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When it comes to spotting the warning signs of developing fiscal problems, the availability of quality information to support decision making is of utmost importance writes Chris Ridley, public sector policy manager at ACCA.

Most countries run with a public sector finance deficit and have done so for many decades, but when does it become unsustainable?

The recent shift towards an integrated global economy has driven the requirement for information to be available on a comparable basis. Gone is the time when national finances can operate in blissful ignorance of conditions overseas. This has resulted in a growing number of nations moving away from country-centric accounting standards towards a common set of international standards for budget and reporting purposes.

International Financial Reporting Standards (IFRS) are already widely used and an equivalent set of International Public Sector Accounting Standards (IPSAS) have been developed alongside them. While being similar in many respects, they reflect the unique requirements of the public sector. For example, the focus on public service provision rather than profit making, and the levying of tax and other charges by government to meet the financial commitments created. This is important as the public sector commonly accounts for around one-third of the Gross Domestic Product (GDP) in the majority of developed countries.

A significant number of countries continue to manage their public sector finances on a cash basis, although an increasing number have adopted full accrual accounting. This has the advantage of looking beyond a simple income and expenditure analysis towards the complete financial position, including the assets and liabilities held. Where this information is consolidated, for example as a set of Whole of Government Accounts (WGA), this provides strategic information on the sustainability of the national fiscal arrangements.

ACCA remains supportive of IPSASs and continues to encourage a move towards the adoption of full accrual rather than cash-only IPSASs given the additional financial information provided. With the move towards IPSAS in many countries, ACCA launched the Certificate in International Public Sector Accounting Standards (Cert IPSAS) at the end of 2014. ACCA’s Cert IPSAS is a flexible, top-up qualification for finance professionals working in / with the public sector. As a globally accessible online course and assessment it meets the needs of individuals and organisations wishing to develop essential working knowledge of IPSAS in an efficient and cost effective way.

Only by improving the information held on public finances and then acting on the issues raised can public services be maintained and improved for the future. Otherwise, as recent events have highlighted, countries could find themselves with severe financial difficulties that might take a generation to resolve.

When it comes to financing sustainable public services, more often than not, there are no quick fixes.

Predicting the future is a dangerous business – just think Sinclair C5 and you’ll understand straight away.  Yet, the newly published ‘See the Future’ report from ACCA and EFMD, gives some pretty good clues about where business education is heading.

It’s perhaps no surprise that technology is going to play a big part.  It’s not just about the MOOCs that have become the subject of so many conversations in the past two years.  Technology has been changing business education since the Open University started broadcasting on late night television in the 1970s.

Indeed, the Open University have been pioneers of technology on many occasions in the past 40 years.  Several years ago, the Open University became one of the first adopters of iTunes U, the Apple platform for disseminating educational content free of charge.  Today, the Open University has had more than 60 million downloads from the service out of more than one billion worldwide, and tops the rankings of most downloaded with Stanford University from the USA.  More recently, the Open University was the driving force behind futurelearn, the UK MOOC platform.

More than anything else, technology is enabling lifestyle learning, the opportunity for students to learn any time, anywhere.  A prospective university student can be up to speed on a subject before they arrive at university, a current student can download the best professors from anywhere in the world as part of their studies and the alumnus can get updates on their specialisation while working, continuing their professional development to suit their individual needs.  The future is flexible and personal.

Such a future poses challenges for business schools, some of which are already manifest.  Recruiting high quality faculty has been difficult for some time and may only become harder and/or more expensive in coming years.  Some business schools have adapted some of their delivery by moving to a fly in, fly out model, with faculty not on the payroll, but booked to deliver certain programmes at certain times before leaving again.  Increasingly technology means that the cost to the business school may be reduced further with faculty logging in to teach and then logging out, avoiding the costs of flying.

What does this mean in practice?  Imagine the first year of an undergraduate accounting degree.  The high cost of faculty, perhaps more interested in research than teaching, means that the classroom experience has had to change.  To give students a richer experience, a business school might partner with an employer to provide their qualified staff to act as facilitators in a digital classroom where students are ‘taught’ with a MOOC delivered by some of the best global accountancy professors, located at universities elsewhere in the world.

The technological transformation of business education won’t stop at traditional class room degrees.  Employers seeking to grow productivity are already using technology to deliver learning in the workplace.  According to the study ‘By 2020, employers believe 57% of training and development will be delivered online in their organisations’.

Again cost is an element of this transition.  Rather than sending staff away for professional development, employers can run programmes in the workplace, without staff having to leave their desks in some cases.  Perhaps more important are the impact on the individual and the flexibility of delivery.  For an individual, lessons learnt can be applied as soon as a course is over, there is no delay returning to the office.  For the employer, programmes can be quickly constructed with the choice of many different providers available online.

All of this technological involvement in education begs the question, but is it as good as face-to-face learning?  Had you asked the question, ten years ago, the answer might well have been no.  The experience was clunky and often involved little more than watching videos of slide presentations online.

Today the experience is much improved.  Not always perfect, but definitely better.  Interaction with instructors and other students is much more common as providers add social tools to their learning technology.  How will it be in ten years time?  Better still and, perhaps more importantly, there will be a generation of learners who think digital is normal.

Cheryl Sandberg, COO of Facebook, commented a few years back “If you want to know what people like us will do tomorrow, you look at what teenagers are doing today”.  My 10 year-old daughter still has a few years until she becomes a teenager, but I see already she has no fear of technology, it is part of much of her life and will increasingly be so.  For her not to do some of her learning online or with a range of digital tools would seem odd to her, for her not to learn with the best providers wherever they are in the world wherever she is in the world would seem strange and for her not to learn from her peers and from the knowledge and experience of all those around her not just academics would be a missed opportunity.  This is my prediction for her future and for the future of business education.

Andrew Crisp is a Director and co-founder of CarringtonCrisp and author of the See the Future report.

The mid-market sector is now the “most finance-constrained segment of the real economy.” 

I’ve analysed ACCA’s Global Economic Conditions research and how it relates to the Autumn Statement.

The UK recovery throughout 2013 was very robust, but has started to slow down significantly since the end of last year, weighed down by weakness in Europe and low real income growth at home. Here’s what our business confidence readings look like – all saved to here: http://share.pho.to/88bfB.

It’s clear from our analysis that the mid-market is holding up best, but even those very dynamic firms can’t resist the pull of gravity. We note the significant loss of confidence among financials. New orders are up, especially for the mid-market, while other parts of the real economy have seen trends slow in 2014. And job creation, while up significantly year-on-year, is definitely slowing across all size-bands.

ACCA / IMA Global Economic Conditions Survey

When it comes to Small and Medium Sized Enterprises (SME) access to finance, the Treasury must be feeling very relieved. Our analysis of finance constraints and growth capital index data for recent quarters is insightful- it’s worth noting how well micro and small firms are going – as recent as mid-2013 they were lagging the rest of the UK economy significant in terms of access to finance, but they’ve caught up very quickly since.

“This is not likely to last forever, as today’s liquidity conditions are extraordinary. But there are reasons to be confident. To me of course, what is news is that the mid-market isn’t better catered for. They are now bizarrely the most finance-constrained segment of the real economy (not least because they are innovators and exporters). But they clearly also recognise that government support is increasingly targeted squarely at them.

Is any of this going to lead to an increase in investment? Well, so far capital spending by SMEs and the mid-market has soared year on year from 2013. But it’s very interesting how large corporates are weighing down capital spending – lots of stories in the press about falling capital expenditure among listed firms; it’s a longer-term trend that the UK and the world needs to address.

GECS can be found here: 

http://www.accaglobal.com/gb/en/technical-activities/browse-resources/gecsr-update.html

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The good news is that yesterday BG Group cut incoming Chief Executive, Helge Lund’s remuneration package to within the scope of the remuneration policy agreed by shareholders less than six months ago. The board responded to considerable pressure from shareholders and no doubt from the Institute of Directors.

The bad news is that the BG Group reneged on the promise it made to shareholders in the first place in proposing this departure.

I have a small number of shares in BG Group. I have considered selling, but always think I’d better hang onto them for the long-term. I’ve never been to an AGM or paid close attention to the management or governance of BG Group until two things coincided a couple of weeks ago.

Just before the BG Group story broke some colleagues explored how ACCA may address the CG shortfalls in transparency in the UK identified in a recent ACCA and KPMG Singapore study ranking the CG requirements of 25 markets. The UK came number one but the research did identify some issues; that executive remuneration disclosure is not mandated, nor is the process for executive and director performance.

The second was before I was aware of the BG proposal outcry, I received a 30 page letter from the Chairman calling the extraordinary general meeting to vote on the conditional share award ahead of Helge Lund’s appointment.

It was a long well-crafted and compelling argument of how thorough the independent executive remuneration benchmarking was and that a package of this magnitude was needed to secure someone of Lund’s calibre. It sounded desperate.

Once I got over (kind of) the huge annual package and “golden hello” Lund was due to receive, I was nearly convinced to vote in favour. But it didn’t feel right to me at all and I felt like it was going to be a huge issue. It was and here’s what I’ve learnt from all this.

More good news

Shareholders (and others) are speaking louder

The Chairman’s proposal really hit a few nerves with institutional investors (Legal and General, Aviva), individual shareholders (me), politicians (Vince Cable), and the public (IOD, High Pay Centre) calling for a shareholders to vote against a binding pay deal being overturned so soon. Interestingly Standard Life Investments has long opposed the rewards given for “meeting unchallenging performance targets” – abstaining from votes on remuneration for 13 consecutive years.

UK corporate governance “saves face”

The U-turn from BG Group has allowed UK corporate governance to “save face”. The UK is considered a leader in corporate governance principles and practices since the Cadbury Report in 1992. It has a reputation to uphold, and many countries look to the UK when developing instruments and codes. I hope they still will.

And more bad news …. Wealth inequality is still growing

Executive pay packages like this one are driving greater wealth inequality between the UK’s top and bottom earners. The pay deal is still enormous – potentially £18m reduced from £25m – and this reduction won’t address the widening gap.  Is it time to seriously consider a maximum pay ratio?

Transparency and performance

The chairman’s letter was transparent about how much Lund would receive, but I still struggle to understand how performance will be measured. So do others.

Studies indicate that pay packages linked to short-term financial measures and share price movement encourage excessive risk taking, with calls for performance based on non-financial measures to be included as well.

So, on 15 December, I will be going to the BG Group EGM and I have to say that I am a little disappointed that I won’t need to use my vote at the meeting! However, I am pleased that the much discussed Mr Lund has still decided to join BG with the generous package pre-approved by shareholders. But most of all I am pleased that we “voted” for the long-term societal impact and not short-term shareholder value. This will serve as a warning to companies thinking of breaching their remuneration policies any time soon.

Tax is difficult…

accapr —  1 December 2014 — Leave a comment

By Jason Piper, ACCA Technical Manager, Tax and Business Law

Tax is difficult because the world is complicated. Trite though that sounds, it is unfortunately the simplest way of expressing the inevitable outcome of a huge bundle of conflicting factors. One of the most fundamental issues is that tax is always expressed as an amount of money, but is at the same time used as a mechanism to influence underlying behaviours in line with society’s ‘values’.

Whether you think of monetary labels as the price or the value of something may depend on your level of cynicism, but those amounts are only ever an equivalent for whatever the underlying “thing” is worth. It follows that how we define and process those numerical expressions is fundamental to calculating tax liabilities so the ‘value’ of a business’s activities, as reflected by its tax contribution, is seen through that filter.

Take a factory producing bicycles. The actual taxes paid by the operators of the business will certainly be far more sensitive to the accounting treatments of the factors of production than to the quality of the bicycles, the treatment of the workers or the environmental impact of the whole operation. Whether the ownership of the factory is leasehold or freehold, and whether the workers are employees or independent contractors makes no direct difference to the number of physical bicycles it can produce – and yet those different legal descriptions can radically alter the tax outcomes.

In the long run it’s as likely, if not more so, that the success or failure of the venture will depend more upon the abstract legal considerations than it will the quality of the bicycles or its treatment of the workforce and environment– even though you could make a good argument that it’s actually those aspects of the factory’s operations that society ought to be more interested in.

For the vast majority of individuals things are generally simpler. There’s far less in the way of accounting to be done; all that matters is the tax treatment of the cash amounts of earnings that hit their bank accounts in the year and valuations usually arise only in the context of “benefits in kind”. (It’s probably a given that all employees consider the monetary value their employers put on them to be far too low, but that’s another issue).

The other main tax individuals pay in most countries is sales taxes or VAT – but these are almost entirely dealt with and accounted for by the businesses selling the goods to them, and the complexities that arise bypass the consciousness of consumers altogether. A recent change in VAT treatment of a popular consumer product in the UK hasn’t even resulted in a noticeable change in the retail price, despite the 20% shift in margins for supermarkets.

The issues arise because society tries to use the application of the tax system to enforce its values directly (rather than just raising the revenue to fund other measures). Differentials in tax treatment inevitably end up cruder than the world they’re trying to operate on. There’s a myriad shades of difference between a factory employing local disadvantaged and disabled people to build environmentally friendly water filters for developing economies and a fully automated cigarette rolling plant that deposits its waste products straight into a local river.

It may look simple to use the tax system to distinguish between those two extremes, but then comes the difficulty of drawing the black and white line between tax/no tax on infinite shades of grey. Somewhere after all the tax system has to draw the line, because tax is a binary choice between “this dollar is yours to spend as you will” against “this dollar is taken by the state and you no longer have a say in its use”, and it’s around those tipping points that the uncertainty will crystallise. Set that in the context of accounting standards so complex that even experts can’t agree on them, and tax codes so long that no one dare claim to be expert on all aspects of them, and it can hardly be a surprise that we can’t work out what the tax system does do, let alone what it ought to.

Read ACCA’s certainty in tax paper here