤ÏÌ·ÙÔ˜ ÛÙË ¯ÒÚ· Ì·˜, ··ÚÈıÌ› Û‹ÌÂÚ· 2,500 ̤ÏË Î·È ¶·Ó›ÎÔ˜ N. TÛÈ·˚Ï‹ 2,500 ÊÔÈÙËÙ¤˜. ªÂ ÙËÓ Â˘Î·ÈÚ›· Ù˘ ÚfiÛÊ·Ù˘ ÂÙ‹ÛÈ·˜ °ÂÓÈ΋˜ ™˘Ó¤Ï¢Û˘ ÙÔ˘ ™∂§∫, ›¯·Ì ÙËÓ Â˘Î·ÈÚ›· Ó· Û˘Ó·ÓÙËıԇ̠̠ÙÔÓ ¶Úfi‰ÚÔ ÙÔ˘ ™˘Ó‰¤ÛÌÔ˘ Î. ¶·Ó›ÎÔ ¡. ∆ÛÈ·˚Ï‹, Î·È Â›¯·Ì ÙËÓ ÈÔ Î¿Ùˆ Û˘Ó¤ÓÙ¢ÍË. ™ÙË Û˘Ó¤ÓÙ¢ÍË ·˘Ù‹ Ô Î. ∆ÛÈ·˚Ï‹˜ ·Ó·Ê¤ÚÂÙ·È Î˘Ú›ˆ˜ ÛÙ· ÚÔ‚Ï‹Ì·Ù· Ô˘ ·ÓÙÈÌÂÙˆ›˙ÂÈ Ë ∫‡ÚÔ˜ ˆ˜ ΤÓÙÚÔ ÚÔÛÊÔÚ¿˜ ¯ÚËÌ·ÙÔÔÈÎÔÓÔÌÈÎÒÓ ˘ËÚÂÛÈÒÓ ÛÙȘ ‰ÈÂıÓ›˜ ÂȯÂÈÚ‹ÛÂȘ Î·È ˘Ô‚¿ÏÏÂÈ ÂÈÛËÁ‹ÛÂȘ ÁÈ· ÙËÓ ·ÓÙÈÌÂÙÒÈÛ‹ ÙÔ˘˜. ∆· ÚÔ‚Ï‹Ì·Ù· ·˘Ù¿ ÙËÓ ·ÚÂÌÔ‰›˙Ô˘Ó Ó· ÂÂÎÙ·ı› Û ¤Ó· ÈÔ ‰˘Ó·ÌÈÎfi ¯ÚËÌ·ÙÔÔÈÎÔÓÔÌÈÎfi ΤÓÙÚÔ Î·È Ó· ·ÓÙÈÌÂÙˆ›ÛÂÈ ÙÔÓ ¤ÓÙÔÓÔ ·ÓÙ·ÁˆÓÈÛÌfi ·fi ¿ÏÏ· ¯ÚËÌ·ÙÔÔÈÎÔÓÔÌÈο ΤÓÙÚ·. ™ÙË Û˘Ó¤ÓÙ¢͋ ÙÔ˘ Ô Î. ∆ÛÈ·˚Ï‹˜ ·Ó·Ê¤ÚÂÙ·È Â›Û˘ Î·È ÛÙ· ÊÔÚÔÏÔÁÈο ÚÔ‚Ï‹Ì·Ù· Ô˘ ·ÓÙÈÌÂÙˆ›˙ÔÓÙ·È fiÛÔÓ ·ÊÔÚ¿ ÙËÓ Î˘Úȷ΋ ÔÈÎÔÓÔÌ›· Î·È ˘Ô‚¿ÏÏÂÈ Â›Û˘ ÂÈÛËÁ‹ÛÂȘ ÁÈ· ·ÓÙÈÌÂÙÒÈÛ‹ ÙÔ˘˜. ∏ Û˘Ó¤ÓÙ¢ÍË Ì ÙÔÓ Î. ∆ÛÈ·˚Ï‹ ·ÎÔÏÔ˘ı›: ∂Ú. 1: ¶ÔÈ· Ë ÛËÌ·Û›· ÁÈ· ÙËÓ ∫‡ÚÔ ÙˆÓ ¯ÚËÌ·ÙÔÔÈÎÔÓÔÌÈÎÒÓ ˘ËÚÂÛÈÒÓ Ô˘ Ë ∫‡ÚÔ˜ ÚÔÛʤÚÂÈ ÛÙȘ ‰ÈÂıÓ›˜ ÂȯÂÈÚ‹ÛÂȘ; ∞.: ∆Ô fiÛÔ ÛËÌ·ÓÙÈÎfi˜ Â›Ó·È Ô ÙÔ̤·˜ ÙˆÓ ¯ÚËÌ·ÙÔÔÈÎÔÓÔÌÈÎÒÓ ˘ËÚÂÛÈÒÓ ÛÙËÓ ÔÈÎÔÓÔÌ›· Ù˘ ∫‡ÚÔ˘ ·Ô‰ÂÈÎÓ‡ÂÙ·È ·fi ¤Ó· ¯·Ú·ÎÙËÚÈÛÙÈÎfi ·Ú¿‰ÂÈÁÌ·. °È· οı ¢ÚÒ Ô˘ Íԉ‡ÂÈ Ô Í¤ÓÔ˜ ÂÂÓ‰˘Ù‹˜ ÛÙËÓ ∫‡ÚÔ, Ù· 50 ÛÂÓ٠ηٷϋÁÔ˘Ó ¿ÌÂÛ· ‹ ¤ÌÌÂÛ· ÛÙ· ACCOUNTANCY CYPRUS ñ VOLUME 92 ñ SEPTEMBER 2008 Ù·Ì›· ÙÔ˘ ÎÚ¿ÙÔ˘˜. √ ˘ÔÏÔÁÈÛÌfi˜ ·˘Ùfi˜ ‰ÂÓ Ï·Ì‚¿ÓÂÈ ˘fi„Ë Ù· ¤ÛÔ‰· ·fi ÊfiÚÔ Ô˘ ηٷ‚¿ÏÏÂÈ Ô ÂÂÓ‰˘Ù‹˜ Ô‡Ù ÙÔ ÔÏÏ·Ï·ÛÈ·ÛÙÈÎfi fiÊÂÏÔ˜ ÛÙËÓ ÔÈÎÔÓÔÌ›· Ù˘ ∫‡ÚÔ˘ ·fi ÙËÓ Í¤ÓË Â¤Ó‰˘ÛË. ∂Ô̤ӈ˜ ÙÔ fiÊÂÏÔ˜ ÁÈ· ÙËÓ ÔÈÎÔÓÔÌ›· Ù˘ ¯ÒÚ·˜ Ì·˜ Â›Ó·È Ôχ ÌÂÁ·Ï‡ÙÂÚÔ. ∂Ú. 2: ∆È ¯ÚÂÈ¿˙ÂÙ·È Ó· Á›ÓÂÈ ÁÈ· Ó· ·Ó·Ù˘¯ı› ÂÚ·ÈÙ¤Úˆ Î·È Ó· ηٷÛÙ› ¤Ó· ÛËÌ·ÓÙÈÎfi ¯ÚËÌ·ÙÔÔÈÎÔÓÔÌÈÎfi ΤÓÙÚÔ Ë ∫‡ÚÔ˜; ∞.: ∆Ô ÏÔÁÈÛÙÈÎfi ¿ÁÁÂÏÌ· Â›Ó·È ·˘Ùfi Ô˘ ηْ ÂÍÔ¯‹ ‚Ô‹ıËÛ ÁÈ· Ó· Á›ÓÂÈ Ë ∫‡ÚÔ˜ ¤Ó· ηٷÍȈ̤ÓÔ ‰ÈÂıÓ¤˜ ¯ÚËÌ·ÙÔÔÈÎÔÓÔÌÈÎfi ΤÓÙÚÔ. ∞˘Ùfi ¤ÁÈÓ ڿÍË Ì ÙËÓ Ù¯ÓÔÁÓˆÛ›· Î·È Ù· ˘„ËÏ¿ ›‰· ·ÁÁÂÏÌ·ÙÈÛÌÔ‡ Î·È ÚÔÛÊÂÚÔÌ¤ÓˆÓ ˘ËÚÂÛÈÒÓ. ∆Ô Â›Â‰Ô ·˘Ùfi ÂÈÙ‡¯ıËΠοو ·fi ·ÓÙ›ÍÔ˜ Û˘Óı‹Î˜ Î·È Ì ‰È·¯ÚÔÓÈο ÂÏ¿¯ÈÛÙË Î˘‚ÂÚÓËÙÈ΋ Û˘Ó‰ÚÔÌ‹. ™‹ÌÂÚ· Ë ∫‡ÚÔ˜, ·Ú¿ ÙËÓ ·ÍÈfiÏÔÁË ı¤ÛË Ô˘ η٤¯ÂÈ, ‰ÂÓ Â›Ó·È ÚˆÙÔfiÚÔ˜ Î·È Ë ÚˆÙÔÔÚ›· ÛÙÔ Ê¿ÛÌ· ÙˆÓ ¯ÚËÌ·ÙÔÔÈÎÔÓÔÌÈÎÒÓ ˘ËÚÂÛÈÒÓ ¤¯ÂÈ Ôχ ÌÂÁ¿ÏË ÛËÌ·Û›·. °È· Ó· ·Ó·Ù˘¯ı› ¯ÚËÌ·ÙÔÔÈÎÔÓÔÌÈο Ë ∫‡ÚÔ˜, ¯ÚÂÈ¿˙ÔÓÙ·È ¤ÚÁ· Î·È fi¯È ÏfiÁÈ·. ÃÚÂÈ¿˙ÂÙ·È Ë ‡·ÚÍË Â˘ÓÔ˚΋˜ ÊÔÚÔÏÔÁÈ΋˜ ÓÔÌÔıÂÛ›·˜. ÃÚÂÈ¿˙ÂÙ·È Ë ‡·ÚÍË Î·Ù¿ÏÏËÏˆÓ Û˘ÌʈÓÈÒÓ ÁÈ· ÙËÓ ·ÔÊ˘Á‹ ‰ÈÏ‹˜ ÊÔÚÔÏÔÁ›·˜. ÃÚÂÈ¿˙ÂÙ·È Ë ·Ó¿Ù˘ÍË Â˘ÓÔ˚ÎÒÓ ‰ÈÌÂÚÒÓ Û¯¤ÛÂˆÓ ÙfiÛÔ ÂÓÙfi˜ Ù˘ ∂∂ fiÛÔÓ Î·È ÂÎÙfi˜ Ù˘ ∂∂. ÃÚÂÈ¿˙ÂÙ·È fï˜ Î·È Î¿ÙÈ ¿ÏÏÔ. ¶¿Óˆ ·’ fiÏ· Ú¤ÂÈ Ó· ·ÁηÏÈ¿ÛÔ˘Ó Î·È Ó· ÛÙËÚ›ÍÔ˘Ó ÙËÓ ÚÔÛ¿ıÂÈ· ·˘Ù‹ ÔÈ ˘ËÚÂۛ˜ ÙÔ˘ ÀÔ˘ÚÁ›Ԣ √ÈÎÔÓÔÌÈÎÒÓ ·ÏÏ¿ Î·È ÔÈ ¿ÏϘ ÎÚ·ÙÈΤ˜ ˘ËÚÂۛ˜ Ô˘ ÂÌϤÎÔÓÙ·È ÛÙÔÓ ÙÔ̤· ·˘Ùfi. ÃÚÂÈ¿˙ÂÙ·È ¤Ó· ÎÚ¿ÙÔ˜ Ú·ÁÌ·ÙÈο ÊÈÏÈÎfi ÚÔ˜ ÙÔ˘˜ ÂÂÓ‰˘Ù¤˜. ∏ ÙÂÏÂ˘Ù·›· ÊÚ¿ÛË ¤¯ÂÈ Í¯ˆÚÈÛÙfi ‚¿ÚÔ˜ ‰ÈfiÙÈ ‚ÚÈÛÎfiÌ·ÛÙ ÂÓÒÈÔÓ ÌÈ·˜ ‰ÈÂıÓÔ‡˜ ÔÈÎÔÓÔÌÈ΋˜ ÎÚ›Û˘ Ô˘ ·Ó·fiÊ¢ÎÙ· ı· ÂËÚ¿ÛÂÈ Î·È ÙËÓ Î˘Úȷ΋ ÔÈÎÔÓÔÌ›·. ∫·È ·˘Ùfi ·ÓÂÍ¿ÚÙËÙ· ·fi ÙËÓ Â˘ÚˆÛÙ›· Ô˘ Û‹ÌÂÚ· ÙËÓ ¯·Ú·ÎÙËÚ›˙ÂÈ. ∏ ΢Úȷ΋ ÔÈÎÔÓÔÌ›· ÛÙËÚ›˙ÂÙ·È ÛÙËÓ ÚÔÛÊÔÚ¿ ˘ËÚÂÛÈÒÓ. ™’ ·˘Ù¤˜ Û˘ÌÂÚÈÏ·Ì‚¿ÓÔÓÙ·È Î·È ÔÈ ˘ËÚÂۛ˜ Ô˘ ÚÔÛʤÚÔ˘Ó Ù· ̤ÏË ÙÔ˘ ™∂§∫ ÚÔ˜ ÔÈÎÔ- 15 To XÚËÌ·ÙÔÔÈÎÔÓÔÌÈÎfi ∫¤ÓÙÚÔ Ù˘ ∫‡ÚÔ˘ ÓÔÌÈÎÔ‡˜ √ÚÁ·ÓÈÛÌÔ‡˜ Ô˘ ¯ÚËÛÈÌÔÔÈÔ‡Ó ÙËÓ ∫‡ÚÔ ˆ˜ ¢ÈÂıÓ¤˜ ÃÚËÌ·ÙÔÔÈÎÔÓÔÌÈÎfi ∫¤ÓÙÚÔ. ∂Ú. 3: ¶Ò˜ ÂËÚ¿˙ÂÙ·È Ë ı¤ÛË Ì·˜ ˆ˜ ¯ÚËÌ·ÙÔÔÈÎÔÓÔÌÈÎfi ΤÓÙÚÔ ·fi ÙËÓ ·ÁÎfiÛÌÈ· ÔÈÎÔÓÔÌÈ΋ ÎÚ›ÛË; ∞.: ™Â ÂÚÈfi‰Ô˘˜ „ËÏ‹˜ ·ÁÎfiÛÌÈ·˜ ÔÈÎÔÓÔÌÈ΋˜ ·Ó¿Ù˘Í˘, Ë ∫‡ÚÔ˜ ·Ó·Ù˘ÛÛfiÙ·Ó ·›ÚÓÔÓÙ·˜ ̤ÚÔ˜ ·fi ÌÈ· ÔÈÎÔÓÔÌÈ΋ ›Ù· Ô˘ Û˘Ó¯Ҙ ÌÂÁ¿ÏˆÓÂ. ™’ ·˘Ù¤˜ ÙȘ ÂÚÈfi‰Ô˘˜ ‰ÂÓ ÓÔÈ·˙fiÌ·ÛÙ·Ó ÙÈ ¤Î·Ó·Ó ÔÈ ·ÓÙ·ÁˆÓÈÛÙ¤˜ Ì·˜. ∆ÒÚ· Ô˘ Ë ·ÁÎfiÛÌÈ· ÔÈÎÔÓÔÌ›· ÂÈ‚Ú·‰‡ÓÂÙ·È, ÙÒÚ· Ô˘ ‰È·ÚÎÒ˜ ÌÂÁ·ÏÒÓÂÈ Ô ·ÓÙ·ÁˆÓÈÛÌfi˜ ÛÙË ¢ÈÂıÓ‹ ∆Ô˘ÚÈÛÙÈ΋ µÈÔÌ˯·Ó›·, ÁÈ· ÙËÓ ÔÈÎÔÓÔÌ›· Ù˘ ∫‡ÚÔ˘ ˘¿Ú¯ÂÈ ÌfiÓÔ ¤Ó·˜ ‰ÚfiÌÔ˜. ∂›Ó·È Ô ‰ÚfiÌÔ˜ Ô˘ ı· ÙË Ê¤ÚÂÈ ÛÙËÓ ÚÒÙË ı¤ÛË ÌÂٷ͇ ÙˆÓ ·ÓÙ·ÁˆÓÈÛÙÒÓ Ù˘. ¢ÂÓ ¤¯Ô˘Ì ÙËÓ ÔÏ˘Ù¤ÏÂÈ· ÙÔ˘ ÂÊËÛ˘¯·ÛÌÔ‡, Û ¤Ó· ‰ÈÂıÓ¤˜ ÂÚÈ‚¿ÏÏÔÓ Ô˘ Ô ·ÓÙ·ÁˆÓÈÛÌfi˜ Á›ÓÂÙ·È ÔÏÔ¤Ó· Î·È ÈÔ ÛÎÏËÚfi˜. √ ÂÊËÛ˘¯·ÛÌfi˜ Ô‰ËÁ› ÛÙËÓ ·ÎÈÓËÛ›· Î·È Ë ·ÎÈÓËÛ›· ·ÊÔÏ›˙ÂÈ ÙËÓ ÂÙÔÈÌfiÙËÙ· Ó· ·ÓÙÈÌÂÙˆ›˙Ô˘Ì ÙȘ ÚÔÎÏ‹ÛÂȘ. √ ™∂§∫ ›¯Â ‰È·¯ÚÔÓÈο ¿ÚÈÛÙË Û˘ÓÂÚÁ·Û›· Ì fiÏ· Ù· ·ÚÌfi‰È· ÀÔ˘ÚÁ›· Î·È ÙËÓ ∫ÂÓÙÚÈ΋ ∆Ú¿Â˙· ÛÙËÓ ÚÔÛ¿ıÂÈ· ÁÈ· ÚÔÒıËÛË Ù˘ ∫‡ÚÔ˘ ˆ˜ ¯ÚËÌ·ÙÔÔÈÎÔÓÔÌÈÎfi ΤÓÙÚÔ. À‹Ú¯Â ‰Â ·ÍÈÔÔ›ËÛË Ù˘ ‰ÂÍ·ÌÂÓ‹˜ ÁÓÒÛ˘ ÙÔ˘ ™∂§∫ Î·È Î·Ïԇ̷ÛÙ·Ó ¿ÓÙÔÙ ӷ ÂÎÊÚ¿ÛÔ˘Ì ÙȘ ·fi„ÂȘ Ì·˜ Î·È Ó· Û˘Ó‰Ú¿ÌÔ˘Ì Ì ÙËÓ Ù¯ÓÔÁÓˆÛ›· Ô˘ ‰È·ı¤ÙÔ˘Ì ÛÙËÓ ÎÔÈÓ‹ ÚÔÛ¿ıÂÈ·. ªÂÙ¿ ÙËÓ ¤ÓÙ·ÍË ÛÙËÓ ∂∂, Ë Û˘ÓÂÚÁ·Û›· ‰ÂÓ Û˘Ó¯›ÛÙËÎÂ, ÂÓÒ ·ÓÙ›ıÂÙ· ı· ¤Ú ӷ ›¯Â Á›ÓÂÈ ·ÎfiÌË ÈÔ ¤ÓÙÔÓË. ∞fi ÙfiÙ ÏÔÈfiÓ ¤¯Ô˘Ó ηٷÁÚ·Ê› Ù· ÂÍ‹˜ ·ÔÙÂϤÛÌ·Ù·: ñ ∂ÓÙ·¯ı‹Î·Ì ÛÙËÓ ∂∂ ·ÏÏ¿ ‰ÂÓ Î·Ù·Ê¤Ú·Ì ӷ ··Ï›„Ô˘Ì ÙÔ fiÓÔÌ· Ù˘ ∫‡ÚÔ˘ ·fi ÙËÓ Ì·‡ÚË Ï›ÛÙ· Ô˘ ÙËÚÔ‡Û·Ó Î·È ÙËÚÔ‡Ó ÔÈ Ó˘Ó ÂÙ·›ÚÔÈ Ì·˜, fiˆ˜ ÁÈ· ·Ú¿‰ÂÈÁÌ· Ë πÛ·Ó›·, Ë πÙ·Ï›· Î·È Ë ¶ÔÚÙÔÁ·Ï›·. ñ ¶·Ú¿ ÙËÓ Â›ÛÔ‰fi Ì·˜ ÛÙËÓ ∂∂, Ë ·ÓÙ·ÁˆÓÈÛÙÈÎfi- ÙËÙ· Ù˘ ∫‡ÚÔ˘ Û˘Ó¯Ҙ ‰ÈÔÏÈÛı·›ÓÂÈ. ñ Œ¯ÂÈ Û˘ÌÂÚÈÏËÊı› ÙÔ fiÓÔÌ· Ù˘ ∫‡ÚÔ˘ ÛÙËÓ Ì·‡ÚË Ï›ÛÙ· Ù˘ ƒˆÛ›·˜. ∏ Î·Ù·Ï˘ÙÈ΋ ÛËÌ·Û›· Ù˘ ƒˆÛÈ΋˜ ·ÁÔÚ¿˜ ÁÈ· ÙËÓ Î˘Úȷ΋ ÔÈÎÔÓÔÌ›· Â›Ó·È Û fiÏÔ˘˜ ÁÓˆÛÙ‹ Î·È ‰ÂÓ ¯ÚÂÈ¿˙ÂÙ·È ÙËÓ ·Ú·ÌÈÎÚ‹ ÂÂÍ‹ÁËÛË. ∂Ú. 4: ∞ÓÙÈÌÂÙˆ›˙ÔÓÙ·È ÚÔ‚Ï‹Ì·Ù· fiÛÔÓ ·ÊÔÚ¿ ÙȘ Û˘Ì‚¿ÛÂȘ ÁÈ· ÙËÓ ·ÔÊ˘Á‹ ‰ÈÏ‹˜ ÊÔÚÔÏÔÁ›·˜ Î·È ·Ó 16 Ó·È ÙÈ ÂÈÛËÁ›ÛÙ ÁÈ· ÙËÓ ·ÓÙÈÌÂÙÒÈÛË ÙÔ˘ ÚÔ‚Ï‹Ì·ÙÔ˜; ∞.: ∂ÎÙfi˜ ·fi ÙÔ ÁÂÁÔÓfi˜ fiÙÈ Ë ∫‡ÚÔ˜ ‚Ú›ÛÎÂÙ·È ÛÙËÓ Ì·‡ÚË Ï›ÛÙ· Ù˘ ƒˆÛ›·˜, Ë ·Ú¯È΋ ‰È·Ú·ÁÌ¿Ù¢ÛË ÁÈ· ÙË Û‡Ó·„Ë Û˘Ìʈӛ·˜ ·ÔÊ˘Á‹˜ ‰ÈÏ‹˜ ÊÔÚÔÏÔÁ›·˜ Ì ÙËÓ √˘ÎÚ·Ó›· ¤¯ÂÈ ‰˘ÛÙ˘¯Ò˜ ηٷϋÍÂÈ ∆Ô ÏÔÁÈÛÙÈÎfi ¿ÁÁÂÏÌ· Â›Ó·È ·˘Ùfi Ô˘ ηْ ÂÍÔ¯‹ ‚Ô‹ıËÛ ÁÈ· Ó· Á›ÓÂÈ Ë ∫‡ÚÔ˜ ¤Ó· ηٷÍȈ̤ÓÔ ‰ÈÂıÓ¤˜ ¯ÚËÌ·ÙÔÔÈÎÔÓÔÌÈÎfi ΤÓÙÚÔ. Û ·ÚÓËÙÈο ·ÔÙÂϤÛÌ·Ù·. ∏ √˘ÎÚ·Ó›· Â›Ó·È ÁÓˆÛÙfi ·fi fiÏÔ˘˜ fiÙÈ Â›Ó·È ÌÈ· ·Ó·‰˘fiÌÂÓË ·ÁÔÚ¿ Ì ÂÍ·ÈÚÂÙÈΤ˜ ÚÔÔÙÈΤ˜ ÁÈ· ÙËÓ Î˘Úȷ΋ ÔÈÎÔÓÔÌ›·. ¶·Ú¿ÏÏËÏ· Ë ‰È·Ú·ÁÌ¿Ù¢ÛË ÁÈ· ÙËÓ ˘ÔÁÚ·Ê‹ Ó¤·˜ Û˘Ìʈӛ·˜ ·ÔÊ˘Á‹˜ ‰ÈÏ‹˜ ÊÔÚÔÏÔÁ›·˜ Ì ÙËÓ πÓ‰›· ¤¯ÂÈ Â›Û˘ ηٷϋÍÂÈ Û ·ÚÓËÙÈο ·ÔÙÂϤÛÌ·Ù·. ∏ ·Ó·‰˘fiÌÂÓË ÔÈÎÔÓÔÌ›· Ù˘ πÓ‰›·˜, Ë ÔÔ›· ηٿ ÙÔ˘˜ ˘ÔÏÔÁÈÛÌÔ‡˜ ÂȉÈÎÒÓ ·Ó·Ì¤ÓÂÙ·È Ó· ÍÂÂÚ¿ÛÂÈ ÙÔ˘˜ Ú˘ıÌÔ‡˜ ·Ó¿Ù˘Í˘ Ù˘ ÔÈÎÔÓÔÌ›·˜ Ù˘ ∫›Ó·˜, Â›Ó·È ÌÈ· Ó¤· ÊÈÏfi‰ÔÍË ·ÁÔÚ¿ ÁÈ· ÙËÓ Î˘Úȷ΋ ÔÈÎÔÓÔÌ›·. ∞Ó ‰ÂÓ ·ÏÏ¿ÍÂÈ Ë Û˘Ìʈӛ· Ô˘ ¤¯ÂÈ Î·Ù’ ·Ú¯‹ ÌÔÓÔÁÚ·ÊËı› Ë ·ÁÔÚ¿ Ù˘ πÓ‰›·˜ ı· ÎÏ›ÛÂÈ ÁÈ· ÙËÓ ∫‡ÚÔ ÚÈÓ Î·Ï¿ - ηϿ ·ÓÔ›ÍÂÈ. ∫·Ù¿ Û˘Ó¤ÂÈ· ı· Ú¤ÂÈ Ó· ÏËÊıÔ‡Ó ·ÔÊ¿ÛÂȘ ÁÈ· Ó· ÚÔˆıËı› Ë ·Ê·›ÚÂÛË ÙÔ˘ ÔÓfiÌ·ÙÔ˜ Ù˘ ∫‡ÚÔ˘ ·fi fiϘ ÙȘ Ì·‡Ú˜ Ï›ÛÙ˜. °È· Ó· Á›ÓÂÈ ·˘Ùfi Ú¤ÂÈ ·Ì¤Ûˆ˜ Ó· ÙÚÔÔÔÈËı› Ë ÊÔÚÔÏÔÁÈ΋ Ì·˜ ÓÔÌÔıÂÛ›· ÒÛÙ ˆ˜ ÎÚ¿ÙÔ˜ Ó· ÌÔÚԇ̠ӷ ·ÓÙ·ÏÏ¿ÛÔ˘Ì ÏËÚÔÊÔڛ˜ ̤۷ ÛÙ· Ï·›ÛÈ· ÙˆÓ ÚÔÓÔÈÒÓ ÙˆÓ Û˘ÌʈÓÈÒÓ ÁÈ· ·ÔÊ˘Á‹ ‰ÈÏ‹˜ ÊÔÚÔÏÔÁ›·˜ Î·È ÙˆÓ ‰ÂÛ̇ÛÂÒÓ Ì·˜ ÛÙ· Ï·›ÛÈ· Ù˘ ∂∂. ¶·Ú¿ÏÏËÏ· Ú¤ÂÈ ·Ì¤Ûˆ˜ Û ÔÏÈÙÈÎfi Â›Â‰Ô Ó· ·ÚıÔ‡Ó Ì¤ÙÚ· ÁÈ· ‚ÂÏÙ›ˆÛË ÙˆÓ ÌÔÓÔÁÚ·ÊËıÂÈÛÒÓ Û˘ÌʈÓÈÒÓ ÁÈ· ÙËÓ ·ÔÊ˘Á‹ ‰ÈÏ‹˜ ÊÔÚÔÏÔÁ›·˜ Ì ÙËÓ √˘ÎÚ·Ó›· Î·È ÙËÓ πÓ‰›·. °È· ÙÔ ÛÎÔfi ·˘Ùfi Ú¤ÂÈ Ó· ˘¿Ú¯ÂÈ Ë Û˘ÌÌÂÙÔ¯‹ ÙÔ˘ ȉȈÙÈÎÔ‡ ÙÔ̤· ÛÙȘ ‰È·Ú·ÁÌ·Ù‡ÛÂȘ ÁÈ· ·ÔÊ˘Á‹ ‰ÈÏ‹˜ ÊÔÚÔÏÔÁ›·˜ ÁÈ· ÛÎÔÔ‡˜ Ù¯ÓÔÎÚ·ÙÈ΋˜ ÛÙ‹ÚÈ͢ ηٿ ÙË ‰È¿ÚÎÂÈ· ÙˆÓ ‰È·Ú·ÁÌ·Ù‡ÛˆÓ. ∂Ú. 5: √È ÂÙ·ÈÚ›˜ ‰ÈÂıÓÒÓ ‰Ú·ÛÙËÚÈÔÙ‹ÙˆÓ Ô˘ ‰Ú·ÛÙËÚÈÔÔÈÔ‡ÓÙ·È ÛÙËÓ ∫‡ÚÔ ·ÓÙÈÌÂÙˆ›˙Ô˘Ó ÔÔÈ·‰‹ÔÙ ÊÔÚÔÏÔÁÈο ‹ ¿ÏÏ· ÚÔ‚Ï‹Ì·Ù· Î·È ÔȘ ÔÈ ÂÈÛËÁ‹ÛÂȘ Û·˜ ÁÈ· ÙËÓ ·ÓÙÈÌÂÙÒÈÛË ÙˆÓ ÚÔ‚ÏËÌ¿ÙˆÓ ·˘ÙÒÓ; ∞.: ∏ ›ڷ ÙˆÓ ¤ÍÈ ¯ÚfiÓˆÓ Ù˘ ÊÔÚÔÏÔÁÈ΋˜ ÌÂÙ·Ú- ACCOUNTANCY CYPRUS ñ VOLUME 92 ñ SEPTEMBER 2008 To XÚËÌ·ÙÔÔÈÎÔÓÔÌÈÎfi ∫¤ÓÙÚÔ Ù˘ ∫‡ÚÔ˘ Ú‡ıÌÈÛ˘ ¤¯ÂÈ ·Ô‰Â›ÍÂÈ fiÙÈ ÙÚÔ¯Ô¤‰Ë ÛÙËÓ ·Ó¿Ù˘ÍË Ù˘ ∫‡ÚÔ˘ ˆ˜ ¯ÚËÌ·ÙÔÔÈÎÔÓÔÌÈÎfi ΤÓÙÚÔ, Â›Ó·È Ô Ì‡ıÔ˜ Ô˘ Û˘ÓÙËÚԇ̠ˆ˜ ¯ÒÚ· fiÙÈ ‰‹ıÂÓ Ô ÂÙ·ÈÚÈÎfi˜ ÊÔÚÔÏÔÁÈÎfi˜ Û˘ÓÙÂÏÂÛÙ‹˜ Â›Ó·È 10%, fiÙÈ Ù· ÌÂÚ›ÛÌ·Ù· ÂÍ·ÈÚÔ‡ÓÙ·È Ù˘ ÊÔÚÔÏÔÁ›·˜ Î·È fiÙÈ ÙÔ Î¤Ú‰Ô˜ ·fi ÒÏËÛË Ù›ÙÏˆÓ Â›Û˘ ÂÍ·ÈÚÂ›Ù·È Ù˘ ÊÔÚÔÏÔÁ›·˜. ∏ ·Ï‹ıÂÈ· Â›Ó·È fiÙÈ Ù· ÌÂÚ›ÛÌ·Ù· ·fi ÙÔ Â͈ÙÂÚÈÎfi ‰ÂÓ ÂÍ·ÈÚÔ‡ÓÙ·È ¿ÓÙÔÙÂ, ·ÓÙ›ıÂÙ· ÔÏϤ˜ ÊÔÚ¤˜ ÊÔÚÔÏÔÁÔ‡ÓÙ·È Ì 15%. ∂›Û˘ ÔÈ ÙfiÎÔÈ Ô˘ Ï·Ì‚¿ÓÔ˘Ó ÔÈ ÂÙ·ÈÚ›˜ ‰ÂÓ ÊÔÚÔÏÔÁÔ‡ÓÙ·È ÌfiÓÔ Ì 10%. ∞Ó¿ÏÔÁ· Ì ÙËÓ ÂÚÌËÓ›· ÙÔ˘ ÓfiÌÔ˘ Ô˘ Â›Ó·È ÂÍ·ÈÚÂÙÈο ·Û·Ê‹˜, ÔÈ ÙfiÎÔÈ ÊÔÚÔÏÔÁÔ‡ÓÙ·È Ì ¤Ú·Ó ÙÔ˘ 15%. ∂›Û˘ ÙÔ Î¤Ú‰Ô˜ ·fi ÒÏËÛË Ù›ÙψÓ, fiˆ˜ ·˘Ùfi˜ ÂÚÌËÓ‡ÂÙ·È ·fi ÙȘ ‰ÈÂıÓ›˜ ¯ÚËÌ·Ù·ÁÔÚ¤˜, ‰ÂÓ ÂÍ·ÈÚÂ›Ù·È ¿ÓÙÔÙ Ù˘ ÊÔÚÔÏÔÁ›·˜ ·ÊÔ‡ Ë Î˘Úȷ΋ ÓÔÌÔıÂÛ›· ‰›ÓÂÈ Ôχ ÂÚÈÔÚÈÛÙÈÎfi ÔÚÈÛÌfi Ù˘ ¤ÓÓÔÈ·˜ Ù›ÙÏÔ˜ Ì ·ÔÙ¤ÏÂÛÌ· ÙÔ Î¤Ú‰Ô˜ Ó· ÊÔÚÔÏÔÁÂ›Ù·È ·ÓÙ› Ó· ÂÍ·ÈÚ›ٷÈ. √È ·Û¿ÊÂȘ ÛÙËÓ ÓÔÌÔıÂÛ›· Ô˘ Û¯ÂÙ›˙ÔÓÙ·È Ì ٷ ¤ÍÔ‰· Ô˘ ÂΛÙÔÓÙ·Ó ÙÔ˘ ÊÔÚÔÏÔÁËÙ¤Ô˘ ÂÈÛÔ‰‹Ì·ÙÔ˜, ·˘Í¿ÓÔ˘Ó ÙÔÓ ·ÔÙÂÏÂÛÌ·ÙÈÎfi ÊÔÚÔÏÔÁÈÎfi Û˘ÓÙÂÏÂÛÙ‹ fiÙ·Ó Ù· ¤ÍÔ‰· ÂÚÈÔÚ›˙ÔÓÙ·È. ¢ÂÓ ÌÔÚԇ̠ӷ ·ÓÙ·ÁˆÓÈÛÙԇ̠·ÔÙÂÏÂÛÌ·ÙÈο ¯ÒÚ˜ fiˆ˜ Â›Ó·È Ë √ÏÏ·Ó‰›·, ÙÔ §Ô˘ÍÂÌ‚Ô‡ÚÁÔ, ÙÔ µ¤ÏÁÈÔ, fiÙ·Ó ·˘Ù¤˜ ÂÈÙÚ¤Ô˘Ó ˆ˜ ÂÎÈÙfiÌÂÓ· ¤ÍÔ‰· ÙÔ˘˜ ÙfiÎÔ˘˜ Û ‰¿ÓÂÈ· ÁÈ· ·ÁÔÚ¿ Ù›ÙÏˆÓ ÂÓÒ Ë Î˘Úȷ΋ ÂÚÌËÓ›· Â›Ó·È ·ÓÙ›ıÂÙË. ∏ ‰Â ÌË ‡·ÚÍË Î·ıÔÚÈṲ̂Ó˘ ‰È·‰Èηۛ·˜ ¤Î‰ÔÛ˘ Áӈ̷Ù‡ÛÂˆÓ ÂȉÈο ¿Óˆ Û ı¤Ì·Ù· ÂÚÈıˆÚ›Ô˘ ΤډԢ˜ ÁÈ· Û˘Ó·ÏÏ·Á¤˜ ÌÂٷ͇ Û˘Ó‰Â‰ÂÌ¤ÓˆÓ ÚÔÛÒˆÓ, ÙÔ ÏÂÁfiÌÂÓÔ «Transfer Pricing»Â›Ó·È ¤Ó· ¿ÏÏÔ Ôχ ÛËÌ·ÓÙÈÎfi ·ÓÙÈΛÓËÙÚÔ. ∂›Ó·È ÛÎfiÈÌÔ Ó· ·Ó·Ê¤Úˆ ›Û˘ fiÙÈ ·Ó·Ì·Ûԇ̠ÁÈ· ¯ÚfiÓÈ· ÙÔ ı¤Ì· ÙÔ˘ ÙÚfiÔ˘ ÊÔÚÔÏÔÁ›·˜ ÙˆÓ ÂÂÓ‰˘ÙÈÎÒÓ ÂÙ·ÈÚÂÈÒÓ Î·È ÙˆÓ ·ÌÔÈ‚·›ˆÓ ÎÂÊ·Ï·›ˆÓ, ¯ˆÚ›˜ Ó· ·›ÚÓÔ˘Ì ·ÔÊ¿ÛÂȘ ÁÈ·Ù› ˘¿Ú¯ÂÈ ¤Ó·˜ ·ÙÂÎÌËÚ›ˆÙÔ˜ ÈÛ¯˘ÚÈÛÌfi˜ ·ÒÏÂÈ·˜ ÂÛfi‰ˆÓ. £· ‹ıÂÏ· Ó· ·Ó·Ê¤Úˆ ›Û˘ fiÙÈ ÙÔ „ËÏfi Ù¤ÏÔ˜ Ô˘ ÂÈ‚¿ÏÏÂÙÔ ¿Óˆ ÛÙÔ ÔÓÔÌ·ÛÙÈÎfi ÎÂÊ¿Ï·ÈÔ ÁÈ· ÙËÓ ÂÁÁÚ·Ê‹ ÂÙ·ÈÚÂÈÒÓ Â›Ó·È ÂÓÙÂÏÒ˜ ÂÎÙfi˜ ·ÓÙ·ÁˆÓÈÛÌÔ‡. ∂›Û˘ Ô ÊfiÚÔ˜ ¯·ÚÙÔÛ‹ÌÔ˘ ·ÎfiÌË Î·È Ì ÙËÓ ÔÚÔÊ‹ Ô˘ ¤¯ÂÈ ·ÔÊ·ÛÈÛÙ› ÚfiÛÊ·Ù· Â›Ó·È ·ÓÙÈΛÓËÙÚÔ. ŒÙÛÈ Ú¤ÂÈ Û·Ê¤Ûٷٷ ¯ˆÚ›˜ ÂÚÈÔÚÈÛÌÔ‡˜ Ó· ÂÍ·ÈÚÔ‡ÓÙ·È Ù˘ ÔÔÈ·Û‰‹ÔÙ ÊÔÚÔÏÔÁ›·˜ fiÏ· Ù· ÌÂÚ›ÛÌ·Ù· Ô˘ Ï·Ì‚¿ÓÂÈ Ë ÂÙ·ÈÚ›·. ÕÏψÛÙÂ Ë ˘ÊÈÛÙ¿ÌÂÓË ÓÔÌÔıÂÛ›· ·ÓÙ›ÎÂÈÙ·È ÛÙÔ ÎÔÈÓÔÙÈÎfi ÎÂÎÙË̤ÓÔ ÂÂȉ‹ οÓÂÈ ‰È¿ÎÚÈÛË ÌÂٷ͇ ÌÂÚ›ÛÌ·ÙÔ˜ ·fi ÙËÓ ∫‡ÚÔ Î·È ACCOUNTANCY CYPRUS ñ VOLUME 92 ñ SEPTEMBER 2008 ÌÂÚ›ÛÌ·ÙÔ˜ ·fi ÙÔ Â͈ÙÂÚÈÎfi. ¶Ú¤ÂÈ Â›Û˘ ۷ʤÛٷٷ, ¯ˆÚ›˜ ÂÚÈÔÚÈÛÌÔ‡˜ ÙÔ ÂÈÛfi‰ËÌ· ·fi ÙfiÎÔ Ô˘ Ï·Ì‚¿ÓÂÈ Ë ÂÙ·ÈÚ›· Ó· ÊÔÚÔÏÔÁÂ›Ù·È ÌfiÓÔ ÛÙÔÓ ÂÙ·ÈÚÈÎfi ÊfiÚÔ ÙÔ˘ 10%. ¡· ÌËÓ ˘¿Ú¯ÂÈ ‰ËÏ·‰‹ Ë ÊÔÚÔÏÔÁ›· ÁÈ· ÙËÓ ¿Ì˘Ó·. ¶·Ú¿ÏÏËÏ· Ú¤ÂÈ Ó· ÂÂÎÙ·ı› Ô ÔÚÈÛÌfi˜ Ù˘ ¤ÓÓÔÈ·˜ Ù›ÙÏÔ˜ ÒÛÙ ӷ ηχ„ÂÈ fiÏ· Ù· Û‡Á¯ÚÔÓ· ÚÔ˚fiÓÙ· Ô˘ Ù˘Á¯¿ÓÔ˘Ó ‰È·Ú·ÁÌ¿Ù¢Û˘ ÛÙȘ ¯ÚËÌ·Ù·ÁÔÚ¤˜. ∂›Û˘ Ó· ÂΉ›‰ÔÓÙ·È Áӈ̷Ù‡ÛÂȘ ÁÈ· Ù· ÂÚÈıÒÚÈ· ΤډԢ˜ fiˆ˜ Î·È ÚfiÓÔÈ· ÁÈ· Ù· ÂÎÈÙfiÌÂÓ· ¤ÍÔ‰·. ∞ÛÊ·ÏÒ˜ Ú¤ÂÈ Ó· ηٷÚÁËı› ÙÔ Ù¤ÏÔ˜ ÂÁÁÚ·Ê‹˜ ÂÙ·ÈÚ›·˜ fiˆ˜ ¤Î·Ó ÚfiÛÊ·Ù· ÙÔ §Ô˘ÍÂÌ‚Ô‡ÚÁÔ Î·È Ó· ηٷÚÁËı› Î·È Ô ÊfiÚÔ˜ ¯·ÚÙÔÛ‹ÌÔ˘. √ ¯ÚfiÓÔ˜ Ô˘ ··ÈÙÂ›Ù·È ·fi ÙÔ ∆Ì‹Ì· ÙÔ˘ ∂ÊfiÚÔ˘ ∂Ù·ÈÚÂÈÒÓ ÁÈ· ÙËÓ ÂÁÁÚ·Ê‹ ÂÙ·ÈÚ›·˜ ÛÙËÓ ∫‡ÚÔ Â›Ó·È ÂÈÂÈÎÒ˜ ··Ú¿‰ÂÎÙÔ˜. √È ·ÓÙ·ÁˆÓÈÛÙ¤˜ Ì·˜ ÁÚ¿ÊÔ˘Ó ÂÙ·ÈÚ›˜ ·˘ıËÌÂÚfiÓ. √ ÛÙfi¯Ô˜ ÁÈ· ÂÁÁÚ·Ê‹ ÂÙ·ÈÚ›·˜ ·˘ıËÌÂÚfiÓ Â›Ó·È ÂÊÈÎÙfi˜. ÃÚÂÈ¿˙ÂÙ·È Î·Ï‹ ÔÚÁ¿ÓˆÛË Î·È ·Ô‰Ô¯‹ Ù˘ ·Ó¿Á΢ ÁÈ· ‰Ú·ÛÙÈΤ˜ ·ÏÏ·Á¤˜ ÁÈ· ¤Ó· Û‡ÛÙËÌ· Ô˘ ·Ô‰Â‰ÂÈÁ̤ӷ ·¤Ù˘¯Â. ∂Ì›˜ ̤۷ ÛÙ· Ï·›ÛÈ· Ù˘ Û˘ÓÂÚÁ·Û›·˜ Ô˘ ¿Ú¯ÈÛÂ Ô ÀÔ˘ÚÁfi˜ √ÈÎÔÓÔÌÈÎÒÓ, ›̷ÛÙ ¤ÙÔÈÌÔÈ Ó· ÙÔÓ ÛÙËÚ›ÍÔ˘Ì ÁÈ· Ó· ÂÈÙ‡¯ÂÈ ÙÔ ÛÙfi¯Ô ÙÔ˘. Œ¯Ô˘Ì ÙË ‰ÂÍ·ÌÂÓ‹ ÁÓÒÛ˘, ÙËÓ ÂÌÂÈÚ›· Î·È ÙȘ ‰ÈÂıÓ›˜ ·ʤ˜ ÁÈ· Ó· ‚ÔËı‹ÛÔ˘Ì ÛÙ· ı¤Ì·Ù· ÊÔÚÔÏÔÁÈ΋˜ ÓÔÌÔıÂÛ›·˜ Î·È ÁÈ· ÙÔ ÎÚ›ÛÈÌÔ ı¤Ì· ÙˆÓ Û˘Ì‚¿ÛÂˆÓ ÁÈ· ÙËÓ ·ÔÊ˘Á‹ ‰ÈÏ‹˜ ÊÔÚÔÏÔÁ›·˜. ∂Ú. 6: °È· ÙËÓ ÂÁ¯ÒÚÈ· ÔÈÎÔÓÔÌ›· ¤¯ÂÙ ÔÔÈÂÛ‰‹ÔÙ ÂÈÛËÁ‹ÛÂȘ fiÛÔÓ ·ÊÔÚ¿ ÙÔ ÊÔÚÔÏÔÁÈÎfi ηıÂÛÙÒ˜; ∞.: ŸÛÔÓ ·ÊÔÚ¿ ÙÔ ÊÔÚÔÏÔÁÈÎfi ηıÂÛÙÒ˜ Ù˘ ∫‡ÚÔ˘ ı· ‹ıÂÏ· Ó· ·Ó·ÊÂÚıÒ Û˘ÓÔÙÈο Û ‰‡Ô ı¤Ì·Ù·: ñ ∂›Ó·È ·‰È·ÓfiËÙÔ Ô ÊÔÚÔÏÔÁÈÎfi˜ Û˘ÓÙÂÏÂÛÙ‹˜ ∫ÂÊ·Ï·ÈÔ˘¯ÈÎÒÓ ∫ÂÚ‰ÒÓ Ó· Â›Ó·È ÈÔ „ËÏfi˜ ·fi ÙÔ ÊÔÚÔÏÔÁÈÎfi Û˘ÓÙÂÏÂÛÙ‹ ‰ÈÂÍ·ÁˆÁ‹˜ ÂÌÔÚÈÎÒÓ ‰Ú·ÛÙËÚÈÔًوÓ. ∆Ô Ê·ÈÓfiÌÂÓÔ ·˘Ùfi Â›Ó·È ÊÔÚÔÏÔÁÈÎfi˜ ·Ú·ÏÔÁÈÛÌfi˜. ñ √È ÚfiÓÔȘ ÁÈ· ÏÔÁÈ˙fiÌÂÓË ‰È·ÓÔÌ‹ ÌÂÚ›ÛÌ·ÙÔ˜ ¯ÚÂÈ¿˙ÔÓÙ·È Â·Ó·‰È·Ù‡ˆÛË ÁÈ· Ó¿ÚıÔ˘Ó ÔÈ ÛÙÚ‚ÏÒÛÂȘ Ô˘ ‰ËÌÈÔ˘ÚÁÔ‡ÓÙ·È ÛÙËÓ ÔÈÎÔÓÔÌ›·. ∂Ú. 7: ¶ÔȘ ÔÈ ·fi„ÂȘ Û·˜ ÁÈ· ÙËÓ Â‡Ú˘ıÌË ÏÂÈÙÔ˘ÚÁ›· ÙÔ˘ ∂ÊÔÚÈ·ÎÔ‡ ™˘Ì‚Ô˘Ï›Ô˘; ∞.: ŒÓ· ÂÍ·ÈÚÂÙÈο ÛÔ‚·Úfi Úfi‚ÏËÌ· Ô˘ Ù·Ï·Ó›˙ÂÈ 19 To XÚËÌ·ÙÔÔÈÎÔÓÔÌÈÎfi ∫¤ÓÙÚÔ Ù˘ ∫‡ÚÔ˘ ÙÔ Î˘ÚÈ·Îfi ÊÔÚÔÏÔÁÈÎfi Û‡ÛÙËÌ· Â›Ó·È ÙÔ ı¤Ì· ÙÔ˘ ∂ÊÔÚÈ·ÎÔ‡ ™˘Ì‚Ô˘Ï›Ô˘. √ ™∂§∫ ·ÁˆÓ›ÛÙËΠÁÈ· ÙËÓ ÂÁηı›‰Ú˘ÛË ÂÓfi˜ ·ÓÂÍ¿ÚÙËÙÔ˘ ™ÒÌ·ÙÔ˜ Ô˘ ı· ·ÔÊ¿ÛÈ˙ ¿Óˆ ÛÙ· ÁÂÁÔÓfiÙ· ÙˆÓ ÊÔÚÔÏÔÁÈÎÒÓ ˘Ôı¤ÛÂˆÓ ÊÔÚÔÏÔÁÔ˘Ì¤ÓˆÓ Ô˘ ı· ÚÔۤʢÁ·Ó ÂÓÒÈfiÓ ÙÔ˘. Œ¯Ô˘Ì ÙËÓ ÂÌÂÈÚ›· ÔÎÙÒ ¯ÚfiÓˆÓ ÏÂÈÙÔ˘ÚÁ›·˜ ÙÔ˘ ∂ÊÔÚÈ·ÎÔ‡ ™˘Ì‚Ô˘Ï›Ô˘. ∞˘Ù‹ Ë ÂÌÂÈÚ›· Ì·˜ οÓÂÈ Ó· ·ÔÚԇ̠·ÏÏ¿ Î·È Ó· ·ÁˆÓÈԇ̠ÁÈ· ÙËÓ ·Ú¿Î·Ì„Ë ÙÔ˘ ·˘ÙÔÓfiËÙÔ˘. ∆Ô˘ ÎÚÈÙËÚ›Ô˘ Ù˘ Ù¯ÓÔÎÚ·ÙÈ΋˜ ¿ÚÎÂÈ·˜ Û ¤Ó· ¢·›ÛıËÙÔ ÙÔ̤·. ∫·È ·˘Ùfi ‰ÈfiÙÈ Ù· ̤ÏË ÙÔ˘ ∂ÊÔÚÈ·ÎÔ‡ ™˘Ì‚Ô˘Ï›Ô˘ ÂÈϤ¯ÙËÎ·Ó Ì ÎÔÌÌ·ÙÈο ÎÚÈÙ‹ÚÈ·. ∆Ô ‰ÈÔÈÎËÙÈÎfi ÚÔÛˆÈÎfi ÙÔ˘ ∂ÊÔÚÈ·ÎÔ‡ ™˘Ì‚Ô˘Ï›Ô˘ ÛÙÂϯÒıËΠ·fi ÏÂÈÙÔ˘ÚÁÔ‡˜ ÙÔ˘ °Ú·Ê›Ԣ ºfiÚÔ˘ ∂ÈÛÔ‰‹Ì·ÙÔ˜. √È ‰ÈÔÚÈÛÌÔ› ‰ÂÓ ‹Ù·Ó ÌfiÓÈÌÔÈ. ™ÙȘ ˘Ôı¤ÛÂȘ Ô˘ Âͤٷ˙ ÙÔ ∂ÊÔÚÈ·Îfi ™˘Ì‚Ô‡ÏÈÔ ‰ÂÓ ·ÔÊ¿ÛÈ˙ › ÙˆÓ ÁÂÁÔÓfiÙˆÓ ·ÊÔ‡ ¯ÚËÛÈÌÔÔÈÔ‡Û ˆ˜ ÚÔËÁÔ‡ÌÂÓÔ ·ÔÊ¿ÛÂȘ ÙÔ˘ ∞ÓÒÙ·ÙÔ˘ ¢ÈηÛÙËÚ›Ô˘ Ô˘ ‰ÂÓ ÂÍÂÙ¿˙ÔÓÙ·È Ù· ÁÂÁÔÓfiÙ·. ∆Ô Û˘Ì¤Ú·ÛÌ· ·Ó·fiÊ¢ÎÙ· Â›Ó·È fiÙÈ ÙÔ ∂ÊÔÚÈ·Îfi ™˘Ì‚Ô‡ÏÈÔ ‰ÂÓ ‹Ù·Ó ·ÓÂÍ¿ÚÙËÙÔ Î·È ‰ÂÓ Ù‹ÚËÛ ÙÔ˘˜ fiÚÔ˘˜ ÂÓÙÔÏ‹˜ Ù˘ ÂÁηı›‰Ú˘Û‹˜ ÙÔ˘. ∞ÓÂÍ¿ÚÙËÙ· ·fi ÙËÓ ·ÔÁÔËÙ¢ÙÈ΋ ÚÒÙË ÔÎÙ·ÂÙ›· ÙÔ˘ ıÂÛÌÔ‡, Ô ™∂§∫ ˘ÔÛÙËÚ›˙ÂÈ ÂÓÙÔÓfiٷٷ ÙËÓ ‡·ÚÍË ÂÓfi˜ ·ÓÂÍ¿ÚÙËÙÔ˘ ∂ÊÔÚÈ·ÎÔ‡ ™˘Ì‚Ô˘Ï›Ô˘ Ô˘ ı· ·ÔÊ·Û›˙ÂÈ Â› ÙˆÓ ÁÂÁÔÓfiÙˆÓ ÙˆÓ ˘Ôı¤ÛÂˆÓ Ô˘ ÂÍÂÙ¿˙ÂÈ. ∂ÈÚfiÛıÂÙ· ˘ÔÛÙËÚ›˙Ô˘Ì ¤ÓıÂÚÌ· ÙËÓ Â¤ÎÙ·ÛË ÙˆÓ ·ÚÌÔ‰ÈÔÙ‹ÙˆÓ ÙÔ˘ ∂ÊÔÚÈ·ÎÔ‡ ™˘Ì‚Ô˘Ï›Ô˘ ÒÛÙ ӷ ÂÍÂÙ¿˙ÂÈ Î·È ˘Ôı¤ÛÂȘ Ô˘ ·ÊÔÚÔ‡Ó ÙÔ º.¶.∞. Group Relief for Losses Are Cyprus group loss relief provisions compatible with European Community Law? INTRODUCTORY COMMENTS It is generally accepted that not all companies realise profits from their operations especially in the first years of their life. This is completely natural given the high initial set-up costs in many cases, the difficulties in penetrating in many By Andreas Iosif industries as well as the Tax Services unstable global economic PricewaterhouseCoopers Ltd environment. 20 Also, as a result of increasing competition, consumers are becoming more sophisticated and their needs are changing all the time. In accordance with Adam Smith, a tax system should have the characteristics, inter alia, of equality i.e. “pay tax in proportion to their respective ability to pay tax”. Therefore, where a company realises losses in a year and profits in the next, it should be able to pay taxes only on the profits exceeding the losses previously incurred. The fact that profits are on one hand taxed immediately and the losses may only be carried forward leads to a cash disadvantage for a taxpayer in a group of companies. This is why most of the jurisdictions allow loss relief for ACCOUNTANCY CYPRUS ñ VOLUME 92 ñ SEPTEMBER 2008 Group Relief for Losses companies which are within the same group for tax purposes, the so-called group relief for losses. CYPRUS DOMESTIC TAX LEGISLATION ON GROUP LOSS RELIEF Pursuant to article 13 (4) of the Income Tax Law 118(I)/2002 as amended, group loss relief is available under certain circumstances. In accordance to the aforementioned article “...losses may be surrendered by a company resident in the Republic (the surrendering company) and, on the making of a claim by another company resident in the Republic (the claimant company) may be allowed to the claimant company set-off of group losses [...].” Therefore, it is clear from the above provisions of the Cyprus Income Tax Law that group relief is only available for companies which are Cyprus tax residents. The question is whether this is compatible with one of the European Community (EC) Treaty fundamental freedoms, namely the freedom of establishment. CYPRUS GROUP LOSS RELIEF PROVISIONS AND THE EC LAW In order to evaluate this, reference to the European Court of Justice (ECJ) rulings should be made. The UK group loss relief provisions have been challenged at least twice. Historically, the first challenge of these provisions took place in 1998 in the “Imperial Chemical Industries Plc” (ICI) case. The then UK group loss relief provisions allowed group relief only between UK tax resident companies. ICI was refused by the UK tax authorities to claim group losses from its own subsidiary because those losses had been realised from trading in investment in companies which were not tax resident companies in the UK. The UK tax authorities reasoned as follows: as the profits from those companies were not subject to UK tax, corresponding losses could not have been surrendered. ICI challenged the case to the UK High Court, which in its turn stayed the proceedings and referred the case before the ECJ pursuant to article 236 of the EC Treaty for a preliminary ruling. ACCOUNTANCY CYPRUS ñ VOLUME 92 ñ SEPTEMBER 2008 ECJ stated that even though direct tax remains within Member States’ competence, Member States should nevertheless exercise this competence consistently with the Community Law. The case was examined from the perspective of “Freedom of Establishment” (Article 43 EC Treaty read with 48.). This was because the ECJ evaluated the purpose of the national legislation. Where the national provisions require a percentage of holding which allows the holding company to exercise significant influence over the other company’s policies and activities, then freedom of establishment is relevant. Article 43 of the EC Treaty provide that “ within the framework of the provisions set out below, restrictions on the freedom of establishment of nationals of a Member State in the territory of another Member state shall be prohibited..... Freedom of establishment shall include the right to take up and pursue activities as self-employed person and to set up and manage undertakings, in particular companies or firms within the meaning of the second paragraph of article 48....”. In the case of Cyprus, for group relief to be provided “...two companies shall be deemed to be members of a group if one is by 75% subsidiary of the other or both, each one separately, are by 75% subsidiaries of a third company”. Article 48 states “... Companies or firms means companies or firms constituted under the civil or commercial law, including cooperative societies, and other legal persons governed by public or private law, save for those which are non-profit-making” . After examining the UK group relief provisions, the ECJ concluded that there was an inequality between companies resident in the UK and those residents in other Member States. This was because in a comparable situation, i.e. should the trading of investments was in UK companies, group relief would be possible. As a result of the ECJ decision on ICI, UK group relief provisions were slightly changed. Following this change, group loss relief is now available to losses which are within the scope of UK tax law. Following this change it is possible that UK permanent establishment (PE) losses of non-resident companies are allowed to be set off against UK tax resident companies’ profits. Also, UK subsidiary losses were allowed against UK PE profits of a nonresident parent. 21 Group Relief for Losses However, in a more recent case, Marks & Spencer (M&S), (case C - 446/03) these revised UK group relief provisions were challenged again. M&S, a company registered and incorporated in the UK had subsidiaries in other Member States, including France, Belgium and Germany. M&S claimed losses incurred by its subsidiaries established in these countries. The UK tax authorities, however, did not allow group relief against M&S profits. This was due to the fact that the French, Belgium and German subsidiaries losses were not within the scope of UK tax law. These subsidiaries did not have UK PEs, to which losses could be attributed. M&S referred the case before the High Court. The High Court itself decided to stay the proceedings and refer the case to the ECJ for a preliminary ruling. ECJ said that prima facie, UK group loss relief provisions “hinder the exercise by that parent company of its freedom of establishment be detecting from setting up subsidiaries in other Member States” (paragraph 33 of the case). At this stage it is also important to refer to the provisions of article 43, in conjunction with those of article 48. Under the provisions of this article, the “host State” is required to apply its legislation to the nationals of other Member States in the same manner as its own nationals. However, it is now settled case law that the State of origin should not maintain provisions which restrict its own nationals from investing in other Member States. (Case C196/04 Cadbury Schweppes, Case C- 347/04 Rewe). ECJ then considered whether the restriction could be justified and whether “its application was appropriate to ensuring the attainment of the objective thus pursued and not go beyond and what is necessary to attain it”. The UK government provided three justifications: 1 The risk of tax avoidance 2 The risk of double claiming of losses 3 Allocation of taxing rights As there were no valid justifications of this inequality, the UK group relief provisions were held to be incompatible with article 43 of the EC Treaty. accepted in this case. In subsequent cases, some of these justifications could be accepted in isolation by the ECJ. [OyAA, Lidl Belgium etc] However, this was not the end of the story. Despite the fact that the above justifications for the restriction were accepted by ECJ, they failed the proportionality test since less restrictive rules could apply. More specifically, where the losses incurred by subsidiaries established in other Member States were considered being terminal or final, cross-border group loss relief should be allowed. Losses would be so considered were the surrendering company has exhausted all possibilities to utilise these losses. This includes carry back, carry forward or utilised by third parties. CONCLUSION It seems that the current domestic tax group loss relief provisions in the Cyprus tax law are not compatible with freedom of establishment and the ECJ ruling on Marks & Spencer. They are actually not even compatible with earlier ICI ruling! Therefore, some amendments would be necessary in order to avoid future challenges either from the Commission itself or via a Cyprus based company claiming losses from its subsidiary resident in another EU State. Such amendments would obviously enhance the Cyprus tax system’s competitiveness within the EU community. It is evident that the Commission’s Communication on Loss relief encourages EU Members States to take necessary provisions which give the opportunity under certain circumstances for cross border group loss relief within the Community. Cyprus should be one of the first Member States welcoming such practices. The ECJ stated that these justifications all together can be 22 ACCOUNTANCY CYPRUS ñ VOLUME 92 ñ SEPTEMBER 2008 The Cyprus Economy The Cyprus Economy Interview with the Minister of Finance, Mr. Charilaos Stavrakis The accountants contribute towards the successful establishment of Cyprus as a Financial Centre. Interview to Ninos Hadjiroussos, Editor and Tassos Anastasiades, Deputy Editor of accountancy Cyprus Journal According to the Minister of Finance Mr. Charilaos Stavrakis the rate of economic growth during 2007 reached 4.4% in real terms compared with 4.1% in 2006. This satisfactory rate of growth of the Cyprus economy was also reflected in the labour market, with the prevalence of almost full employment conditions. The Mr. Charilaos Stavrakis unemployment rate according to the Labour Force Survey (LFS) was 3.9% of the economically active population in 2007, as compared to 4.5% in 2006. The growth rate of the Cyprus Economy, owing partly to external factors, is expected to be around 3.8% in 2008 and 3.7% in 2009, with private consumption and the export of services being the main driving forces. Responding to the question about the current account deficit and how this is financed, Mr. Stavrakis stated that foreign direct investment (FDI), which reached 4.8% of GDP in net terms in 2007, has been a significant source of financing the current account deficit, thus reducing the need for borrowing from abroad. With regard to the productivity of the Cyprus Economy Mr. Stavrakis stated that measured as purchasing power per employee is estimated to be around 85% of the average EU productivity, and measures are being taken to improve it. In parallel measures are also being taken to improve the productivity of the public sector. As Mr. Stavrakis stated, bureaucracy in the public sector implies lengthy administrative procedures and increasing administrative burden, which result in higher costs for the entrepreneurs and the taxpayer. The reduction of bureaucracy is a major objective of the Government. “The ACCOUNTANCY CYPRUS ñ VOLUME 92 ñ SEPTEMBER 2008 increase of the effectiveness of the public sector, leads to positive effects on the business sector, more foreign investment and a better well being of the citizens of Cyprus”, Mr Stavrakis stated. With regard to the rationale for transferring the management of the pubic debt from the Central Bank to the Ministry of Finance Mr. Stavrakis stated that the Debt management policy is closely connected with the government’s fiscal policy and as such it should fall under the responsibility of the Central Government. This will ensure a better coordination and effectiveness of its policies and it will enable the Government to improve the utilization of its assets and the control of its liabilities, by gradually establishing an Asset Liability Framework (ALM). The interview with Mr. Charilaos Stavrakis follows: Mr Stavrakis we would like to start our interview by asking you to give us a broad outline of the prevailing economic situation in Cyprus. During 2007, the Cyprus economy exhibited satisfactory growth, notwithstanding the challenging external environment. The relatively low growth of the EU economy, the real effective appreciation of the Euro, as well as the significant increase of oil prices, which led to a deterioration of the terms of trade, had a negative impact on exports. The increase of disposable income, the reduction of real interest rates, the sustained fiscal consolidation as well as the exploitation of the comparative advantages of Cyprus in the services sectors constituted the main factors contributing towards strong growth. More specifically, during 2007, the rate of economic growth reached 4.4%, in real terms, compared to 4.1% in 2006. 25 The Cyprus Economy 3.7% in 2009, with private consumption and the export of services being the main driving forces. The employment rate will continue to improve, while the unemployment rate is expected to remain close to 4% in 2008. It should be noted that the forecasts regarding short term economic developments are surrounded by uncertainty, with considerable downside risks, such as whether credit-financed consumption well suddenly slacken. What about the inflation rate and the fiscal deficit for 2008 and 2009? The satisfactory rate of growth of the Cyprus economy was reflected also in the labour market, with the prevalence of almost full employment conditions. The unemployment rate according to the Labour Force Survey (LFS) was 3.9% of the economically active population in 2007, as compared to 4.5% in 2006. The rate of inflation, as measured by the Harmonised Consumer Price Index (HCPI), was 2.2% in 2007 as in 2006, despite the large increase of oil prices in world markets. The core inflation rate, which excludes the impact of factors of temporary nature on the inflation rate, reached 1.6% in 2007, reflecting the continuation of price stability conditions. The fiscal balance, as a percentage to GDP, exhibited a substantial improvement in 2007, a surplus of 3.2%, as compared to a deficit of 1.5% in 2006. The improvement of the fiscal balance in 2007 is attributed to the effective implementation of the fiscal consolidation programme. Public debt fell to 59.8% of GDP in 2007, as compared to 64.6% in 2006. What are the prospects of the economic growth of Cyprus for 2008 and 2009, given the unfavourable international economic environment? The Cyprus economy is expected to continue to expand at a satisfactory rate, however at slightly lower rates compared to 2007. Inflation, as measured by the Harmonised Consumer Price Index (HCPI), is expected to increase, due to the impact of changes in the price of crude oil and other commodity prices and will reach 4.8% in 2008, from 2.2% in 2007. However, in 2009 HCPI is expected to decrease just under 3%. The budgetary surplus is estimated at around 0.5-1% of GDP in 2008 and 0.7% of GDP in 2009. The reduction of surplus compared to 2007 is mainly due to the temporary character of some important increases of revenues in 2007, recent tax reductions, as well as the promotion of measures, aiming at improving social cohesion. The public debt is projected to decrease below 50%, that is, significantly under the threshold of 60% which constitutes an important objective for the member countries of the EU. Specifically, the public debt will be at 49% of GDP and 44.4% of GDP in 2008 and 2009, respectively. What measures are being taken to contain the inflationary pressures? Inflation pressures in Cyprus are, mainly, attributed to exogenous factors. In order, to contain the impact of these exogenous factors on inflation, the following measures are being promoted: ñ Pursuing fiscal consolidation and ensuring that wage increases are kept in line with productivity gains. The growth of the Cyprus economy, owing partly to external factors, is expected to be around 3.8% in 2008 and 26 ñ The Consumer Protection Service publishes, on a ACCOUNTANCY CYPRUS ñ VOLUME 92 ñ SEPTEMBER 2008 The Cyprus Economy regular basis, a list of prices of a basket of goods, to inform consumers and enable them to make a broad comparison among various supermarkets, petrol stations and bakeries. We consider this practice to have an important impact on raising awareness and transparency in markets. ñ Enhanced co-operation and active support of Consumer Association. ñ Strengthening the Competition Commission, with make the current account deficit manageable. The productivity of Cyprus is lower than the average of the Eurozone. What policies or measures are being taken or will be pursued to address this serious problem? Indeed, the level of productivity in Cyprus is lower compared to the EU average. Productivity of labour in Cyprus measured as the purchasing power per employee is estimated at around 85% of EU(25) average. additional staff. ñ Promotion of energy savings measures in the private and public sector. ñ Structural reforms, aiming at raising the productivity in the economy. The policy measures promoted by the Government, aiming at improving productivity, include the following: ñ fostering entrepreneurship and attraction of foreign investment, ñ reduction of administrative burden for enterprises Does the fact that the Cost of Living Index is linked to the payroll cost create inflationary pressures? (better regulation), ñ enhance investment in research and better link and The Cost of Living Index has served the Cyprus economy well, since it has safeguarded social peace, without leading to inflationary pressures or unemployment. In this context, our goal is to ensure that wages grow in line with productivity in order to enhance flexibility in labour markets. According to available data, bank credit is expanding at a very fast rate. Will this be a threat to monetary stability and will it contribute to the current account balance? Rapid credit expansion to the private sector has led to an increased deficit of the current account of the Balance of Payments. In order to offset the negative impact of credit expansion, it is considered necessary to maintain surpluses in fiscal accounts, follow wage moderation and, in parallel, enhance prudential supervision of the banking system. The current account deficit is a perennial problem, which in 2007 was 10% of GDP. How has Cyprus survived so far and what can be done to reduce this current account deficit? Foreign direct investment (FDI), which reached 4.8% of GDP in net terms in 2007, has been a significant source of financing the current account deficit, thus reducing the need for borrowing from abroad. The size of available financing for the current account deficit in the form of non debt flows is encouraging, as well as its composition, which includes sizeable inflows in the form of reinvested earnings, constitutes an additional strong factor helping to ACCOUNTANCY CYPRUS ñ VOLUME 92 ñ SEPTEMBER 2008 cooperation between business firms with universities and colleges, ñ upgrade education and training of labour force to match labour market needs. In parallel, in May 2008 a study was initiated, aiming at identifying ways for the improvement in the utilization of labour force in Cyprus. Are any measures being taken to improve the productivity of the public sector? Bureaucracy in the public sector implies lengthy administrative procedures and increasing administrative burden, which result in higher costs for the entrepreneurs and the taxpayer. The reduction of bureaucracy is a major objective of the Government. In order to combat this problem, several measures are being undertaken, the main ones being: ñ containment of the size of the civil service, ñ increasing the number of groups with interchangeable staff, ñ promotion of the introduction of a fairer personnel assessment system for civil servants on the basis of the study prepared by Price Water House Coopers, ñ continuous training of civil servants, especially for newcomers and further education of staff on EU issues, ñ simplification of procedures for the reduction of bureaucracy and the avoidance of work duplication among departments with similar work, 29 The Cyprus Economy ñ further promotion of the IT in the civil service and especially in the district hospitals, in courts and the continuation of the office automation programme, ñ enhancement on citizens_ service via the extension of the establishment of new Citizen Services Centres (CSC). It is planned that 2 more CSC_s in Paralimni and Paphos will operate in 2009 and by the end of 2008, a mobile CSC is also planned to begin operating. The reduction of bureaucracy is expected to have a positive impact on the Cyprus economy, as a whole. The increase of the effectiveness of the public sector, leads to positive effects on the business sector, more foreign investment and a better well being of the citizens of Cyprus. What is the rationale for transferring the management of the public debt from the Central Bank to the Ministry of Finance? The Debt management policy is closely connected with the government’s fiscal policy and as such it should fall under the responsibility of the Central Government. This will ensure a better coordination and effectiveness of its policies and it will enable the Government to improve the utilization of its assets and the control of its liabilities, by gradually establishing an Asset Liability Framework (ALM). Under the current legislation, the Government and more specifically the Ministry of Finance was strongly involved in the debt management process as it is the competent authority for determining the timing and the nature of newly issued public debt. This framework created a conflict of responsibilities with the Central Bank and confusion which needed to be resolved with the introduction of a clear new framework. This transfer is in line with international practice, as in most advanced economies the debt management function has been removed from the Central Bank. It has either being transferred to another independent agency or back to the government, thus allowing the Central Bank to concentrate on its core responsibilities and the government to better manage and co-ordinate its key policies. What are your views about the setting up of a single Regulatory Authority? Over the last 20 years, an increasing number of countries 30 have started to examine the way they regulate and supervise financial intermediaries. Many countries, especially in the EU, have adopted integrated supervision in response to the growing importance of financial conglomerates and blurring distinctions among some of the banking, securities and insurance companies, which had made it more difficult to supervise their financial sectors through separate agencies. Other countries, with small economies have adopted integrated supervision in order to maximize economies of scale and scope, thus reducing the operating costs of having several supervisory entities. In view of the above and the fact that Cyprus has in place a multiple sectoral supervisory model, the Ministry of Finance has set up an Ad hoc Committee, with the participation of all supervisory authorities, to examine whether there is a need for an integration of the supervision of the financial sector in Cyprus. The Committee will prepare a report analyzing the existing supervisory structure and proposing ways to improve it, if this is needed. However, potential changes in the supervisory structure if deemed necessary, will be promoted with great caution, so as to ensure the effective supervision of the financial sector. How the current unfavourable international economic environment will affect the Cyprus economy? In Cyprus, the exposure of the financial sector is limited to risks related to the current international financial turmoil. However, the expected slowdown of the economic growth in the European and Eurozone economy is likely to affect, to some degree, the export performance of Cyprus, and the economy in general, particularly in 2009. In this context, I would like to reiterate that Cyprus is well equipped to cope with the unfavourable international economic environment. Finally, how do you see the role of our Institute and its members in the Government plans for establishing Cyprus as a financial centre? Cyprus has enjoyed considerable economic success. This can be largely attributed to the well-educated, dynamic and flexible workforce. A vital part of this workforce are accountants. The accountants through the provision of their services for businesses and foreign investors contribute towards the successful establishment of Cyprus as a financial centre. ACCOUNTANCY CYPRUS ñ VOLUME 92 ñ SEPTEMBER 2008 The Downturn in Share Prices The second downturn in share prices The downturn in Cypriot share prices toward the start of the year was a direct result of the uncertainty caused by the financial subprime crisis that hit the banking industry in the USA. Since the banking industry is closely associated with investment, the atmosphere of doom there quickly had a severe By Dr. Jim Leontiades, Cyprus International Institute impact on share prices. of Management Many European banks quickly discovered they too were vulnerable to mortgage related problems. European shares followed the USA downturn. Whatever else one my say about globalization, it is undeniable that today’s financial markets are global. European share prices are closely linked to USA share prices. This is evident from even a casual observation of the variations in New York share prices compared to those of London, Paris, Milan and Cyprus. After a few months, the financial crisis appeared to subside. It appeared the worst was over. With Spring, came the first signs of a second downturn in share prices, this time related to events in the real economy. Oil prices which had been rising took to the stratosphere. A new phenomenon was the onset of a world shortage in commodities driven by the rapidly developing economies of India and China. Accounting for almost a third of the world’s population, their demand for oil, grains, metals introduced a new level of demand for these commodities that sent their prices upward. Unemployment jumped in the USA, consumer confidence dropped, inflation rose. The central banks of the developed economies were able to bring about some measure of control over the first, the banking crisis. But when the second downturn hitting the real economy arrived, the Federal Reserve was (and is) effectively out of ammunition. Any further lowering of ACCOUNTANCY CYPRUS ñ VOLUME 92 ñ SEPTEMBER 2008 interest rates would only spur the inflation already evident in oil and commodity prices. The prospect of no further interest rate reductions and even interest rate increases has placed further downward pressure on share prices. CYPRUS - A FUTURE ECONOMIC SLOWDOWN Share prices in Cyprus have been closely connected to these events, with a major difference. For every drop in the New York Dow Jones index of share prices, Cyprus share prices drop much more. While the Dow Jones has dropped some 14 % from the first of the year, the Xak has dropped 40%! This is despite the fact that we have not had a subprime crisis here. The banks have been earning record profits, employment is high and Cypriots are confident and spending as if there were no tomorrow. Cypriot banks are enjoying financial results that most foreign banks in Europe and the USA can only dream of. We will no doubt feel the real impact of rising oil prices and commodity prices in the future, particularly this winter. It is also fairly certain that the overblown land prices that currently prevail in Cyprus will also suffer. However, the special circumstances that brought about the subprime crisis are not present in Cyprus (thanks partly to the policies of the central bank). Cyprus is also different in certain other respects. Although share prices here are more volatile than those in the major developed countries, a comparison of countries on the basis of the real economy shows the reverse. After the dot com bubble of 2000, the USA and much of Europe suffered a recession (Gross National Product contracted). The economy in Cyprus, showing less volatility, did not contract. During the post bubble period Cypriot GNP growth continued to grow but at a slower pace, dropping to an annual low growth rate of 1.9% for a year and subsequently growing rapidly. Eventually this continued growth in the economy made itself felt in Cypriot share prices. People who had taken advantage of the exceptionally steep fall in share prices during the last economic slowdown made a killing when the upturn came. 33 The Downturn in Share Prices WILL THIS BE REPEATED? NO ONE KNOWS. THE XAK IS MOVING DOWNWARD Sharply and is likely to continue in this mode. The Cypriot economy is still growing at a healthy rate but we will not escape untouched. An impact from the global increase in prices and the credit crisis will eventually effect Cyprus. Indeed the indications are that this is already happening. The good news is that once again the impact on the real economy here is likely to be less than that in the major industrial countries. In brief, it is likely that once more we will see that share prices are dropping faster than warranted by a decline in the real economy and the earnings of Cypriot companies, particularly in the case of the banks and the larger companies here. This means that the amount of money required to buy future income derived from owning Cypriot shares is falling. This is reflected in higher dividend yields and lower price earnings ratios, particularly in the banking sector. Investors buying shares for future capital gains are taking a beating. However, investors buying shares for future income may still do well. All this is taking place in a climate of uncertainty which has made investors fearful. Is this an opportunity? Buffett’s advice: “be greedy when other are fearful and fearful when others are greedy”. Main funding programmes for EU Main EU funding programmes for business By Christos Tavelis Director Deloitte Member of European Union Affairs Committee INTRODUCTION 34 ACCOUNTANCY CYPRUS ñ VOLUME 92 ñ SEPTEMBER 2008 Main funding programmes for EU ACCOUNTANCY CYPRUS ñ VOLUME 92 ñ SEPTEMBER 2008 37 Main funding programmes for EU 38 ACCOUNTANCY CYPRUS ñ VOLUME 92 ñ SEPTEMBER 2008 Chartered Accountants Benevolent Association Chartered Accountants Benevolent Association CABA - CYPRUS - FREQUENTLY ASKED QUESTIONS Interview with Mr. David Barker, Chief executive of the Organization and Mrs Pamela Wood Head of Support and Development. By Tassos Anastasiades CABA is the Chartered Accountant’s Benevolent Association. It was established by Chartered Accountants in 1886 as a not for profit organization which helps Chartered Accountants and their dependant families in times of need. Where does your money come from? Mr David Barker, Chief executive of CABA and Mrs Pamela Wood Head of Support and Development, visited Cyprus after an initiation by Mr. Nicos Syrimis who is a member of the ICAEW Council and who represents all Cyprus based Chartered Accountants at the ICAEW, while he is also a valued volunteer and supporter of CABA. Mr. Nicos Syrimis is also a member of the Council of ICPAC. CABA is a not profit organization which helps Chartered Accountants and their dependant families in times of need. While in Cyprus we had the opportunity to meet with them and had the following interesting interview. At the interview Mr. Nicos Syrimis was also present. We would like to start our interview by asking you to tell us what is CABA. ACCOUNTANCY CYPRUS ñ VOLUME 92 ñ SEPTEMBER 2008 CABA is funded by a mixture of donation income from individual Chartered Accountants and from investment income. Our turnover is about GBí2.5m of which about EBí1m will be given away as direct financial donations and a large proportion of the remainder is spent on providing non - financial support services. Why does CABA exist, after all, who has ever heard of a poor Chartered Accountant? There are 152.000 Chartered Accountants (including 12.000 Students) in over 183 countries around the world. More than half do not work in accountancy. We are able to help those who become disabled or chronically ill, unemployed or made redundant and those who experience mental ill health or breakdowns due to stress. Some of those we help are widows or orphans. There is an ever growing demand for our services. 41 Chartered Accountants Benevolent Association Who is eligible for your support? Any member or ex member of the ICAEW, the Institute of Chartered Accountants in England and Wales, together with any ACA Students. We are also able to assist the dependants of the Members and Students. We define dependants as broadly as we can and we include unmarried and single sex partners as dependants. What services do you offer? Available in Cyprus: ñ We provide single grants and regular, on - going financial support for those in financial need. ñ We have a 24 hour telephone advice line which also offers a counseling service that deals with things like Bereavement, Addictions such as gambling, alcohol and drugs abuse, work and personal relationship problems, stress, bullying and much more. ñ We have an information web site that provides support for all the above but also covers things like returning to work and care of the elderly. The web site is always expanding offering more and more information. The web site is www.youcount.org.uk. ñ We offer skills training in how to identify and cope with stress and addictions and we also offer courses to senior managers about the risks their business now faces if they do not address the stress levels amongst their staff. preparing for retirement. The second part of our development plan is to better help those outside the UK. Our visit to Cyprus is the start of that international focus. The ICAEW, whose members we support, is the leading international accounting organization and increasingly its membership is coming from outside the UK. Is CABA part of the ICAEW? No, CABA is completely separate from the ICAEW with independent elected Trustees who make up its Board. The ICAEW has no influence over CABA at all. The President of the ICAEW is the Honorary Patron of CABA but is not part of its Board and plays no part in the running of CABA. Are your services confidential? Yes, we do not pass information to the ICAEW or to the regulatory bodies around the world. Our 230 Chartered Accountant volunteers in 22 countries and our staff are exempted from the ICAEW rules of reporting while operating for CABA so we can guarantee confidentiality. Why did a CABA team visit Cyprus in 2008? We were invited by Nicos Syrimis who is a member of the ICAEW Council and who represents all Cyprus based Chartered Accountants at the ICAEW. He is also a valued volunteer and supporter of CABA What have you achieved in Cyprus? ñ Nicos Syrimis is the Chairman of KPMG Cyprus and is Only available in the UK: We are running trial programmes to support those with money and debt management problems and also to support those who care for people in their own families who cannot care for themselves. Those being cared for are not just the disabled but also those with mental health problems, chronic or terminal illnesses, the elderly and so on. These services we hope will eventually be available to Members and Students who live outside of the UK. What are your plans for the future? also a council member of ICPAC and ICAEW. He is a volunteer supporter of CABA and he attended one of our training courses is the UK. Nicos realized that similar training was not available in Cyprus and asked CABA to provide this training to his management team at KPMG and to his staff. He is also enlisted the support of ICPAC and he introduced us to the other large and small firms of Chartered Accountants in Cyprus. As a result, we have been able to run and fill 16 training courses during our week long visit. ñ We have also met with those we financially support and with our volunteer supporters in Cyprus. Our future plans are to develop more targeted and relevant services for Chartered Accountants and their families. At present we are looking at supporting people who return to work after maternity or a career break, to develop a well being programme and to provide support to people 42 ñ Lastly, but importantly, we have met with the officers of ICPAC who have their own benevolent fund. It may be that we can impart our knowledge and so help develop their own support services in Cyprus. ACCOUNTANCY CYPRUS ñ VOLUME 92 ñ SEPTEMBER 2008 Agreements for the Construction of Real Estate IFRIC 15 Agreements for the Construction of Real Estate BACKGROUND SUMMARY OF PROPOSALS It is common practice for real estate developers to market their developments well before the start of any construction and this activity then continues throughout the construction period. SCOPE OF THE INTERPRETATION A typical ‘off plan’ arrangement will involve a By Gabriel Onisiforou, buyer entering into a sales Partner Ernst & Young agreement with a developer to acquire a specific unit upon completion of construction. Often the buyer is required to pay a deposit, which is only refundable if the developer fails to deliver the unit as contracted. Accounting for such arrangements is not consistent. Some real estate developers recognize revenue from these arrangements as construction progresses by reference to the stage of completion of the development, while others recognise revenue only when the completed unit is handed over to the buyer. IFRIC 15 addresses this divergence in accounting treatment and clarifies when and how revenue and related expenses from the sale of a real estate unit should be recognised if an agreement between a developer and a buyer is reached before the construction of the real estate is completed. Furthermore, the interpretation provides guidance on how to determine whether an agreement is within the scope of IAS 11 or IAS 18. The IFRIC has named the interpretation, ‘Agreements for the Construction of Real Estate’, because the primary issue of whether an agreement is within the scope of IAS 11 or IAS 18 only arises from agreements that include construction activities. Although the interpretation is not intended to be applied outside the real estate industry, it may be applied by analogy to industries other than real estate in accordance with the IAS 8 hierarchy. DETERMINING WHETHER THE AGREEMENT IS WITHIN THE SCOPE OF IAS 11 OR IAS 18 Determining whether an agreement for the construction of real estate is within the scope of IAS 11 or IAS 18 depends on the terms of the agreement and all the surrounding facts and circumstances. Such a determination requires judgment with respect to each agreement. IAS 11 applies when the definition of a construction contract is met. Let us assume an entity buys a plot of land with the intention of constructing an office block, the entity then markets the office block to potential buyers and signs an agreement for the sale and construction of the office block with one of the potential buyers. The buyer may not put the land or the incomplete office block back to the entity. All the major structural decisions of the development are made by the entity - the buyer has little or no influence on the design. This arrangement should be separated into two components: ñ a component for the sale of land; This Interpretation supersedes the current guidance for real estate (Example 9) in the Appendix to IAS 18. It is applicable retrospectively for annual periods beginning on or after 1 January 2009. and ñ a component for the construction of the development. The sale of land component is within the scope of IAS 18 ACCOUNTANCY CYPRUS ñ VOLUME 92 ñ SEPTEMBER 2008 43 Agreements for the Construction of Real Estate and revenue is recognised when the criteria of paragraph 14 of IAS 18 are met. The construction component is less straight forward; the key question being whether the arrangement meets the definition of a construction contract in accordance with IAS 11. This depends on the terms of the agreement as well as all of the surrounding facts and circumstances, and requires judgment with respect to each agreement. The most important feature is whether the buyer is actually specifying the main elements of the structural design of the property. If this is not the case, then the definition of a construction contract is not met and the arrangement is accounted for under IAS 18. The interpretation goes on to say that, when the arrangement is not a construction contract, but is an agreement for the rendering of services, then revenue can be recognised by reference to the stage of completion of the transaction using the percentage of completion method. This means the entity, in fulfilling this service does not acquire and supply the construction materials. This, in effect, means that again the requirements of IAS 11 are applicable to the recognition of revenue. When an agreement involves providing services with the construction materials, this is considered a ‘sale of goods’. In these cases, it is possible for a developer to recognise 44 revenue by reference to the stage of completion if the risks and rewards of ownership are transferred to the buyer on a continuous basis. For example, if the agreement is terminated before construction is complete, the buyer retains the work in progress and the entity has the right to be paid for the work performed, this might indicate that control is transferred along with ownership. Again, this would mean that the stage-of completion principles in IAS 11 would apply. Unfortunately, the Interpretation does not explain in detail how the continuous transfer concept works in practice. An entity will need to demonstrate that it will not retain either continuing managerial involvement to the degree usually associated with ownership, or effective control over the constructed real estate. This is highly subjective. For example, if an entity guarantees a return on the buyer’s investment for a specified period, this may be a typical example where managerial involvement remains with the entity. In this case, recognition of revenue may be delayed. Finally, when an entity transfers control and the significant risks and rewards of ownership of the real estate in its entirety only upon completion of the construction, then revenue will only be recognised when all the criteria of paragraph 14 of IAS 18 are met. ACCOUNTANCY CYPRUS ñ VOLUME 92 ñ SEPTEMBER 2008 Agreements for the Construction of Real Estate DISCLOSURES IMPACT The IFRIC sets out that, if an entity applies the percentage of completion method because it met the ‘continuous transfer’ test, then the disclosure requirements of paragraphs 39 and 40 of IAS 11 apply. In this case, an entity shall disclose: ñ How it has determined which agreements meet all the criteria in paragraph 14 of IAS 18 continuously as construction progresses; ñ The amount of revenue arising from such agreements in the period; and ñ The methods used to determine the stage of completion of agreements in progress. Many real estate developers will have to revisit revenue recognition for their developments. ACCOUNTANCY CYPRUS ñ VOLUME 92 ñ SEPTEMBER 2008 Although the IFRIC clarifies when the percentage of completion method can be used, it is unlikely in many situations that many arrangements will meet the necessary criteria. Therefore, such arrangements will result in deferring recognition of revenue (and therefore profit) until construction is complete. Diagram: Analysis of a single agreement for the construction of real estate 47 The Eurozone Economy Eurozone: Between Recession and Slowdown The European Central Bank (ECB) forecasts that the rate of growth for the Eurozone in 2008 will be reduced to 1.4%, which is marginally higher than the 50% of the growth rate achieved in 2007, although there is a possibility to accelerate to 1.8% in 2009. Economists, however, argue that the forecast of the ECB is optimistic. The GDP of the By Andreas Athanasiades, Eurozone during the second Director KPMG quarter in 2008 was reduced by 0.2% and it is estimated that the growth rate for the third quarter was not better than that of the second quarter. Thus if in the third quarter of 2008 there was also a drop in production then we must be speaking of recession in the Eurozone since there will be a drop in the production for two consecutive quarters. The ECB at its meeting of the 4th September 2008 and in spite of danger for recession did not reduce the basic interest rate which was left unchanged at 4.25% as it was fixed last July. The Organization for Economic Cooperation and Development (OECD) forecasts that the Eurozone will avoid recession although it will not achieve a growth rate higher than 1.3% in relation to 1.7% which was the previous forecast. Mr. Loucas Papadimos, Vice President of the ECB, has stated that although the economic activity in the Eurozone has slowed down gradually it will recover in the third quarter of 2008 and will accelerate in 2009. First the world demand for the Eurozone exports together with the revival of the confidence of the consumers will help avoid recession. Referring to the decrease of the production during the second quarter of 2008, both the European politicians as well as economists have stated that this worsening was the result of the correction from the strong economic growth which was recorded in the first quarter of 2008, when the GDP increased by 0.7%, mainly as a result of the strong performance of the German economy. But in the second quarter of 2008, the GDP in Germany decreased by 0.5% and that of France by 0.3%. Ireland has achieved an average annual growth rate of the order of 7.2% in the last decade mainly as a result of massive foreign investments. But now analysts are forecasting that the GDP of the country will decrease by 0.4% in 2008 before achieving a ACCOUNTANCY CYPRUS ñ VOLUME 92 ñ SEPTEMBER 2008 growth rate of 1.9% in 2009. Unemployment in Ireland has reached the level of 7.1% of the working population and in 2009 for the first time since 1990 the country will have a net export of about 20,000 workers. The main reason for this is the drop in the construction sector with the number of houses being erected reduced from 78,000 in 2007 to an estimated 30,000 in 2009. Also in Spain the purchase of houses by foreigners, who helped the country achieve a high economic growth during the last ten years, has dropped by 26% in relation to the previous year and 50% in relation to the previous quarter. Germany has avoided the drop in prices of houses since, to start with, there were no significant increases in prices and in contrast to the USA, Germany is the world’s financier since, according estimates by OECD the surplus in the current account of Germany has reached 7.7% of GDP. But the rest of the Eurozone, however, including Cyprus, are facing a drop in the prices of houses. Prices of houses decreased more in Spain, Ireland and France since these countries previously had the highest price rises. The drop of prices of houses is worst in Ireland and the GDP which increased by 6% in 2007 is forecast to decrease in 2008. The economy of Ireland, however, is small and thus it does not have a serious impact on the rest of the Eurozone, as opposed to Spain which represents the 1/8 of the GDP of Eurozone and a drop in production can affect the rest of the Eurozone economy. It is noted that retail sales in Spain decreased by 8% in relation to the average of the last 12 months while unemployment is on the rise. According to a report by the OECD the worries with regard to the trend of inflation in the Eurozone lead to the conclusion that it will be more difficult to control inflation than in the USA. As the report of the ECB states, the inflation rate in the Eurozone will not return to the target of 2% or below until 2010. This means that the decrease of the interest rates is not being considered in spite of the danger of recession in the Eurozone. Thus the markets are not expecting a decrease in interest rates until the middle of 2009. The inflation rate of the Eurozone decreased to 3.8% in August from 4% in July while for 2008 it is expected that the average inflation rate will be 3.5%. In this respect it is noted that the inflation rate in Cyprus is 5.1%. As Mr. Jean - Claude Trichet, the President of the ECB, has stated the wage rates in the Eurozones increased at a higher rate than productivity which has led to the increase of costs per unit of production. 48 International Financial Reporting Improvements to International Financial Reporting Standards 2008 - Part 2 By Yiannis Leonidou Deloitte Member of the IT and Consultancy Services Committee of the ICPAC On 22 May 2008, the International Accounting Standards Board (IASB) issued its latest Standard, titled Improvements to International Financial Reporting Standards 2008 (IFRSs). This is the first Standard published under the IASB’s annual improvements process which is intended to deal with nonurgent, minor amendments to Standards. The Standard includes 35 amendments, and is split into two parts: ñ Part I - amendments that result in accounting changes for presentation, recognition or measurement purposes; and ñ Part II - amendments that are terminology or editorial changes only, which the Board expects to have no or minimal effect on accounting (summarised in Table 1 below). In the June edition of the acountancy magazine we have presented the impact of the amendments to IFRSs that result in accounting changes for presentation, recognition or measurement purposes. The purpose of this article is to provide further details for the impact of part II of the standard. Table 1 summarises the impact of these amendments. Table 1: Amendments expected to have no or minimal effect on accounting (Part II of Standard) Standard Subject of amendment Detai IFRS 7 conflict Presentation of finance costs Resolution of the potential between IAS 1 and IFRS 7 by amending the Implementation Guidance accompanying IFRS 7 to clarify that interest income is not a component of finance costs. IAS 8 Status of implementation guidance Amendment to clarify that application of the guidance issued with IFRSs that is not an integral part of the Standard is not mandatory in selecting and applying accounting policies. IAS 10 to why Dividends declared after the end of the reporting period Clarification of the explanation as a dividend declared after the reporting period does not result in the recognition of a liability. ACCOUNTANCY CYPRUS ñ VOLUME 92 ñ SEPTEMBER 2008 51 International Financial Reporting IAS 18 Costs of originating a loan Removal of inconsistency between IAS 39 and the guidance in IAS 18 relating to the definition of costs incurred in originating a financial asset that should be deferred and recognised as an adjustment to the effective interest rate. IAS 18 is amended to refer to transaction costs as defined in IAS 39. IAS 20 Consistency of terminology with other IFRSs Amendments to conform terminology used in IAS 20 to equivalent defined or more widely-used terms. IAS 29 Consistency of terminology with other IFRSs Amendment to conform terminology used in IAS 29 to reflect the equivalent defined or more widely-used terms. IAS 34 Earnings per share disclosures in interim financial reports Amendment to clarify that the presentation of basic and diluted earnings per share in interim financial reports is required only when the entity is within the scope of IAS 33. IAS 40 Consistency of terminology with IAS 8. Amendment to text to ensure consistency with the requirement of IAS 8. IAS 40 Investment property held under lease Clarification as to how an investment property held under lease should be measured where the fair value model is applied. IAS 41 Examples of agricultural produce and products Removal of ‘logs’ as an example of agricultural produce (and replacement by ‘felled trees’), because logs are considered to be products that are the result of processing after harvest. IAS 41 Point-of-sale costs Replacement of the terms ‘pointof- sale costs’ and ‘estimated point-of-sale costs’ in IAS 41 with ‘costs to sell’ to ensure consistency with IFRS 5, IAS 2 and IAS 36. the This article intends to provide a general guide on the above subject so it is recommended that specific advice is sought before any action is taken. 52 ACCOUNTANCY CYPRUS ñ VOLUME 92 ñ SEPTEMBER 2008 Investment Banks Investment Banks would be facing more strict regulations According to a study by the American Investment Bank Morgan Stanley and the Economic Advisory Services Company Oliver Wyman, investment banks are now facing the worst financial crisis of the last 30 years. The study of these two organizations states that the revenue of the investment banks could be reduced by 45% in 2008. The By Angelos Gregoriades, writedowns for the housing loans in the USA and with Partner KPMG reduced revenue in all their activities will cost the industry their revenue equivalent to six quarters. The European Banks have a deficit amounting to $400 billion in spite of the substantial issue of shares to share holders. This amount is higher by 20% in comparison to that at the end of 2007 which raises questions with regard to the economic condition of the investment banks while as the Citigroup states the financial crisis continues to deepen. The problem which is created by the activities of the investment banks is that they lend to persons who want to buy assets when the economy is expanding, which leads to the increase of prices both of shares and immovable property. During periods of recession, when prices are falling, the banks are asking for the return of their loans and thus they force the debtors to sell their assets something which leads to the acceleration of the fall in prices. Actually the Regulatory Authorities should intervene in the activities of investment and international banks and ask from them to collect more money during booming conditions, something which could help them in financial crises. If there was such an arrangement the housing loans crisis should not appear to such an extent. But such regulations should be international because otherwise the loans from a country with strict regulations will be directed to countries with less strict regulations. The Regulatory Authority should also be careful during periods of falling prices, because it is during such periods that the banks need capital to stay afloat. But such regulations could not be popular with the banks. This is because the money to be used as capital does not have revenue and consequently there will be lower profits. It may be noted that these rules should apply both to the investment banks and to the commercial banks. ACCOUNTANCY CYPRUS ñ VOLUME 92 ñ SEPTEMBER 2008 The international banks are to meet with American, European and Asian regulators in Basel of Switzerland to consider the best way that the financial organizations could manage their liquidity risks and the effects of the financial crisis. The Regulatory Authorities are intending to press the banks to adopt new regulations as to how they must manage their business so as to better face the financial crises. Something which is necessary is that the banks should have more liquid assets, but it is doubtful that the investments banks will accept the new regulations without protest because if they maintain large liquid assets it is something which will increase their costs and reduce their profits. Until last year’s summer most banks and certain regulatory authorities believed that the development of capital markets reduces the possibility of lack of liquidity in the banks. Since last year the facts have proved wrong this hypothesis and has left the regulatory authorities determined to make more strict the regulations about liquidity. Basel Committee has issued a discussion paper in which suggestions are made for the international banks. One of these suggestions is that the banks should maintain strong reserves of liquid assets so as to be in a position to face extended periods of crises with regard to liquidity. Of course a hasty decision with regard to the regulations of the banks may do more harm than good. Therefore the introduction of regulations should proceed with caution and in any way the world capital markets should be regulated by international regulations or at least there should be close cooperation between the national Regulatory Authorities. Now that the investment banks believe that the Central Banks can help them, a more careful supervision is needed with higher percentages of capital. The commercial banks argue that the investments banks should be subject to the same strict regulations with regard to their capital as the commercial banks. Certain investment banks like Lehman seems to be willing to accept more strict regulations while others with greater self - confidence, like Goldman Sachs, believe that less regulations are needed because investment banks are financed by capital markets and not by the guaranteed deposits by the government. It may be noted that recently Lehman was hit by doubts about raising capital and it has filed for bankruptcy. With the situation still uncertain, however, there is a possibility that there will be arguments against more strict regulations which increase the costs of investment banks and reduce their profits. 55 Real Estate Opportunities at Protaras + Paphos Presumably this article should have been written with foreign potential residents in mind in the foreign press as opposed to a local newspaper. The drop in demand both by locals, as well as by the foreign market has started to have an effect on local property prices and in particular for apartments of the “routine” nature and By Antonis Loizou with no special facilities and Antonis Loizou & Associates Ltd - Property Valuers & Consultants location. At the same time developers, who were used to speedy sales in numbers and as a result of vested speed, are still producing such apartments and now they have got the initial shock of the drop. Foreign agents who have the capability to sell units by the hundreds, are abandoning the island, [some of them have gone into voluntary liquidation in order to avoid numerous claims against them by their clients], whereas the greatest fear of the developers, the resales are increasing in numbers. There are now such good resales for sale that their prices are indeed competitive. As an indication and for routine projects, we have experienced a general drop of values as follows over the last 6 months. What is more worrying is the fact that the drop is increasing and it appears also that this summer season has not helped towards the revival of demand. So, what will happen during the winter period until the new summersales period of 2009 comes? Regrettably the word property markets’ active buyers (the Russians) have specific requirements, which are specified in terms of location and type of property. The Russian demand directs itself towards villas, either on the beach, or those close to the beach, but with sea views. At the same time their interest is directed towards Limassol (by approximately 80%) and the rest in other towns, with Paphos getting only a small share of this lucrative demand. 56 The fast reducing demand from the U.K. (which represents approximately 70% of the total foreign demand in Cyprus) has many explanations and the main reasons for this are recorded below. This is in addition to the situation of the real estate market in the U.K. and the uncertainties of the U.K. economy in the future. In addition to the general real estate market (worldwide) situation, Cyprus has had added taxes on real estate, as well as other burdens which are recorded below (main causes) and which have added to the increase in the acquisition costs: *: The base rate is the rate the Central Bank lends to the banks there is an extra margin on top of 1.75%-2% by the banks to their customers. *2 : Expectation on our part *3 : Against the Euro, sterling has lost its value ACCOUNTANCY CYPRUS ñ VOLUME 92 ñ SEPTEMBER 2008 Real Estate [2008/2007] by 14.5% . It is expected by economic circles that this will stabilize in 2009 around 8-10% loss in value. that will govern the final price of property. The prevailing situation is expected, on present trends/ conditions, to continue for another 12-18 months. *4 : The year 2008 had the most increase in construction costs due to the oil increases. In the first 6 months costs rose by 20% on materials and 6% on labour. Normal increase, in construction costs, [up to 2006], were around 10% on overall costs. In the year 2007 the increase was 4%. We are of the opinion that prices for certain type of properties, such as tourist areas [ holiday homes] will drop and stabilise on all areas over this period except Limassol, where it will have the minimal drop effect and even increase due to the Russian preference. As can be seen, from the above table of costs, there are four basic reasons for the increase in price, of property in 2008, for the UK orientated buyer: a. The increase in the lending base rate from 3.75% 5.25% b. The increase in the contribution [deposit] from 20% 30% c. The difference in the sterling value which lost about 14.5% of its value against the Euro. d. The increase in construction costs, which ultimately is passed on to the sales price. However, at the end of the day, it is the Demand & Supply So for those who are in search for property, value for money, now is the time to start looking. Of course the more one waits our expectation is that the more apartments and other accommodation will appear in the market, but on the other hand, the good units will be the first to go. Looking at the same subject on the owners/developers side, we will suggest to be as much accommodating, regarding prices, as you can. For example, if you are charged a 7% p.a. cost on your loan, it is better to drop the price by 7%, rather than expect a better price in the future, since the future is not certain (the cost of maintenance, taxes etc apart). Dear readers we are sure that we have made some of you happy and some of you unhappy, but for those who might rush to buy property without titles, please follow our 10 Commandments in buying and with the special reference to the Bank release and resale clause being on top of your requirements. IAS 40 - Investment Property Amendments to International Accounting standard 40 Investment Property INTRODUCTION Andreas Aspris Assistant Audit Manager Baker Tilly Klitou In May 2008 the IASCF, added to its issue of Improvements to IFRSs, certain amendments to IAS 40 “Investment Property”. These amendments aimed to provide clarity to the conflicting provisions regarding the treatment of an investment property categorised for undetermined use, which is being ACCOUNTANCY CYPRUS ñ VOLUME 92 ñ SEPTEMBER 2008 constructed or developed. The amendments provide also necessary clarification in respect to the issue that arises, when an entity is unable to determine reliably the fair value of an investment property. CURRENT SITUATION Investment property as defined in IAS 40, is property (land or building - or part of a building - or both) held (by the owner or by the lessee under a finance lease) to earn rentals or for capital appreciation or both. As quoted in the relevant standard, the following uses of a property do not fall into the scope and definition of IAS 40: 57 IAS 40 - Investment Property (a) use in the production or supply of goods or services or for administrative purposes, or (b) sale in the ordinary course of business Some examples of investment properties are specifically quoted in the standard: (a) land held for long term capital appreciation rather than for short-term sale in the ordinary course of business (b) land for currently undetermined future use As paragraph 9(d) states, a property which is being constructed or developed for future use as an investment property should be accounted for as property under construction and therefore the regulations and provisions of IAS 16 “Property, plant and equipment” should apply until the construction or development is completed. On the other hand, as quoted in paragraph 58 of the standard, if an entity begins to develop an existing investment property for continued future use as an investment property, the property remains as an investment property unless there is evidence for a change in use in the specific property. It is clearly visible from the above that there is a conflict between paragraphs 58 and 9(d). The conflict becomes apparent when we consider the following example: Consider an entity which acquires a plot of land which at this initial stage, its use is undetermined. According to paragraph 8(b), this property should be classified as investment property. In a later stage the entity decides to construct or develop its investment property for future use as an investment property. Paragraph 9(d), states that this investment property should be treated under the provision of IAS 16 until the end of the construction and development. This is also supported by paragraph 57(e) which states that “end of construction or development, for a transfer from property in the course of construction or development (covered by IAS 16) to investment property”, is an example of evidence of change in use and therefore transfer under the provisions of IAS 40. Following the provisions of the standard there is an apparent conflict between paragraphs 9(d) and 58. The questions is whether the entity should continue classify its property as an investment property during the construction or development stage or treat the property under the provisions of IAS 16 until construction and development is completed. In simple words the provision of the standard were conflicting to the fact whether, upon construction or development of an investment property currently classified for undetermined use is actually a change in use during the period until construction or development is completed. One can argue that it is just a difficulty in understanding 58 the interpretation of the provisions of the standard, but what if we consider the different approaches to the recognition of the gains from the measurement of the fair value each year end. Then the issue becomes material. The change in fair value under IAS 16 is transfer as revaluation reserve in equity but on the other hand gains from change in fair value of an investment property are recognised to the Income Statement. Considering the fast moving changes in the fair values properties the issue becomes highly interesting. AMENDMENTS The relevant amendments were specifically focus to this situation and were aimed to provide a consistent and clear treatment of such a situation. As issued in May 2008 the amendments included a new paragraph (8(3)) which specifies as an example of investment property which previously was not mentioned, the “property that is being constructed or developed for future use as investment property”. It also abolished paragraph 9(d) which stated that “the cost of a self constructed investment property is its cost at the date when the construction or development is completed. Until that date an entity applies IAS 16 and upon completion it is transfers under IAS 40”. It is also included in paragraph 53 which states how an investment property is to be treated when there is an inability to determine its fair value reliably, that if the fair value of an investment under construction cannot be measured reliably, the entity can measured its investment property at cost until the construction is completed or the fair value can be measured reliable, whichever the earlier. CONCLUSION By issuing the above amendments the necessary clarification is provided so as to have a clear interpretation to the classification of properties which are at the stage of the construction or development for future use as investment properties. It is now clearer to reach a firm conclusion if the relevant situation exists that a change in use which is the main factor to change the treatment of the property from IAS 40 to IAS 16 is not occurred. We must highlight though that the uncertainty in identifying the change in use that is supported by all the relevant evidences remains. The above amendments to IAS 40 are effective for periods beginning on or after 1 January 2009. Earlier application is permitted if the entity applies the amendments to the paragraphs 8, 9, 22, 53, 53A, 53B, 54, 57 and 85B of IAS 40 that reflects the above changes, at the same time. If the entity applies the amendments for an earlier period it must disclosed that fact. ACCOUNTANCY CYPRUS ñ VOLUME 92 ñ SEPTEMBER 2008 The return of fiscal policy The Management of the National Economy The return of fiscal policy By Tassos Anastasiades, Deputy Editor After the 2nd World War there was a period of strong economic growth, low unemployment and low inflation. Towards the beginning of the 1960’s this period was coming to an end when still economists and economic decision makers were still optimists that high employment with relatively low unemployment around 3% could be achieved by using fiscal policy. But during the 1970’s it was realized that fiscal policy could not help as after the 2nd World War. And this because if there is unemployment and public expenditure increases and tax revenue is reduced the result will be a fiscal deficit which to be financed interest rates increase, something which adversely affects private investment and in private consumption. Thus in the 1970’s Prices and Incomes Policy was introduced. But Prices and Incomes Policy, however, also failed because the social partners were violating the agreements with regard to the increases of prices and wages. Also this policy was an obstacle to the increase of productivity and the competitiveness of an economy. Thus prices and incomes policy was abandoned and gradually it was accepted that the policy which can better manage a national economy is monetary policy, i.e. by the increase or decrease of interest rates and controlling the money supply. In periods of recession interest rates are reduced and during booming periods, high growth rates and inflationary pressures interest rates are increased. Thus for a long period fiscal policy was marginalized and the management of the economy depended on monetary policy. In parallel it was realized that in cases of unemployment which is not the result of reduced demand but due to structural reasons in the economy then monetary and fiscal policies cannot help but lead to higher inflation and still higher unemployment. Thus until today the economic recipe for economic growth and low inflation is the taking ACCOUNTANCY CYPRUS ñ VOLUME 92 ñ SEPTEMBER 2008 of measures for a more flexible labour market and the control of demand by the changing of interest rates and low fiscal deficits. The flexibility in the labour market can be achieved by better training of unemployed labour force, the decrease of regulations, the decrease of taxes and the elimination of bureaucracy. With these measures incentives are given to the employees to accept work including over time while for the investors to make new investments. So much importance is given to the monetary policy that all developed countries decided to make independent the Central Banks, so that they can change interest rates according to the economic conditions prevailing and not according to political criteria. Besides the National Central Banks of the EU the European Central Bank has also become independent and does not take instructions from the ministers of Finance of the Eurozone. At the same time fiscal discipline is a primary target of all countries, including the communist China which has a fiscal surplus. It should be noted, however, that in certain circumstances when there is a serious financial crisis, monetary policy can not help and the use of fiscal policy is needed. This was proved in practice in Japan when the interest rates were reduced to zero but because of the serious recession prevailing the businesses were not interested to borrow to invent because there was no adequate demand. Also the consumers did not want to borrow to increase consumption because they were afraid that they might lose there jobs and not be able to pay their debts. Thus it seams that fiscal policy is more effective to face a serious recession. The American President Mr. George Bush suggested and the Congress approved a fiscal stimulus of $170 billion. This amount was used for tax refunds to persons who earn less than $75,000 a year and incentives were given for investment. Now the Democratic Congressmen are suggesting a second fiscal stimulus. In parallel the Managing Director of the International Monetary Fund Mr. Dominique Strauss - Kahn has suggested that countries which face the danger of recession use fiscal stimulus. It may be noted that this the first time in 25 years that the IMF is suggesting a fiscal stimulus. It is well known that usually the IMF suggests to member countries fiscal discipline and reduced fiscal deficits. 61 The Excel Wizard The Excel Wizard By Stratos Panayides, BA (Econ), ACA - AKTINA LTD Member of the IT and Business Consulting Committee of the Institute Question: How can we speed-up the printing process? Wizard: A useful tool enabling the quick setting of print areas is the Set Print Area tool, which replaces the command File Print Area Set Print Area. It is activated as follows: 1. Right click on any existing toolbar 2. Choose Customize … 3. Go to the Commands tab 4. From the File Category, click on the Set Print Area tool, drag it towards a toolbar and release the mouse button exactly where you want the tool positioned. 5. Click on Close When you select an area you want to print, you may now just click on the Set Print Area tool instead of choosing the File Print Area Set Print Area command which takes longer. Question: We often have multiple large ranges to print from a file, a process repeated daily. Selecting these ranges is quite time consuming. Is there a shortcut? Wizard: The obvious answer is to name the ranges you frequently print, so that you may then easily select and print them. One way you may name a range is the following: 1. Select the range as usual 2. Click on the Name Box (left of the formula bar) 3. Type a name (no spaces are allowed) 4. Press Enter 62 ACCOUNTANCY CYPRUS ñ VOLUME 92 ñ SEPTEMBER 2008 The Excel Wizard ACCOUNTANCY CYPRUS ñ VOLUME 92 ñ SEPTEMBER 2008 65 The Excel Wizard Presentation Excellence Excellence in presentations! Advance presentation skills - part 1 How many times have you left a presentation saying to yourself, “Wow, that was great. I wish I could do that! Why can’t I be that good?” By Demetris Stylianides, DipLC, CTM, CL, FAIA, FCCA, Trainer of NLP 66 During these series of articles, you will find precise instructions to direct you along the path to presentation excellence. Communication is imperative to training. The quality of our communication largely determines the quality of our training and our lives. Our communication is constant, whether or not we are speaking. We all, in one way or another, send our messages out to the world, and rarely do we send them consciously. We act out our state of being with nonverbal body language. We lift one eye-brow for disbelief. We rub our noses for puzzlement. We clasp our arms to isolate ourselves or to protect ourselves. We shrug our shoulders for indifference, wink one eye for intimacy, tap our fingers for impatience, and slap our forehead for forgetfulness. The gestures are numerous, and while some are deliberate, many are mostly unconscious. ACCOUNTANCY CYPRUS ñ VOLUME 92 ñ SEPTEMBER 2008 Presentation Excellence Have you ever encountered presenters with extremely distracting styles? They pace up and down, exhibit nervous tics, jingle coins in their pocket, use weird gestures. Maybe they have an unusual way of speaking that is hard to understand, or drives you crazy. If so, you were probably not paying attention to the content of what they were saying, and you ended up with a confused or garbled version of their talk. If your tonality or body language does not support the content of your presentation, then your message is unlikely to be heard NON-VERBAL PATTERNS OF COMMUNICATION When first presenting and training, people often wonder what to do with their hands. Hands seemed to have a life of their own, and were distracting to us, as well as the audience. Do we put them in our pockets; hold them rigidly down by our sides; hide them behind our backs, clutching a board marker; or do we clasp them modestly in front in the ‘fig leaf’ posture? Neuro-linguistic programming (NLP) which is the art of excellence in communication found the answers by studying Virginia Satir - the famous family therapist who used a number of category patterns in her routines. She was a family therapist who developed an effective way of working with families. These non-verbal patterns of communication are specific postures and gestures that involve your entire body, including your hands. Each has an accompanying voice tonality. Each category seems to have cultural associations, so adopting one particular physiology will trigger not only a certain state within you, it will also create a certain state within your audience. They are international; they work across cultures. I know this because I train people from all over the world. Since learning these Satir categories, trainees reported that using these gestures works very successfully in their own countries. THE SATIR GESTURES Here is a brief summary of these five non-verbal communication patterns: “Leveller”: Adopt a symmetrical physiology, hands start centrally ACCOUNTANCY CYPRUS ñ VOLUME 92 ñ SEPTEMBER 2008 palms down about waist height moving in an outward direction. As if you are smoothing something (like plaster). This is sending out a very powerful message. Use this sparingly during your presentation in order to make a really important point. Using this gesture at the beginning of your presentation (without saying anything) can also have the effect of people stop talking and start paying attention to you. With Leveler your voice has a falling tonality, and you are slowing down as you do the movement. Generally Leveler asserts authority and calms people down, so it is very good for bringing things down to earth. When people see that movement and hear that tonality it is as though they are getting the message: “Let me give you the facts. Believe me. This is how things are around here.” When using Leveler, pause at the end of the statement. The unconscious message being send out to your audience is: “This is the way it is”, “This is true”, “Pay attention”, “This is important”, “I know what I am saying”. “Placater”: Adopt a symmetrical open physiology with palms turned up or open, moving in an upward or outward direction, like someone pleading for mercy or begging. This should be used rarely in a presentation as this “openness” implied by the gesture can be perceived by your audience as a “weakness” on your behalf. Use it if you want to apologize about something which is your fault. Avoid using it when you convey facts and information as you 67 Presentation Excellence will not be taken seriously. Unconscious message to your audience: “Help me”, “I’m open”, “I want to please you” or “I’m honest you can trust me”, “I apologize for this mess”. “Blamer”: This posture is demonstrated by the pointing finger, jabbing finger and by leaning forward. Warning: this body language can be perceived as very aggressive so use it sparingly. It can be used to point out important issues and procedures that must be followed otherwise the audience will “suffer” serious consequences for not following the procedures. It can be used for motivational purposes during the end of your presentation when you want to inspire your audience or move them to action on a certain matter. Note that when using the pointing or jabbing finger then point above the heads of people. You don’t want to point to anyone during this gesture as this will be taken as rude and inappropriate. Male presenter watch out! If you over use this gesture, you will be perceived by audience members as arrogant. Female presenter warning! If ladies use this gesture a lot then the male audience members will not like the presenter as it could bring back memories of their mother in law or their spouse giving them instructions! Unconscious message to your audience: “It’s your fault” or “It’s down to you”, “Do it this way, or else...”. “Computer / Thinker”: To adopt this gesture you have to put one hand on chin with the other 68 arm folded across the chest, hand supporting the elbow. Feet parallel and the hand supports the chin in a closed fist. This is the stance adopted by someone who is thinking, or about to make a decision. Unconscious message to your audience: “I’m the authority”, “I’m reasonable, logical and sensible” or “Here are the facts” or “I have the answers”. Use this gesture when you want to convey facts and information to your audience. Distracter: Adopt an asymmetrical physiology, incongruent and off balance weight on one foot etc. Use this gesture if you have a heckler in your audience who tries to annoy you with silly comments or questions. As this is an extreme gesture you should use the Leveler gesture immediately after Distracter. You don’t want the audience members to associate you with the Distracter gesture and not take you seriously. The Distracter gesture can also be performed in a more subtle way by bringing the elbows closer to your body while doing the gesture. With this gesture goes a fluctuating voice, which is distracting because it is unpredictable: high then low; fast then slow. Unconscious message to your audience: “I don’t know”, “It’s not my fault” or “Who cares anyway”. People will be picking up meaning from this non-verbal communication all the time, and may even be getting more from it than from the presentation itself. The body language you use is a really important part of your telling of the story. Adding the Satir gestures to your presentation will completely transform it; you will find you are communicating far more effectively and this will be reflected upon your audience as they will better understand your message and be more alert during the presentation. In the next article, I will share with you my knowledge on how to structure/prepare any presentation using a simple format with ease and elegance. ACCOUNTANCY CYPRUS ñ VOLUME 92 ñ SEPTEMBER 2008 Cooperation between Greek and Turkish Cypriots No Applications for Greek and Turkish Cypriot Joint Ventures On the 21st May 2007 the then Minister of Finance Michalakis Sarris, announced new measures for the “improvement of the conditions for economic development and cooperation between Greek and Turkish Cypriots”, the two schemes announced referred to the creation of small joint ventures and for the By Costas Apostolides, technological upgrading of Economist joint ventures. The deadline for applications to the Ministry of Finance was 30th September 2008, and last week the responsible officer at the Ministry is quoted in the press as stating that there have been no applications for the scheme even though e.a. m30mln had been budget for subsidies and grants. confidence building measures agreed between the leaders of the two communities. The reasons for the failure to attract applications for joint venture assistance appear to be as follows: ñ The idea of encouraging “joint ventures” is conceptually difficult to apply. ñ The regulations were complex, bureaucratic and inappropriate. ñ The grants were to be given in stages (over 5 years), only after the expenditure is undertaken and after audited accounts are provided. ñ Publicity was inappropriate and there were no simplified easy to understand guidelines. ñ The whole process was under the Ministry of Finance The two projects, therefore, represent the total failure of the previous Government to address the issue of encouraging cooperation in business between Greek and Turkish Cypriots. This failure may be considered by some as reinforcing the view expressed in diplomatic circles that the scheme was announced by the previous government, simply to try to impress the European Council that the Republic of Cyprus was trying to encourage business cooperation between the two communities in Cyprus, but it did not really believe in the effort. That is unfortunate because the Government does much to help the Turkish Cypriot Community but is totally hopeless at making the measures known, or of guiding people as to how they can benefit from the various schemes. In part this is because there is no one authority in charge of Turkish Cypriot assistance programmes, and through the Public Information Office published some announcements on its website, but has with the election of President Christofias it removed them, and replaced them with the new set of ACCOUNTANCY CYPRUS ñ VOLUME 92 ñ SEPTEMBER 2008 and not through intermediaries (i.e. such as the banks). Over and above the design of the measures did not take into account the political reservations of both Greek Cypriot and Turkish Cypriot businessmen. Joint ventures sound good, and when they are proposed everyone considers them a good idea, but in actual fact they are difficult to set up and involve a “partnership” and a very high level of trust between the participating parties. Traditionally partnerships are difficult to sustain in Cyprus, even between family members. Though there is a tradition in law offices and among accountants. Part of the problem is trust, which can be illustrated by the old joke used by accounts: “An auditor his client for his set of accounts and the client responds, “which set”. He is then asked “How many do you have?” he replies “three: one set for the inland 71 Cooperation between Greek and Turkish Cypriots revenue, one for more partner, and one for my self”. One could facilitate Greek Cypriot and Turkish Cypriot business cooperation more successfully if there is a clear statement by both community leaderships encouraging the private sector to do business together. Most obviously with respect to green line trade, but also in services, and by encouraging cross green line cooperation. For example a Turkish Cypriot businessman wishing to represent a franchise in northern Cyprus, should be able to reach agreement with the Greek Cypriot franchise, with the international franchise corporation’s approval. Joint projects do not require joint venture companies, but parallel and complementary activities across the green line. UNDP ACT utilizing US funds designed a scheme five years ago, by which a Greek Cypriot and Turkish Cypriot company would cooperate to produce and market a product, but would receive financial assistance separately on presentation of a joint business plan. The Government of Cyprus never replied when the proposal was submitted, it was pigeon holed and unfortunately it was abandoned. Another form of cooperation is through networking, which means that each company keeps its separate legal status but cooperates with others on specific proposals, tenders or other projects or ventures. This too should be encouraged by ensuring unbiased tender procedures when Turkish Cypriot firms are participating, but also by encouraging networks of companies to cooperate. The regulations for the two joint venture schemes are complex and very difficult to understand, and under the scheme for small business joint ventures the eligible costs covered are inappropriate, and as with the other scheme the grants come in too late (possibly over a year after expenditure is made). As usual the Ministry of Finance does not provide simplified explanations, and they leave out things for one to guess at the implications. For example what are the implications of the areas for which EU Objective 2 grants are provided? In other words what is the implication of investing outside these areas in the cities (Nicosia, Larnaca, Limassol and Pafos municipalities). Perhaps the greatest problem (other than political reservations) is the way grant payments are to be made. Payments are to be spread out over five years and should not exceed 33% of the grant total in any one year, and be paid on provision of receipts and submission of final audited accounts. Given that new firms require money up 72 front to start a business, this means that the grant element comes in with at least an 18 month delay, something which is not very helpful and implies bank loans are necessary to cover expenditure as it is undertaken. Given the delays in payment by Government, the programme provisions are, therefore, of limited use. There is little doubt that the publicity campaign, if any, undertaken by the Ministry of Finance was a total disaster. Apart from an initial press conference by the Minister which gave very little information to the public, the ministry website is totally inadequate (www.mof.gov.cy). On the home page, in the Greek version there is a big button referring to the two joint venture schemes, when you hit the button a page opens up with 9 different pdf files, all written in official language providing an announcement, summary note, detailed guidelines and application form on the joint venture programme. This is followed by what appears to be the same text in Turkish. There is, contrary to the constitution, no homepage in Turkish, but there is an English text website which, however, does not lead to joint venture programme. Surprisingly there is no translation of the programme in English, and only if one chooses to go to the Research and EU service of the Ministry of Finance does one find a reference to “Turkish Cypriot Issues”. If you click that you get a paper on the “Economic Aspects of the Annan Plan”. This is unfortunate because almost all Greek and Turkish Cypriots contemplating cooperation would work together on an English language text, rather than to have to struggle to understand each other in their own language and translate themselves where required. In order to be useful the whole programme has to be redesigned, and applications for grants made through an intermediary, most appropriately a bank. That would mean that the business plan has been analyzed and found adequate and that total funding is available from loans and grants. Part of the grant should be paid on signing a contract, or at minimum on provision of a receipt that investment has been made. The whole procedure should be simplified. Moreover a proper publicity campaign should be organized and contact points shown on the website. Designing a successful project for cooperation between the two communities is difficult, the Ministry of Finance failed to address the programme in the right spirit or to provide adequate, appropriate and simplified information. No wonder it has failed. ACCOUNTANCY CYPRUS ñ VOLUME 92 ñ SEPTEMBER 2008 The International and the Cyprus economy Economic Bulletin THE BANK OF CYPRUS GROUP PLANNING AND RESEARCH DIVISION PUBLICATION By Elena Triantafyllou INTERNATIONAL ECONOMY Based on the International Monetary Fund’s World Economic Outlook Update (July 2008), the global economy is seen in a tough spot, caught between sharply slowing demand in many advanced economies and rising inflation everywhere, notably in emerging and developing economies. Rising energy and commodity prices have boosted inflationary pressure. Consequently, global growth is expected to decelerate significantly in the second half of 2008, before recovering gradually in 2009. More specifically, IMF’s projections for the rate of growth of the world economy stand at 4,1% for the whole of 2008 and 3,9% for 2009 (with the corresponding projections based on the previous report in April 2008 referring to a rate of growth of 3,7% and 3,8%, respectively). The global economy recorded a satisfactory rate of growth within 2007, which was at 5,0%, compared to 5,1% for the whole of 2006. The United States of America recorded a rate of economic growth of 2,2% for the whole of 2007. Projections for the U.S. economy in 2008 point to a growth rate moderating to 1,3% on an annual-average basis (an upward revision from 0,5% projected in April 2008), and to 0,8% for the whole of 2009 (from 0,6% previously projected). Growth projections for the euro area show a slowdown in activity, which for the whole of 2007 rose to 2,6%, while for 2008 is set to contract to 1,7% (from 1,4% projected in April 2008). For 2009, economic growth projections in the euro area remained unchanged (as in April 2008) to 1,2%. China continued to expand at fast rates, recording an economic growth of 11,9% in 2007. India and Russia also grew at a rapid pace in 2007, recording growth rates of 9,3% and 8,1%, respectively. Projections for these three countries for the whole of 2008 remain at very high levels but show signs of slowing down nevertheless. Based on the revised IMF projections in July 2008, their respective growth rates are expected at 9,7%, 8,0% and 7,7%. CYPRUS ECONOMY Based on the latest available national accounts of the Republic of Cyprus, the growth rate of the Cyprus ACCOUNTANCY CYPRUS ñ VOLUME 92 ñ SEPTEMBER 2008 economy for the whole of 2007 stood at 4,4%, notably improved from the corresponding 2006 level of 4,0%. Satisfactory growth for the Cyprus economy was sustained mainly due to the financial intermediation & real estate sectors (+8,0%), the building and construction sector (+5,0%), while private consumption (+6,2%) and gross fixed capital investments (+6,3%) also had a major contribution. Within 2007, the harmonized rate of inflation rose by 2,2%, recording the same rate as in 2006. For June 2008, the harmonized rate of inflation exhibited an increase of 5,2%, compared to June 2007 levels (from an increase of 1,7% which was recorded in the same month of 2007 over 2006). The Consumer Price Index for the period from January to December 2007 rose by 2,4%, compared to 2,5% inflation rate in 2006. The rate of increase of the Consumer Price Index in June 2008 was at 5,5%, compared to an increase of 4,9% in May 2008 and an increase of 1,9% in June 2007. For the period January - June 2008, the Consumer Price Index rose by 4,8% over the corresponding 2007 period. As far as the labor market is concerned, the average number of unemployed persons for 2007 exhibited a drop of 6,3%. Unemployment by year-end 2007 was at 3,9% from 4,5% at the end of 2006. For the first quarter of 2008, unemployment rose to 4,6% of the labor force, while for the 4th quarter of 2007 it stood at 3,5% (for the corresponding quarter of 2007 the unemployment was at 4,8%). It is noted that the number of unemployed persons as at the end of June 2008 rose to 10.509 persons, compared to 9.253 unemployed persons in May 2008, an increase of 1.256 persons. The fiscal balance was in surplus by year-end 2007 at +3,3% of GDP (from a deficit of -1,2% as at year end 2006). At the same time, the public debt shrunk to 59,8% of GDP at the end of 2007, retreating below the relevant target/commitment for accession in the eurozone (2006: 64,8% of GDP). In the tourist sector, tourist arrivals for the whole of 2007 73 The International and the Cyprus economy exhibited a slight increase compared to 2006 (+0,6%). For the period January - June 2008, tourist arrivals rose to 989.851, compared to 964.097 over the corresponding period of 2007, marking an increase of 2,7%. For the period January - June 2008, income from tourism is estimated at m671,9 million, compared to m676,4 million over the corresponding period of 2007, marking a drop by 0,7%. 2007, seems to have had a more profound - than originally estimated - impact, in effect tending to result in a world credit crisis. PROSPECTS Furthermore, the recent sharp rises in the price of grains, corn, wheat and rice, which in turn exacerbate inflationary pressures, coupled with the severe water shortage due to a prolonged drought in Cyprus, form part of the long list of adverse factors that threaten the world, as well as the local economy. The Cyprus economy’s short to medium-term prospects are positive, with numerous downside risks threatening growth. The international economic community forecasts that rates of economic growth for the global economy in 2008 will remain in positive ground, however, a significant slowdown is to be experienced in the growth rate of the world economy and the economies of the EU. At the same time, several risks that may hinder world economic growth are outlined. According to the most recent projections by the Cyprus Ministry of Economics and Finance, the island’s economic growth rate is expected to suffer a slowdown and be in the region of 3,5%-3,7% for 2008. The inflation rate is expected to hike as high as 4,5%, due to oil price and foodstuff price rises. The fiscal balance is to sustain a surplus for 2008 at 0,5% of GDP. Public debt is also anticipated to continue shrinking and fall below 50% of GDP by year-end 2008. These risks refer to - inter alia: ñ the potential of further rises in oil prices (even though within the 2nd half of 2008 oil prices retreated significantly), ñ turmoil in the international exchange rate markets (especially the euro against the dollar) and ñ increasing volatility in the financial markets. It should be noted that the relevant projections by the International Monetary Fund place the Cyprus economy rate of growth even lower for 2008 (3,4%), while a slight improvement is expected for 2009 (3,5%). According to IMF projections unemployment is to remain at 3,9%. The turmoil in the US housing market, which was triggered by the sub-prime loans market towards the end of Note: above commentary takes into consideration economic developments and data available up to 31 July 2008. MAIN ECONOMIC INDICATORS G.D.P. (real growth rate - %) Unemployment rate (%)* Inflation rate (%) Harmonized rate of Inflation (%) Fiscal deficit (%) Public debt (%) Repo rate (31 Dec.-%)* Exchange rates (2004, 2005, 2006 & 2007 average) Euro/CYP U.S. Dollar/CYP STG/CYP 2005 2006 2007 20081 3,9 5,3 2,6 2,0 -2,4 69,1 4,25 4,0 4,5 2,5 2,2 -1,2 64,8 4,25 4,4 3,9 2,4 2,2 +3,3 59,8 4,00 3,6 4,0 4,5 n.a. +0,5 48,5 5,25** 0,5769 0,4641 0,8452 0,5750 0,4680 0,8366 0,5826 0,4256 0,8517 n.a. n.a. n.a. 1: projection * As of 1st September 2006, the main refinancing operations rate (repo) replaced the marginal lending facility rate (Lombard) for the purpose of pricing local currency bank loans. It is also noted that as of 1st January 2008, Cyprus joined the eurozone and therefore, interest rates shall be set by the European Central Bank. ** ECB marginal lending facility Source of statistical data for Cyprus’ economy: Ministry of Finance, Central Bank of Cyprus & Statistical Service 74 ACCOUNTANCY CYPRUS ñ VOLUME 92 ñ SEPTEMBER 2008 Key Performance Indicators The new thinking on key performance indicators Very few organisations really monitor their true key performance indicators (KPIs), because very few have explored what a KPI actually is, says performance consultant David Parmenter Show me a company which thinks it has KPIs which are measured monthly and quarterly, and I will show you measures that do not create change, alignment and growth and have never been KPIs. But first let me explain what a KPI is through two stories... AN AIRLINE My favourite KPI story is about the late Lord King, who set about turning British Airways (BA) around in the 1980s by reportedly concentrating on one KPI. Lord King appointed some consultants to investigate and identify the key measures he should concentrate on to effect a turnaround in the ailing airline. They came back and told Lord King that he needed to focus on one critical success factor (CSF): the timely arrival and departure of aeroplanes. Finding the CSFs and narrowing them down to no more than five to eight is a vital step in any KPI exercise, yet one seldom performed! Lord King, however, was reportedly not impressed since everybody in the industry knows the importance of timely planes. However, the consultants then pointed out that this is where the KPIs lay and they proposed that Lord King focus on late plane measures. As a result, he was notified, wherever he was in the world, if a BA plane was delayed over a certain time - say, two hours. The BA airport managers at the relevant airports therefore knew that if a plane was delayed beyond a certain ‘threshold’, they would receive a personal call from Lord King. Predictably, it was not long before BA planes had a reputation for leaving on time. The ‘late plane’ KPI was linked to most of the CSFs for the airline. It linked to the ‘delivery in full and on time’ CSF - namely, the ‘timely arrival and departure of aeroplanes’, it linked to the ‘increase repeat business’ CSF, and so on. The importance of the ‘timely arrival and departure of aeroplanes’ CSF can be seen by its impact on all the six perspectives of a modified balanced scorecard (BSC) - see A balanced scorecard with six perspectives box (in which I have added ACCOUNTANCY CYPRUS ñ VOLUME 92 ñ SEPTEMBER 2008 employee satisfaction and environment/ community to the traditional four perspectives). Late planes impacted all six balanced scorecard perspectives, because they: ñ increased cost in many ways: including additional airport surcharges, and the cost of accommodating passengers overnight as a result of late planes being ‘curfewed’ due to noise restrictions late at night (financial perspective); ñ meant unhappy customers, and alienated those people affected by the late arrival of the passengers - ie possible future customers (customer satisfaction perspective); ñ created a negative impact in the wider community and thus reduced the potential pool of future employees (community perspective); ñ incurred wastage of food, since hot food has a short serving window, and wastage of fuel as planes endeavoured to make up for lost time and operated outside their most economical flight speed (environmental perspective); ñ had a negative impact on staff development as staff would repeat the bad habits that had created late planes (learning and growth perspective); ñ adversely affected supplier relationships and servicing schedules resulting in poor service quality (internal process perspective); and ñ led to employee dissatisfaction as they had to deal both with frustrated customers and the extra stress each late plane created (employee satisfaction perspective). A DISTRIBUTION COMPANY A chief executive officer (CEO) of a distribution company 77 Key Performance Indicators realised that a critical success factor for their business was trucks leaving as close as to capacity as possible. Large train trucks capable of carrying more than 40 tonnes were being sent out with small loads as despatch managers were focusing on ‘deliver in full on time’ to customers. Each day by 9am, the CEO received a report of those trailers that had been sent out underweight. The CEO rang the despatch manager and asked whether any action had taken place to see if the customer could have accepted that delivery on a different date that enable better utilisation of the trucks. In most cases the customer could have received it earlier or later, fitting in with a past or future truck going in that direction. Just as with the airline example, staff did their utmost to avoid a difficult phone call with their CEO. And the resultant sending out of more trucks at, or close to, capacity had a significant impact on profitability. CHARACTERISTICS OF A KPI KPIs represent a set of measures focusing on those aspects of organisational performance that are the most critical for the current and future success of an organisation. Crucially, there are only a few KPIs in an organisation (no more than 10) and they have certain characteristics. These include: ñ that they are measured frequently eg daily or 24/7 KPIs should be monitored and reported 24/7, daily, or in a few cases, perhaps weekly: to measure a KPI monthly is to shut the barn door well after the horse has bolted. KPIs are therefore ‘current’ or future measures as opposed to past ones. When you look at most organisational measures, they are very much past indicators measuring events of the last month or quarter. These indicators cannot be and never were KPIs. That is why a satisfaction percentage (eg 65%) from a customer satisfaction survey performed every six months can never be a KPI. When you put a pound or dollar sign to a measure you have not dug deep enough. Sales made yesterday will be a result of sales calls made previously to existing and prospective customers, advertising, amount of contact with the key customers, product reliability etc. I term any sales indicators expressed in monetary terms as result indicators which will be further explained in this article. In many organisations a KPI may rest with certain activities undertaken with your key customers who often generate most, if not all, of your profit. All good KPIs that I have come across - those that have made a difference - had the CEO’s constant attention, with daily calls to the relevant staff. Having a potentially careerlimiting discussion with the CEO is not something staff want to repeat, and in the above mentioned airline’s case, innovative and productive processes were put in place to prevent a recurrence. (KPIs are not measured monthly); ñ that they are non-financial measures (not expressed in $s, £s etc); ñ that they are acted upon by the CEO and the senior management team on a daily or 24/7 basis; ñ that all staff understand the measure and what A KPI should tell you about what action needs to take place. The BA ‘late plane’ KPI communicated immediately to everybody that there needed to be a focus on recovering the lost time. Cleaners, caterers, groundcrew, flight attendants, and liaison officers with traffic controllers would all work some magic to save a minute here and a minute there, whilst maintaining or improving service standards. corrective action is required; ñ that responsibility can be tied down to the individual or team; ñ that the KPI has a significant impact on the organisation eg it impacts on most of the critical success factors and balanced scorecard perspectives; and ñ that positive movement affects all other performance measures in a positive way. 78 A KPI is deeply enough embedded within an organisation to be tied down to an individual. In other words, the CEO can ring someone and ask “why?” Return on capital employed has never been a KPI as it is a result of many activities under different managers. Can you imagine the reaction if a general manager was told one morning by the CEO “Pat, I want you to increase the return on capital employed today”? A KPI will affect most of the critical success factors and more than one balanced scorecard perspective. In other words, whenthe CEO focuses on the KPI, and the staff ACCOUNTANCY CYPRUS ñ VOLUME 92 ñ SEPTEMBER 2008 Key Performance Indicators A balanced scorecard with six perspectives FINANCIAL CUSTOMER Utilisation of assets Optimisation of working capital Focus on top 10% of customers Seamless service Increased customer satisfaction INTERNAL PROCESS EMPLOYEE SATISFACTION Positive company culture Retention of key staff increased recognition Delivery in full on time Effective relationship with key stakeholder’s Optimising technology ENVIRONMENT/ COMMUNITY Supporting local business Green Globe 21 Community leadership LEARNING AND GROWTH Empowernment increased expertise Adaptability etc follow, the organisation scores goals in all directions. A KPI has a flow-on effect on other performance measures. Reducing late planes would improve I use an onion analogy (see Figure 1) to describe the relationship of these three measures. The outside skin describes the overall condition of the onion, how much sun, water and nutrients it has received, how it has been handled from harvest to supermarket shelf. The outside skin is thus a key result indicator. The layers represent the various performance indicators and the core is where you find the key performance indicators. THE 10/80/10 RULE Kaplan and Norton recommend no more than 20 KPIs, and Jeremy Hope (of ‘Beyond budgeting’ fame) suggests fewer than 10. To aid those involved in performance measurement I have developed the 10/80/10 rule. This means an organisation should have about 10 KRIs, up to 80 PIs and 10 KPIs: there is very seldom a need for more measures, and in many cases fewer can be used. KEY RESULT INDICATORS (KRIS) performance measures around improved service by ground staff as there is less ‘fire fighting’ to distract them from a quality and caring customer contact. THE THREE TYPES OF PERFORMANCE MEASURE From the research I have performed, from workshop feedback across diverse industries and as a by-product of writing a ‘Key performance indicators manual’ (second edition), I have come to the conclusion that there are three types of performance measure: ñ key result indicators (KRIs) - which give an overview on performance and are ideal for the board as they communicate how management has done in a critical success factor or balanced scorecard perspective; ñ performance indicators (PIs) - which tell staff and management what to do; and ñ key performance indicators (KPIs) - which tell staff and management what to do to increase performance dramatically. ACCOUNTANCY CYPRUS ñ VOLUME 92 ñ SEPTEMBER 2008 The common characteristic of KRIs is that they are the result of many actions. They give a clear picture of whether you are travelling in the right direction, and of the progress made towards achieving desired outcomes and strategies. They do not, however, tell management and staff what they need to do to achieve desired outcomes. Only PIs and KPIs can do this. KRIs that have often been mistaken for KPIs include: _ customer satisfaction; ñ net profit before tax; ñ profitability of customers; ñ employee satisfaction; and ñ return on capital employed. A car’s speedometer provides a useful analogy. The board will simply want to know the speed at which the car (the organisation) is travelling. Still using this analogy, management needs to know more information since the car’s speed is a combination of what gear the car is in and what revs the engine is doing. In fact, management might be concentrating on something completely different, such as how economically they are driving eg a gauge telling them how many kilometres they are getting per litre, or how hot the engine is running. 79 Key Performance Indicators These are two completely different performance indicators. Separating out KRIs from other measures has a profound impact on the way corporate accountants report performance. There is now a separation of performance measures into those impacting governance (up to 10 KRIs in a dashboard) and those impacting management. PERFORMANCE INDICATORS (PIS) The 80 or so performance measures that lie between the KRIs and the KPIs are the performance indicators (PIs). The performance indicators, while important, are not ‘key to the business’. PIs help teams to align themselves with their organisation’s strategy. PIs complement the KPIs and are shown with them on the organisation’s, divisions’, departments’ and teams’ scorecards. PIs could include: _ profitability of the top 10% of customers; ñ net profit on key product lines; ñ % increase in sales to the top 10% of customers; ñ % of employees participating in the suggestion scheme; and ñ duration of the cash to cash cycle (eg 65 days). REMOVING THE LEAD/LAG CONFUSION Many management books talk about ‘lead’ and ‘lag’ indicators which I believe merely clouds the KPI debate. Using this new way of looking at KPIs we dispense with the terms lag (outcome) and lead (performance driver) indicators. I have presented to nearly 2,000 people on KPIs and I always ask “is the ‘late planes in the air’ KPI, a lead or lag indicator?” The vote count is always evenly split. Surely, this is enough proof that lead and lag labels are not a useful way of defining measures? KRIs replace outcome measures, which typically look at activity over months or quarters. PIs and KPIs are now characterised as either past, current or future measures. The new concept called ‘current measures’ are those monitored 24/7 or daily. You will find the real KPIs in your organisation are either current or future measures (see 80 Leads and lags PAST MEASURES (1st week/fortnight/ month/quarter) eg number of late planes last week / 1st month CURRENT MEASURES (24/7 and daily) eg planes over two hours late (updated continuously) FUTURE MEASURES (next day/week/ month/quarter) eg number of initiatives to be commenced in the next month/two months to target areas which are causing late planes Leads and lags box). The lead/lag division did not focus adequately enough on the timing of the measures. Most organisations that want to create alignment and change behavior need to be monitoring what corrective action is to take place in the future. In other words if quality improvements are to happen we need to measure the number of initiatives which are about to come online in the next week, fortnight, month. If we want to increase sales what is important to know is what the number of meetings which have already been organised/scheduled with our key customers in the next week, fortnight, month is. LAST WORDS You should consider the following: ñ ask your management to review the two presentations on KPIs I have recorded on www.bettermanagement.com - search ‘parmenter’ using the search engine; ñ deliver a PowerPoint presentation to the senior management team to get buy-in for your KPI/BSC project; and ñ link with an external expert who can contribute to brainstorming sessions designed to ascertain the CSFs for your organisation. David Parmenter is chief executive officer of waymark solutions, specialising in assisting organisations with measuring, reporting and improving performance. [email protected] ACCOUNTANCY CYPRUS ñ VOLUME 92 ñ SEPTEMBER 2008
