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studentsImportant Dates

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SPOTLIGHT ON...Pamela Fenech

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FEATUREThe Use of Cash in Maltese SME’s

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TECHNICALIFRS, IAS, ISA update

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MIA NEWSMIA holds Sixth SMP Forum

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FEATUREVAT andBad Debts

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p.2 SPRING 2015 | theaccountant.ORG.mt SPRING 2015 | theaccountant.ORG.mt p.02THE ACCOUNTANT CONTENTS

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spotlight on... PAMELA FENECHby Bridget Craig Robinson

STUDENTS

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studentS’ notice board

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A former ACCA student’s experienceby Mark Abela

news

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MIA NEWS

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LOCAL UPDATE

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GLOBAL UPDATE

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PRESIDENT’S ADDRESS

TECHNICAL

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IFRS, IAS, ISA UPDATE

SMPs

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accountants’ biggest concerns in 2015by Antoni Gómez

Ethics

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ethics and the smeby Mario P. Galea

FEATURES

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vat and bad debtsby Paul Giglio and Sarah Casolani

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the use of cash in maltese sme’s

by Kathleen Abela

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keeping it in the family by Dr David Zahra

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the audit of related parties and application of professional scepticism (part 2)by Massimo Laudato

p.3SPRING 2015 | theaccountant.ORG.mtp.03THE ACCOUNTANTPRESIDENT’s AddrESS

PRESIDENT’s AddrESSMaria micallef, mia president

This will be my last editorial as President of the Institute as my term will end in July 2015 when we will be holding our AGM.

The two year term has been an exciting if at times turbulent period in view of the various local and EU developments that have occurred during the time. Together with my Council and committees, I have worked hard to overcome the challenges that came our way and to achieve results that are of benefit to our profession whilst protecting and supporting the public interest.

One of the main objectives of my presidency was to continue to make the Institute more relevant to its members. In order to achieve this objective we have worked on a number of fronts, which I will briefly outline hereunder.

Networking/building bridges with other stakeholders with whom our members interact: To this effect we held meetings with various bodies including tax and regulatory authorities, the Banking sector, the University of Malta, ACCA and ICAEW, the Chamber of Advocates, the Malta Chamber of Commerce, where amongst the constituted bodies with which we met. We also had meetings with various Government Ministers to better understand their policy on matters pertinent to our profession. We are also participating in different fora to be better able to influence the debate on those developments affecting our profession and our clients. I am proud to note that the Institute is being asked for its view on a number of different matters including the Family Business Act, the Accounting and Audit Directives and the Regulation on specific requirements regarding statutory audit of public-interest entities.

European legislative and regulatory initiatives: We are currently very active in the working group (WG) led by the Accountancy Board and tasked with the transposition of the Accounting Directive (DIR 2013/34/EU). Following the adoption of a common position by the WG on the Member State Options that are available to Malta, the Institute’s technical staff together with staff from the Registry of Companies at MFSA finished drafting the amendments to the Companies Act. In parallel, our staff supported by members of the MIA Accounting Committee is in the final stages of drafting the necessary consequential amendments necessary to GAPSE. As part of this development we also dealt with audit exemptions issue. An ad-hoc MIA working group composed of a cross section of members in public practice has identified a number of potential exemptions that have been discussed with representatives from the ministries of finance and competition. The feedback so far has been positive.

The Institute is also a very active member on another working group also led by the Accountancy Board but this time tasked with the transposition of the Audit Directive and the PIE Regulation. It is with great satisfaction that I note that despite the difference of opinions the different sized audit firms may have on audit regulation we managed to find a common position on the member state options relating to audit regulation which our institute has put forward to the pertinent government bodies. Another project, which the Institute’s technical staff has been working on for some time, relates to ‘other assurance services’. In recent years, the requirements on auditors have increased not least from the requests of one form of assurance confirmation or another that are being requested by Government

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entities from the auditor. These requests are not related to the statutory audit but are mainly requests for which the auditor would have to structure another engagement in accordance with IFAC’s framework for non-audit assurance services. Compilation requests are being received by our members who regularly turn to the Institute for guidance. Both the audit and ethics committees are involved in this project. There are other matters we are working on not least the Legal Bill. We have always maintained that we support initiatives that help to better regulate a profession and that enhance the public interest. We are not against this bill but against certain clauses including the very wide definition given to legal advice and the obligation on the Accountancy profession to include a disclaimer in any written advice they give to clients.

I would like to take this opportunity to thank all our members who are involved in one way or another in these projects who dedicate their time on a voluntary basis. Needless to say I would also like to thank our staff, in particular our technical director, who have been kept very busy in these past months.

Revision of the Institute’s internal structures: As a Council we have taken a hard look at our strategy, internal structures and executive set-up to see how these may be improved to support an Institute that is seeking to continue to move ahead efficiently and effectively in an ever changing, dynamic and at times chaotic environment. At the July 2014 AGM our Members’ approved changes to the MIA statute, which included revised objects, clarification of the different organs’ responsibilities, introduction of a maximum time limit within which a member can serve on Council (has been set at 18 years and is intended to find a balance between experience and the need for new blood) and the creation of a CEO role intended to manage the largest professional institutes in Malta. We are currently in the process of recruiting a CEO that has the necessary competencies and experience to translate the vision of Council into strategic and action plans to enable us to better support the evolving accountant’s role.

Better utilisation of Information Technology: This is an area where I believe we have achieved mixed results during my presidency. One of the successes was the introduction of the ijournal in May 2014 together with a revamped print edition. We have received favourable comments from Members, which indicate that these have been well received by our members. We are also in the process of rolling out our online CPE facility. We have finalised the technical upgrades that were necessary to our website and content management system so that we would be able to host a repository containing a series of online courses sourced from leading online CPE providers that will be offered at a discount to MIA members. Our staff are in the process of finalising agreements with these well-established providers so that MIA members can benefit from the widest choices possible as from the launch date.

The MIA privilege scheme and the related members’ smartphone application are also in the process of being completed in the coming weeks.

We have however not as yet managed to enhance the website, a project that the Institute was planning to launch in 2013. The project did not come to fruition for various reasons. It is now being combined with a larger project that is also meant to enhance the back office and the generation of pertinent data. I augur that this project will be successfully realised under the next President.

International membership: Our continued membership of regional and international organisations such as the Federation of European Accountants (FEE) and the International Federation of Accountants (IFAC) is very important since through these we are constantly gaining awareness of those regional and International developments, which would need to be taken into consideration by our technical committees. I am pleased to note that William Spiteri Bailey has recently been appointed technical advisor to one of the members of the IFAC SMP Committee. This appointment, coupled with his role as member of the FEE SMP Forum, ensures that the MIA is engaged to the fullest extent on SMP matters.

Education: I consider this to be one of the core pillars of the Institute. Our education committee has been involved on various projects including the revision of the CPE regulations which became applicable in January 2015. This revision was meant amongst other things to simplify and in some cases streamline matters.

We need to continue to provide the means to enable students to obtain their professional qualification which we currently do through our joint scheme with ACCA – a very important development in the history of the Institute. In these past years we have transformed the graduation ceremonies into an event where graduates together with their parents and other loved ones can proudly celebrate their achievement. The guest speaker at this year’s ceremony which was attended by some 450 people was President Emeritus Dr Ugo Mifsud Bonnici who delivered an interesting speech on values in the profession. In 2014 the Institute acquired the full shareholding in BPP Malta Limited and entered into an exclusivity agreement with BPP International to enable our school to continue to provide tuition based on BPP curricula and methodologies. The school is now in the process of implementing a re-branding exercise. We need to step up our efforts and rise to the challenge to attract the brightest students to the profession. We lack the aura of the traditional professions and the excitement of the more modern ones and nowadays we seem to be stuck somewhere in between. As an institute we need to continue to strive to attract to the profession not only numbers but also quality.

Public interest: In my first address as President I had stated that if we only serve our self-interest we will fail. Our values and ethics are essential in discharging our professional responsibilities and no efforts should be spared in making these known to and embraced by our members. In March 2015 our Institute launched a revised Code of Ethics that is based on International standards and considers the fundamental EU principles on Statutory Auditors’ Independence. I would like to take this opportunity to remind ourselves that this code is not a document that is meant to grace our physical or electronic libraries. Indeed it should be an integral part of our genetic code. An Accountant whether in public practice, a PAIB, or employed in the public sector must remain impartial and loyal to ethical guidelines and should be constantly vigilant to reduce the risk of manipulation of accounting records. Greed in the business world could lead to shaving ethical boundaries for the sake of better returns. We, as accountants and warrant holders, should not let a desire to earn a better living get in the way of doing what is right and expected of professionals bound by a code of ethics.

To conclude, on 28 May 2015 the MIA will celebrate its 50 year anniversary from the date when the original MIA merged with the Malta Corporation of Accountants. In these past fifty years the Institute has come a long way and today is the largest professional body in Malta. We are proud that practically all qualified accountants are members of the Institute. Through the foresight and hard work of past Presidents and council members the Institute can take satisfaction in the results it has managed to achieve for its members over the years and in being regarded by government bodies, regulators, constituted bodies, employers and other professional peers as the leading representative of the accountancy profession and sound advocate of public interest. The Institute intends to commemorate this occasion in the coming weeks.

Our interim CEO, Noel Zerafa, who was due to retire at the end of this year handed in his resignation to pursue other opportunities. Mr Zerafa was a long standing employee of the Institute having served for over 18 years as its Secretary General and more recently interim CEO. On behalf of my fellow Council members, I would like to thank him for his years of service and wish him well in his new endeavors.

I am immensely proud of our profession and of the Institute. It is made up of high quality people of integrity and I thank you all for giving me this opportunity to serve as the Institute’s President. I would like to thank also my fellow officers, council members, committees and MIA staff - it is through their hard work and support that progress was registered during this two year term. I would also like to take this occasion to augur all the best to the incoming President.

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p.5SPRING 2015 | theaccountant.ORG.mtp.05THE ACCOUNTANTNEWS

MIA NEWS

JULY MIA AGM SAVE THE DATE

The annual general meeting of the Institute will be held on Thursday 16 July 2015. Members who wish to be nominated for election to the Council are kindly requested to inform the Institute, in writing, by not later than Friday 31 May 2015. Any Member who wishes to bring before the Annual General Meeting any motion not related to the ordinary annual business, but relating to matters affecting the Institute or the Accountancy Profession as laid down in Bye-law 5 .04 of the Statute, are to remit any such motion to be received by the Secretary General by not later than Friday 31 May 2015.

The following Members of Council will be eligible for re-election:

Mr Franco Azzopardi Mr Etienne Borg Cardona Mr Simon Flynn Mr Kevin Mahoney Ms Maria Micallef Mr William Spiteri Bailey Mr Anthony Zarb

MIA 50TH ANNIVERSARY CELEBRATIONS

This year the Institute will be celebrating its first 50 year anniversary. On 28 May exactly 50 years ago, the original MIA (set up in 1942) merged with the Malta Corporation of Accountants (formed in 1954) and retained its original name that of the Malta Institute of Accountants.

At the Institute’s first General Meeting the Members present elected a Council of 12 members for the Institute as newly formed: Hon President, Paul Busuttil, President, John Falzon, Vice-President, Arthur Arrigo, Secretary, Joseph Tabone, Assistant Secretary, Sydney Barbara, Treasurer, Paul Galea Souchet, Assistant Treasurer, Anthony Camilleri, Members, Gontran Borg, Francis X. Darmanin, Edward Messina Ferrante, Charles Sammut and John L. Duncan.

Since then the newly formed Institute has always made it a point to be at the forefront of International and local developments and debates. Nowadays the Institute is still striving to be the Voice of the Maltese Accounting Profession and today more than ever, the MIA remains committed to attract the best talent to the profession and to provide high quality support services to its ever-growing member base.An event to commemorate this important day will be held at the MIA’s offices in Swatar on 1 June 2015. A number of initiatives will be launched by the President on the day.

MIA HOLDS ITS SIXTH SMP FORUM

In April the MIA held its sixth forum for small- and medium- sized

practitioners (SMPs). MIA’s Small- and Medium- Sized Practices Advisory Committee (SMPAC) drafted a full-day programme event covering a wide array of topics which are of interest to SMPs.

The SMP Forum brought together representatives from the regulatory community and thought leaders and experts in their fields who addressed current issues, industry best practices seeking to address common challenges, and knowledge-sharing opportunities.

Ms Maria Micallef, MIA President welcomed and updated the participants about the work which was carried out by the MIA during the past year. Ms Micallef reminded participants about the ongoing technical support offered by the MIA Technical Department and ACCA Helpdesk facility (free of charge for Members). Participants were also informed about the online CPE platform which will be shortly launched by the MIA. Mr William Spiteri Bailey, MIA Honorary Secretary and Chairperson of MIA’s SMP Advisory Committee continued by presenting an overview on the work carried out by the SMPAC in favour of the SMPs and gave an insight to the IFAC and IFAC’s SMP Committee on which he sits as technical advisor.

Back to the day’s programme, Mr Raphel Aloisio spoke about one of the main challenges for SME, access to finance. Venture Capital Malta and Malta Stock Exchange prospects were the main items of this presentation. Participants were then presented with two concurrent sessions about credit management, and foundations and cooperatives. Mr Simon Camilleri and Mr Charles Xuereb spoke about the importance of credit management and good credit management practices. Dr Vitorine Bajada LL.D. and Mr Rolan Micallef Attard created more awareness on the concepts of foundations and cooperatives. Dr Ian Spiteri Bailey LL.D. depicted dismissals in employment law and related case-law in a very interesting manner by presenting various cases for discussion with the audience.

After lunch, Dr Alexander Mangion LL.D. presented the recent amendments to the Prevention of Money Laundering Act and the Prevention of Money Laundering and Funding of Terrorism Regulations. Inspector Antonovitch Muscat focused on the salient provisions of the anti-money laundering legislation, the involved parties, the tracing of assets and international cooperation. This was accompanied by real case scenarios. In the concluding session, Dr Joseph Giglio LL D., assisted by his brother Paul, spoke about the professional and crime, addressing those situation that create difficulties in practice.

MIA PARTICPATES IN BULGARIAN ICPA CONFERENCE

In April, the MIA Technical Director Mark Abela represented the Institute in the Bulgarian Institute of Certified Public Accountants conference entitled “The Auditing Profession in the Context of the New European Legislation”. Participants included representatives or

SPRING 2015 | theaccountant.ORG.mtp.06THE ACCOUNTANTNEWS

other European professional accountancy organisations as well as the President of FEE, Mr Petr Kriz and Mr Jacques Potdevin, Member of the IFAC Board.

Mr Abela participated in a panel discussion entitled “The Influence of the New Accounting and Auditing Legislation on the Small and Medium-Sized Audit Practices” and spoke about Malta’s initiatives related to the transposition of the accounting and statutory audit directives. The second part of the conference addressed key Issues in the Application of the statutory audit directive (EU 2014/56/EC) and the PIE Regulation (EC 537/2014) within the Legislation of the Member Countries of the European Union.

MIA DONATION TO PUTTINU CARES

The proceeds collected from a raffle organized at the MIA Xmas party held at The Villa on 4th December 2014 which was attend by over 400 members amounted to some €670. These were rounded up to €1,000 by the Institute and donated to the cancer support group Puttinu Cares. The MIA president Maria Micallef is seen presenting the respective cheque to Mr Andrew Decelis of Puttinu Cares.

NEW MIA MEMBERS

MIA Mr Semen SpiridonovMs Kristina Hili Mr David Bajada Ms Susan Caruana Domancich

MIA upgradesMr Clarence Attard

Suspended MembersMs Charlene Attard; Ms Maria Grech SantMr Henry E. Micallef Ms Sarah Refalo Mr Joseph E. Scerri.


local update

FACILITATING THE FREEDOM OF CROSS BORDER ESTABLISHMENT

A proposal on facilitating registration of cross-border single-member companies in the EU, currently being discussed in the European Parliament, was the subject of an exchange of views between stakeholders held at Dar l-Ewropa.

The proposed Single-Member Private Limited Liability Company directive asks member states to provide for, in their national legislation, a national company law registration form that would be harmonised across the EU. The purpose of the proposed directive is to make it easier for any potential business to set-up single-member private limited liability companies across the EU. It provides a standard template for the articles of association as well as the possibility to register such companies electronically, without the need of a physical presence of the founder before the authorities of the Member State of registration.

Speakers included Maltese MEPs Therese Comodini Cachia (EPP) and Marlene Mizzi (S&D), who are both directly involved in the ongoing legislative process of the proposal.

MEP Mizzi is the Rapporteur on the subject within the Internal Market and Consumer Affairs Committee, which is asked to give its opinion as part of the process. In her report she tabled over a hundred amendments wherein the main objective is to include safeguards to ensure that businesses operate cross-border for the right reasons. She said this possibility should not be available to all companies

irrespective of size. The main concerns are linked to fiscal evasion, corporate governance standards, and forum shopping.

MEP Comodini Cachia is a member of the Legal Affairs Committee, which is the lead committee ultimately responsible for the dossier. She said this discussion comes in time for the input of stakeholders to be channelled into the legislative process. She said that in the initial discussions held there was a divergence of views between the main political groups.

Most requirements being presented in the proposal are already catered for in Maltese company law, she said. “A good reputation has been established locally as far as the incorporation of companies is concerned”, she said. The view of the EPP group is to back any initiative that would facilitate cross-border business and reduce the bureaucratic burdens small companies face.

Mr Joe Caruana, Registrar of Companies within the Malta Financial Services Authority, explained that online registration of a company is already possible in Malta. He said that only last year around 5,000 companies were registered in Malta, 70% of which by non-Maltese residents.

The event was also addressed by Omar Cutajar and Mark Seychell from the MBB. Other participants included legal practitioners, the Malta Institute of Accountants, the Notarial Council, and the Malta Chamber of Commerce, Enterprise and Industry.The event was held jointly between the European Parliament Office in Malta and the Malta Business Bureau, in partnership with Enterprise Europe Network.

p.07THE ACCOUNTANT news


THE ACCOUNTANTnews

ACCOUNTANCY BOARD PUBLISHES UPDATED CODE OF ETHICS FOR WARRANT HOLDERS

On Friday 6 March, the Accountancy Board published a revised Code of Ethics for Warrant Holders (‘the Code’). Consequently Directive Number 2, Accountancy Profession (Code of Ethics for Warrant Holders) issued in terms of the Accountancy Profession Act (Cap. 281) and the Accountancy Profession Regulations 2009 has been amended. The revised Directive is available for the public and may be viewed by accessing the website of the Accountancy Board at the address https://secure3.gov.mt/accountancyboard/Library/Regulations.aspx, or may be obtained during office hours from the Secretary to the Accountancy Board, Ministry for Finance, Maison Demandols, Triq Nofsinhar, Valletta.

The revised Code issued by the Accountancy Board is based on the International Ethics Standards Board for Accountants (‘IESBA’) Code amended in certain areas to reflect additional requirements contained in the 2002 EU recommendation on a set of fundamental principles on Statutory Auditors’ Independence in the European Union.

The Code includes the extensively revised IESBA Code published in 2009 as well as incorporates further amendments to the IESBA Code that have been issued to date. While the Directive shall in accordance with article 8 of the Accountancy Profession Act, come into force one week from its publication in the Government Gazette, transitional rules for different parts of the revised Code have been established as considered appropriate to assist with an orderly implementation of the revised provisions.

The Malta Institute of Accountants would like to inform its Members that it will be engaging in various initiatives aimed at increasing its Members’ awareness about the requirements of the revised Code.

Quality Assurance OversightCommittee publishes 2014 Annual Report

In March, the Quality Assurance Oversight Committee published its 2014 Annual Report.

Mr Peter J Baldacchino, Chairman – QAOC & member of the Accountancy Board, said that, “The focus in this report is on matters where the Committee believes that improvements are required to safeguard and enhance quality standards on audit engagement files reviewed by the Quality Assurance Unit.”

Mr Marcel Coppini, Head of the QAU, said that “With the expectations gap on auditor reporting widening the need for audit practices to have robust systems of internal quality controls, and adequate risk management procedures are today more pronounced than ever before.”

The report is available on the Accountancy Board’s website at https://secure3.gov.mt/accountancyboard/Library/Reports.aspx

ROC WEBSITE TO OFFER NEW FEATURES

The Registry of Companies Online System is currently being upgraded. One of the new features of the system will be the possibility of issuing automated electronic reminders to all registered companies concerning the due dates and deadlines regarding the filing of the annual returns and annual accounts. For this purpose the Registry of Companies should be provided with one or more valid e-mail address/es where such reminders will be sent.

A company may provide its own corporate e-mail address, and/or other e-mail addresses where the officers of the company would prefer to receive these reminders, such as the e-mail address of its accountant or legal practitioner. It is important that the e-mail address/es provided is/are functional and regularly used so that the reminders will be read in time. Companies are being urged to furnish the

Registry with the electronic mail address/es at the earliest opportunity so that they may benefit from this service as soon as it is up and running. This automated reminder service should help companies not to overlook filing deadlines. Companies may inform the Registry of Companies by an e-mail addressed to [email protected] of the e-mail addresses they choose to use for this service indicating also the name of the company and its registration number.

SHIREBURN SOFTWARE SUPPORTS ICT STUDENTS

Shireburn Software is proud to announce its support of the University of Malta ICT Student Association (ICTSA), signing a one year agreement as a gold sponsor. Through this agreement, Shireburn will support ICTSA in reaching its objectives as a focal student body in the future of the ICT in Malta, seeking to attract more students to this sector.

The collaboration between Shireburn and ICTSA will also ensure that students benefit from excellent career opportunities and industry exposure, both throughout their formal studies at the University, but also beyond. ICTSA strives to represent all University students reading any degree in some way associated with information and communications technology.

This initiative forms part of Shireburn’s ongoing commitment to support the IT professionals of the future. Shireburn is also currently in discussions with MCAST in order to take on students as apprentices for the coming year.

NEW WEBSITE FOR NEXIA BT

Nexia BT is proud to announce the launch of its new website www.nexiabt.com. The online portal offers an interactive experience through which the firm shall continue to communicate information through its knowledge, expertise and services, in relation to the variety of industries in which the firm operate.

The website has been revamped with a fresh and modern look, whilst maintaining indispensable features such as the articles and news sections. By means of this online facility, Nexia BT aims to deliver highly informative and relative articles, practical guidance on industry trends and the latest updates to its customers through a user-friendly and easy-to-navigate platform. Users may also choose to subscribe to the company’s news alerts by submitting their email address.

The simple-to-use site navigation is broken down into specific categories for Services, Sectors, Business in Malta, Careers, News section, Articles, About Nexia BT and Contact Details. Each category includes respective subsections with informative material that one may read, print or download. The website has just been officially launched and is now live.


THE ACCOUNTANTfeature

Bad debts are bad news! As much as traders may attempt to avoid bad debt situations, unfortunately they tend to be common to all traders at one point or another. For many businesses, especially those where cash flow is tight, any help to ease the bad debt burden is welcome.

Insofar as VAT and bad debts are concerned, item 4(c) of the Seventh Schedule to the Maltese VAT Act provides that when, after a supply takes place, the amount due as consideration for that supply becomes a bad debt, and “the taxable value of that supply shall be reduced accordingly”.

Item 10(2) of the Tenth Schedule to the VAT Act goes on to state that “a claim for a deduction by way of a bad debt relief shall be subject to such directives as the Commissioner may give as to the circumstances in which it may be made and the documents or other evidence that should be produced.”

In light of the above, on 30th November 2014, the VAT Department issued guidelines outlining the administrative procedures that must apply in order to affect a claim for bad debt relief. The following salient conditions have been highlighted:

1. A claim for bad debt relief may be made following a final Court judgement showing beyond doubt and to the satisfaction of the Commissioner that the debt can never be recouped.

2. The claim must reach the Commissioner by not later than twelve months from the date of delivery of the final judgement.

3. VAT in connection with the claim must have already been accounted for and paid to the Department.

4. All VAT returns and payments due as at the date of the claim must have been submitted by that date.

5. The debt must have been written off in the claimant’s day-to-day VAT accounts and transferred to a separate bad debt account.

6. The supply must have been made to the customer, or to a third party through the customer.

7. The value of the supply must not be more than the customary selling price.

8. The debt must not have been paid, sold or factored under a valid legal assignment.

Given that claiming bad debt relief tends to be a topical issue which is of interest to many, guidance in this respect was definitely required and welcomed as it has provided a degree of clarity in assessing whether to affect such claims, or otherwise. Notwithstanding the above the conditions appear to be somewhat onerous.

Comparing the VAT and IRD Guideline for Bad Debt Relief Claims

Reference is being made to the guidelines issued by the Maltese Inland Revenue Department, outlining when a deduction for bad debts is allowable for income tax purposes.

According to article 14(1)(d) of the Income Tax Act, the Commissioner has to be satisfied that the debt has become “bad”. These guidelines provide that whether a debt is bad is dependent on objective consideration of the facts surrounding the case and, in accordance

After having worked with Deloitte & Touche, Paul Giglio established Attard Giglio + Co in 1998 together with Anthony Attard. Paul Giglio specialised in statutory audit and taxation with specialist knowledge in various sectors including insurance, financial services, construction, pharmaceutical, manufacturing, gaming and hospitality. He acts as client service partner for some our larger international clients.

Paul Giglio is a graduate from the University of Malta in accountancy, a qualified Chartered Certified Accountant (ACCA) and a certified public accountant. He holds a master degree in MS. Finance. Paul Giglio is a fellow in the Malta Institute of Accountants and is an active member in various sub-committees of the Institute.

Sarah Casolani joined Mazars Malta in August 2013 as Indirect Taxation Services Manager. Sarah worked with a leading tax firm for four years where she was responsible for the provision of a plethora of corporate management services to a portfolio of clients, which role included the provision of tax advice and support services and VAT advice. She was also involved in the importation and registration of aircraft.

She is a University of Malta B.Com (Hons.) Banking and Finance graduate and obtained a M.A. Fin. Services in November 2012 after submitting her thesis which studied the international direct taxation Issues concerning the exploitation of intellectual property rights using Maltese companies. Subsequently, Sarah also obtained a Diploma in Taxation from the Malta Institute of Taxation and is now specialising in VAT.

Paul Giglio

Sarah Casolani

FEATUREVAT and Bad Debts


THE ACCOUNTANTFEATURE

with Revenue practice, a debt should not be considered “bad” until:

• The debtor has died leaving no, or insufficient assets out of which the debt may be satisfied; or

• The debtor has become insolvent; or

• The debtor cannot be traced and the creditor has been unable to ascertain the existence or whereabouts of any assets against which action could be taken; or

• The debt has become statute-barred; or

• If dealing with a corporate debtor, the debtor is liquidated or in liquidation and there are insufficient funds to pay the debt being claimed; or

• The creditor has taken all the legally available steps to recover the debt, where appropriate, or

• The debtor has absconded and his whereabouts are unknown.

The guidelines issued by the IRD further provide that the debt need not be “bad” in its strict sense (that is the debt is not required to be irrecoverable in the future) however relief should be still allowed insofar as the commercial judgement pointing to the relevant facts indicates that a debt is bad for the time being. This is a marked difference from the position taken by the VAT Department which provides that court judgement must indicate that the debt “can never be recouped”.

The IRD guidelines add that it is NOT essential that a creditor takes all legally available steps to recover bad debts but that a creditor makes a bona fide assessment, based on commercial consideration, of the extent to which the debt is bad. Again this approach appears to be in stark contrast to the VAT guidelines which require that full legal action be taken.

The Commissioner has also ruled that a debt may be considered to have become bad where “on an objective view of all the facts or on the probabilities existing at the time the debt, or part of the debt, is alleged to have become bad, there is little or no likelihood of the debt, or part of the debt, being recovered. The guidelines set-out a list of some or all steps which one could take to make a claim in this respect, one of which being that a “judgement has been entered against the delinquent debtor”. This item is similar to the aforementioned judgement requirement imposed in terms of the VAT guidelines; however, this is merely an option available to the claimant of bad debt relief rather than a requirement, as it has been made for VAT purposes.

Another point of note in this respect is that, from a VAT perspective, all VAT returns and payments due as at the date of the claim must have been submitted by that date however this condition has not been instilled from an income tax perspective.

Following the merger of the Revenue Departments, one would expect that a single set of principles defining what constitutes a “bad debt” would have been drawn up, for both Income Tax and VAT purposes. As a result of the current inconsistencies, a company’s debt may be classified as “bad” for income tax purposes and as a debt due and payable from a VAT perspective.

Comparing the Maltese situation to that in the UK and Ireland

The Maltese guidelines are similar to those issued by the UK however, one significant difference is that that the UK requires the debt to have remained unpaid for a period of 6 months after the later of the time the payment was due and payable (determined by the supplier’s normal credit terms or in accordance with an agreement reached with a customer) and the date of the supply in order to be eligible for claim. Also, the UK allows for the claim to be made within 4 years and 6 months. Conversely, apart from linking the possibility of making such claim to being in possession of a final Court judgement

evidencing that the debt can never be recouped (rather than the expiration of a 6 month period as imposed by the UK), the Maltese VAT guidelines require that the claim is made by not later than 12 months from delivery of final judgement.

With reference to the Irish guidelines, in order for relief to be claimed, a trader must have taken all reasonable steps to recover bad debt. The acts that constitute ‘reasonable steps’ would need to be determined on a case by case basis and may comprise a number of actions undertaken to recover the debt such as correspondence with the debtor, referral of issue to a solicitor or debt collectors or other action which can provide objective evidence that the trader can reasonably consider a debt to be bad and to classify the debt as such in his/her accounting records. The guidelines provide that correspondence from the liquidator of the debtor confirming that the debtor does not have sufficient funds to pay non-preferential creditors could provide evidence to justify such a claim. Again, this differs significantly from the requirements imposed in terms of the Maltese guidelines which require “a final Court judgement showing beyond doubt and to the satisfaction of the Commissioner that the debt can never be recouped”. This criterion creates an automatic barrier to smaller traders who would most likely:

• Limit claims of bad debts relief to dealings with clients which end up in court;

• Evaluate the cost/benefit analysis before proceeding – i.e. the cost of initiating proceedings – court fees, legal fees, time spent etc. against the benefit of recouping VAT which they have essentially advanced to the VAT Department in anticipation of the receipt of such amount from their clients, the latter which was never received.

Consequently, it is more likely that larger traders would be in a position to apply for such relief, which would result in them being better off in comparison with smaller traders carrying out the same activity however who do not have sufficient resources at their disposal (human and financial) to initiate the process to affect such a claim. Additionally, in terms of the Maltese guidelines, the Commissioner must also be satisfied that the debt can never be recouped. This has introduced a subjective element to the test.

Interestingly, another requirement for claiming bad debt relief as per the Irish guidelines is that the debt is allowable as a deduction in arriving at the tax-adjusted profits for income tax purposes. This effectively links the trader’s VAT position to its income tax situation. As evident from the above, the Maltese guidelines effectively do not make such a link.

UK rules also provide that if a taxable person pays a premium for insurance against bad debts, payment by the insurer does not affect the person’s right to claim relief. The Maltese guidelines on the other hand provide that the Commissioner reserves the right to refuse or reverse a bad debt relief claim where the person was insured against the bad debt. Similarly to the UK, the Irish guidelines also provides that entitlement to receive compensation payment under a policy of insurance against a bad debt does not affect entitlement to bad debt relief.

A requirement that Malta has introduced, which UK and Ireland have not is the requirement that all VAT returns filed and VAT payments due paid by the date of the request. Also, in order to claim relief in Malta, an application to the Commissioner would need to be made by means of a registered letter, enclosing the relevant documentation requested in the guidelines and relief may only be accounted for once authorised by the Commissioner. On the other hand, from their giudelines it seems that both Ireland and UK allow a claim to be made directly through a tax payer’s VAT return without obtaining the prior green light from the authorities. UK and Ireland also outline the method of calculation of such relief in cases where partial payment has been received and substantiate this by using examples. On the other hand, the Maltese guidelines simply provide that pro-rata calculation shall be made in the case of invoice/s subject to varying VAT rates. The Maltese VAT Department may not have felt the need to go into depth in this respect, possibly since the method may be communicated once

p.11THE ACCOUNTANT feature

winter 2015 | theaccountant.ORG.mt

The Malta Institute of AccountantsLevel 1, Tower Business Centre, Tower StreetSwatar, BKR 4013Malta

Tel: +356 2258 1900Fax: +356 2132 3906

E-mail: [email protected]

On Friday 6 March, the Accountancy Board published a revised Code

of Ethics for Warrant Holders (‘the Code’). Consequently Directive

Number 2, Accountancy Profession (Code of Ethics for Warrant

Holders) issued in terms of the Accountancy Profession Act (Cap.

281) and the Accountancy Profession Regulations 2009 has been

amended. The revised Directive is available for the public and may

be viewed by accessing the website of the Accountancy Board at the

address https://secure3.gov.mt/accountancyboard/Library/Regulations.

aspx, or may be obtained during office hours from the Secretary to

the Accountancy Board, Ministry for Finance, Maison Demandols, Triq

Nofsinhar, Valletta.

The revised Code issued by the Accountancy Board is based on the

International Ethics Standards Board for Accountants (‘IESBA’) Code

amended in certain areas to reflect additional requirements contained

in the 2002 EU recommendation on a set of fundamental principles

on Statutory Auditors’ Independence in the European Union.

The Code includes the extensively revised IESBA Code published

in 2009 as well as incorporates further amendments to the IESBA

Code that have been issued to date. While the Directive shall in

accordance with article 8 of the Accountancy Profession Act, come

into force one week from its publication in the Government Gazette,

transitional rules for different parts of the revised Code have been

established as considered appropriate to assist with an orderly

implementation of the revised provisions.

The Malta Institute of Accountants would like to inform its Members

that it will be engaging in various initiatives aimed at increasing its

Members’ awareness about the requirements of the revised Code.

ACCOUNTANCY BOARD PUBLISHES UPDATED CODE OF ETHICS FOR WARRANT HOLDERS



the go-ahead to claim VAT has been granted by the Commissioner.

In accordance with the Maltese guidelines, the debt must not have been paid, sold or factored under a valid legal assignment. The UK seem to take the same position insofar as the assignment of the debt is absolute, i.e. there is no provision for the reassignment of the debt in the contract. On the other hand, where there is provision for the reassignment of debt, bad debt relief can be availed of once the debt is reassigned to the trader. Similarly to the UK, the Irish guidelines provide that in a factoring or invoice-discounting arrangement with recourse, the originator may be entitled to bad debt relief where all the other conditions imposed in terms of the Irish guidelines are satisfied.

VAT and Bad Debts: VAT Directive and EU Case Law

The provisions available in the VAT Act in relation to bad debt relief effectively transpose article 90 of Council Directive 2006/112/EC (the Principal VAT Directive), which provides that:

1. In the case of cancellation, refusal or total or partial non-payment, or where the price is reduced after the supply takes place, the taxable amount shall be reduced accordingly under conditions which shall be determined by the Member States.

2. In the case of total or partial non-payment, Member States may derogate from paragraph 1.

According to case-law of the Court of Justice of the European Union (CJEU), the transposition of a directive into domestic law does not necessarily require the provisions of the directive to be enacted in precisely the same words in a specific, express provision of national law and a general legal context may be sufficient if it actually ensures the full application of the directive in a sufficiently clear and precise manner, so that, in the case of a directive intended to confer rights on individuals, the persons concerned are enabled to ascertain the full extent of their rights and, where appropriate, rely on them before the national courts.

The core of article 90(1) of the VAT Directive is that a Member State is required to reduce the taxable amount and consequently the amount of VAT payable when, after a transaction has been concluded, part or all consideration has not been received by a taxable person. This embodies one of the fundamental principles of this Directive which provides that the taxable amount is the consideration actually received and, as a consequence of this, the tax authorities may not charge an amount of VAT exceeding the tax paid by the taxable person.

Nevertheless, article 90(2) permits Member States to derogate from the rule outlined in 90(1) and hence a taxable person is not in a position to rely on the right of reduction in their taxable amount in the case of non-payment of the purchase price if the relevant Member State intended to apply the derogation provided for in Article 90(2). The intention of the EU legislature here is to allow discretion to each Member State to determine whether non-payment entitles a taxable person to reduce the taxable amount accordingly or whether such a reduction is not allowed in that situation.

Despite allowing a certain degree of discretion to determine the reduction, the CJEU held that it does not alter the precise and unconditional nature of the obligation to allow the reduction in cases referred to in article 90. Therefore, a taxable person may reply on the provisions of article 90(1) of the VAT Directive before national courts against the State to obtain a reduction in their taxable amount for VAT.

It however must be noted that, in terms of article 273 of the VAT Directive, Member States may impose the necessary obligations to ensure the correct collection of VAT and to prevent VAT evasion. Since both 90(1) and 273 do not specify either the conditions or obligations which the Member States may impose, the ECJ held that the provisions give Member States a margin of discretion as to the formalities to be complied with to ensure that the taxable amount has been indeed reduced.

From CJEU case law, it is evident that measures to prevent tax evasion or avoidance may not, in principle, derogate from the rules relating to the taxable amount except within the limits strictly necessary for achieving that specific aim. According to the CJEU, they must have as little effect as possible on the objectives and principles of the VAT Directive and may not therefore be used in such a way that they would have the effect of undermining the neutrality of VAT.

Observations

In light of the above, one may question whether the fact that a final Court judgement showing beyond doubt and to the satisfaction of the Commissioner that the debt can never be recouped is too onerous and may undermines the neutrality of VAT. Another question that comes to mind is – what if the VAT which is rightly recoverable is not substantial, would a taxable person bother going through the hassle of initiating court proceedings to make a claim?

Additionally, in a case involving substantial VAT which a taxable person is attempting to recover, obtaining a court judgment may take a significant amount of time, which for a business means money, especially more so if that business utilized a form of financing to cover VAT costs which it has not recouped.

Moreover, are Maltese courts not over clustered with pending cases to now have the added burden of decisions to contend?

Recommendations

In the light of our analysis, we believe that the following could be considered to increase the efficiency of VAT system on bad debts.

First of all, given the merger of the local tax administrations, one set of principles which would streamline the classification of a “bad debt” from both an income tax and a VAT perspective could be established. This should simplify the relief situation for traders. Secondly, specific conditions should be introduced to deal with relief from a VAT perspective involving claims of a low amount. We believe that reference to the guidelines issued by the Inland Revenue Department should be made. Thirdly, prior to the issuance of future guidance notes, more communication between all stakeholders could be suggested.

Finally, we question whether it is more practical to create a Council that would be tasked with fiscal assessment. Upon evaluating the evidence, which would be presented by the unpaid debtor this Council could very well confirm whether the balance should be allowable under the bad debt relief systems in accordance with both the Income Tax Act and VAT Act.

“one may question whether the fact that a final Court judgement showing beyond doubt and to the satisfaction of the Commissioner that the debt can never be recouped is too onerous and may undermines the neutrality of VAT.”



Kathleen Abela graduated from the University of Malta with a Bachelor of Accountancy (Hons.) degree in 2013 and is currently working with EY in tax accounting, compliance and reporting.

Kathleen Abela

FEATUREThe Use of Cash in maltese SMe’s

Introduction

With today’s advances in technology, cash utilisation within some Maltese SMEs is declining, in part due to the existence of other convenient and secure payment methods. Nonetheless, depending on the type of industry, the presence of cash still exists and misappropriations may take place if internal controls are weak.

Large cash balances within an SME may lead to misappropriations since cash in itself is of a physical nature and can be easily transported. Since small businesses have limited resources, generally less anti-fraud controls are implemented, leaving the business more vulnerable for abuse and fraud.

SME’s and their background in Malta

The term ‘Small and Medium Enterprises (SMEs)’ may be defined as those entities engaged in an economic activity, which satisfy the criteria as laid down by the European Commission in respect of the number of employees and either the turnover or balance sheet total.

SME’s play an important role in the European economy since they represent 99% of all European businesses, thus effectively being considered as the backbone of Europe’s economy. Malta’s membership in the EU in 2004 facilitated the entry of Maltese SMEs into the European Market. Thus, since the EU in itself is a single market, Maltese businesses are capable of trading within Europe as if they are trading in their own country. Another aspect that made trading easier for Maltese businesses was the introduction of the Euro in 2008.

The majority of businesses in Malta are SMEs that tend to be also family owned businesses. Table 1 has been extracted from the Small Business Act (SBA) Malta Fact Sheet 2014. It gives an insight into the number of small, medium and large enterprises in Malta.

As one can see, Malta’s economy is made up of small businesses which are mainly micro-enterprises representing 94.6% of total businesses.

The Use of Cash

The term ‘cash’ may be defined as money in coins or notes, as distinct from cheques, money orders, or credit. The rationale as to why firms hold cash “to some extent depends upon management’s attitude towards risk”. There has to be a balance between keeping cash-in-hand and investing cash wisely, which will eventually reap profits in the future. Moreover, the transactions motive, the precautionary motive and the speculative motive are the three main reasons why firms may sometimes want to keep cash since it is the most liquid of assets in a business.

Unlike credits cards and other methods of payment, which have some form of theft protection, cash cannot be traced. This may allow cash to be mishandled, through physical theft and fraud. Mishandling of cash can take various forms and may take place well before it is injected in the business. Figure 1 relates to misappropriation of cash by employees.

Number of EnterprisesMalta

Number

MicroSmallMedium-sizedSMEs (Total)LargeTotal

Table 1 – Small Business Act (SBA) Malta Fact Sheet 2014

28,9051,298291

30,49454

30,548

94.6%4.2%1.0%

99,8%0.2%

100,0%

Share


THE ACCOUNTANT FEATURE

Theft and mishandling of cash in businesses are likely to occur through the falsification of accounting records; destroying accounting records; creating fictitious invoices or refunds; or not recording the cash received, among others.

One of the major implications of having a business dealing in high cash balances is tax avoidance. In a report published for the European Parliament’s Progressive Alliance of Socialists & Democrats Group by Murphy (2012), it is reported that Malta is losing an estimated €577 million in taxes each year as a result of underground economy [1].

Internal Controls

Organisations with weak internal controls are vulnerable and more likely to be abused by asset misappropriation schemes.

Although internal controls vary depending on the type of SME, certain basic controls are common to all. It is important that SMEs have a cash policy in place. Such a policy often includes how cash should be handled; by whom and for which purpose. Cash policies should mainly specify the duties and responsibilities of the persons:

• in charge of cash once it has been received; • securing the asset;• in charge of reconciling cash.

SMEs tend to fail to understand the importance of having a written cash policy in place either because the individual who takes care of the cash is the owner manager or it is an omission from the management’s part.

Restaurants and hotels are likely to implement cash policies since they have several employees dealing with cash transactions at different stages of the cash handling cycle. On the other hand, sole traders are less likely to have a cash policy, which makes this type of environment more susceptible for fraud.

If cash policies are in place, the whole process can be overseen and random spot checks can be carried out constantly, leading to proper cash management. Cash policies act as a deterrent since employees would be expected to know and conform to such policies. Also, lack of cash policies in place can have a negative impact on the auditors’ perception of the company’s cash management practices.

Cash related internal controls can be divided into four main categories:

SKIMMING CASH LARCENY FRAUD DISBURSEMENTS

On-going evaluation and monitoring of internal controls where discrepancies in cash have been identified are crucial to make sure that any improvements necessary are made. It is important that strict rules are imposed when there are discrepancies in cash.

The following are some characteristics for effective internal controls.

Strong internal controls will not prevent fraud or theft, but will minimise the possibility of fraud. Management should periodically perform assessments on internal controls to identify any weaknesses, which should be rectified immediately. Figure 2 below presents the cycle involved for maintaining internal controls.

Skimming occurs when cash is misappropriated before it is posted in the

accounting records of the business.

Skimming may take place at the cashier’s desk, from accounts recievable or from

refunds.

Cash larceny schemes take place after the cash has been recorded in the

books.

Fraud disbursements occur during the process

when the company is acquiring goods or

services.

These range from payments made by the employer, which are not business

related, to acts carried out by employees, such as

tampering with cash systems in order to conceal the

withdrawal of cash.

1. Segregation of duties

2. Accountantability

3. Security of assets

4. Reconciliations

• Different persons carrying out the cash process.

• In reality, this might not be practical for some SMEs since the owner of a small business or an accounts administrator usually takes care of this function.

• Approvals from authorised personnel.

• Cash should be documented appropriately.

• Transactions can be traced to the employee who performed the task.

• Cash must be put in a secure location and access to such cash should be given to few persons.

• Reconciliations of cash receipts and bank statements must be carried out to confirm that accounting transactions have been recorded properly.

• Frequent reconciliations will flag any irregularities that might be occurring in the business.

It can take place while the cash is being held by

the company.

Figure 1 – Types of cash misappropriation

Table 2 – Cash related internal controls



Businesses should bear in mind that the creation and implementation of internal controls impose legal obligations on management. Staff and clients have a right to privacy within the parameters of the law and this should be adhered to. Therefore, companies should be cautious when implementing certain controls on customers.

Findings for selected Maltese SMEs *

SME’s analysed for the study hailed from the retailing and the services sector [2] whereby the majority of the sample were micro enterprises followed by medium sized enterprises.

Based on the sample of businesses under review, the majority do not deal with high volumes of cash-in-hand, with the exception of supermarkets. This is mainly attributed to the fact that customers are nowadays effecting payment through non-cash payment methods, primarily through cheques and cards.

Consumer’s payment methods*

For service-based companies (such as IT related entities and insurance companies), cash utilisation is less when compared to other payment methods. Customers’ first prefer to effect cheque payments with their second preference being online bank transfers. With respect to hotels, customers’ prefer paying via credit cards. Hotels tend to have policies in place to either accept cheque payments up to pre-determined amounts (which is set by management) or in the case of foreign clients, refuse cheque payments for plausible reasons. Furthermore, certain businesses tend to only accept cheque payments from known and trusted clients.

Pharmacies and certain supermarkets that are frequently visited by consumers have an almost balanced proportion of cash and cheque/credit card payments. Moreover, food outlets are generally paid in cash followed by credit cards.

Other retailers still deal with cash balances since customers use cash when paying for items of low amounts. Moreover, some local stores have a ‘cash only payment’ policy since they are reluctant to introduce credit card machines in view of the bank charges incurred.

Certain businesses that still have a proportion of cash payments (such as supermarkets), are nowadays encouraging their clients to pay through cheques and credit cards in an attempt to reduce cash handling and misappropriation. Although businesses acknowledge that these options may be more costly and burdensome, it would reduce the risk of theft or misappropriation of cash by staff.

In March 2015, the European Parliament approved a regulation to cap the transaction fees charged for the use of debit and credit cards. Currently, banks impose fees on businesses for debit and credit card transactions carried out by their customers. Retailers pass this cost to

consumers who are effectively paying a higher price for the purchase. Although the cap introduced by the new legislation should effectively lead to lower prices, SMEs could decide to increase their profitability by maintaining the same prices, meaning that consumers will not benefit from lower prices.

Payments to suppliers *

Although the tendency is that payments to suppliers are effected via cheques or bank transfers, some suppliers still require cash payments. Consider an example where the owner of a restaurant is dealing with local fishermen. The norm is for the fishermen to be paid in cash. Another example includes hardware stores, whereby the cash collected from customers is normally used to pay its suppliers.

Some business owners use Internet banking themselves apart from cheques. Where employees are involved, it is still common practice that cheques are prepared for the employers’ review and signature since employees do not normally have access to the company’s Internet banking system. This implies that business owners might either be reluctant to give limited rights of the Internet banking system to the employee to effect payments or are unaware of the main benefits provided by the Internet banking function.

Although the use of cheques is not the most efficient type of payment nowadays, it is still considered to be the main preferred payment option by local SMEs.

The concept of traceable methods of payment

Nowadays the use of Internet banking by both individuals and businesses is increasing and certain payments may be effected even on smart phones.

Cash is not considered traceable. Examples of traceable methods of payment include the use of credit and debit cards, cheques and online banking facilities.

Malta with the highest % of cheque payments

According to statistics published by the ECB (Table 3), Malta holds the highest percentage of cheque payments when compared to all EU countries. In 2013, 26.28% of non-cash payments in Malta were through cheques (increase of 2.38% from 2012).

It is evident that older generations might be unwilling to use newer payment options. They tend to feel ‘safer’ issuing a cheque rather than processing an online bank transfer or effecting payment via credit cards.

Limits on cash payments in some countries of the EU

In recent years, a number of foreign Governments have been introducing cash caps in order to reduce the amount of cash that a business may accept from its customers; and alternatively using controlled financial flows such as credit cards. The primary reason for some countries is to reduce tax evasion and fraud; while for other countries, the main aim is to slowly move their country towards a ‘cashless’ society. At present, there is no law being imposed by the EU regarding such limits.

Figure 2 – Internal Controls Maintenance Cycle

Table 3 – ECB statistics

Malta

201120122013

Credit Transfers

21.6722.1019.54

Direct Debits

4.184.416.49

Cards

43.4749.4647.59

Cheques

30.6223.9026.28



Country

Italy 2011 €1,000 The Italian Government introduced a new limit on the use of cash in an attempt to reduce and limit tax avoidance in the country.

The Law provides that the maximum allowed cash payment that businesses can accept is €1,000. Any payment of an amount above this limit should be made using traceable methods of payment. This legal cash cap was initially set for Italians and foreigners alike.

In late February 2012, the Italian Government sought to revoke the law for foreigners since retailers, especially those operating in luxury goods, claimed that such restriction would lead to losing foreign business.

Spain 2012 € 2,500 Residents €15,000 Non-residents

The Spanish Government, proposed the implementation of a cash transaction limit of €2,500 for residents and €15,000 for non-residents in 2012. Any transaction, involving at least one businessperson and an amount above the mentioned limit, cannot be made in cash.

Furthermore, the Government imposes fines of 25% on the value of the cash payment if citizens do not comply with the limitation.

Belgium 2012 €3,000 The Belgian Government introduced a cash limit of €15,000 with the aim of reducing black economy in commercial transactions. However, this threshold has been further decreased to €5,000 in 2012 and subsequently lowered to the present amount of €3,000 as from 2014. Any amounts above €3,000 have to be made either by credit cards or bank transfers.

France 2010 €3,000 Residents€15,000 Non-residents

France introduced a cash payment limit of €3,000 for professional and personal expenses in 2010. However, this limit changes to €15,000 for persons who have a tax residence outside France. The latter limit applies for personal expenses only.

Further decreases in limits are being discussed.

Denmark - €1,500 Denmark has proposed the introduction of a cash payment limit of 10,000 kroner; equivalent to €1,500. However, payments made in cash over the amount of 10,000 kroner will still remain legal. Nevertheless, adhering to the suggested limit ensures that “the buyer won’t be culpable in a major case of tax evasion”.

Sweden - - Sweden does not have any cash limits within its legislation and might be the first country where the presence of cash will be almost inexistent.

Effective Year

Present Cash Payment Limit

Description

The introduction of the law to limit cash transactions is relatively new since such changes started in recent years. While the main aim for this measure is to combat tax evasion and other related fraud, it may also eventually lead to more surveillance in the EU. One still has to determine whether this measure is really effective in the long-run and what repercussions it might have on other aspects of the economy.

Respondent’s views on the introduction of the cash payment limit in Malta

Some of the sampled SME’s claimed that there will not be serious implications for their business should cash limits be introduced. However, owners expressed concern that the company may incur higher bank charges due to the increased use of credit cards, which might not always be recoverable. Governments should consult and negotiate favourable terms with local banks to aid businesses in this respect.

Nevertheless, advantages may be foreseen from using traceable methods of payment; more transparency since non-cash payments produce digital trails and less cash-in-hand will be safer for staff

during cash handling processes.

Certain businesses stated that should the cash payment limit be introduced as a proposition (instead of a law), they would not adopt such practice; however they would closely monitor those companies who have chosen to adopt this proposition.

Such payment limit will not affect each industry in the same way. For example, a €1,000 cash limit will not affect restaurants since clients rarely exceed this limit. On the other hand, this limit might affect clients purchasing from a white goods shop. Thus, should this cash limit be introduced in Malta, it might be fruitful for the Government to propose and adjust limits for different industries as it deems appropriate.

The way forward

Businesses should be constantly proactive and aware of the technological advances, which are leading countries to slowly move towards being ‘cashless’ societies. On an international level, a recent technological innovation is the use of near field communication [3]

Table 4 – Regulations on cash capping in Europe



(NFC). This technology allows a customer to make payments by simply waving his Smartphone at specific NFC terminals.

Alternatively, customers may use their special VISA Cards, namely, ‘VISA payWave’ instead of their Smartphone. These cards incorporate a tiny microchip in order to transmit payment details securely to specific payment terminals. Although the NFC technology has not yet been introduced in Malta, this is considered to be the way forward.

Concluding remark

Cash utilisation for payment purposes is being replaced by other traceable methods of payment. Consequently there has been an increase in the use of electronic money.

In view that in the future, our society is to move towards being cashless, SMEs should embrace the various types of current and upcoming payment technologies in order to be most efficient, for the benefit of the business itself and also for its customers. It is important that SMEs are proactive and alert for all technological advances and innovations that might cause a shift in the way businesses operate.

* Certain information presented in the article, specifically in those sections denoted by an asterisk, is based on the limited sample of SME’s chosen at the time of the study and may not necessarily reflect the practice of all the SME’s in Malta. Therefore, such information should not be generalised since respondents’ views do not reflect the views of all SMEs in Malta.

Tutor’s Bio

Lauren Ellul delivers lectures in Financial Management and Cost Accounting at the University of Malta. Lauren holds a Bachelor of Accountancy (Hons.) degree from the University of Malta and an Executive Masters in Business Administration, accredited by

the University of Edinburgh in association with ENPC School of International Management, Paris and KPMG. Lauren has worked within the Advisory function of KPMG for a number of years, as a Senior Manager.

Tutor’s Review

Cash is gradually being replaced by traceable methods of payments, which are considered as being more efficient and safe. These non-cash payment methods, however trigger bank charges.

Ms Abela’s dissertation provides an insight on the use of cash within selected SMEs and the specific related internal controls in place to safeguard the asset. Moreover, it analyses the general practices of the payment methods varying from one industry to the other. The dissertation also provides background information regarding the introduction of cash payment limits in some countries within Europe.

FOOTNOTES

1. The part of a country’s economic activity that is unrecorded and untaxed by its government.2. Including IT related companies, insurance industry, tourism and hospitality, healthcare and retail shops.3. A technology allowing the short-range wireless intercommunication of mobile phones and other electronic devices for purposes such as making payments.

REFERENCES

All references used in this article are available upon request at the Department of Accountancy, University of Malta.



David Zahra is founder of David Zahra & Associates Advocates, a commercial law firm based in Valletta, Malta. He has specialised in international and comparative trust law when reading for an LLM at the University of London (King’s College, London). David is actively involved in corporate and commercial law, with particular focus on mergers and acquisitions, corporate restructurings and succession and wealth management planning.

Dr David Zahra

FEATUREKeeping it in the family

Succession planning is currently on everybody’s lips.

As family businesses, already idiosyncratic and complex in their own right, are transferred from one generation to the next, professional advisers are increasingly looking at developing their own family business practice and ensuring that they possess those extra skills and resources needed to serve the family business client.

Statistics quoted by the Maltese Government in support of recent legislative initiatives specifically enacted to address the needs of family businesses show that there are around 38,000 small family businesses in Malta, and that only 30 per cent of businesses which completed the successful transition from the first to the second generation survived for the long term and less than 10 per cent of such businesses scraped through to the third generation [1]. Local advisors are most certainly aware of the current discussion on the proposed introduction of a Family Business Act – said to be the first of its kind in the European Union.

However, with much less fanfare and hype, a new instrument is now available for owners and advisors of family businesses to consider when restructuring their family business or assets either as part of their succession planning or as a means of better wealth management.

“Family Trust”

The “family trust” is an instrument which allows the setting up of a trust where the family assets are either instantaneously or progressively settled on trust and therefore transferred to a trustee to hold such family assets for the present and future needs of family members or dependants who are related to the settlor of the trust, and who are definite and can be ascertained on the creation of the trust.

In practice, the individual wishing to create the “family trust” (that is, the settlor) sets up a company which will act as trustee of the family estate transferred to it under trust, for the benefit of the family members or family dependants.

Historical Background

Family trusts were first introduced as part of an omnibus bill amending various financial services legislation presented to the House of Representatives in June 2012.

Following a period of consultation (and a delay due to the 2013 general elections), the Trusts and Trustees (Amendment) Act, 2014 was eventually enacted on 25 April 2014. As a result, a new article 43B was introduced permitting the establishment of family trusts and setting out the framework necessary for the introduction of rules intended to regulate family trusts.

The new Article 43B creates a parallel regulatory framework for trustees satisfying the following conditions. A trustee company:

(i) whose object and activities are limited to acting as trustee in relation to a specific settlor or settlors and providing administrative services in respect of a specific family trust or trusts;

(ii) which does not otherwise hold itself out as a trustee to the public; and

(iii) which does not act habitually as a trustee, in any case in relation to more than five settlors at a time[2];

is only obliged to register with the Malta Financial Services Authority (‘MFSA’) and a company may not act as a trustee for a family trust unless it is so registered. The family trust company, as opposed to professional trustees, need not be subjected to the rigorous authorisation process set out at law and handled by the MFSA.

Rules

The registration process, and the registration requirements and conditions imposed by the MFSA for such registration, shall be established by rules that are as yet to be issued by the MFSA. The MFSA has, however, on 25 November 2014, issued a consultation document together with draft “Rules for Trustees of Family Offices” [3] (the “Rules”). The relevant consultation period closed on 23 December 2014 and it is not yet known whether any feedback has been received and how the Rules will be amended to take into

p.19SPRING 2015 | theaccountant.ORG.mtSPRING 2015 | theaccountant.ORG.mt


account such feedback, if any.

Despite the exemption from authorisation, family trustees are not free from all forms of supervision. The Rules set out a number of conditions which must still be met, albeit less rigorous.

Eligibility

The Rules create a public Register of Trustees for Family Offices, which registry shall be updated and maintained by the MFSA.

In order for a trustee company to be included in such a register, an applicant must necessarily be a company registered in Malta having as its object (as set out in its Memorandum and Articles of Association) acting as trustee in relation to a specific settlor or settlors and providing administrative services only in respect of a specific family trust or trusts.

Insurance

The Rules also require the family trustee company to maintain insurance cover at all times, which cover shall be proportionate to the nature and size of the activities carried out by the same trustee company.

Family Dependants

The Rules also intend identifying those persons who would fall within the parameters of the term “family dependants”.

According to the definition currently found in the Rules, a family trust can be set up by a settlor by progressively transferring his/her assets to the family trustee company for the benefit of family members or of those individuals who are related to the settlor by blood or by marriage, whether ascendant or descendant, in the collateral line up to the fourth degree (that is, first cousins).

Trustee Company Governance

One of the dangers of having the settlor setting up a company to act as trustee of the family estate transferred to it under trust, for the benefit of the family members, is that such a trust risks being seen as a sham where the settlor had no genuine intention to create a trust relationship and effectively retains effective control (through the trustee company he owns and manages) and, as a result, remains the beneficial owner of the assets settled on trust.

It is against this background that the Rules impose strict rules on the governance of such family trustee companies by introducing and element of ‘independence’ from the family in its administrative and management body.

The Rules require that the family trustee company’s board of directors is composed of at least three individual directors, composed by both family members and independent and qualified individuals – referred to in the Rules as the ‘qualified director’.

The ‘qualified director’ must be a person of good repute, possessing experience and qualifications in financial, fiduciary, accounting or legal services and approved by the MFSA as being fit and proper to carry out the duties related to the role of the trustee. The qualified director is seen as a watch dog for the trust vehicle who must ensure that the trust company is operated and managed in line with the provisions of the Trusts and Trustees Act including ensuring that the company keeps accurate accounts and records of its administration.

Apart from his professional qualifications, the ‘qualified director’ must also be seen as being independent from the family members. The independence criteria will be assessed by the MFSA on whether the director is related by consanguinity or affinity or has had any business relationships with the settlor or beneficiaries. Furthermore, the ‘qualified director’ cannot have been employed by the settlor or have been an employee or an executive officer of a company owned or controlled by the settlor for the previous three years; cannot have had

a significant business relationship with the settlor, either directly or as a partner, shareholder director or senior employee of a body that has such a relationship with the settlor; or has had close family ties with the settlor or with any of the other directors or senior employees of the trustee company.

The composition of the trustee company’s board ensures a balance between, on the one hand, the family retaining a (limited) degree of control over the trust and the comfort in knowing that the family estate is not in the hands of persons unrelated to the family, and, on the other hand, the independent ‘qualified director’ who will bring to the family trust a sense of objectivity and expertise, and minimising the possibility of conflicts of interest and undue influence by interested parties. The ‘qualified director’ should also have the benefit of emotional detachment from the family.

This position creates an opportunity for qualified, competent, professional and non-executive directors who may wish to make themselves available for appointment to boards of family trustee companies.

Added value of the Family Trust

The healthy balance between family involvement (brought about by family members sitting on the trustee company’s board) and independence (brought about by the ‘qualified director’) highlights a fundamental feature of the family trust which addresses what, on the basis of experience, has been the biggest stumbling block to the more frequent use of the trust as a vehicle for succession planning and wealth management.

Too often, persons looking for wealth management or succession planning solutions desperately seek their lawyer’s guidance so as to understand what a trust (very often proposed by their bank managers) entails. They are very often reluctant to go down the trust route because they cannot fathom how transferring their patrimony or prized assets – very often a source of great pride – to a third party over whom they exercise little influence and no control can be in their interest.

The family trust structure being proposed by the recently amended Trust and Trustees Act and the Rules would be preferred by owners of Maltese family businesses over the regular trust structure as the settlor/s will not be transferring their wealth to an independent third party. The settlor and his/her family may still possess some form of control over the trust through their position on the board of directors. This composition provides assurance and allows the family members to participate in the managements of the estate and not relinquish complete control of their assets.

The emergence of such an instrument under our law clearly provides the ultimate benefit as whilst the family members retain some form of control over their assets, the ‘qualified director’ provides the emotional objectivity of a third party and also his/her professional expertise. This provides reassurance and peace of mind to the settlor who knows the status of his assets and still have the assurance that the assets are being.

The regulatory framework for family trusts will also continue to add to Malta’s offering as a jurisdiction of choice for wealth management and family offices. Foreign high net worth individuals and their families may now use, when managing their family assets, a bespoke trustee solution in which they can also actively participate, which is designed around their family’s distinct needs in a stable and reputable jurisdiction, and which benefits from a simplified registration procedure.

1.Macdondald, V. Benefits of the new Family Business Act (Times of Malta, Thursday 26 March 2015) p.7

2.Article 43B, Trust and Trustees Act (Cap. 331, Laws of Malta)

3.<http://www.mfsa.com.mt/pages/readfile.aspx?f=/files/Announcements/Consultation/Documents/Family%20Trusts%20Rules(25112014)cln.pdf> last accessed on 6 April 2015

p.20THE ACCOUNTANTSMPs


Accountants’ Biggest Concerns in 2015SMPs

Challenges Facing SMPs

The recent IFAC Global SMP Survey showed that attracting new clients is a top concern for SMP accountants with 58% of respondents rating it as a high or very high challenge. This challenge is particularly significant in the Middle East, where as many as 80% of respondents rated it as a high or very high challenge, and in Central/South America and Europe (66% and 59%, respectively). The IFAC Global SMP Survey is conducted annually, and the 2014 edition received more than 5,000 responses from accountants operating in small- and medium-sized practices (SMPs) around the world.

Pressure to lower fees is also worrying accountants in some of these regions. As many as 68% of accountants in the Middle East, 56% in Asia, and 52% in Africa consider fee pressure a high or very high challenge for their practices. This is happening in the context of increasing amounts of regulation. The survey found that keeping up with regulations and standards was rated as a high or very high challenge by 57% of respondents. Increased regulatory responsibilities and potentially lower revenues driven by fee pressure make a very dangerous combination and may compromise the ability of professional firms to continue operating in the future.

Changing Business Environment

Accountants need to adapt to the changing environment as their work and that of auditors is changing enormously. On one hand, technology is simplifying and converting to commodities some of the tasks that were previously part of the specialised knowledge of accountants. On the other hand, electronic invoicing, cloud access, and the ability to submit tax returns online are making it possible for companies and professionals to meet some compliance requirements without the skills and experience of accountants.

Business complexity and competition are also key environmental factors impacting both SMPs and their clients, typically small- and medium-sized entities (SMEs). Competition is very steep, and so differentiation from competitors is critical; and increasing complexity making the right decisions are getting more and more difficult. Excellence in managing legal and tax matters, information management, risk assessment, human resources, and many other factors are essential to keeping a good position on the market. Being close to their SME clients, accountants’ skills and specialised knowledge, such as professional skepticism, objectivity, ability to quantify business impact, and risk analysis, can play a significant role in helping SMEs find solutions to their complex business issues and make good decisions.

But in this complex world, a multidisciplinary approach is essential. The right solutions to SME problems require teamwork and gathering enthusiastic and highly skilled people—it is essential for SMPs to recruit and retain talented individuals. Accountants should also be open to collaboration with other professionals to be able to handle the more complex needs of their clients. SMPs need to consider

mergers, associations, or other means of expanding their capabilities to convince potential clients their practice can meet their needs. Therefore, the essential ingredients for SMPs are the right service portfolio with value-added services, superior capability, and excellent quality. These qualities and capabilities also need to be properly marketed and communicated to be sure that potential clients are reached.

Internationalisation is also essential. Globalisation means that a lot of fields that just a few years ago were local are now international. In some cases, local markets are limited, but today there are more opportunities for SMEs to change their business model and look internationally.

This is an opportunity but also a challenge for SMPs. According to the IFAC Global SMP Survey, the majority of respondents (57%) reported that only 5% or less of their SME clients have international operations. Except for those practicing in a particular market niche (for instance, insolvency, local charities, or very small local entrepreneurs), internationalisation will be important for practices to keep their best clients and attract new ones. If an SMP doesn’t solve clients’ problems, it will just be a matter of time before losing those clients. The good news is that 24% of practices are considering joining a network, association, or alliance, which can bring international service capability, and should, therefore, be sought after as a strategy to help attract and retain clients. The survey results also found that SMPs that are currently serving a larger percentage of clients with international operations are more likely to belong to a network, association, or alliance than the global average.

The Future

So with all of these changes and challenges, does the profession have a future? Of course. There are many elements in its favor: society is demanding more transparency; financial and non-financial information is considered a social good, not a private matter; companies need someone to provide assurance to increase trust in their financials and the business overall; and regulation and decision-making processes are more complex, so more independent and qualified people will be needed.

But, on the other hand, accountants need to adapt to the great changes that their clients are facing. Accountants need to make the profession attractive for talented, young people and integrate technology into their day-to-day work. They need to be innovative in attending to clients’ demands, and keep an open mind to different cultures and professions. Surely the profession will succeed in overcoming these challenges, as it has throughout time.

This article originally appeared on the IFAC Global Knowledge Gateway: www.ifac.org/Gateway. Visit the Gateway to find additional content on a variety of topics related to the accountancy profession.Copyright April 2015 by the International Federation of Accountants (IFAC). All rights reserved. Used with permission of IFAC.

by Antoni Gómez, IFAC SMP Committee Member


THE ACCOUNTANTSPRING 2015 | theaccountant.ORG.mt

feature

Fraud Risk Factors

One of the objective of the audit is that of identifying fraud risk factors arising from related parties and assessing the probability that they can lead to fraudulent financial reporting.

For such purpose the auditor should remain alert to fraud risk factors throughout the audit and, as already mentioned, especially when:

• considering the fraud potential of related parties at the engagement team discussion;

• considering whether the features of the entity’s control environment may deter or facilitate fraud, especially in terms of potential management override of controls;

• considering the fraud implications of the intentional non-disclosure by management of related party relationships or transactions; and

• the business rationale of significant related party transactions outside the normal business of the entity is evaluated.

Related Party with Dominant Influence

Related parties may be in a position to exert dominant influence over an entity or its management and, when a single person or small group of persons is capable of exerting such influence that represents a fraud risk factor.

The auditor may recognise the existence of dominant influence by a related party when some indicators, suggested by ISA 550, are present. That could be the case when, for instance:

• the related party has vetoed some significant business decisions taken by management or directors;

• significant transactions require final approval by the related party;

• when business proposals are initiated by the related party they are not questioned by management or directors;

• transactions involving the related party are not independently authorised or approved.

Dominant influence may also exist when the related party has been a founder of the entity and continues to be significantly involved in its management. That could often be the case for the owner-manager of a smaller entity and the auditor should consider that dominant influence is more likely than not to exist in owner-managed entities.

When other risk factors are present alongside the fraud risk factor of a related party with dominant influence that may indicate significant risks of material misstatement due to fraud.

Such significant risk may exist if there is a high turnover of management or professional advisers, as in certain cases that may suggest that the related party is imposing unethical or fraudulent business practices to serve its own purposes.Similarly, if business intermediaries are used for significant transactions that do not have a clear business rationale, that may indicate that the dominant related party may have an interest in such transactions and may control the intermediaries for fraudulent purposes.

If the auditor has assessed a significant risk of misstatement due to fraud as a result of the existence of a related party with dominant influence, the auditor should apply the requirements of ISA 240, which deals specifically with fraud. The procedures required by ISA 240 may include, among others, testing of the appropriateness of journal entries and other adjustments in the preparation of the financial statements and reviewing accounting estimates for bias.

In addition to applying the requirements of ISA 240, the auditor may perform some other procedures to understand what business relationships the dominant related party may have established, directly or indirectly, with the entity and to determine whether further substantive procedures are needed.

The procedures that can be performed to obtain such understanding may include:

• direct enquiry of the related party;

• background research of certain transactions, for instance control of intermediaries may be researched using company registrar’s information or business information databases;

• review of significant contracts with related parties or intermediaries;

FEATUREThe audit of related parties and the application of professional scepticism (PART 2)

After obtaining a business study degree from the University of East London, Massimo qualified as ACCA in a medium sized accountancy firm in London’s West End, where he later became a manager for a large and varied portfolio of clients. A Fellow of ACCA, Massimo spent 6 years in public practice, specialising in audit and business advice, before joining ACCA where he has worked for nearly 7 years.

Massimo joined ACCA as a technical adviser in 2007 where his work has mainly been focused on the areas of auditing and financial reporting. Alongside providing advice to finance professionals on a range of issues, including audit, financial reporting, business advice, taxation, company and business law, ethics, export and access to finance, Massimo also leads on ACCA’s Audit Programs.

BY Massimo Laudato FCCA


THE ACCOUNTANTfeature

• review of employee whistle-blowing reports if available.

Discovery of Unidentified or Undisclosed Related Parties or Transactions

The auditor may discover information or arrangements indicating the existence of related party relationships or significant transactions that have not been previously identified or disclosed by management.

In such a case the auditor should probe the underlying circumstances and, if previously undisclosed related parties or significant transactions are identified, it will be necessary to take action and perform various procedures to respond to the risks that the discovery involves.

In particular the auditor will have to:

• communicate promptly the newly identified related parties to the engagement team as this may affect the results of risk assessment already performed and the further audit procedures needed;

• ask management to identify all transactions with the newly identified related parties and inquire why the entity’s controls failed to detect the party or transactions;

• perform substantive audit procedures in respect of the identified parties or transactions;

• reconsider the risk that other unidentified related parties or transactions may exist and perform further procedures to identify them if necessary; and

• if the non-disclosure by management appears intentional, therefore indicating a risk of material misstatement due to fraud, evaluate the implications for the audit.

Substantive audit procedures that can be performed in respect of the newly identified related parties or transactions can include:

• enquiries about the nature of the relationships with the newly identified related parties, including inquiring parties outside the entity who may have significant knowledge of the entity and its business; these could be legal advisers, agents, consultants or other close business partners;

• analysing accounting records to identify further transactions with the newly identified related parties;

• checking the terms and conditions of transactions with the newly identified related parties and verifying if they have been accounted for and disclosed in line with the applicable financial reporting requirements.

If management has intentionally not disclosed to the auditor related party relationships or significant transactions, the omission would represent a considerable risk of material misstatement due to fraud. In such a case the requirements and guidance in ISA 240 in respect of the auditor’s responsibilities relating to fraud in an audit of financial statements will apply.

In particular the possible involvement of management in a misstatement due to fraud requires reconsidering the reliability of the audit evidence previously obtained, as this may raise doubts about the completeness and truthfulness of the representations made by management and the genuineness of accounting records and documentation. In turn, this will require the auditor to re-evaluate the assessment of the risks of material misstatement due to fraud and the nature, timing and extent of the audit procedures to respond to the assessed risks. In other words the intentional non-disclosure by management of related parties and its potential involvement in fraud requires a substantial re-planning of the audit.

Additionally, in accordance with ISA 240, the fact that the auditor has significant concern about the integrity of management or the directors of the entity, as it could the case if management intentionally omitted

to disclose related party information to the auditor for fraudulent purposes, is one of the exceptional circumstances that brings into question the auditor’s ability to continue performing the audit. In such circumstances the auditor should consider whether it is appropriate to withdraw from the engagement. Arm’s Length Assertions for Related Party Transactions

An entity could make a statement in the financial statements that a related party transaction was conducted on terms equivalent to those that prevail in an arm’s length transaction. When this type of statements are included in the financial statements, the auditor should obtain sufficient appropriate audit evidence to verify the assertion.

The auditor may face some practical difficulties when trying to obtain audit evidence in respect of all the various aspects of a related party transaction. In fact, whilst the auditor may be able to confirm that such a transaction has been conducted at market price, like a similar arm’s length transaction, as audit evidence in that respect may be readily available, it may be difficult to confirm whether other terms and conditions are equivalent to those that would apply with an independent party. For instance the transaction may feature different credit terms or provisions for contingencies or charges.

However financial reporting frameworks normally require management to make an arm’s length statement in respect of related party transactions only if such assertion can be substantiated, as it is the case for IAS 24 Related Party Disclosures. The auditor should therefore be able to obtain sufficient appropriate audit evidence by testing the management’s support for the arm’s length assertion.

If for instance management has based its assertion on comparing the terms of the related party transaction with those of an identical or similar one with unrelated parties or with the known market terms for broadly similar transactions, the auditor may consider whether the approach taken by management is appropriate to support the assertion and may verify the source of the internal or external data and check whether the data is accurate, complete and relevant.

Evaluation of the Accounting for and Disclosure of Related Parties

In forming an opinion on the overall financial statements the auditor will need to evaluate whether:

a) Accounting and disclosure of related party relationships and transactions comply with the requirements of the applicable financial reporting framework, and

b) The effects of the related party relationships and transactions prevent the financial statements to achieve fair presentation.

The evaluation of related party disclosures in respect of the applicable financial reporting requirements may need special attention by the auditor as they may be complex and are often a source of material misstatement. The same complexity and excessive detail of the disclosures may actually obscure the substance of the related party transactions.

Related party disclosures should be evaluated considering whether the facts and circumstances of the entity have been appropriately summarised and presented so that disclosures are understandable. Disclosures may not be understandable if the business rationale and the effects of the transactions on the financial statements are unclear or if the key terms, conditions or other important elements necessary for understanding the transactions are not appropriately disclosed.

Other Requirements in ISA 550

The auditor is required to obtain written representations from the entity’s management, and in certain circumstances from directors when these are not involved in managing the entity, that:

a) They have disclosed to the auditor the identity of related parties and all the related party relationships and transactions they are aware


THE ACCOUNTANT FEATURE

of; andb) They have accounted for and disclosed such relationships and transactions as required by the reporting framework.

The auditor may request written representations from directors to confirm oral representations on details of certain related party transactions or when they have interests in related party transactions.

Additionally, unless all the directors are involved in managing the entity, the auditor is required to communicate with directors (those charged with governance) significant related party matters arising during the audit.

Discussing with directors significant related party issues, as they arise during the audit, helps in reaching a common understanding of facts and circumstances and in finding a resolution to these issues on a timely basis.

Significant related party matters that can be discusses with directors include non-disclosure (intentional or not) by the management of

Toby Hamilton

Wilma Hamilton

Frank Hamilton

Edwina Hamilton

Non-executive director and 20% shareholder

Non-executive director and 20% shareholder

Managing director and 20% shareholder

Finance director and 20% shareholder

Uses the restaurant on a regular basisSome large functions held at hotel in the past at reduced ratesDividend

Uses the restaurant and spa on a regular basis

Dividend

Uses the restaurant on a regular basis

Dividend

Salary

Uses the restaurant and spa on a regular basis

Large function held at hotel in audit period at reduced ratesDividend

Salary

Steps taken to ensure completeness(e.g. inspection of documents, observation of processes, further management enquiries)The booking schedules for the restaurants and spa and diaries are reviewed by Tess Foreman on a weekly basis to ensure that there is a value against all transactions.

Specific risk areas identified(e.g. transactions outside the entity’s normal business activity, fraud risk from management override of internal controls, etc.)No major risk areas anticipated and related parties appear to be limited to family members.

Audit impact of the aboveAudit procedures should include ensuring that the controls identified have been applied.

Discussions with clientSufficient understanding of related parties requirementsThe client’s control environment is conducive to compliance with financial reporting requirements for related parties with clear cut policies and procedures for related party transactions and responsibilities assigned to senior employees for identifying, recording,summarising, and disclosing such transactions.Importance attached to identification and disclosure of related partiesThe use of a qualified member of the team to review for transactions reflects how seriously they take this matter.Intentional disregard of controls or requirementsNone identified.

£2-3,000 per annum through the DLA

£20,000 per annum through his DLA


£20,000 per annum through her DLA


£20,000 per annum through his DLA

£50,000 per annum


£10,000 invoiced and promptly paid

£20,000 per annum through her DLA£50,000 per annum

Name of related party

Nature of relationship

Types of transactions

Likely value of transactions

related parties or significant transactions, which may alert directors of the existence of relationships or transactions of which they were not aware.

Similarly the auditor may point out to directors significant related party transactions not appropriately authorised and approved, which may indicate suspected fraud.

The auditor should also discuss with directors any disagreement with management about the disclosure of related party transactions under the applicable financial reporting requirements.

In respect of related parties’ documentation, ISA 550 requires the auditor to document the names of the identified related parties and the nature of the related party relationships.

The schedule below illustrates the documentation requirements in respect of related parties included in ISA 550 and relates to a family owned/managed business consisting of a hotel and leisure centre.

p.24THE ACCOUNTANTethics


ethicsThe Accountant in Society

It does not matter where accountants carry out their work from. It doesn’t matter what means you use to work. What matters is that you reach your destination safely, punctually, steadfastly and pay due consideration to the interests of others.

The notion of Accountants as a new profession in Malta at the middle of the last century was that of someone who keeps books and later also prepares the tax return. Whilst the original notions remain, today’s notion of an Accountant is far wider and more sophisticated.

Getting here was arduous. The business world has positively changed the way people live today, albeit sometimes hurting people in the process. It has also changed the Accountant’s role from one of detecting, to that of preventing, damage to society through unethical practices. Today’s Accountant is surrounded by volumes of standards, rules and regulation which channel the members of the profession into a narrow band of how to do things. This however by no means narrows the variety of disciplines that Accountants engage in, but a red line of ethics runs through all that they do. So for instance if Accountants maintain books of accounts they are prohibited from also auditing them and if they advise on a key number in the balance sheet they cannot then also provide assurance thereon unless they have all the necessary safeguards in place.

This state of affairs has not dampened the Accountants’ character though and their sense of judgement based on their extensive professional training and experience remains of undeniable value to business owners and company directors who report to society on their financial performance and health, as well as the readers of those reports; to the users of public money as well as the providers of capital, that is to society as a whole.

Today’s Accountant has a role that brings him much closer to society. The culture, the social dilemmas, the regulation of the financial, business and accountancy worlds turned Accountants into guardians of correct behaviour both within their own profession as well as of ethical conduct in their clients’ interaction with society.

At the core of the Accountant’s culture are, professional training and the ethical framework as set out in the Accountancy Board’s Code of Ethics (‘the Code’). This Code, which the Accountant is bound to follow in his day to day practice is detailed and extensive. Moreover it is continually changing even if unfortunately it takes a few years to transpose the changes made by international bodies from time to time, into our laws and regulations. In November 2001, the International Federation of Accountants (‘IFAC’) started converting

the old code from a set of recommendations into a conceptual framework and effectively making it a standard for ethical practice behaviour of Accountants in whatever sphere they work. IFAC started by making extensive revisions to the independence requirements for assurance engagements. During the following eight years to 2009 IFAC produced an updated principles based (or ‘Framework’) Code addressing all Accountants both in public practice and in business. As indicated in the opening memorandum of our transposed Code, the IFAC process has been accompanied by the development of similar guidance, with particular emphasis on Auditor independence, which has been issued by various regulatory and other authorities, including the European Commission.

The description of the Accountant in the above paragraphs can be taken as representing the life of each and every one of us as we go along our daily paths. Some may regard this as wishful thinking. The truth is probably somewhere in between. Our Accountant comes from all parts of this range. There are those who practice ethically all the time, those who sometimes can’t help the occasional slip in the interest of their own or to favour others’ motives and those who simply are indifferent as they are either vulnerable or the circumstances do not allow them. All of these scenarios are subject to the provisions of the Code which we are bound to follow.

So what exactly does this Code represent and what is it telling us? The Accountancy Board has recently launched an updated Code following years of deliberation of changes made by International Ethics Standards Board for Accountants (‘IESBA’), which is the Board within IFAC that is tasked with Ethics. Although the effective date of the original Code issued by IESBA was 1 January 2011, the effective date of this update for Maltese Accountants is March 2015, to allow for the delay in publishing.

The opening pages of our Code make it clear that this document represents a set of principles which should guide us in our day to day practice. There are sections however which are prescriptive in order to provide the public with peace of mind that ours is an orderly and organised profession. This, opposed to a free for all application of ethics with the danger of moral relativism creeping in, with different Accountants rating behaviour differently. The prescriptive limitations are aimed at unequivocally checking relativism in areas of utmost importance to the public.

The most important aspect of the Code is that it provides a conceptual framework which sets forth a set of principles which the Accountant continually applies in the public interest at the exclusion of all

Mario joined Norman Spiteri & Co. in 1977. From 1979 to 1982 Mario worked with a small firm in the UK. He returned to Malta in 1982 to join JT & Co. which today is KPMG. In 1985 Mario was seconded to Ernst & Whinney (now Ernst & Young) and in 1990 he joined Ernst & Young in Tripoli full time. He returned to Malta after four years, when he again joined JT & Co for a brief period. He then worked on a freelance basis for two years until 1997 when he started the new Ernst & Young office in conjunction with Mizzi Scerri Said and Co. Mario was MIA President between 2005 and 2007 and is currently the Chairman of the MIA Ethics Committee.

Mario P. Galea

p.25

Venturing into Dubai for the second time in a relatively short span of time, after having been there only some months prior attending an international residence summit, PKF had thankfully already picked up on the trimmings of Emirate culture and custom, both of which go a long way in breaking the proverbial ice with the locals after having being air-bound for long enough to truly feel that one is landing in a brand new kingdom.As often happens in life, in the midst of exploratory prep work carried out in order to identify the niche which we would seek to most vehemently promote, things seemed to self-align on their own steam, revealing to us that the said niche would be Venture Capital Malta, or VC-MT as it has aptly been dubbed.

As it happened in the week immediately preceding the Dubai Trade Mission, the press launch of VC-MT (Venture Capital Malta) took place, precisely on the 16th of February and presided by the Hon. Minister Cardona at the Ministry for the Economy, Investments and Small Business. Incidentally, Malta Enterprise, in being the ‘key champion and driver of FDI to Malta’ Malta Enterprise also has a fundamentally instrumental role to play in this new venture through the provision of guided assistance to the member firms on matters surrounding exactly this foreign direct investment limb of the project.

And complementing this, being one of the eight founding members for VC-MT suited PKF perfectly as the firm’s fresh commitment to collaborate on

an initiative intended to facilitate the provision of venture capital in Malta evidently became the crown jewel which PKF would strive to push towards attaining a tangible platform of recognition for during its stay in Dubai.But what exactly is Venture Capital Malta and why is investors’ interest being sought to be garnered so passionately in its favour?

VC-MT (Venture Capital Malta) was fashioned with the key objective of facilitating the provision of venture capital in Malta, as an alternative mode of financing, which initiative in turn, is in line with the Maltese Government’s commitment to pioneer a conducive path in this regard to effectively elevate SMEs access to finance. Whereas the advent of venture capital firms can be traced back to the United States, circa 1946 , Malta never formally entertained the notion until presently, making VC-MT a most significant and valid step in the path towards Malta being recognised for sporting an altogether more emancipated economy. In America today, venture capital is a contributing driver to an ecosystem that converges to their national innovation system. In Malta’s case, this is perhaps the first clarification required whereby the chosen nomenclature ‘venture capital’ could potentially act to hinder rather than aid a discussion on the subject, and so since what Malta is looking towards is alternative methods to SMEs having access to finance at large, at this stage generally and without discriminating in favour of tech-based innovations, although

one may parenthetically add that there is affirmatively already a visible thirst for funding from this sector locally. Malta’s stance is that the pinch from banks who are not lending sufficiently is being felt to be causing an impasse and it is this impasse that requires to be bridged into establishing ‘a formal venture capital ecosystem in Malta’.This leads to perhaps the second aspect that needs tailoring. When approaching venture capital firms as we did, the relevance of detail attributed to the end user cannot be stressed enough. Venture capital is as the name implies venture specific and consequently details on the end user being pitched need to be clearly identified through high level descriptions sufficient to wet these VC’s appetite to the requisite degree.

Once this is cemented, the next uphill climb will be cultivating an education amongst local SMEs to the extent of their embracing the idea of a third party being actively present within their business in more than financing ways. As this has never been the culture for Maltese businesses, it will invariably present a steep learning curve that will surely yield inevitable growing pains, however education is the single most important function of any society whose government envisages for it true and lasting growth.

In addition, what we are after is that in an ideal world we want to charm these VC’s sufficiently to entice them to come and set up shop here where Malta becomes synonymous with an ideal jurisdiction for VC activity.

This is where Dubai becomes more complicated on two levels, the first being that if what we are after is generic access to diverse finance then what we met is an absence of a mood for the same generally and often fuelled by jurisdictional restrictions imposed upon UAE venture capital firms to stay within UAE territory and not invest outside let alone set up a branch elsewhere. The second is their perception of us which is very important as context is all and to the Emirates we are the relatively unknown. Such basic threads as Malta’s size and major economic contributors needed to be fed into tabula rasa (blank slate) recipients who at best knew only that currently in the Mediterranean region Malta is surrounded by neighbouring countries that are in recession ;having registered a drop in their GDP growth and with relatively high unemployment rate hence positioning us dangerously close to contagion while sporting an ailing currency. In this light, selling Malta becomes increasingly arduous. Having said that however, there were multiple ‘platinum’ moments during our Dubai trip where the city of wonder smiled upon our delegation with promise that perseverance is the Emirate simple recipe to guaranteed success. In the end, we were privileged enough to have dined with locals in their homes and sent back home educated, with a handful of good leads in one hand and some golden desert sand in the other- the innuendo being that when sand shuffles in our manolo’s we would have made our bones in the Emirates.

Accounting for Venture Capital

featurep.25SPRING 2014 | theaccountant.ORG.mt

THE ACCOUNTANT Advertorial

For more information visit www.pkfmalta.com, call on 21 484 373 / 21 493 041 or email [email protected]

Dr Marilyn MifsudThe author is an advocate and Business &

Securities Associate at PKF Malta


THE ACCOUNTANTEthics

other interests. The major responsibility for the Accountant, which emanates from this framework approach is that if the accountant judges that a particular principle is threatened then he should either walk away from a particular engagement or search for and apply sufficient safeguards in order to bring down the level of threat to an acceptable level and thus protect the public interest. Notice the ability for the Accountant to apply judgement which in my opinion is the strongest pillar of our profession as opposed to a rules based approach which, however much discipline it affords, also tends to encourage a degree of circumvention.

The Code depicts a number of situations which an Accountant might find himself or herself in, the threats that may be present and some safeguards that he / she may apply. In its spirit of encouraging professional judgement, the Code does not purport to apply a set of circumstances and the respective solutions, but gives examples of how to apply the component principles in various situations.The Code starts by reminding us of the old pillars of ethics namely integrity, objectivity, competence and due care, confidentiality and professional behaviour. These fundamental principles lay down the basics of behaviour such as honesty, trust, discretion, respect, ability, skill, sobriety, charity in the sense of being of service to others, diligence, fortitude, thoughtfulness and humility.

Independence is conspicuous by its absence in the opening fundamental principles laid down by the Code. This is no relegation of the principle; indeed it is the Code’s elevating the principle into a conceptual framework in itself rendering what was hitherto a basic principle, to a continual state of mind of the accountant. When applied to independence, this conceptual framework articulates two important areas of independence, namely that of the mind and that of appearance. This is all a matter of authentic trust building; the Accountant’s innate ways of building trust with those around him as well as the Accountant’s effortless appearance of independence. There is no room for pretention, as this is wrong, deceitful and the public will anyway detect it and it leads nowhere other than to discredit the whole profession. The independence conceptual framework fortifies the integrity, objectivity and professional scepticism aspects of the accountant.

The Code provides extensive direction to Accountants in public practice in order to assist the practitioner in avoiding the threats of self-interest, self-review, advocacy, familiarity and intimidation. These threats, if left unchecked, would severely impair the quality of the practitioner’s work as a service to society as a whole. At the outset of an engagement the practitioner assesses the extent of the presence of such threats and builds the necessary safeguards to mitigate damage to quality, reputation and all.

The Code also provides extensive direction to members of the profession in business paying particular attention to their role in preparing financial information for public consumption. The Code recognises other organisational responsibilities, which the Accountant in business assumes, such as the in the areas of financial management and advice which impact organisations which rely on them. The Code first and foremost reminds the Accountant of the importance of being reliable in the services offered to those immediately around him/her. This however not at the cost of the integrity and reputation of the profession as a whole and accordingly also in this case highlights the threats which may afflict the Accountant in practice and charges the Accountant with the responsibility of setting up the necessary safeguards to prevent or reduce to acceptable levels the threats of self-interest, self-review, familiarity and intimidation.

One very important aspect in the Code for the Accountant in business is when he is a key figure in an organisation and is entrusted with governance. The Code places on such Accountants the responsibility of creating and cascading an ethical culture down their organisation and this is an important demand given that many accountants also end up fulfilling the role of business leaders in our communities. To conclude I would like to make a rather onerous statement. Accountants lend credibility in whatever they do. A responsibility which demands not only a lot of professionalism but also deep constant consideration as to why the Accountant goes to work to practice the profession beyond keeping books and tax returns.

An accountant’s place is in society.


THE ACCOUNTANTGlobal Update

IFAC, IASB, FEE, EU Updates

GLOBAL UPDATE

COMMISSION APPOINTS CHAIR OF EUROPEAN FINANCIAL REPORTING ADVISORY GROUP (EFRAG)

The European Commission recently decided to appoint Mr Wolf Klinz as President of the Board of the European Financial Reporting Advisory Group (EFRAG). EFRAG was established in 2001 to provide technical expertise and advice to the European Commission on accounting matters. Mr Klinz, a former member of the European Parliament, is due to take office after his nomination is submitted to the European Parliament and Council and after appointment by the General Assembly of EFRAG.

IFAC GLOBAL SMP SURVEY: 2014 RESULTS

The 2014 International Federation of Accountants® (IFAC®) Global Small and Medium Practitioners (SMP) Survey asked practitioners operating in small- and medium-sized practices (SMPs) a number of questions about the challenges they face, the market factors and technologies most likely to affect them in the future, the consulting services they provide, and their performance, both in 2014 and projected for the year ahead. In addition, respondents were asked about their small- and medium-sized entity (SME) clients, including questions around the challenges they face, exposure to financial crimes, access to finance, and the extent of their international operations. The report includes a summary of overall insights and notable highlights by region and size of practice.

The 2014 survey was conducted in 21 languages between November 3 and December 29, 2014 and received 5,083 responses from 135 countries. The survey was undertaken in collaboration with lead researchers from the University of Dayton (US), and the report was authored by professors Timothy and Marsha Keune. IFAC wishes to thank the many member and regional organisations that helped with translation and distribution of the survey. Some regions, countries, and larger SMPs were not well represented in the survey results; caution should be exercised when attempting to generalise survey results to specific countries, specific regions, or SMPs of all sizes.

Conducted since 2011, the IFAC Global SMP Survey provides an opportunity for SMPs around the world to share their insights on key trends and developments facing them and their small business clients. The results are critical to IFAC and its member bodies gaining a deeper understanding of the challenges and opportunities facing this key sector.

ICAS AND IAAER CALL FOR RESEARCH TO INFORM THE IAASB STANDARD-SETTING PROCESS

The International Auditing and Assurance Standards Board (IAASB), The Institute of Chartered Accountants of Scotland (ICAS) and The International Association for Accounting Education and Research (IAAER) are delighted to announce a new global call for research to gather independent evidence to inform the IAASB’s crucial standard setting process.

The call for research asks for proposals which will help to inform the IAASB, and specifically asks for research to address the following topics:

• Data analytics;• Materiality;• Audit quality;• Preliminary announcements and the role of the auditor;

• Professional judgment and professional skepticism; and • New and revised auditor reporting standards.

The IAASB sets, independently and under its own authority, high-quality international standards to serve the public interest. The IAASB is committed to the goal of developing a set of robust international standards that are generally accepted worldwide in both the private and public sectors, and facilitating their adoption and implementation. The IAASB’s objectives contribute to enhanced quality and consistency of practice throughout the world, and strengthened public confidence in the global auditing and assurance profession.Up to four research grants of £20,000 each will be awarded. The funding for this program is provided by ICAS and the ICAS Foundation (exclusively from the SATER funds).

Successful candidates will be expected to present research progress at three deliverables and submit a report for publication by the IAASB, ICAS and IAAER. Launch events for the reports may also be held to encourage dissemination of the findings and research impact amongst the profession and policy makers. Academic papers are also encouraged.

Prof. Arnold Schilder, Chairman of the IAASB, stated, “The IAASB has recently begun several new projects under its Strategy for 2015-2019 and this research program is an important means to obtain insights into new and emerging issues, particularly in the areas of innovation, audit quality and implementation.”

Anton Colella, ICAS Chief Executive, said, “ICAS is committed to supporting world class research which informs future policy and is delighted to be working with the IAASB and IAAER to support research which will inform and assist with the development of the highest quality audit and assurance standards. By focusing on crucial and emerging issues, such as data analytics, the research will help both the profession and the standard setting process evolve and continue to deliver the high quality audits required by both the global markets and the public.”

Katherine Schipper, President of IAAER, added, “IAAER is both delighted and honored to work with ICAS and the IAASB in this research program. Fostering and encouraging high quality, rigorous research that aims to inform and support the independent standard-setting activities of the IAASB is wholly consistent with one of the foundational principles of IAAER’s mission, namely, to maximise the academic community’s contribution to the development of high quality global standards of accounting practice.”

The deadline for submission of proposals is October 1, 2015

IFAC WELCOMES REVIEW GROUP REPORT TO ENHANCE GOVERNANCE ARRANGEMENTS FOR PUBLIC SECTOR ACCOUNTING STANDARDS

The International Federation of Accountants® (IFAC®) welcomes the release of the International Public Sector Accounting Standards Board® (IPSASB®) Governance Review Group report on the future governance of the IPSASB, which is an important milestone in further strengthening its governance and credibility.

“We fully support the recommendations of the Review Group, and believe they will strongly enhance the robustness of the standard-setting arrangements and ultimately improve the legitimacy and acceptance of the International Public Sector Accounting Standards (IPSASs) across the globe” said Fayez Choudhury, Chief Executive


THE ACCOUNTANTGlobal Update

Officer of IFAC. “High-quality internationally accepted standards provide the necessary foundation for high-quality financial reporting in the public sector—an area that needs vast improvement in many jurisdictions around the world, and which leads to better government decision-making, transparency, and accountability.”

Following a public consultation early last year, the Review Group made several important recommendations, including that:

• a governance body, the Public Interest Committee, be established to ensure that the public interest is served by the standard-setting activities of the IPSASB; the Committee’s membership should include, but not be limited to, individuals from the IMF, OECD, World Bank Group, and INTOSAI;

• the Committee’s objectives should be to review and advise IFAC and the IPSASB on the (i) terms of reference of the IPSASB; (ii) arrangements for nomination and appointment of IPSAB members; and (iii) procedures and processes for formulation of the IPSASB’s strategy and work plan and development of IPSASs to ensure that the views of all relevant stakeholders are sought and given due consideration;

• the Committee should not have a direct role in the development, adoption, and implementation of public sector accounting standards;

• IFAC should establish a Consultative Advisory Group (CAG) for the IPSASB; and

• a public consultation on the effectiveness of the IPSASB’s reformed governance arrangements be undertaken no later than 2020.

“The recommendations represent strong support for robust and balanced standard-setting arrangements, whereby the involvement of the profession, public sector, and international organisations ensure that the standards that are produced are in the public interest and are high quality—and can be practically implemented.” Mr Choudhury added, “IFAC is highly appreciative of the work done by the Review Group and its members and looks forward to working with these organisations to put the new arrangements in place in 2016.”

INFORMATION PAPER ON THE PERFORMANCE AUDIT IN THE PUBLIC SECTOR

The Federation of European Accountants (FEE) project “Getting involved in public sector assurance” has set off with the publication

of an information paper on the performance audit; an independent examination on whether the activities of public organisations are economical, efficient and effective and how they can be improved.

The project is part of FEE’s ongoing contributions to improving public sector financial management. This has become especially relevant since the financial and fiscal crisis have decreased the trust of citizens who push public sector organisations to deliver value for money. With this pressure the demand grows for assurance services that enhance the information on which government or public management base their decisions. The European accountancy profession can play a role in making this information more transparent and reliable. With “Getting involved in public sector assurance” FEE starts exchanging best practices to this end.

TAX TRANSPARENCY PACKAGE

Recently the European Commission issued a package of measures to boost tax transparency.

This is the first step in a programme to reform EU tax policy. The Commission’s main proposal is that all Member States shall share information on the tax rulings they grant to multinational corporations, but it also includes other transparency initiatives.

FEE believes that tax policy is a matter for society as a whole. We look forward to discussing these issues in more detail at our 4th FEE Tax Day on 29 April 2015. We welcome the Commission’s actions to modernise the international tax system; a robust legislative process is needed to work towards coordinated, new and stable tax regimes for corporations operating in the realities of the 21st century. We will keep engaging with all stakeholders to advance this debate and find sustainable solutions.

The accountancy profession recognises that the political context on tax matters has radically changed. Legislation has not kept up with an increasingly digital and global economy. It is difficult to question yesterday’s practices in the light of today’s values, including social responsibility.

We support efforts to update the international framework on corporate taxation and other progress in addressing the demands of civil society for more transparency and of business for more clarity and legal certainty. Increased transparency can ensure better accountability and decision making. This only works if this transparency focusses on the quality and relevance of the information disclosed, rather than merely make more information available. It should not add any further confusion to the already complex area of international tax legislation.


THE ACCOUNTANTLifestyle

Pamela FenechARTICLE BY:

Bridget Craig Robinson

Pamela Fenech is a Certified Public Accountant and holds a practising certificate in Auditing. She is a member of the Malta Institute of Accountants and the Malta Institute of Taxation. In 2004 she started practicing with one of the major audit firms, where she was responsible for a portfolio of clients and worked on audits in Malta, London and Luxembourg. In 2009 she moved to the family audit and accountancy practice, EmauelFenechandCo, where she manages and provides consultancy, audit, taxation, and accountancy services to Small and Medium enterprises.

If you ever feel the need to disprove the term ‘boring accountant’ you only need spend an hour with the vibrant Pamela Fenech. Trim and elegant she may be, but don’t be taken in by those spindly heels, for this woman has endured huge personal challenges – and she can climb mountains, literally.

We’ve all experienced those stuck-in-a-rut Monday blues but, when they hit Pamela and her friend Maria Borg, rather than opt for an exotic holiday they set their sights on the Kilimanjaro Challenge. Pamela happily admits that she had no idea what she was letting herself in for.

Mount Kilimanjaro in Tanzania is the highest freestanding mountain in the world standing at 5,895m. While climbing it doesn’t require mountaineering skills, the trek is still a daunting feat of human endurance. Furthermore, despite the risk of oedema, hypothermia, altitude sickness and even death, Pamela’s 15 year old son Brad Lee agreed to join them, and thus became the youngest ever participant from Malta.

Pamela explains: “We wanted to do something which would challenge us physically and mentally, change our outlook on the world and, at the same time, help others. The Kilimanjaro Challenge 7 gave us all this and more. It was also a unique opportunity for a mother and son bonding exercise, and for Brad Lee to embrace living life first hand rather than from behind a computer screen. It also gave both of us the chance to discover the rewards of working with others to help people in real need.”

This was no six-day wonder. It was a project that took over a year to realise. First there was fund-raising. The 17 KC7 participants were responsible for their own expenses (their kit alone cost over €500 each), but the main purpose was to raise €60,000 towards Dun Gorg Grima’s project to build a home for children with special needs in Kenya (www.gesufilproxxmu.com).

spotlight on...


THE ACCOUNTANT Lifestyle

Fundraising provided an opportunity for them to bond as a team and learn to deal calmly with the unexpected, such as 100 guests turning up when 80 were expected at an event. Apart from a hog roast, a fenkata, a poker tournament, soliciting donations for raffles and an evening with Freddie Portelli, Brad also reached out to his peers with a PlayStation Tournament.

Alongside the fund-raising, the team was building up the endurance

needed to cope with long hikes at high altitude in extreme temperatures and oxygen-deprived air. Every night after work Pamela attended circuit training or joined a three-hour walk, and, on weekends, the whole team underwent five-to-eight hour walks round Malta and Gozo. All this helped the mixed group of former strangers to develop an understanding of each other’s strengths and weaknesses.

Packing efficiently provided another lesson for life, with organiser


THE ACCOUNTANTLifestyle

Keith Marshall setting a strict limit of 15kgs per rucksack and 5kg per backpack, despite having to cope with the mountain’s extreme climatic changes through three zones: damp tropical forest, sunny open moorland and icy alpine desert, with temperatures ranging from a high of 15 to minus 5 Celsius.

Finally, in September 2013, following a courtesy visit to the then President, HE George Abela, the group flew to Dar es Salaam. Two days later they travelled to the Kilimanjaro base camp to commence their climb up the longer but more scenic Machame route. Over six days they trekked for seven-to-nine hours a day, occasionally climbing high, then descending to a slightly lower level to sleep in order to accustom the body to the lack of oxygen. Pamela felt this instantly and suffered from shortness of breath but her body adapted until they

reached the Lava Tower at 15,100 feet (or 5,000 metres), when the altitude sickness became overpowering. Conditions were grim: the sleeping quarters were tiny, low lean-tos with barely enough room for one person let alone two plus bags. The toilet facilities were stinking holes and the bowl of water provided for washing was covered in a layer of dust.

Pamela found the challenge was more mental than physical. Many days she felt she could not continue, but was spurred on by the porters’ cautious cajoling of ‘Pole Pole’ (slowly, slowly) and her friends’ urging ‘Ejja ha mmorru!!’ and, possibly in a bid to convince themselves, shrugs of ‘Hakuna Matata’.

The last night was the most difficult. Despite hiking for six hours


THE ACCOUNTANT Lifestyle

Pamela found it impossible to sleep. Everyone was excited but tense. Pamela’s anxiety was doubled by guilt at placing her son in danger, while he slept more soundly than he ever sleeps in Malta. They started their bid for the summit at midnight, in three groups. The challenge then was to keep the group together as some people were faster than others, but had to show patience and compassion for their weaker members. At this stage even fitness was no defence against sickness. As they climbed slowly upwards breathless, puking and lurching as if inebriated, they were discouraged by passing ailing climbers who had had to abandon their ascent.

After eight hours they reached Stella Point on the edge of the crater in time to enjoy, possibly, the most magnificent sunrise of their lives, before pushing on. The ice-clad summit still had to be conquered, and that was another two long hours away. Pamela’s lungs ached agonisingly with the pressure, but she found the strength to continue as she looked up to see Brad, her son and her hero at the summit.

Working as a group, they had triumphed! Everyone made it to Uhuru Peak, though the exhilaration was short lived as they had to start their descent almost immediately before cold and fatigue set in. The descent was even tougher for now they were exhausted, slithering and sliding through the snow with their knees buckling under them. By the time they reached their overnight camp they’d been on the go for 19 hours. Celebrations were postponed until the next day, when they reached the base camp and were presented with ‘gold’ certificates to mark their achievement. The group then left for a Serengeti safari still hyped up, though their hoped-for relaxing recovery in Zanzibar was marred by the aftereffects as many of the group succumbed to illness.

I was curious. Surely after such a unique experience there must have been a feeling of anti-climax once it was over. “Absolutely not,” protested Pamela, “It was the beginning of a new life. I felt that if I could achieve that then I am capable of anything. I’m far more confident and disciplined now and see things differently. It has helped me so much in my life and work. I no longer panic and can face all manner of difficulties and have experience of what can be achieved by working as a team.”

Sadly Pamela was to be tested when tragedy struck her family within three months of the climb, but she adds that even then the mountain saved her. “It was a Godsend. I had learnt that self-pity is demoralising. I am capable, I can cope with the ups and down of life and persistence pays off.”

She had also made life-long friends. The KC7 group is still close. Brad is now studying Accounts and Marketing, while Pamela is reading for a Masters in Knowledge-Based Entrepreneurship and, this year, she ran the Malta Half-Marathon.

Pamela’s abiding memory of her magical mountain is the wonder of nature mingled with the ingenuity of man. “Once the sun goes down you are surrounded by millions of stars – stars above and below. The stars above are the real stars, dazzling and bright. The stars below are the lights of the villages that shine through the clouds – truly spectacular.”


THE ACCOUNTANTnews

TECHNICAL NEWSIFRS, IAS, ISA UPDATE

IASB SETS OUT PRACTICAL EFFECTS OF BRINGING LEASES ONTO THE BALANCE SHEET

The International Accounting Standards Board (IASB) is in the process of finalising a new International Financial Reporting Standard (IFRS) that will require companies to bring leases onto the balance sheet. It has recently published a document outlining the likely practical effects of the new Leases Standard, as well as details on the similarities and differences between the IASB’s requirements and those of the US Financial Accounting Standards Board (FASB).Deliberations by the IASB on the new accounting model for leases will be completed this month and the final Standard is scheduled to be issued later this year. Responding to calls from stakeholders for further information on the possible effects of the new Standard, the IASB staff have developed a document comparing the new and current accounting requirements.

The IASB and the FASB have been working jointly on the Leases project and have reached the same decisions in many areas, including requiring leases to be shown on the balance sheet, how to define a lease and how lease liabilities should be measured. However, there are some differences between the two Boards’ models and the document provides an overview of the likely practical effects of these differences.

Hans Hoogervorst, Chairman of the IASB, commented: “Our stakeholders have asked for more details on how the new Leases Standard will change things in practice. The most important difference is that the new Standard will provide a richer set of information for investors than is available today, which, in turn, will aid their decision making.

The main change that will be brought about by the new Leases Standard is an increase in assets and liabilities on the balance sheet for those companies that currently have a large amount of leases off balance sheet, thus improving the transparency of a company’s leverage and asset base.”

In addition to changes to the balance sheet, the new Leases Standard is likely to result in some important differences on the income statement. Among them is the reporting of higher operating profit compared to the current requirements – and in comparison to the FASB’s model. There will be no changes to total cash flows but, in the cash flow statement, the amount of operating cash will increase while the amount of financing cash will decrease.

The IASB’s analysis concludes that the costs to companies of applying the new Standard will be broadly similar for both the IASB’s and the FASB’s model.

The document also looks at other potential implications of the leases accounting model, such as the possible impact on the cost of borrowing. It clarifies that the new Standard will provide more transparent information about a company’s financial commitments, but does not change those commitments. Therefore, should the Standard affect the cost of borrowing for a company, this will be because the improved reporting provides lenders with new information that is relevant and important to their decision making.

SUMMARY OF THE MODEL FOR INSURANCE CONTRACTS WITHOUT PARTICIPATION FEATURES

An overview of the IASB’s tentative decisions on the general model that would apply to insurance contracts without participation features, and the IASB’s reasons for reaching those decisions, is now available. Access the document Insurance Contracts without Participation Features.

In addition, the following information has been updated on the Insurance Contracts project page:

• Project Update - Updated overview of the Insurance Contracts project summarising the progress on the project, including tentative decisions to date. View the Insurance Contracts: Project Overview.

• Due process overview – describes the key due process steps undertaken to date by the IASB in developing its proposals for a global Standard on insurance contracts. View the Due Process Overview.

• Due process steps – shows how the IASB has complied to date, since publication of the 2013 Exposure Draft Insurance Contracts, with the due process steps required to finalise the Standard on insurance contracts in accordance with the Due Process Handbook. View the Due Process steps.

IASB PUBLISHES PROPOSALS TO CLARIFY THE WAY IN WHICH LIABILITIES ARE CLASSIFIED

The International Accounting Standards Board (IASB) recently published for public comment the Exposure Draft Classification of Liabilities (Proposed amendments to IAS 1), which clarifies how entities classify debt, particularly when it is coming up for renewal.

The proposed amendments are designed to improve presentation in financial statements by clarifying the criteria for the classification of a liability as either current or non-current. The proposed amendments do this by:

• clarifying that the classification of a liability as either current or non-current is based on the entity’s rights at the end of the reporting period; and

• making clear the link between the settlement of the liability and the outflow of resources from the entity.

The proposals are open for public comment for 120 days. Comments on the proposed amendments should be sent to the IASB by 10 June 2015. The Exposure Draft can be accessed from the Open for comment section of the IFRS website.

IAASB’S REVISED STANDARD ISA 720 ENHANCES AUDITOR FOCUS ON ANNUAL REPORTS IN LIGHT OF INCREASED INVESTOR FOCUS ON QUALITATIVE DISCLOSURES

The International Auditing and Assurance Standards Board® (IAASB®) recently released International Standard on AuditingTM (ISATM) 720 (Revised), The Auditor’s Responsibilities Relating to Other Information. The revisions aim to clarify and increase the auditor’s involvement with “other information”—defined in the standard as financial and non-financial information, other than the audited financial statements, that is included in entities’ annual reports.

“The annual report is a critical document for investors. It is in the public interest that an auditor undertakes an ‘intelligent read’ of an annual report, in the context of the knowledge obtained in the audit, and perform certain procedures to ensure the annual report is not materially inconsistent with the audited financial statements,” explained Prof. Arnold Schilder, IAASB Chairman.


THE ACCOUNTANTnews

The standard also includes new requirements related to auditor reporting on other information that complement the changes arising from the IAASB’s new and revised Auditor Reporting standards, issued earlier this year. Concurrent with those standards, ISA 720 (Revised) will be effective for audits of financial statements for periods ending on or after December 15, 2016.

“Which documents have been read and considered by the auditor and the results of the auditor’s work on those documents will now be transparent to auditor report users,” explained Kathleen Healy, IAASB Technical Director. “Specifically articulating the auditor’s responsibilities for other information, including the fact that the auditor’s opinion does not cover this information, will also give users the appropriate context in which to consider an entity’s annual report.” The standard also seeks to address the practical challenges that may arise when some or all of the other information is not available as of the date of the auditor’s report, and prescribes additional communications in auditor’s reports for listed entities in these circumstances.

The staff-prepared Basis for Conclusions, which explains the IAASB’s rationale for its decisions, and an At a Glance document, which explains the main changes from the extant ISA, are also now available.

IPSASB PUBLISHES RECOMMENDED PRACTICE GUIDELINE ON REPORTING SERVICE PERFORMANCE INFORMATION

The International Public Sector Accounting Standards Board®

(IPSASB®) has published Recommended Practice Guideline 3 (RPG 3), Reporting Service Performance Information.RPG 3 provides good practice guidelines on reporting service performance information. Development of this RPG reflects the IPSASB’s commitment to addressing public sector-specific reporting issues, including those that relate to information additional to the financial statements.

“Service provision is the primary function of the vast majority of public sector entities,” said IPSASB Chair Andreas Bergmann. “Service performance information is essential for users to evaluate the services provided and public sector entities’ efficient and effective use of resources to deliver those services. RPG 3 provides guidance to support the quality of service performance information already reported by entities and offers a useful framework for entities that have not yet started to report service performance information.”

RPG 3 provides principles applicable to the presentation of service performance information and definitions that establish a standardised service performance information terminology. It addresses the reporting entity and reporting period for service performance information. RPG 3 also provides guidance on the choice of performance indicators that show an entity’s achievements with respect to its service performance objectives, disclosures about the basis of the reported information, and service performance-related narrative discussion and analysis.

RPG 3 states that service performance information may be presented, either in the same report as the financial statements or in a separate report, and identifies factors to consider when making that decision.


THE ACCOUNTANTstudents

STUDENTS’ NOTICE BOARDIMPORTANT DATES

MAY

8 May

In the first year as an ACCA student, students will be required to pay an annual subscription if students complete their initial registration before 8 May.

Late exam entry closing date for the June exams. The late exam entry facility is only available via myACCA for students who have not already entered for the exam session. During the late exam entry period no exam entries can be amended (irrespective of when the entry was made).

June

Exams take place. These are normally held over an eight-day period in the first and second week.

July

The closing date for June administrative review appeals is this month. Please see “Administrative reviews” for further information.The closing date for receipt of a mitigating circumstance request or a centre complaint in relation to the June examination session is this month. Requests must be received within 4 weeks of the date of the exam. Further details can be found under ‘Exam FAQs’.

SIMPSON SCHOLARSHIP 2015 - NOW OPEN

The Simpson Scholarship exists to reward talented ACCA students who have already proven themselves to be of sufficient merit and distinction in ACCA examinations. Each year, the Simpson Scholarship will fund the ACCA examination and registration fees of five students for a period of five years or until they become members – whichever happens first. In order to be eligible for the Scholarship, applicants must meet the qualification criteria and submit a 1,000 word essay. Students can apply for the Simpson Scholarship if they meet the following criteria.

• Registered as an ACCA student, and

• Paid fees for the year ahead, and

• No other fees outstanding, and

• Completed and achieved an average of 80% or more in the Knowledge module (Papers F1–F3) of the Fundamentals level of the ACCA Qualification - at first attempt, or

• Have achieved 66% or more in at least two ACCA Qualification papers in the Fundamentals Skills module - at first attempt if exemptions from the Knowledge module (Papers F1–F3) of the Fundamentals level are awarded.

The applicant, must write an essay entitled: ‘How the award of a Scholarship will help me to realise my full potential’.When the judging panel are deciding on the winning essays, they are

looking for five that will really inspire them and where they can see that the candidate will really benefit from receiving it. The application must be accompanied by a Scholarship submission form including two references.

Your essay must be personal and inspiring and must:

• be typed in MS word or other similar word processing package

• be a maximum of 1,000 words

• be in 12-point sized, black font

• be double line-spaced

• have a 1-inch (2.5cm) margin at each side

• be A4 size

• include your student registration number, date and page number at the top of each page

• be in English

• be clear, concise and relevant to the title above.

If using tables and figures, six figures count as one word. Handwritten submissions will not be accepted.

Submitting your application

Completed applications must be submitted – preferably by email – to: [email protected]

Please do not submit queries about the Scholarship to this mailbox as you will not receive a response. Any queries should be directed to ACCA Connect. If it is not possible to submit the application by email, it will need to be posted to the following address: ACCA, 2 Central Quay, 89 Hydepark Street, Glasgow, United Kingdom, G3 8BW. ACCA cannot accept any responsibility for postal applications that do not arrive before the closing date.

Selection process

There are three stages in the selection process. Below are key dates and details on how the process will be administered.

1 May Closing date for receipt of applications1 June 20 finalists selected for judging panel15 June Five Scholarship winners selected by judging panel26 June Scholarship winners announced

The five Scholarship winners will be notified by ACCA, via email, that their application has been successful. All winners will be sent an information pack and letter confirming that they will receive funds from the Simpson Scholarship

The winners of the Scholarship will have the following fees paid on their behalf, from the Scholarship Fund, for a maximum of five years



from the date of the award or until they have become members – whichever happens first.

Payment of ACCA:

• examination fees• annual student subscription fees• annual affiliate subscription fees• membership admission fee (does not include the annual

membership subscription fee)

As an added bonus, Scholarship winners will be provided with a set of learning materials from one of our Approved Content Providers for each ACCA paper they are studying.

IMPORTANT CHANGES TO THE TIME LIMITS FOR COMPLETION OF THE ACCA EXAMS

ACCA is introducing important changes to the time limit allowed to students for completing the exam component of the ACCA Qualification. Under the current rules, students are removed from the register if they have not completed the exams within 10 years of their initial registration date.

WHY IS THIS CHANGING?

ACCA have listened to feedback from employers and students, and are making the changes as a result of this.

ACCA’s current 10 year rule does not take into consideration that ACCA students can start at different levels of the exams. Depending on prior qualifications and exemptions awarded, ACCA allows all students – irrespective of what level they start the exams – 10 years to complete the exams. This means some students have 10 years to complete the five exams at Professional level if they have completed a relevant and accredited accounting and finance degree and some students have 10 years to complete 14 exams if they are starting with the minimum entry requirements and have no exemptions. ACCA wants to be fair and provide the same opportunities to all students. In addition, employers tell us that a time limit is important. They value up-to-date knowledge and want reassurances that ACCA trainees and members have knowledge which is current and relevant to the workplace. Prompt completion of the exams demonstrates a commitment to becoming a professional accountant. You may also find many employers will have their own company policies for completing the exams within a certain time limit.

SO WHAT ARE THE CHANGES TO THE TIME LIMIT FOR TAKING EXAMS?

Under the current rules, students are removed from the register if

they have not completed the exams within 10 years of their initial registration date.

Under the new rules a seven year time limit will be introduced at the Professional level. Therefore, there are no time limits for passing the Foundation level exams as part of Foundations in Accountancy or for taking exams F1-F9 at the Fundamentals level of the ACCA Qualification. However, ACCA strongly recommend students take exams on a regular basis as this increases the chances of success.

Students will have seven years to pass the exams at Professional level (P1, P2 and P3 and two of the options paper P4-P7). If a student does not pass all the Professional level exams within seven years, they will lose any passes that were achieved more than seven years ago and will need to retake. The seven year time limit starts when a student passes their first Professional level exam.

WHEN WILL THE NEW TIME LIMIT RULE TAKE EFFECT?

All current students on the register will have been given a last exam session date which is 10 years from when they initially registered. Under the new rules, if a student has not completed the exams by his/her last session date, he/she will not be removed from the register. However, students will lose any passes achieved at the Professional level if he/she passed them more than seven years ago so these exams will have to be retaken. All Professional Level exams must be passed within a 7 year period.

New students registering with ACCA

The new seven year time rule at Professional level will apply to any new students registering with ACCA who are given March 2016 as their first eligible exam session. (ACCA will be offering four paper exam sessions in March, June, September and December by 2016).

OXFORD BROOKES DEGREE AND TIME LIMITS

Please note if a student wants to achieve the Oxford Brookes BSc degree in Applied Accounting, the degree must be completed within 10 years of the initial registration on the ACCA Qualification otherwise eligibility will be withdrawn. This rule remains unchanged.

FORMAT CHANGES

The Fundamentals Paper examinations have undergone significant changes, with a new format for the examination applicable from the December 2014 exam session. Although the knowledge needed to pass remains the same, the way it is being examined is changing. Details of the new structure can be found in the Syllabus and Study Guide at: http://www.accaglobal.com/gb/en/student/acca-qual-student-journey.html



STUDENTSA former ACCA student’s experience - by MARK ABELA

Michael Mercieca is a Certified Public Accountant. He joined Deloitte Malta in January 2003 and soon after successfully qualified as a Chartered Accountant. Michael pursued further studies and read for the Diploma in Taxation offered by The Malta Institute of Taxation and the Advanced Diploma in International Taxation offered by The Malta Institute of Management.

During his first six years at Deloitte, Michael formed part of the Audit & Assurance team. Following this experience, Michael moved to the Deloitte tax compliance department and since January 2012 he took up a position within the firm’s International Tax Department. As from January 2014 Michael joined Deloitte’s Global Employer Services function in which he focuses on individual tax client requirements and on employer’s tax related matters.

Through the combination of working in both Deloitte’s audit service line and tax service line, Michael has more than ten years of practical knowledge and experience in various industries.

Michael has participated in various training programs both locally and abroad aimed at developing specific skills with a focus on taxation and is also a lecturer for the ACCA tax paper and for various CPE events organized by a number of education providers.

TA. What influenced you to opt for the accountancy profession?

MM: I think that the accountancy profession has come a long way over the past decades. Today an ideal candidate should be a ‘people’s person’ and also be a person who is business oriented and who at the same time understands the importance of ethical and professional business practices. This diverse pool of requirements is one of the factors that influenced me to opt for the accountancy profession. Another factor relates to the various opportunities that the accountancy profession offers, also bolstered by the rapid growth of the Maltese financial services sector in Malta.

TA. Why did you opt for ACCA?

MM: ACCA gives you the advantage of obtaining work experience earlier than a student that opts for another full-time route to qualification like that that is offered by the University of Malta. Furthermore, ACCA is an internationally recognised brand, which is a consideration that I also made at the time since I wanted to keep my options open by also considering taking my career overseas in another country.

TA. Tell us some more about your learning experience.

MM. As I work in a big four firm my learning experience is ongoing. When I graduated and received my qualification certificate I felt extremely satisfied and at the same time relieved. I have learnt, however, that obtaining a qualification does not mean that your studies have ended. Quite the opposite in fact. Indeed, in my case I was only getting started. As a matter this is also being experienced by many other Accountants that I know. I think it stands to reason that given the way that our profession and the landscape surrounding us is changing, any member of the accountancy profession has to study throughout his career to maintain his technical competence and

remain up to date with current practices.

This is partly why the profession so interesting and rewarding!

TA. Completing ACCA was ………?

MM. Quite tough.

At the academic level, ACCA is a qualification of very high standard. It hence takes dedication and commitment to complete the course of studies in an acceptable time frame.

Also, because I was attending lectures and other educational events during my study days, I managed to make friends and contacts, many of which I still know till today and some of which have now become my business contacts. So I can say that I have benefitted on two levels: on a professional and on a personal level. TA. What are your career aspirations?

MM. My career aspirations, for the time being, are to continue advancing in my current role, which is that of a personal tax advisor. I like this role because it has provided me with a great deal of exposure to interesting and complex tax matters especially in the area of cross border employment.

I am also lecturing for ACCA and I would like to keep on doing this because I think that passing on knowledge to others is a very rewarding experience.

TA. Any advice you may wish to share with the readers?

MM. You have to love your job in order to succeed - do not settle for anything less.

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